Understanding Mexico’s Judicial Reform: Implications and Strategies for Foreign Investors

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On September 15, 2024, the Diario Oficial de la Federación (Official Gazette of the Federation) published a decree providing for an extensive reform of Mexico’s judicial branch. The reform reduces Supreme Court justices from 11 to 9, imposes popular elections for all judges, dissolves the Federal Judiciary Council, and introduces faceless judges for organized crime cases.  

The most significant provision of the reform calls for the removal of all sitting judges. Prior to the reform, judges were appointed through a merit-based system. Lawyers entered the judiciary fresh out of law school and worked their way up. This process may erode judicial independence, and judges could be subject to the pollical influence of the masses.   

US investments account for the largest share of foreign direct investment (FDI) in Mexico, which is one of the largest recipients of FDI inflows in Latin America. Naturally, companies that are investing in Mexico — or considering investments in that jurisdiction — are concerned about the reform’s potential impact on the Mexican judiciary’s willingness to enforce contracts and uphold property rights. This article briefly summarizes the key aspects and criticisms of Mexico’s judicial reforms. The authors then analyze different alternatives for mitigating the potential risks stemming from the judicial reform.  

Mexico’s Judicial Reform 

Because there have been many articles written over the past few months summarizing the various aspects of the Mexican judicial reform, here is a brief recap of the reform’s key provisions:  

The sweeping judicial reform in Mexico has also elicited diverse political reactions both domestically and internationally. While the judicial reform is not without its supporters, there are significant criticisms against the reform:  

Mechanisms for protecting investments 

There is still considerable uncertainty about the potential implications of Mexico’s judicial reform and whether the critics will be proven right. Nonetheless, US companies operating in Mexico should consider implementing strategies to mitigate risk. Strategies will differ based on whether the dispute needs to be heard in Mexico or if it can be routed to a foreign jurisdiction.  

Companies that need or want to litigate in Mexico  

Arbitration taking place in Mexico 

Commercial arbitration has been widely touted as an alternative to the Mexican judicial system especially for those disputes that cannot be taken out of Mexico for one reason or another (i.e., excessive cost, lack of bargaining power, etc.). In that respect, Mexico’s Arbitration Law follows the UNCITRAL Model Law and international treaties like the New York Convention. Both local and federal courts handle enforcement, giving recognized awards the same effect as final judgments. While recognition may be denied for procedural issues, courts cannot — as a theoretical matter — review the award's merits. The importance of selecting legal counsel is essential given potential concerns about the judiciary in Mexico.  

While commercial arbitration may certainly help to mitigate concerns about the judiciary, it bears emphasis that any arbitration seated in Mexico would not be immune from potential judicial intervention and/or overreach. Moreover, judicial intervention is necessary for enforcement, annulment, and provisional measures. As further discussed below, companies can also incorporate arbitration provisions into future or existing commercial agreements providing for arbitration outside of Mexico. This would ensure that not only the substance of any dispute is resolved through arbitration, but also that any judicial oversight of potential disputes takes place outside of Mexico. This would permit a party to get an award. Of course, this does not guarantee that a Mexican court would then proceed to enforce that award.  

Structure investments to secure protection under investor state treaties 

For companies that do not have the flexibility to seat disputes about their investments outside of Mexico, they may wish to structure future investments through entities eligible for bilateral investment treaty (BIT) protection. This would provide access to international dispute resolution mechanisms and provide a mechanism to challenge problematic judicial determinations. Lion Mexico Consolidated v. United Mexican States, a recent case against the Mexican state, offers an example of how this approach can be used successfully by a foreign investor. In that case, an international arbitration tribunal found Mexico internationally liable for “denial of justice” — i.e., a situation where a state, through its judicial system, fails to provide a fair and accessible legal process to an individual, effectively preventing them from obtaining their rightful remedy.  

For US investors who are “part[ies] to a covered government contract” and belong to five “covered sectors” — i.e.,  

they may be able to rely on the United States-Mexico-Canada Agreement (the USMCA) which entered into force on July 1, 2020, replacing the North American Free Trade Agreement.  

With respect to investors in other sectors, they are eligible for protection under a less favorable regime through the USCMA. Such investors may wish to consider creating a foreign entity in a different jurisdiction which has a BIT with Mexico and channel such investments through entities in that third jurisdiction. This enables them to benefit from the rights and protections granted under those treaties, even if their actual business activities are conducted within Mexico. Currently, Mexico has BITs in force with countries such as Hong Kong, Brazil, the United Arab Emirates, China, Spain, the United Kingdom, among others, and is party to treaties with investment provisions like the USMCA, CPTPP, Pacific Alliance, and various FTAs with Latin American, European, and Asia-Pacific countries.  

Disputes litigated outside Mexico 

Arbitration taking place internationally 

Foreign investors facing legal uncertainty in Mexico and who would have an ability to execute on an award outside of Mexico may want to consider seating their international arbitration outside of Mexico to reduce the power of the Mexican judiciary to interfere with their proceedings. For US investors in Mexico, they typically select Houston, Miami, and New York as the place where their arbitration will be heard pursuant to the rules of one of a number of reputable institutions (e.g., AAA/ICDR, ICC, JAMS, etc.). Selecting the right seat is crucial, as it determines the competent court overseeing the arbitration process. 

Forum selection clauses favoring US jurisdiction 

While not as common for the resolution of international disputes, a potential option for US companies wishing to avoid litigation in Mexico is to include forum selection clauses that favor US jurisdiction in their contracts, particularly New York for commercial matters.  

Even where the parties have no connection to New York, General Obligations Law 5-1402 provides that clauses would be enforceable in commercial contracts worth at least US$1 million that are governed pursuant to New York. By choosing the New York jurisdiction, companies can benefit from a stable and predictable judicial system with a long tradition of handling complex commercial cases, which could provide greater legal certainty compared to the recently reformed Mexican judicial system. Anti-suit injunctions may complement forum selection clauses that privilege jurisdictions such as New York by allowing a party to use a US court to potentially compel its adversary to withdraw proceedings abroad.  

More uncertainty means more risk 

Mexico’s judicial reform has generated uncertainty for foreign investors. Investors should analyze the risk carefully and consider implementing the strategies discussed above as well as following any additional legislation and judicial developments.    

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