Litigation Funding Overview - Mexico

Paloma Castro [1]

Introduction

Third party litigation funding is still a relatively new concept in Mexico. However, a distinction should be drawn between financing for judicial proceedings before local and federal courts, and financing for arbitration proceedings, which has seen massive growth in recent years.

i Domestic court litigation

Mexico is a federal country with a civil law legal system. As such, Mexico does not have a specific regulatory framework governing or restricting the use of third party litigation funding, which is generally allowed and accepted.

However, litigation funding is not yet well established within Mexican litigation practice. Until a few years ago, there were very few funds with the capacity to underwrite and finance Mexican domestic litigation.

The slow penetration and delayed availability of third party litigation funding in Mexico can be attributed to the following factors:

1. Generally speaking, the costs of litigating in Mexico are low in comparison to common law jurisdictions where high costs have spurred the development of the third party litigation funding financing market. Legal fees are generally lower, and there are no statutory court fees or costs associated with filing civil or commercial lawsuits. Furthermore, it is not possible to request security for costs in commercial litigation.[2]
2. On the other hand, the financial exposure of plaintiffs is substantially low. The recovery of costs and legal fees from the losing party is not generally available unless the judge considers that one of the parties has proceeded with recklessness, bad faith, or both. In any case, the financial exposure is statutorily limited, and it is generally determined by a tariff or a percentage of the claimed amount depending on the state in which the case is heard.
3. The civil law regime in Mexico tends to be quite strict and conservative when it comes to awarding significant amounts of damages as compared to common law jurisdictions.

These factors naturally limit the interest of litigation funders in domestic court cases in Mexico.

The cost profile of cases with lower capital deployment and potentially lower returns may explain why litigation funding is still not well established.

Nevertheless, Mexico's legal system has seen some important developments and court decisions that might present interesting opportunities for the litigation finance industry going forward.

The country's historical ties with the US have seen Mexican courts adopt certain notions from the US legal system that could prove to be instrumental in the development of the litigation funding market in Mexico.

In the past decade, Mexico has enacted a comprehensive legal framework for collective redress actions protecting consumer relationships, including antitrust, financial services and product liability cases.

As with other countries, litigation funding could play a major role in the development of the Mexican class action system, which has remained mostly untested in these sectors.

The Supreme Court has also introduced a particular notion of punitive damages that includes features of the common law concept that are not typically seen in civil law liability systems.

As the courts begin to adopt these concepts and criteria, it is expected that damages-based litigation, which has been limited historically, will present opportunities for the third party litigation funding market to develop.

ii Alternative dispute resolution – arbitration

Alternative dispute resolution (ADR) methods have become increasingly popular in Mexico.

Arbitration remains the most common method of ADR in Mexico with well-established international and domestic arbitration centres.

Although not well established, third party litigation funding for arbitration is more commonly used in comparison to domestic court litigation.

In fact, the increase in the use of arbitration has been one of the main factors contributing to the arrival of third party litigation funding in Mexico due to the higher costs associated with these proceedings.[3]

According to statistics published by the ICC, in 2020 Mexico was the third most common nationality among parties to arbitration proceedings registered by the ICC in the American continent.

In 2021, Mexico was ranked as the fifth most common nationality in the total new cases registered under the ICC Arbitration Rules.[4]

Despite the delayed arrival of litigation funding in Mexico, these trends in the dispute resolution market have started to attract the interest of global litigation funders in recent years, and they see Mexico as an ideal hub for their Latin American practice.

The main global litigation funders that are active in Mexico are Deminor, Omni Bridgeway and Nivalion, and there are also Latin America-focused funders such as Lex Finance.

The effects of the covid pandemic have threatened the economic wellbeing of many businesses in Mexico, where there have been limited governmental stimulus programmes.

In a country where small to medium-sized companies generate approximately 52 per cent of GDP, the economic effects of the pandemic have pushed companies to look for alternative sources of capital and to interact with litigation funding for the first time.

Law firms are also increasingly aware of the litigation finance market, and they are realising the value it can bring to their firms and clients.

Although Mexico should still be considered a market under development, it is widely expected that third party litigation funding will continue to progress in the coming years, especially in the following types of claims:

1. International and domestic arbitration: arbitration has become the preferred dispute resolution mechanism for many sophisticated parties conducting business or investing in Mexico. This trend is not only present with foreign parties, but also among domestic companies who prefer this method over the Mexican court system.
2. Investment arbitration: one of the main priorities of the current federal administration has been to strengthen the role of state-owned enterprises in the energy sector. The executive decisions and reform bills proposed by the executive branch have been subject to scrutiny and challenge by private parties before the federal courts. It is expected that these measures may in some cases harm the rights of investors. Those investors, in turn, might seek redress through investment arbitration.
3. Private enforcement of antitrust violations: the Mexican competition authority has been one of the most active in the region in recent years. Together with class action reform, Mexico now offers a solid legal framework to pursue the private enforcement of competition law via damages claims before the domestic courts.

2023: The year in review

During the past year, Mexico has experienced strong recovery from a pandemic that had deep social and economic impact, including impact on the litigation system.

