No Getting Away With Murder: The Lion Case and Mexican Justice

Investors coming to Mexico are sophisticated. They do their homework and document their loans and collateral with proper care and retain experienced legal counsel. They also know that in case of a dispute, they have to try their cases in a specific forum (either courts of law or arbitration) and according to a specific set of laws. Investors doing business in Mexico pay significant amounts of money to ensure that their collateral is properly documented and recorded. Mexico is very formalistic in that regard. Notwithstanding, investors believe that those steps and expenses will provide reassurance that whenever there is a breach, they will be able to collect. They rely on the rule of law in our country, which includes a robust and independent judiciary. That is the assumption.

Yet, there are horror stories that diminish our country’s credibility as a place for investment. My belief is that such stories must be exceptional but, in my practice, you can find several of them. For instance, imagine that a foreign company made a huge loan to a Mexican company, implemented collateral and agreed to submit to the Mexican courts and tribunals to decide any dispute arising among the parties in order to fund a real estate project in one of the beautiful beaches along the Pacific Ocean. Then, there is a breach by the debtor. While trying to negotiate or restructure its debt with the Creditor, (i) the Debtor files a lawsuit in a local court in the Mexican territory (which is not the court that the parties agreed in the loan documents), (ii) submits false evidence before such court; and (iii) contributes to a defective service of process to deny the possibility for Creditor to defend its loan and collateral. Long story short, after a few years of a very formalistic litigation, the Debtor is acquitted and the Creditor loses the collateral guaranteeing payment without having the possibility to defend itself. There was a denial of justice. One of many horror stories in our country.

When everything seems lost before the intricacies of the Mexican court system, the Creditor decides to take the case further, taking advantage of one of the many — thank God — international treaties protecting foreign investors. Most importantly, it mandates that the host country (Mexico) should provide fair and equitable treatment to investors, which includes the obligation not to incur in a denial of justice.

The above narrative is from a real case: the Lion case arbitration award. This was an investment arbitration case under Chapter 11 of the North American Free Trade Agreement (NAFTA) that gave rise to an adverse award against Mexico for acts performed by the Mexican local judiciary. As a consequence of this arbitration case and its recent arbitration award, Mexico (as a country) was ordered to pay US$47 million plus interest as relief to the foreign investors for denial of justice in a local court and the entire judiciary apparatus that contributed to perpetrate an unfair result. Simply stated: denial of justice. This case differs from the 30 or more investment arbitration cases where Mexico has been respondent since 1994. This is the first case that has created a standard for denial of justice. This is a case to watch further because horror stories from investors doing business in Mexico can have a good result after all. The Mexican federal government must pay attention since activities by local courts that were blind to in the past could be the source of liability for the Mexican state. No more obscure results. To this we turn.

This arbitration case started in December 2015 and lasted almost several years. The three-member arbitration tribunal rendered its award in September 2021. This case arose from NAFTA violations and was held under the Additional Facility of the International Center for Dispute Resolution (ICSID). (For further details of this public decision see the 279-page award in Lion Mexico Consolidated LP -Claimant-, v. United Mexican States -Respondent- ICSID case No. ARB(AF)/15/2.) Also note that ICSID was created under the Washington Convention dated 1965 precisely to oversee and administer, inter alia, arbitration proceedings related to investment conflicts between investors of one country and a different host country.

The Plaintiff made several loans, which would be secured by mortgages. All loans although executed between 2005 and 2007 were declared in default by the end of 2009. Several negotiations and talks regarding possible restructuring occurred until the beginning of 2012. Notwithstanding, while all these negotiations were taking place, the Debtor had previously started a litigation before one local court in the state of Jalisco based on forged documents that aimed to secure an improper and unfair result against the Creditor, or Plaintiff.

Some of the wording used in the arbitration award included: “… [this] was the first step in a complex judicial fraud schemed by [] to avoid the imminent foreclosure of the Mortgages…” and that the “… [arbitral] Tribunal is convinced that [certain documents] are in fact a forgery… .” In short, the Mexican litigation was held due to the forged documets and a Mexican court rendered a judgment against Lion Mexico Consolidated LP. More striking, there was a second round of inappropriate actions (acting falsely on behalf of Lion Mexico Consolidated LP in constitutional proceedings) to ensure the case was lost, consummating the illegal actions by the Respondent. In short, reading the 279-page arbitration award is a narration of one tragedy: the lack of integrity among the attorneys who orchestrated the fraudulent scheme and the Mexican local judiciary that tolerated it.

This arbitration award will not be unnoticed. It is well grounded and very well written. It has marked a new start regarding liability for investment arbitration — at least in Mexico. Once the award was released, it caused turmoil within the entire legal and business community. The community has become aware that parties trying to use improper and illegal activities to defraud foreign investors may cause liability for the Mexican state, and, therefore, make it the Respondent in any international investment arbitration. The standard is very high to prove denial of justice. Notwithstanding, the future is promising in that fraudulent parties and unethical authorities will not get away with murder.