Mexico: Salient trends and developments in ICSID investment arbitrations and political events

In summary

This article provides a detailed analysis of the two recent ICSID investment arbitrations against Mexico, which have been filed under the North American Free Trade Agreement and the United States–Mexico–Canada Agreement, alleging denial of justice. The claimants argue that the actions by the Mexican judiciary violated due process rights, a trend that mirrors cases previously discussed in earlier editions of this review, indicating a rise in such claims. The article also examines the potential impact of Mexico's upcoming presidential elections on the investment arbitration landscape, particularly focusing on the ongoing disputes involving Almaden Minerals Ltd and Vulcan Materials. It explores how the political outcomes may shape Mexico's approach to foreign investment, potentially leading to a surge in the already accumulated claims against Mexico. Last, the text provides a review of the recently published General Law on Alternative Dispute Resolution Mechanisms, highlighting its exclusion of arbitration for administrative disputes and the possible controversies that may raise.

Discussion points

• Analysis of recent arbitrations initiated against Mexico based on denial of justice allegations and their similarities with cases previously discussed
• Expectations and potential impact of Mexico’s presidential elections in the investment arbitration landscape
• Analysis and review of the General Law on Alternative Dispute Resolution Mechanisms

Referenced in this article

• Cyrus Capital Partners, LP and Contrarian Capital Management, LLC v United Mexican States
• Goldgroup Resources, Inc v United Mexican States
• Amadex Minerals Ltd press release, 14 March 2024
• Legacy Vulcan LLC v United Mexican States
• Amparo en Revisión 134/2021, Mexican Supreme Court of Justice
• General Law on Alternative Dispute Resolution Mechanisms
• Pemex Law
• CFE Law
• Federal Law of Administrative Contentious Proceedings
• Law on Public Works and Services Related Thereto

Latest additions to denial of justice claims against Mexico

As noted by the authors of this chapter in the previous edition of the Arbitration Review of the Americas, the number of investment arbitration claims against Mexico has seen a marked increase in recent years, particularly those premised on allegations of denial of justice. In our view, this is a consequence of the landmark Lion Mexico Consolidated LP v United Mexican States award (Lion),^[1] which held Mexico liable and mandated compensation for the damages suffered by Liondue to the judiciary’s faults. This seminal case has set a significant precedent that has prompted investors to resort to arbitration to address grievances stemming from perceived judicial failings.

Out of the 14 ICSID arbitrations against Mexico registered after the Lionaward that are pending resolution, two are at least partially based on denial of justice allegations, with one even raising expropriation claims.^[2] These recent cases against Mexico expose a pattern of judicial inefficiency and partiality concerns.

For example, Goldgroup Resources, Inc(Goldgroup), a Canadian company engaged in mining projects and gold resources, initiated arbitration against Mexico in February 2023. Goldgroup alleges the expropriation of its investment, consisting of 50 per cent of the shares of a Mexican company that owns the San José de Gracia gold mining project in the state of Sinaloa, through a series of acts by the Mexican judiciary that stripped Goldgroup of the shares that backed its protected investment.^[3]

According to the request for arbitration, the Goldgroup case involves three different yet related proceedings before Mexican courts. Goldgroupcommenced two of these proceedings against other shareholders, which have been pending for almost a decade. In comparison, the third proceeding, instituted by the other shareholders against Goldgroup,was decided in less than a year,within a myriad of alleged procedural defects and baseless rulings by the Mexican courts.

Among other issues concerning breaches of due process and illegal actions, Goldgroup accuses the Mexican judiciary of having excessively and inexplicably delayed the proceedings on frivolous technicalities, such as waiting for the submission of one document, which Goldgroup alleges to be an irrelevant piece of evidence.^[4] The claimant also raises serious concerns relating to unlawful service of process, wilful neglect of the proceedings and rendering contradictory judgments without proper – if any – legal basis.^[5] On top of that, Goldgroup condemns the collusion by local courts, with one of them evidently lacking jurisdiction to adjudicate on a lawsuit filed against Goldgroup.^[6]

From Goldgroup’s viewpoint, these actions by the Mexican judiciary have precluded its right to obtain relief, collectively resulting in a denial of justice, and are tantamount to indirect expropriation in violation of article 1105, paragraph 1 (Minimum Standard of Treatment) and article 1110, paragraph 1 (Expropriation and Compensation) of the North American Free Trade Agreement (NAFTA).^[7]

The Goldgroup case is still pending and it is unlikely that it will be decided before 2026. In early May 2024, the tribunal – presided by Eduardo Zuleta, with Henri C Álvarez and Jean Engelmayer as co-arbitrators – issued the procedural order concerning the procedural calendar.^[8] In addressing these claims, arbitral tribunals often scrutinise whether the domestic judicial actions were egregiously flawed and whether the investor was deprived of a fundamental right to justice.^[9] Tribunals also tend to consider whether the investor exhausted all available local remedies before resorting to international arbitration. ^[10] It will be interesting to see if the tribunal on Goldgroup follows these criteria when rendering the final award.

