MEXICO: An Introduction to Dispute Resolution: Arbitration

Mexico is at a critical crossroads as it approaches the presidential elections in June 2024. This pivotal election is set to be a deciding factor in shaping the nation’s future. In just a few months, the Mexican electorate will face a stark choice between two distinct paths: the pursuit of the current administration’s agenda or a significant departure toward a new policy direction. The stakes of this election extend across the fabric of Mexico’s public life, particularly in terms of energy policy. The decision made at the polls will not only determine these policies but will also indirectly set the course for Mexico’s approach to arbitration in the years to follow.

Back in 2013, Mexico captured international attention by ending the state monopoly in the energy sector with the energy reforms enacted under President Enrique Peña Nieto. This move liberalised the energy sector, inviting foreign investment and challenging the longstanding dominance of Petróleos Mexicanos (PEMEX) and Comisión Federal de Electricidad (CFE). The 2013 reforms primarily opened the electricity generation and sales sectors to competition, establishing a market-driven approach. Pursuant to the Electricity Industry Law (LIE), while the state still managed electricity transmission and distribution, it could now collaborate with private entities in these areas. Additionally, CFE was repositioned to compete on an equal footing with other market players.

Upon assuming the presidency in 2018, Andrés Manuel López Obrador embarked on a mission to redefine Mexico’s political and economic direction, distinctly separating his administration’s policies from those of his predecessors. A prime focus of his early tenure was the dismantling of several of the constitutional reforms enacted in 2013. Since 2018, the government’s approach has been to systematically retract the liberalising reforms of the previous administration. By reversing these reforms, the government has reinstated the dominant role of state-owned companies in the energy sector, emphasising nationalisation and a return to resource nationalism, thus reshaping the investment landscape in Mexico.

For example, in an assertive move in February 2021, President López Obrador’s administration introduced legislation to the Mexican Congress proposing significant amendments to the LIE. These revisions clearly aimed to reinforce the position of CFE to the detriment of private energy initiatives, intending to increase CFE’s market share and prioritise its energy production over that of private entities. Furthermore, the administration has sought to renegotiate take-or-pay agreements within numerous gas transportation contracts because such clauses were deemed abusive, pushed for legal reforms enabling state-owned companies to unilaterally terminate contracts without incurring liabilities, and achieved a milestone with the nationalisation of lithium. The President has also publicly criticised international arbitration tribunals that have issued adverse awards against the Mexican government.

The implementation of this policy has led to a marked increase in commercial and investment arbitration proceedings in Mexico. Both Pemex and CFE, the state-owned oil and electricity entities, have found themselves parties to numerous arbitration cases, typically initiated by their business partners. Regarding investment arbitration, 2023 saw over ten new proceedings filed against the Mexican state. Investors operating in Mexico view arbitration as an essential tool to address any government decisions that may impact their commercial interests.

Indeed, the number of arbitration cases initiated against Mexico might have risen had the Supreme Court of Justice not issued a ruling to declare the unconstitutionality of the current administration’s reforms to the LIE in early 2024. Reacting to this decision, President López Obrador stated that initiating impeachment proceedings against Minister Pérez Dayán, the author of the ruling that invalidated the administration’s policies, would be warranted. This ruling exemplifies the judiciary’s role as a sanctuary for private entities. However, the fact that certain commercial decisions by public agencies are beyond judicial oversight, coupled with ongoing executive pressures, suggests that judicial intervention alone may not be adequate to counteract the impact of government policies.

In this context, the outcome of the presidential elections will have a very important impact on the political direction of the country and, undoubtedly, also on the definition and scope of arbitration in Mexico. On the one hand, candidate Claudia Sheinbaum has assured that she intends to continue the policies implemented by López Obrador. If the government’s hostility toward private companies and the judiciary persists, an upward trend in the number of commercial and investment arbitrations can be expected to continue. On the other hand, opposition candidate Xóchitl Gálvez has promised to completely distance herself from the current government policies and has indicated that she will seek to restore private investors’ confidence to do business in Mexico. In this alternative scenario, one would expect that a more welcoming environment for private investors would lead to a decrease in the number of arbitration proceedings involving Mexico and its state-owned enterprises.

The upcoming presidential elections in June 2024 mark a crucial turning point for Mexico, with significant implications for its energy policy, economic framework, legal environment, and role in international arbitration. The choice that voters face between the continuation of current policies and the prospect of transformative legislative change will decisively shape Mexico’s future direction in attracting foreign investment and its stance on state enterprises.

The outcome of the election will not only determine Mexico’s strategic approach to managing its natural resources and resolving disputes but also signal its position in the global economic and legal communities. As Mexico decides on its path forward, the international community remains keenly observant, recognising the broader impact on trade, bilateral relations, and arbitration norms. This moment is a pivotal opportunity for Mexico to define its commitment to a fair, progressive, and stable economic environment on the world stage.