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Analysis

Liabilities in Mexico's Offshore Projects: The Right Balance?

Tue, 01/22/2013 - 13:43

After Macondo the world has changed, and all companies involved in providing equipment or services to the offshore oil and gas industry, as well as the operators, need to understand the risk allocation and mitigation. Currently, environmental pollution liability is one of the most critical issues for service providers to Pemex. Therefore, it is important to understand the four different types of liabilities pursuant to Mexican law: civil, administrative, environmental and criminal.

CIVIL LIABILITY

Liability for breach of contract arises when a party to an agreement fails to comply with its obligations. Force majeure or acts of God are not considered as a breach of contract. The non-breaching party may choose between specific performance under the contract, if possible, or rescission of the obligation; plus the payment of damages and lost profits. Damage is the loss or reduction in the patrimony by the lack of compliance with an obligation, and lost profit is the deprivation of any lawful gain that should have been obtained through compliance with the obligation. Damages and lost profits must be an immediate and direct consequence of the lack of compliance with the obligation. In the event of claim for the payment of damages and/ or lost profits, the plainti† shall prove the existence of the damages and/or lost profits as well as the corresponding amount. Pursuant to Mexican law, the parties can stipulate the payment of liquidated damages in the event that an obligation is not fulfilled. If such stipulation is made, they will not be able to claim damages and/or lost profits. The compensation stipulated as liquidated damages cannot exceed the value of the amount of the main obligation established in the contract.

Mexican legal provisions regulating liability arising out of illegal acts provide that the injured party has the option to claim from the breaching party to do what is necessary to revert to the original condition (restore things as they were before the harmful result occurred) whenever possible, or pay damages and lost profits. Anyone acting in an illegal manner that causes injuries or damages to another person shall indemnify the victim, unless it is proven that the damage was caused due to the fault or gross negligence of the victim. Strict liability is when a person makes use of mechanisms, instruments, apparatus or substances which are inherently dangerous, due to the speed they may develop, due to their explosive or flammable nature, due to the energy of the electric current which they carry, or for other analogous reasons, such person is obliged to respond for the damage caused, even though he is not acting in an illegal manner, unless it is proven that such damage was produced by fault or gross negligence of the victim. Operating an ROV, a rig, vessel or many other onshore and o†shore devices, equipment, among others, may result in strict liability to the contractor.

ADMINISTRATIVE LIABILITY

When a federal governmental authority acts unlawfully, the law establishes legal procedures for individuals or other authorities to file a claim against the federal authority for the irregular administrative activity and, if applicable, to annul the administrative act. Administrative entities, in the event of an unlawful conduct, may impose several sanctions to its public servants. Pursuant to the Mexican constitution, individuals are entitled to be indemnified in accordance with the guidelines, limits and procedures established by law for damages caused to their rights and assets for unlawful administrative activity of the State. Pursuant to the law, the indemnity shall correspond to full compensation for damage and, if appropriate, for the personal and moral damage.

ENVIRONMENTAL LIABILITY

These liabilities may arise from the lack of compliance with the environmental legal provisions, whether federal or local. The environmental authorities may impose the following penalties or measures: temporary suspension of business, seizure of materials and hazardous waste, analogue actions to prevent pollution, fines, arrest and suspension or revocation of permits, concessions or authorizations. Federal and local criminal codes establish the crimes and penalties regarding violations in connection with the environment provisions which may be imprisonment, fines, actions to restore the environment, suspension, modification or demolition of constructions, works or activities, as deemed appropriate, which constituted environmental crimes, return of materials or hazardous waste or specimens of flora and fauna to the country of origin, and prohibitions to be designated as public servant. It is important to mention that pursuant to the new legal framework for the energy sector, Pemex shall implement actions to prevent and repair damages to the environment caused by works or operations of the oil industry, and it is obliged to cover the associated costs, when found liable by resolution of the relevant authority in terms of the applicable legal provisions. This is limited to force majeure and illegal acts by third parties.

CRIMINAL LIABILITY

Individuals who commit a crime will be penalized pursuant to the criminal code, whether federal or local, depending on the type of crime. Companies may be required to pay damages for the loss caused to the victim of a crime, when the crime is committed by their employees, representatives or contractors in the exercise of their authorized activities. Damages include restitution of the situation as it was before the crime was committed, restitution of any benefi ts obtained from the crime, payment of non-pecuniary damages, pain, su† ering and mental distress caused by the crime, payment of any fi nancial loss and payment of loss of wages or salary and benefi ts, in case of injuries that result in the inability to work. According to the criminal laws, the most relevant sanctions that can be imposed to a company under criminal law are: suspension of activities of companies, dissolution of companies, prohibition of carrying out specifi c operations or businesses, and removal of o· cers.

RISK MITIGATION

According to Mexican law there are no punitive, indirect and consequential damages (other than direct loss of profi t) as in US law. By having a Mexican subsidiary in the form of a stock corporation or limited liability company (S.A. de C.V. or S. de R.L. de C.V.), there is additional protection for the shareholders, including that the responsibility of shareholders as well as the partners is limited to the amount of their participation in the company’s capital. In Mexico, courts rarely pierce the corporate veil. Therefore, forming a Mexican subsidiary and having Mexican law as the governing law in a contract with Pemex will provide additional protection to the investor. If the investor is from Canada or the US, Chapter 11 of NAFTA will provide additional protection in the event of a measure equivalent to expropriation. If a contract is wrongfully terminated by Pemex there could be grounds for fi ling an arbitration claim pursuant to ICSID rules.

The Petroleum Law indicates that the petroleum industry acts that are not foreseen in the Petroleum Law, will be considered as commercial acts and shall be governed by the Commerce Code and by the provisions of the Federal Civil Code. This principle is also included in the Regulations to the Pemex Law, indicating that “the covenants, agreements and other legal acts that Petróleos Mexicanos and the subsidiary entities execute or subscribe to, as a consequence of the compliance of its respective purpose shall be regulated, in addition to the administrative provisions, by the common legislation that corresponds by subject matter, in accordance to their nature”