THE AUTHOR:
Galo Márquez, Associate at Creel, García-Cuéllar, Aiza y Enríquez.
It is rare to find arbitration-related cases before the Mexican Supreme Court, such as the recent case 7790/2019 (constitutional appeal), concerning the annulment of an international arbitral award. Similar to other jurisdictions, the Mexican Supreme Court assumes jurisdiction over a dispute only in exceptional matters, mainly when the dispute concerns a breach of the Mexican Federal Constitution.
Since arbitration usually addresses commercial matters, it is rare for a party to find itself before one of the Chambers of the Mexican Supreme Court. Mexico’s Arbitration Law is embedded within the Commercial Code. The regulation is a near ad verbatim adoption of the UNICTRAL Model Law on International Commercial Arbitration. As such, the grounds in Mexico to set aside an arbitral award or resist its enforcement mirrors those foreseen in the UNCITRAL Model Law.
The Supreme Court has considered these grounds numerus clausus since 2011 (Case 527/2011). In other words, they are not expandable, and they should be interpreted in a strict manner.
The institutional framework within Mexico’s judiciary system is also an additional hurdle for a party to have access to the Supreme Court. Arbitration-related matters before a judge, such as a request for precautionary measures, appointment of the arbitrators, and document production, among other actions, are resolved through a special trial designed for applications related to arbitration proceedings (see, Commercial Code, Arts. 1464-1480). The relevance is that a decision taken by a judge on a special trial can hardly be appealed to the Supreme Court. With this background in mind, Mexico’s Supreme Court decision to answer the case 7790/2019 (constitutional appeal), involving a commercial arbitration, is even more noteworthy.
Background
At the end of December 2022, the Supreme Court released two decisions (tesis) arising from the same dispute concerning the interpretation of the grounds to set aside an arbitral award.
The case derives from a commercial arbitration commenced under the auspices of the International Centre for Dispute Resolution of the American Arbitration Association, under No. 50-180-T-00054 11, resolved by a full panel of renowned Mexican arbitrators. The dispute involves a shareholder and joint venture agreement between Seser & Grant (“Grant”), the Claimant, and Spectrum Trim (“Spectrum”) and several other companies, the Respondents. An award in favor of Spectrum was rendered on January 7, 2013, and Grant filed an application to set aside the arbitral award a month later.
During the arbitration and the subsequent judicial proceedings, Grant claimed that the arbitrators applied different standards to assess the witness and documentary evidence, arguing that this entailed a preferential procedural treatment of the case to the other party. The case was brought to court when Grant applied for annulment before the Mexican District Courts. The Courts’ decision to set aside the arbitral award prompted Spectrum to appeal to the jurisdiction of the Supreme Court.
In the arbitration, Grant submitted two witness statements belonging to Javier and Julio Segovia, who were shareholders of the company. Grant claimed that the arbitrators rejected the evidentiary value of Grant’s witnesses while simultaneously accepting Spectrum’s witness, Mr. Wilder, also a shareholder at Spectrum, as credible and fully evidential. To support this, Grant and a lower Mexican court noted that the arbitrators stated that the “Segovia’s are the people who stand to gain (or lose) […]. Therefore, they have every reason to argue in favor of their position, as opposed to objectively retelling the facts as they occurred”.
Grant also argued that the statements of three witnesses were not considered relevant in the award because they were their previous employees. Comparatively, Grant claimed that the arbitrators gave full probative value to the testimony of Mr. Al George, who had also been a prior employee of Spectrum. Due to this, counsel for Grant advocated that two different stands to value the testimony of the parties’ employees were applied by the arbitrators.
In Grant’s own words, “was the Judicial Branch willing to permit such a breach of the arbitrator’s duties on whom the parties had put their trust on?”.
The Interpretation of the Grounds to Set Aside an Arbitral Award
Initially, the District Courts had annulled the arbitration decision, quoting a prior decision by the Mexican Supreme Court in Case 71/2014. The District Court recalls that “[i]t is possible to annul an award for violation of the principle of procedural equality, […] it is clear that if the arbitral tribunal did not give the parties the same opportunity to allege and prove everything they deemed convenient, or if it did not evaluate the evidence provided with the same standard and identical trial requirements, it is a cause that prevents the affected party from asserting its rights”.
