When a company operates commercially in Mexico, the question often arises as to whether it is less risky to choose a governing law other than Mexican law for the interpretation of its contracts. This decision is usually based on an assumption that is not always correct: assuming that the choice of a foreign law guarantees greater legal protection.
This happens frequently in companies whose primary shareholder or parent company is located outside of Mexico. It is thought that if a foreign law—for example, that of the majority shareholder’s place of incorporation—is agreed upon in the contracts as applicable in the event of a dispute with a client in Mexico, there will be greater control over the outcome of the conflict. It is assumed that a Mexican judge will interpret the clause literally and that the parties will be able to anticipate the outcome of a potential dispute. That assumption, in many cases, is wrong.
In countries like England, parties have broad freedom to agree upon the early termination of a contract under the terms they deem appropriate [1]. There is certainty that, in the event of a breach, the affected party will be able to enforce the clause and that a judge will uphold the early termination of the contract.
In Mexico, such certainty does not exist.
In practice, one of the parties may decide to terminate the contract, confident that the agreement allows it, and make decisions assuming it is released from the contractual relationship. However, the other contracting party may challenge the validity of the clause—even after having accepted it upon signing the contract—and a Mexican judge may rule in their favor, finding that the clause is invalid and therefore not binding upon the parties.
The consequence is worrying: the contract may remain in force against the will of the party that attempted to terminate it.
While in the English system contractual interpretation is predominantly literal, in Mexico it is not necessarily so. It depends on the type of clause intended to be enforced, a difference that is frequently ignored when structuring contracts that take effect within Mexican territory.
Regarding early termination, a Mexican court will analyze elements beyond the literal text of the clause to validate its execution. Consequently, a clause that is fully valid under a foreign law may be unenforceable before a Mexican judge.
For the party seeking to enforce the clause in its literal sense, judicial interpretation in Mexico represents a concrete risk. The local court will evaluate aspects such as the notice period, the impact on freedom of contract, legality, or public policy, in accordance with binding criteria established by the Supreme Court of Justice of the Nation [2].
Therefore, when a contract is to take effect in Mexico—for instance, in the supply of goods or products—the decision to subject it to a foreign law does not eliminate legal risk. In certain cases, it increases it.
Before assuming that a foreign law will effectively govern the scope and interpretation of a contract’s clauses, it is essential to verify whether these will be enforceable before a Mexican court, especially when the contractual relationship is already producing effects in Mexico. Otherwise, a party may face the problem of having to remain in a contractual relationship they believed they had terminated, based on a clause that their counterparty accepted upon signing the contract. To cite just one example.