In recent years, the judicial system had begun to transition to and implement working via electronic means, namely electronic filings and hearings.

These efforts had to be fast-tracked because, for example, it has become common to hold virtual hearings and carry out remote hearings for the deposition of expert witnesses.

Overall, the impact of the pandemic sped up the modernisation of the court system in Mexico by creating and implementing digital justice initiatives that contribute to lightening the paperwork load and enhancing access to justice in Mexico.

In the field of investment arbitration, potential amendments to the energy and lithium sectors in Mexico may potentially impair foreign investors' rights under the more than 40 investments treaties to which Mexico is a party (including those entered into with the United States, Canada, the United Kingdom, China, Germany, France, Spain and Italy).

The aim of these investment treaties is to protect foreign investors from, among other things, discriminatory, arbitrary, and unfair and inequitable treatment by the government, as well as from direct and indirect expropriation of their investments.

Therefore, if foreign investors suffer damage to their investments as a consequence of the regulatory changes to the electricity, lithium mining and secondary regulations, Mexico could see a number of investment treaty arbitrations being launched by foreign investors to protect their legal and commercial interests.

With regard to antitrust cases, in 2021, the judiciary confirmed 84.21 per cent of the Mexican Federal Economic Competition Commission's decisions, which means that 47 out of 58 cases were upheld.[5] Among the most significant cases, it is worth mentioning the following:

1. collusion in the secondary market for the intermediation of government debt securities;
2. abuse of dominance in the market of electric energy and associated products;
3. abuse of dominance in the federal land passenger transport service at Mexico City's Airport; and
4. collusion in the market for the distribution of medicines.

Legal and regulatory framework

Mexico has no regulatory framework applicable to third party litigation funding. Its civil law system does not include historic common law restrictions such as champerty and maintenance.

There are no precedents from the Mexican judiciary regarding the use of third party litigation funding, since it is a relatively new concept with a limited track record in the country.

Mexico's civil law system follows the principles of legal certainty, legality and contractual freedom whereby everything that is not expressly prohibited by law should be permitted.

Therefore, funding arrangements are normally subject to the general principles of contract law, which is mostly based on this contractual freedom, and is only limited by the general requirements of validity and existence established in the Civil Code.

Mexico has no mandatory bar requirements for lawyers. As such, lawyers and law firms are not subject to any general ethical restrictions regarding the use of third party litigation funding.

However, lawyers must abide by the general rules applicable to professionals. For lawyers, these are mainly the obligations to act independently and in the best interests of their clients and to safeguard the principles of professional secrecy (attorney–client privilege).

This means that lawyers are required to obtain express consent from their clients before sharing confidential information with a litigation funder. Contingency fee agreements are also permitted in Mexico and are not subject to any particular restriction.

Since third party litigation funding is still not widely used in Mexico, the prospects for a specific regulatory framework in the near future are quite low.

As its acceptance grows and it becomes more commonly used, we can expect that some cases regarding the use of third party funding might reach the judiciary. This could drive initiatives for regulation, but this is not expected to happen soon.

Structuring the agreement

Litigation funding agreements are not regulated under Mexican law. Since this type of agreement is not specifically regulated, it should generally be considered an atypical commercial contract governed by the general rules of contractual law.

As mentioned above, due to the principle of contractual freedom, the parties should be able to tailor the content of the agreement to their needs.

However, parties should be mindful when structuring a litigation funding agreement in Mexico, particularly when it comes to resolving disputes between parties and the potential tax consequences of the proceeds received through the agreement.

There are no rules governing litigation funding, and it is difficult to know what position the court might take regarding these types of agreements.

The Mexican legal framework should allow the parties to structure the litigation funding agreement in various ways, including as a non-recourse loan, a joint venture agreement, a trust or even a services agreement depending on the needs of the client and the desired involvement of the funder in the book building and conduct of the litigation.

On the other hand, litigation funding agreements face some difficulties in Mexico if the parties seek to implement them as a loan, given that there is no unconditional repayment obligation, and they could be subject to statutory limitations on interest if such a structure is utilised.

In contrast to other civil systems, Mexican law does not include the ancient notion of the right of withdrawal under which the sale or assignment of a claim would allow the debtor to settle the claim by paying the amount paid by the assignee to the assignor.

Therefore, the assignment or sale of litigious rights is permitted under Mexican law and is a relatively common transaction for certain types of collection rights and litigation.

The key provisions that the parties should generally include in the litigation funding agreement are:

1. the consent and control rights of the funder;
2. the legal budget;
3. adverse party costs risk indemnity;
4. the calculation and payment of the funder's remuneration;
5. the collection and distribution of the proceeds of the litigation;
6. the confidentiality of the agreement; and
7. termination rights.

Disclosure

i Domestic court litigation

Since there is no legal framework applicable to third party litigation funding, there is also no formal obligation to disclose the existence of a funding agreement or the identity of a funder under Mexican procedural law.

In addition, discovery is not available in Mexico, and this limits the ability of the parties to request or develop information once a complaint has been filed.

