The redefinition of Mexican public policy: A new standard for annulment and enforcement actions in Mexico

Mexico, alongside some of the other major Latin American countries, has become an active hub for arbitral proceedings. This reflects the modern and arbitration friendly legal framework in place, as well as a healthy set of arbitral jurisprudence created since the adoption of the UNCITRAL Model Law in 1993.
 
In this vein, Articles 1457 and 1462 of the Mexican Commerce Code (following Articles 34 and 35 of the Model Law) establish public policy as a ground for annulment of an award, or deny its recognition and enforcement, respectively. Mexico is part of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), of which, Article V 2 b) also includes public policy as a reason to refuse the recognition and enforcement of arbitral awards.
 
Considering that the grounds for annulment and refusal to recognise and enforce arbitral awards are restricted to those set forth under the Mexican Commerce Code, as well as the New York Convention, and that public policy as a concept is one which may be defined as both ambiguous and broad, it has been recurrently used as a last resource to seek the annulment or refusal of recognition and enforcement of arbitral awards.
 
Among the erroneous conceptions and misuse of the public policy ground for annulment and enforcement refusal actions in Mexico, there are some which have been recurrently used:
 
i) All laws (including commercial legislation) have an element of public policy as they constitute the binding legal framework by which the State sets forth its political agenda (it should be noted that, in part, this misconception of the concept is triggered by the wording of most bills which as a matter of style generally commence by stating: “This bill is of public policy/interest and aims to regulate…” (“La presente ley es de interés/orden público y tiene por objeto regular…”). In fact, the paraphrasing of the aforementioned caption does nothing but reinforce the idea that bills approved by Congress constitute a mandatory regulation of those individuals and actions which fall under its scope (without preempting any criteria involving the arbitrability of the bill’s subject matter).
 
ii) Disputes concerning public entities and public monies constitute a public policy exception because any loss of these resources would have an impact in the State’s finances, and would therefore impose a restriction for the State to achieve its political agenda.
 
iii) Imposing obligations (obligations to take action or performance obligations) to public entities as a consequence of arbitral awards violates public policy as it constrains such entities to pursue actions outside of the State’s development plans.
 
On 18 May 2016, the Mexican Supreme Court rendered a judgment where – amongst other things – it established a new threshold for what should be considered public policy for purposes of annulment and enforcement actions. The decision, which arose out of an ICC arbitration with its seat in Mexico[1], involved a dispute between the State’s electricity production company – Comisión Federal de Electricidad (CFE) – and a combined cycle energy plant arising from an electricity generation commitment agreement and power purchase agreement, and specifically the power plant’s obligations to generate energy for the state of Yucatán and keep it at CFE’s disposal. In the case at hand, the arbitral tribunal granted the energy plant’s request regarding the recognition of an act of God that prevented it from carrying out the above-mentioned obligations.
 
As consequence of the arbitral award, CFE submitted an annulment action based on the idea that the award undermined the plant’s obligation to have an alternative and constant operation of 484 MW when operating with gas, and 440 MW when operating with diesel, as was established in the public bid. According to CFE, the latter affected the functionality of the Mexican electric system and weakened the reliability in the Yucatan Peninsula´s electric grid, thus affecting the general public and giving rise to a public policy ground for annulment.
 
The Mexican Supreme Court – which reviewed the matter by means of a writ of certiorari – rejected CFE’s public policy argument and considered that accepting this position would amount to an incorrect de novo review on the merits of the award. Furthermore, the Mexican Supreme Court returned to the public policy definition previously set forth by the Mexican Judiciary and which understands it as “a violation to the essential principles of the State which transcend to the community through the offensive and serious nature of the mistake in the decision”[2] , and further delimited the concept by establishing that:
 
i) Only clear and important violations to legal norms may justify the annulment of an award;
 
ii) When the finality principle of arbitration (materialised through an arbitral award) comes into conflict with a minor public policy consideration, the pro-arbitration principle (expressly recognised in the Supreme Court’s decision) shall override the latter;
 
iii) The decision to stipulate an arbitration agreement includes the possibility of an interpretative deficiency on matters of law by the tribunal, which does not necessarily mean a public policy violation; 
 
iv) The fact that a bill is of public policy/interest does not mean that it embraces public policy considerations for annulment and enforcement actions.
 
In this vein, the Mexican Supreme Court established a higher threshold for the construction of public policy violation arguments and, thus reinforced the commitment of the Mexican Judiciary to the recognition and enforcement of arbitral awards, and a pro-arbitration approach to the review of arbitral awards through annulment/enforcement actions, as well as Amparo proceedings which arise from them.
 
The construction of the public policy definition has been a sensitive and difficult subject not only in Mexico, but also in other jurisdictions (in addition to the definition of a transnational public policy), which has allowed for the abuse of this figure as a means to avoid the enforcement of otherwise valid arbitral awards. The recent decision of the Mexican Supreme Court in the Amparo Directo 71/2014 has redefined the concept of public policy, thus creating a higher and more stringent standard for the invocation of this ground for annulment as well as refusal of recognition and enforcement of arbitral awards. The latter not only confirms the Mexican Judiciary’s commitment to the use of commercial arbitration as an effective alternative dispute resolution mechanism, but reflects the sophistication of its courts which have achieved the difficult task of giving meaning to this ethereal notion of law. 
 
 
Daniel García Barragán L. is a dual qualified attorney (NY and Mexico) and senior associate at García Barragán Abogados in Mexico City where he focuses his practice in national and international arbitration, as well as cross-border corporate transactions. Mr. García Barragán represents private entities in cross border transactions, as well as corporate entities and individuals, and States in commercial disputes and Public International Law matters. Within his experience, Mr. García Barragán has acted as an arbitrator in disputes carried out under the Rules of the Mexico City Chamber of Commerce, and has been recurrently appointed as secretary of arbitral tribunals acting under the ICC Rules. Furthermore, Mr. García Barragán has represented parties in arbitrations conducted under the following rules: ICC, ICSID, ICSID Additional Facility Rules (NAFTA) and CANACO.
 
Daniel can be contacted on danielgb@gb-abogados.com.mx