In addition to Goldgroup, Cyrus Capital Partners, LP (Cyrus) and Contrarian Capital Management, LLC(Contrarian) recently brought up a denial of justice claim against Mexico.^[11] In their request for arbitration – filed one day before the NAFTA–USMCA (United States–Mexico–Canada Agreement) sunset period elapsed^[12] – the claimants assert that Mexican courts incurred in multiple due process violations. Particularly, the claimants question the issuing of an injunction by a local court in Mexico City, which barred their ability to pursue relief as creditors of one of the most important telecommunications companies in Mexico (TV Azteca). None of the claimants in the arbitration had notice or opportunity to be heard before the Mexico City court issued the injunction, as prescribed by procedural law in Mexico.^[13]

The background to the dispute is that, in 2017, TV Azteca issued US$400 million worth of debt securities with a maturity date of August 2024. Through subsidiaries under their control who act as the noteholders, both Cyrus and Contrarian have claims against TV Azteca upon their control of 8.25 per cent of senior unsecured notes. Since February 2021, TV Azteca has failed to make its required semi-annual payments, resulting in different default events and the acceleration of the debt. However, the claimants contend that the injunction issued by the Mexican courts prevents enforcement of the notes and precludes any potential recovery against TV Azteca.^[14]

Remarkably, the notes are subject to New York law and include consent by all parties to New York jurisdiction.^[15] However, in September 2022, TV Azteca initiated a secret proceeding before the Mexico City courts seeking a decree that the covid-19 pandemic triggered a force majeure event that prevented the company from making the required payments under the notes. Five days after TV Azteca filed the complaint, the Mexican courts granted the injunction.

Also notably, the court’s injunction relieves TV Azteca’s obligations to make the required payments, prohibits any proceedings to enforce remedies relating to the notes and deems the acceleration of the notes ineffective until the World Health Organization (WHO) announced the end of the pandemic – which occurred on May 2023.^[16] Following the formal announcement that covid-19 was no longer a health emergency, the claimants filed a motion to vacate the injunction due to the obvious lapse of its underlying justification. Up to the filing of the request for arbitration, this motion was yet to be adjudicated by the Mexican courts.

In the request for arbitration, the claimants note that they were formally served with the injunction until June 2023, nine months after its issuance. On that note, the claimants also raised that the Mexican courts also purportedly modified or forged court records by inserting an incorrect deadline by which a response was required.^[17]

In short, Cyrus and Contrariancontend that the acts of the Mexican judiciary stem from a stark partiality favouring TV Azteca and amount to a denial of justice as the local court’s mistreatment bars their efforts to recover the owed principal and interests under the notes. The procedural calendar is yet to be defined in this case.^[18] David J A Cairns, co-arbitrator appointed by the claimants, has also participated in another eight ICSID arbitrations, including Lion.^[19]

Overall, the Lion, Goldgroup and Cyrus and Contrariancases share similarities. Apparently, investors frequently cite protracted judicial proceedings, arbitrary or biased rulings and the lack of effective legal remedies as grounds for their claims. As such, Mexico’s judicial system is under scrutiny by international arbitration tribunals. This is because the surge in denial of justice claims has put a spotlight on systemic issues within Mexico’s judiciary. Addressing these concerns is paramount for Mexico to restore confidence among foreign investors and to mitigate the risk of future arbitration claims.

Upcoming presidential elections: forecast for the investment arbitration scenery

While Mexico has been the subject of multiple denial of justice claims brought before international arbitral tribunals in investment arbitration cases, a recent turn of events in a potential dispute between a Canadian mining company and the Mexican government may fuel a new thread of grounds for claims by investors. The case involves Almaden Minerals Ltd and its affiliate Almadex Minerals Ltd, a Vancouver-based company that notified Mexico of its intention to initiate an arbitration in March 2023 under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership if an amicable solution was not reached among the parties in 90 days.^[20]

Unlike other investment arbitration cases analysed in this edition, claimants base their potential request for relief on grounds concerning the Mexican authorities’ actions and do not particularly relate to the judiciary. The dispute arises from certain authorities’ refusal – the Ministry of the Economy – to recognise and uphold the validity of Almaden’s mining concessions for the Ixtaca gold and silver project in Puebla, Mexico. Almaden had obtained these concessions in 2003 and 2009 through its Mexican subsidiaries; however, in 2015, representatives of the Tecoltemic community filed an amparoclaim objecting to the government’s decision to grant the concessions for the mining of their lands without previously consulting the indigenous community and obtaining their free and informed consent.^[21]

