Reducing Risks on Credit Sales into Mexico - 4

Originally published: Apr-23-2007

Part 4: Enforcement of Foreign Judgments and Arbitral Awards

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by Romelio Hernandez, HMH Legal

In this final installment of our four-part series on Mexico, I will provide some insight and advice into selecting the country venue for any legal action against a debtor, as well as the procedures for enforcing decisions made in your location, rather than Mexico.

In Part 3, we pointed out that if you have no collateral to qualify for a special proceeding, and no promissory notes to allow an executive proceeding, you should definitely consider arbitration or litigation in your own locale. And, even if you qualify for the executive proceeding, if the debt is more than US $100,000 you will probably want to take action in your own country, especially if the debtor’s jurisdiction is not reliable.

Once you have decided the venue must be your own country, the next question is: Do you arbitrate or litigate?

Your decision will be based on two factors:

1. Which is easier and more cost effective in your location?
2. Which will be enforceable in Mexico?

Obviously, you will have to rely on your local counsel to advise you regarding question #1. This article will address question #2.

Enforcement of Foreign Judgments

The enforcement of foreign judgments can create challenges for litigation attorneys anywhere, and especially so in Mexico. To date, Mexico is a signatory to only two treaties related to foreign awards:

• The Inter-American Convention on Extraterritorial Validity of Foreign Documents and Arbitral Awards [Montevideo]. The Montevido Convention has so far not been supported by any country other than Mexico, and so is not yet in effect.
• The Inter-American Convention on Jurisdiction in the International Sphere for the Extraterritorial Validity of Foreign Judgments [La Paz]. The La Paz Convention has been signed by several Latin American countries only.

Therefore, in all cases where the creditor is located outside Latin America, he will have to rely on the requirements within Mexican law, specifically the Commercial Code and the Federal Code of Civil Procedure (FCCP). The process for enforcement of foreign judgments in the Mexican courts is called homologación, or “validation”, and it is a very rigorous procedure in which both local and federal rules come into play.

While most Mexican state laws mirror the FCCP procedures, some states have different requirements. Therefore, it is wise to:

1. seek legal advice from counsel familiar with the laws in the state in which your Mexican debtor is located; and
2. consider all requirements and formalities of homologación even before commencing proceedings within your own country. If you won’t be able to fully comply with the Mexican requirements, there is really no point in paying the costs of litigating the account in your own country.

The procedures outlined here are based on the federal procedure under the FCCP.

Requirements for Homologación

According to Article 571 of the FCCP, the recognition and enforcement of a foreign judgment will take place only when eight very stringent conditions are met. Those interested in a detailed explanation of the process should read my article “Avoiding Pitfalls: Enforcement of US Judgments in Mexico”. For the purposes of this article, I’ll summarize the requirements in four points:

1. The judgment must be enforceable in Mexico:
   1. It is not a result of an In Rem right – involving a mortgage or pledge of real and personal property.
   2. The court of origin had proper jurisdiction.
   3. The judgment is res judicata – final and not subject to an appeal process or further review.
   4. No case is pending in Mexico involving the same legal action.
   5. Judgment does not contradict public policy in Mexico. Actions which may be contrary include: awards granted out of tort actions, which are restricted to a maximum amount cap; awards for punitive damages, which are not recognized under Mexican law.
2. A letter rogatory must be completed by the requesting court that:
   1. Is certified, authenticated and legalized.
   2. Is translated into Spanish.
   3. Includes a statement from the court to satisfy comity (or reciprocity) – something to the effect that “under equal circumstances the issuing judge would recognize and enforce a judgment coming from the requested court”.
   4. Includes a statement proving that the judgment is res judicata – final.
   5. Gives full and specific powers to the executing (Mexican) court.
   6. Appoints Mexican counsel and specifies the address.
3. All required documentation is provided, including:
   1. Letter rogatory.
   2. Original judgment.
   3. Document proving proper service of process on the defendant.
   4. Document proving that the judgment is final (if not included in the letter rogatory).
   5. Power of attorney for your Mexican counsel, required for the attorney to request partial executions in case the judgment is not granted in its entirety.
4. All documents are: authenticated (certified); legalized (via Apostille); translated into Spanish; and filed in the proper court in Mexico.