The litigant may elect to disclose the existence of a funding agreement to the judge if it considers it to be in its best interest.

ii Arbitration

In arbitration, disclosure obligations will depend on the rules governing the proceedings. Mexico has incorporated the United Nations Commission on International Trade Law (UNCITRAL) into Book 5, Title 4 of the Federal Commercial Code, making it a federal law that applies nationwide.

The enacted model does not provide for disclosure obligations regarding the existence of third party litigation funding.

However, the law does provide that arbitrators must rapidly identify and disclose any circumstances that may affect their impartiality and independence,[6] and this is where the existence of third party litigation funding should normally be considered.

Parties may opt to disclose the existence of a funding agreement and the identity of the funder to assist this process if they consider it might give rise to follow-on proceedings that challenge the capacity of the arbitrator.

Mexico is the fifth most frequent nationality among parties in arbitration proceedings conducted under the auspices of the ICC.

As of 1 January 2021, arbitration proceedings that follow the recently amended ICC rules must comply with new obligations regarding the disclosure of third party litigation funding.

The new ICC rules seek to improve the efficiency and transparency of arbitration proceedings.

They include the obligation on the parties to disclose the existence of third party litigation funding agreements (where funders or insurers, or both, have a direct economic interest in the award) and the identity of the funder.

This is done in an attempt to prevent any potential conflicts of interest between the arbitral tribunal and the parties to the dispute.

It is important to note that the ICC rules do not provide for the obligation to disclose the terms of the agreement or the agreement itself, as they are not considered relevant to determine if an arbitrator has a conflict of interest.

The trend for including rules around transparency and the disclosure of third party funding arrangements in arbitration proceedings is also followed in the recently amended ICSID rules in the field of investor-state disputes.

The new rules go a step further than other arbitral rules by requiring disclosure of the identity of the funder and granting powers to ICSID tribunals to request additional information on the content of any funding agreement once the notice of funding has been filed.[7]

Proceedings conducted before domestic arbitration centres such as the Mexican Center of Arbitration (CAM) and the National Chamber of Commerce (CANACO) follow their own sets of arbitration rules, which do not include any formal obligation regarding the disclosure of third party litigation funding.

Legal Costs

As explained above, there are no costs or court fees associated with filing a civil or commercial lawsuit before domestic courts in Mexico.

The Federal Commercial Code,[8] which governs commercial proceedings, does not require the losing party to reimburse the prevailing party for costs incurred in proceedings unless the judge determines that the losing party proceeded maliciously or in bad faith.

The Federal Commercial Code establishes that a party shall be considered to have proceeded in bad faith if it:

1. fails to provide any evidence to justify its claim;
2. submitted false evidence;
3. lost a summary executive action;
4. filed an improper claim; or
5. made unwarranted defences.

In these cases, the judge will usually determine and award costs through ancillary proceedings.

There are no federal rules on how to calculate costs, so the calculation will generally depend on the legislation of the state in which the case is heard.

Costs will be awarded pursuant to the provisions of local law rather than on real disbursements.

Costs awarded to the prevailing party are generally fixed by reference to a fee schedule or a percentage of the claimed amount, which will vary from state to state. The percentage of the claimed amount ranges anywhere from 2 to 12 per cent of the claimed amount, with some exceptions.

In Mexico City, for example, costs awarded will range from 6 to 12 per cent of the claimed amount, depending on the stage of the proceedings in which they are granted.

Mexican procedural law does not contemplate the possibility of imposing a security for costs order on the opposing party.

As mentioned above, there are no regulations regarding the use of litigation funding; nor are there judicial precedents. Therefore, third party litigation funders should not be liable to pay any costs awarded in court proceedings in Mexico; nor would they be required to join the proceedings at the discretion of the judge, as in other jurisdictions.

Mexico: Outlook and conclusions

The market for third party litigation funding in Mexico is still under development.

Despite being in its early stages in terms of domestic court litigation, it is showing signs of maturity in the field of both domestic and international arbitration.

As the legal market becomes more familiar with the tool, major growth is expected in coming years due to the potential size of the market. We expect to see major growth and interest in third party litigation funding in Mexican arbitration, as well as in relation to damages-based claims in the field of antitrust and consumer litigation.

We also expect third party litigation funding to take its first steps in judicial proceedings in Mexico in the coming years.

Footnotes

1 Paloma Castro is senior legal counsel at Deminor.

2 Article 17 of the Mexican Constitution provides that every person has the right to have justice administered to them by courts that will be ready to impart it within the time limits and terms established by law, and shall issue its decisions in a prompt, complete and impartial manner. Their service shall be free of charge and, consequently, judicial fees are prohibited.

3 Based on statistics from the ICC, in Mexico costs of arbitration range from 6 to 10 per cent of the claimed amount.

4 ICC preliminary dispute resolution figures for 2021.

5 https://one.oecd.org/document/DAF/COMP/AR(2022)25/en/pdf.

6 Article 1428 of the Federal Commercial Code.

7 2022 ICSID Arbitration Rules, Rule 14(4).

8 Article 1084.

9 Article 1084.