The Supreme Court of Justice ruled on the case definitively until February 2022. In its ruling, the Court ordered the Mexican government to carry out the necessary means for public consultation with the Tecoltemic community concerning the Ixtaca project to determine whether they agree to the continuance of its execution.^[22] This decision left Almaden’s concession titles without any effect and reduced them to their application status. Nevertheless, the dispute between the parties reportedly arose from the Mexican authority’s reconsideration of Almaden’s original application for the concessions, contradicting its decision prior to the Court’s ruling when no issues concerning the application had been raised.^[23] That is, the authority had now found the application deficient and unfeasible, even though this had not become apparent nor was informed when Almaden initially submitted the application. Almaden asserts that inconsistencies in the actions of the Mexican government have been noticeable since the election of Andrés Manuel López Obrador in 2018, suggesting a shift in policy and regulatory approaches that have affected various sectors.^[24]

The question remains whether the Mexican government will encourage a settlement with Almaden on the eve of López Obrador’s departure from the presidential seat, which will take place on 1 December 2024, exactly six months after the election. The 90-day period granted by Almaden inevitably collides with the upcoming highly contested presidential elections between the political party currently in power and the opposition. The fate of Almaden’s claim for damages may depend on the election results; whether Mexico’s next president will maintain the apparent resistance to the Ixtaca project or if, on the contrary, an interest in settling the case will become Mexico’s official stand.

At least, that has been the expressed intention about other disputes, as Mexico has apparently and publicly adopted a conciliatory approach in the Vulcan Materials arbitration. López Obrador announced the government’s aim to settle in relation to the disputed land (located in Playa del Carmen) and thus terminate the arbitration already in process.^[25] The conflict arose in 2018 from Vulcan’s claim against the previous Mexican administration, which had shut down part of its operations while extracting limestone rock from these lands to allegedly comply with new environmental legal requirements, leading to considerable investment losses.^[26]

López Obrador anticipated that Vulcan would not accept Mexico’s original proposal; however, negotiations have not ended yet, and the outcome of this amicable approach is yet to be seen. The developments in this matter have also forced United States’ representatives to warn about the possible actions that their government will take if López Obrador decides to declare the disputed lands a natural protected area (ie, to expropriate such lands).^[27] In a letter addressed to the Mexican Chancellor, several US senators encouraged Mexico’s government to work on a solution that benefits all the parties involved.

While both of these disputes emerged before López Obrador took office, the results of the next presidential election will most likely influence the course of action determined by Mexico’s government and whether it is willing, in the Almaden arbitration, to break from previous accusations regarding the government’s unwillingness to recognise and uphold Almaden’s concessions. In Vulcan’s case, the election will probably determine whether Mexico is willing to maintain a commitment with the negotiations currently in place and finally settle the long-running dispute.^[28]

The outcome of the elections is not only crucial for the ongoing disputes; it will undoubtedly shed light on the possibility of eventual investment arbitration claims following the constant policy readjustment that López Obrador’s government has carried out in the past six years, which has been characterised by an aversion to foreign investment and a protectionist stand in favour of state-owned enterprises. A crystal-clear example is the Electric Industry Law (the CFE Law), recently declared unconstitutional by the Supreme Court of Justice, which had already given place to unconformities by foreign investors, who argued a detriment to private energy initiatives and an unreasonable prioritisation of the government-owned Federal Electricity Commission (CFE).^[29]

While candidate Claudia Sheinbaum has anticipated a continuance to the policies initiated by López Obrador, conversely, opposition candidate Xóchitl Gálvez has vowed to move her government away from antagonist policies and claims she aims to restore confidence among private investors to conduct business in Mexico. The third candidate, Jorge Álvarez Maynez, has seconded this approach. Thus, as voters decide on Mexico’s political future, the country will also implicitly determine its commitment to attracting foreign investment and the stability of the economic environment set for international players. In these circumstances, the unfolding disputes between investor claimants and the Mexican government could become a pattern of the complex landscape of investment arbitration that Mexico currently faces and will face, depending on the highly controversial presidential elections.

General Law on Alternative Dispute Resolution Mechanisms and its references to arbitration

On 26 January 2024, the Mexican Congress enacted the General Law on Alternative Dispute Resolution Mechanisms (the MASC Law), a general law intended to regulate and introduce alternative dispute resolution mechanisms to the administration of justice, which could help reduce the existing workload of local courts and allow parties to seek a more efficient process to settle potential disputes. While references to arbitration in the MASC Law are somewhat limited, article 115 provides that arbitration shall under no circumstances be applicable in matters of ‘administrative justice’.

