Mexico’s Attempt to Limit the Amount of Potential Indemnifications Payable by State Entities

On 28 March 2023 the executive branch submitted an initiative to Congress proposing to amend 23 administrative laws that govern the legal and contractual relationships between public entities and private companies. The initiative is fundamentally divided into three areas: rectification of corrupt practices, prevention of acts that could be harmful to public interest or public funds, and the overall strengthening of the Federal Public Administration.  

Under the guise of safeguarding the public interest and fundamental social rights, the proposed amendments to the administrative regime governing public contracts and licenses include the Mexican government’s proposal to limit the state’s obligation to pay damages and losses in the following scenarios:

Additionally, the initiative proposes to remove reference made in the Act of Expropriation that currently subordinates its application to the international treaties to which Mexico is a signatory and, in any event, to arbitration agreements executed by state entities.

The aim of this initiative is clear: the Mexican government is attempting to strengthen its autonomy to legislate on matters of public interest. Unfortunately, its focus is solely on the potential indemnifications that private companies may claim, rather than on the fundamental issue of the legitimacy of public interest regulations. The limitations on potential indemnifications for private companies apply to disputes involving public contracts, authorisations, permits, and/or licenses (excluding those in the energy sector. As a result, depending on their characteristics and contractual and legal framework, such issues may be resolved in a variety of forums: i) litigation in Mexican courts; ii) national and international business arbitrations; or iii) investment arbitrations. 

Logically, the prospective claims and defences against the indemnification restrictions would differ depending on the resolution forum. Within the domestic context, whether it be litigation before Mexican Courts or domestic and international commercial arbitrations held in Mexico, challenges to indemnification limits should be made on the basis of the Mexican constitution’s fundamental rights of access to justice and fair and complete indemnification, among others. The outcome of any such challenges will ultimately depend on the Mexican judiciary’s interpretation thereof, balancing the legitimacy of the public interest against the indemnification sought by the private contractor. It will also be crucial to assess the reaction and potential deference of foreign courts when asked to enforce an arbitral award that arises from an arbitration seated in Mexico and concerns a matter that may be deemed part of the Mexican public interest.

In investment arbitration, a different approach would certainly be taken. Current trends and theories concerning indemnity standards would almost certainly reject any attempt by a country to limit its liability through national laws that do not have the same legal standing as international investment treaties. Consequently, it is anticipated that the restrictions on indemnifications that the Mexican government is trying to enact will likely be dismissed as irrelevant in investment arbitrations under any of the treaties to which Mexico is a signatory.