In this regard, Art. 1434 of the Commercial Code states that “The parties should be treated equally and each party should be given a full opportunity to assert its rights”. Further, Art. 1457 contemplates that “Arbitral awards may only be annulled by the competent judge when: I. The party bringing the action proves that: […] B) It was not duly notified of the appointment of an arbitrator or of the arbitral proceedings, or for any other reason was unable to assert its rights”.
When interpreting these provisions, the Supreme Court decided that Case 71/2014 did not apply to this situation. It ruled that principles such as equal treatment of the parties and the right to present one’s case can only be violated during the proceedings and not in the final award. It considered that the right to be heard and due process are ‘procedural’ guarantees, and as such, are applicable only during the substantiation of a procedure. The Supreme Court added that, because the arbitrator’s evaluation of evidence is considered part of their decision-making discretion, they do not invalidate the award.
It also determined that the provisions of the Commercial Code do not allow judicial courts to review the merits of the award when a party applies for its annulment on the aforementioned grounds.
Nevertheless, the Supreme Court left a wide range of questions unanswered, including:
- What is the responsibility of the arbitrators in cases where their award is annulled?
- Whether a gross and exorbitant violation on the merits of an award constitutes grounds for annulment, and
- Whether an award itself may be annulled if arbitrators exceed their authority by resolving ultra petita matters.
A Commentary on the Supreme Court’s Decision
The Supreme Court is partially in line with its previous decisions but it’s content might not resonate with current practices in international arbitration.
Stemming from the Supreme Court’s decision in Case 71/2014, the highest court considered that it is not proper to demand from arbitrators the same constitutional duties that are expected from judges. This includes matters concerning the “[r]easoning of the decision and due process”. Nevertheless, the question of the degree of reasoning expected from arbitrators remains open. As recalled by a lower court, the arbitral tribunal in the Grant case had failed to state reasons why a “clearly differentiated evidence standard or burden” was applied when judging the witnesses. The Supreme Court did not address this point.
The Supreme Court also argued that both the UNCITRAL Model Law and the Commercial Code contemplate that the right of the parties to be treated equally is within the chapter of ‘Conduct of Arbitral Proceedings’ and not within the chapter that regulates the award. This grossly misses the fact that the first footnote of the UNCITRAL Model Law states that “Article headings are for reference purposes only and are not to be used for purposes of interpretation”.
Finally, the Supreme Court contradictorily considered that the right to due process also includes the right to receive or be served an award that resolves the dispute, but that such right is fulfilled solely upon notification of the award. Such a conclusion overlooks the fact that arbitrators also have duties when drafting the award, such as the need to state reasons for their decision.
Internationally, the question of whether an arbitral award, per se, could breach a party’s rights to due process and equal treatment is unsettled. For example, Professor Julian Lew recalls that “assessment of evidence is in the discretion of the tribunal and can rarely amount to a ground for challenge of an award” (Comparative International Commercial, page. 675, ¶25-37). Other academics recognize that some jurisdictions include as procedural irregularities “failing to render an award free from ambiguity” and a breach of the principle that “a party is entitled to a decision by the arbitral tribunal that takes its position into account insofar as relevant”. (G. Born, §25.04[B]).
Overall, the question of whether an award deserves to be set aside might be treated differently in each jurisdiction, and it is a fact-finding decision in conjunction with a detailed study of the applicable mandatory norms to the annulment proceedings.
ABOUT THE AUTHOR:
Galo Márquez is an Associate in the Arbitration Practice at Creel, García-Cuéllar, Aiza y Enríquez. Galo is also a Business Law Professor at Tec de Monterrey, a Member of the Academic Forum on ISDS and the Chair of the CAM/CANACO Forum for Arbitration Practitioners in Mexico City. He is an awarded academic and he recently received the Johnny Veeder International Arbitration Scholarship.