This prohibition may become troublesome in the context of administrative contracts, particularly those concluded by the state-owned production companies (EPEs) (ie, Pemex and CFE), as such agreements ordinarily provide for a dispute resolution clause that refers parties to arbitration. Consequently, and from a legal perspective, this newly included exclusion of arbitration for administrative justice by the MASC Law creates a conflict of law with other Mexican legal provisions – such as the Law on Public Works and Services Related Thereto, the Pemex Law and the CFE Law– that explicitly allows public entities and the EPEs to include arbitration agreements in their administrative contracts.

In general terms, the scope and meaning of ‘administrative justice’ remain unclear under the MASC Law. Article 127 states that the parties may seek resolution of ongoing disputes through alternative mechanisms – specifically, negotiation, mediation and conciliation – before initiating or even after an administrative contentious process has begun. Meanwhile, the Federal Law of Administrative Contentious Proceedings establishes that any dispute arising from administrative resolutions must be solved in an administrative proceeding.^[30] Accordingly, the Organic Law of the Federal Court of Administrative Justice, which determines which matters fall within the Federal Administrative Tribunal’s jurisdiction, expressly refers to administrative contracts involving the Federal Public Administration and the EPEs, and states that disputes concerning their application and interpretation must be submitted before the Federal Administrative Tribunal.

At first sight, a combined reading of these legal provisions could lead to the conclusion that the term ‘administrative justice’ found within the MASC Law does include EPEs’ contracts and, hence, does prohibit any dispute arising from such contracts being referred to arbitration. Yet, a prohibition of this sort would clash with the prerogative explicitly provided by articles 115 and 118 of the Pemex Law and the CFE Law,^[31] respectively, which allows these EPEs to enter into arbitration agreements – or even convene on other types of alternative dispute resolution mechanisms – with private contractors. Likewise, article 98 of the Law on Public Works and Services Related Thereto expressly grants public entities the authority to enter into arbitration agreements while specifying that the administrative termination of contracts decreed by the entity cannot be subject to arbitration.

Then, the conflict of law emerges from the contradiction between the MASC Law, which vaguely and generally prohibits the use of arbitration in the administrative justice sector – a term that could encompass the EPEs’ administrative contracts – and the specific provisions outlined in the laws that regulate the existence and functionality of the EPEs.

This conflict of law could inevitably cause practical issues that will have to be solved by federal courts. The contradiction among these provisions could enable disputes regarding an arbitral tribunal’s jurisdiction to rule on a dispute derived from an administrative contract involving an EPE. In the best-case scenario, this dispute would eventually be put to rest by a pro-arbitration decision; however, it would still obstruct the efficiency and time-saving attribute that characterises arbitration and that persuades parties to choose this alternative over a judicial proceeding. The risks following this conflict of law may even go as far as using dilatory tactics if the parties intentionally object to the arbitral tribunal’s jurisdiction under a MASC Law claim to delay the arbitration and gain time.

Although these difficulties that can be anticipated from the ambiguous prohibition set by the MASC Law, Congress’s original intent regarding arbitration and its exclusion in this Law shed light on how such a prohibition should be interpreted and applied. The MASC Law was preceded by a bill and four different initiatives that initially excluded arbitration from the Law’s scope as the Commercial Code and certain international treaties already regulate commercial arbitration proceedings. On the fourth and last initiative of January 2023, legislators ultimately concluded that arbitration had to be recognised as an alternative dispute resolution mechanism and, thus, as a means of guaranteeing the right of access to justice since a public institution could also provide this mechanism free of charge.^[32] In these circumstances, the MASC Law is intended to govern arbitration as a public mechanism for dispute resolution, distinguishing it from the private arbitration regulated by the Commercial Code.

The problem is that the MASC Law’s text does not reflect this understanding. Instead, it appears to include any type of proceeding – whether public or private – in its definition of arbitration. While the context and background of the MASC Law’s enactment clarify the conflict of law at hand, and the Law’s explanatory statement illustrates the legislators’ interpretation and intended application of it for arbitration proceedings, article 115 still opens the door to a contradiction that will most likely have to be solved by the courts, taking into account both Congress’s intent by enacting the MASC Law and the lex specialis principle governing the interpretation and application of legal provisions under Mexican law.

Despite this possible conflict of law derived from the recently published MASC Law, this regulation represents a milestone in Mexico’s efforts to introduce and enforce alternative dispute resolution mechanisms. These mechanisms, particularly in the context of administrative contracts concluded by the EPEs, must remain an available option to solve any arising dispute due to the advantages that arbitration presents for parties and, specifically, foreign contractors unwilling to face the Mexican judiciary’s deficiencies.

Endnotes