On March 24, President Andrés Manuel López Obrador presented an extensive reform bill to the Chamber of Deputies (Cámara de Diputados), targeting 23 laws, which could considerably affect the private sector. Businesses and investors in Mexico—particularly in the mining, energy, rail, and construction industries—are likely to experience the most significant impact.
In this Legal Update, we aim to provide you with a comprehensive explanation of the potential repercussions of this bill and its implications for your business interests.
WHAT’S BEING PROPOSED
The reform bill has three main sections:
I. Rectification of Corruption Acts
Based on the premise of challenging corruption acts, the reform bill proposes changes to existing laws in order to establish a ”more precise and comprehensive” definition of “juicio de lesividad.” The executive branch would have broader authority to initiate actions to nullify or amend administrative acts it considers to be contrary to the public interest or harmful to the financial interests of the State.
These adjustments also seek to amend the nullity trial (juicio de nulidad) for addressing administrative acts that fail to satisfy legal prerequisites. Administrative acts that do not adhere to the validity criteria set forth in paragraphs I to X of Article 3 of the Federal Law of Administrative Procedure (Ley Federal de Procedimiento Administrativo) could no longer be cured as previously allowed. Additionally, declarations and registrations containing regulatory irregularities made by individuals will become the responsibility of those individuals.
II. Protection of Public Finances and Deterrence of Actions Detrimental to the Public Interest
This section introduces measures to:
III. Reinforcement of the Federal Public Administration
This section of the bill strives to streamline the consolidation of public entities, reabsorb their assets into federal agencies, and expedite the execution of public works and services.
Notable proposals in this section include:
WHAT MIGHT HAPPEN NEXT
To pass, the bill only requires a simple majority in the Chamber of Deputies and the Senate, as it involves modifications to 23 laws and not the federal constitution. The “Morena” political party and its allies currently hold a sufficient majority to approve this potentially problematic bill. However, if enacted, it is likely to face multiple constitutional challenges.
In addition, the implementation of the provisions in this bill, if passed, may lead to claims against Mexico under investment protection treaties that safeguard foreign investors and their investments. These treaties afford various protections against actions of the host State, including one which provides that expropriation must not only serve a public purpose or interest and be carried out in a non-discriminatory manner but also adhere to due process and be accompanied by prompt, adequate, and effective compensation. Several provisions in the bill designed to facilitate and expedite expropriation proceedings, as well as reduce or even eliminate compensation in certain cases, appear to contradict these investment protection treaties and international law. Consequently, Mexico’s application of these provisions may entitle foreign investors to initiate arbitration against the country under the relevant bilateral investment treaties. Even US investors, who under the new USMCA treaty that replaced NAFTA have more limited protections than other investors, might also resort to arbitration under certain conditions, as expropriation is one of the few standards that, if breached, still allows US investors to initiate arbitration against Mexico under the USMCA. US investors may also resort to arbitration when their investment is structured through a government contract, in sectors such as oil and gas, power generation, telecommunications, transportation services and ownership or management of roads, railways, bridges or canal.
On the other hand, the bill’s attempt to subject compensation obtained in international proceedings or in arbitration to domestic law by removing a paragraph from the Expropriation Law is unlikely to be effective. Mexico’s international commitments are recognized at a constitutional level, and the derogation of such paragraph does not have any impact on these commitments nor on Mexico’s existing agreements to arbitrate. Additionally, the removal of such paragraph is completely irrelevant at an international law level, and any investor will be entitled to effectively pursue remedies under international law and enforce arbitration agreements. If anything, the derogation of this paragraph may bring uncertainty in respect of arbitrations sitting in Mexico, reviving the ghost of the infamous Commisa vs Pemex case and discouraging foreign investors from accepting Mexico as a seat of arbitration in the future.
WHAT BUSINESSES AND INVESTORS SHOULD DO NOW
Since this reform bill would change Mexico’s legal landscape and could increase litigation and arbitration proceedings, it‘s crucial that businesses, foreign and domestic investors, and private property owners in Mexico stay informed about the bill’s progress and engage with industry associations and legal counsel to discuss the potential implications of its provisions on their operations. Building a robust compliance program and maintaining a thorough understanding of the evolving legal environment can help businesses mitigate risks and adapt to any potential changes in the regulatory framework.
Investors should also analyze whether they are sufficiently protected under international treaties and consider modifying the structure of their investments to maximize this protection. They should also keep this bill in mind when setting up new investments and signing new contracts with Mexico or Mexican authorities.
Also, considering the possible challenges to the constitutionality of the bill, businesses and investors must keep an eye on the outcomes of any such legal actions. These outcomes may provide valuable insights into the future direction of Mexico’s legal environment and its impact on private sector activities.
Disclaimer: This material should not be construed as legal advice and is provided for informational purposes only.
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