Enforcement Process

The homologación can be considered a summary proceeding. Defendants are given a 9-day period, after the filing of the documents for enforcement, to either defend themselves or request the presentation of evidence in court. Once the court has determined which evidence is admissible, a hearing date will be set for disclosure. Judgment follows. There is also a 5-day period for either party to request an appeal.

Enforcement of Foreign Arbitral Awards

The process for enforcement of a foreign arbitral award in Mexico is much less troublesome and expensive than the process described above for legal judgments. In general, arbitrating in your country and enforcing the decision in Mexico, is your best option for the following reasons:

1. The debtor has limited defenses and arguments. The courts are allowed to deny enforcement of such awards in only the following cases:
   • The parties (either) in the arbitration had no legal capacity to enter into the contract and commit to the arbitration clause. (It’s important to ensure that the individual signing the credit application actually has such legal authority. See Part 1 of this series.)
   • The contract is considered null and void by the law governing such contract or the law of the state where the award was issued (if nothing was agreed in regard to governing law).
   • No legal and proper notice was given for the appointment of the arbitrator or any of the proceedings. (Before commencing the arbitration proceedings, hire a Mexican attorney to serve the debtor personally.)
   • The award deals with issues not contemplated by or exceeding the terms of the arbitration clause.
   • The composition of the arbitral tribunal or the arbitration procedure was not in accordance with the parties’ agreement, or not in accordance with the law of the country where the arbitration took place.
   • The award has not become binding on the parties, or has been set aside or suspended by a judicial court in the country under the law of which the award was made.
   • The subject matter of the dispute is not capable of settlement by arbitration according to Mexican law, or is contrary to public policy.
2. There is no need to comply with the formal requirements set forth for foreign judgments.

Requirements

The process for enforcing foreign arbitral awards in Mexico is relatively simple. A formal petition (demanda incidental), drafted by your Mexican attorney and signed by your legal representative, along with supporting documents, is sufficient to request enforcement. Supporting documents must be translated into Spanish and include:

• An original or certified copy of the arbitration award, duly authenticated with the appropriate Apostille.
• An original or certified copy of the arbitration clause or contract that contains such clause.

Enforcement Procedures

The process for enforcement of an arbitration award is much the same as that for judgments. It can be considered a summary proceeding. Parties are given 3 days, after filing the petition for enforcement, to contest or request the presentation of evidence in court. Once the court has decided which evidence is admissible, a hearing date is set for disclosure. Final allegations are allowed in the following three days; ten days are given for discovery; the court must resolve within 5 days. Both parties have five days, after a decision, to request an appeal.

In Conclusion – Reducing Risks on Credit Sales Into Mexico

• Part 1: How to turn your credit application into a valuable legal document that can protect you in cases of buyer default
• Part 2: Three documents that can make or break your case when litigating default payments
• Part 3: Legal Remedies Available in Mexico
• Part 4: Enforcement of Foreign Judgments and Arbitral Awards

These four articles devoted to Reducing Risks on Credit Sales into Mexico have provided some practical advice on how to protect your company in case of default by your Mexican buyers. If I were to sum up the four essential points that I hope each reader will take away from this information they would be:

Think strategically. Develop a game plan for managing your Mexican credit sales that anticipates the necessity to resort to some legal remedy in order to get paid.

Get secured. In the context of staying competitive, get everything you can from the buyer to secure your sale and ensure you have access to the least expensive and fastest proceedings available in the Mexican courts.

Choose wisely. If your customer will not provide security, or your transaction will exceed US $100,000 and the debtor’s jurisdiction is not reliable, ensure that arbitration will be the means for resolving any dispute.

Develop a paper trail. Document every step of the transaction. Require an original, signed credit application that includes terms and conditions of sale. Require a purchase order (at least by fax), and get signed delivery receipts (bills of lading) for every shipment.

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None of the information or materials contained in this presentation may be considered legal advice. All suggestions contained herein should be carefully considered with the advice of competent legal counsel.

Romelio Hernández is president and director of litigation for HMH Legal. Based in Tijuana, Baja California, Romelio works extensively with foreign exporting companies and collection agencies, assisting with their out-of-court and legal collection efforts throughout Mexico. He provides guidance and general counsel to foreign companies in mitigating the various risks of selling internationally. Romelio is a member of the CLLA, the International Bar Association, the OtayMesa Chamber of Commerce, and Rotary. He is a graduate of Universidad Autonómade Baja California, and was admitted to practice law in Mexico in 1997.