Nearly two years after the publication of the landmark case-law [1] decision of Mexico’s Supreme Court, which qualified the principle of free will in commercial matters, also known as freedom to contract, allowing the parties to freely agree upon the terms and conditions governing their contracts, we considered it timely to offer a few reflections on the matter.
On that occasion, the now-extinguished First Chamber of the Supreme Court of Justice of Mexico (the Court) examined a case in which a company and an individual sought the rescission of a supply agreement in which they acted as suppliers, as well as compensation for damages.
The defendant, acting as the customer under the supply agreement, argued that the contractual clauses had to be enforced. Said clauses provided that, in the event the customer received from a third party an offer to purchase raw materials at a price more competitive than that agreed with the supplier, the customer would notify the supplier in order to confirm whether the latter was in a position to offer an equal or lower price.
The supplier was granted a twenty-four-hour period to inform the customer of its counteroffer; otherwise, it would be deemed that the supplier was unable to offer an equal or lower price, and the contract could be terminated.
The Court held that clauses of this nature are unconstitutional, as they breach the principle of equality between the parties governing commercial matters.
Among the reasons why the Court qualified the principle of freedom to contract were the following:
a) Freedom to contract is limited by legality, public policy, and equality between the contracting parties.
b) Provisions such as Article 1797 of the Federal Civil Code [2] also operate as a limit to this principle, particularly with respect to the termination of contracts.
This is because, although a contractual clause allowing for termination prior to the contract’s expiration may be lawful, an agreement that enables the customer to terminate the contract solely upon finding a more favorable price aligned with its own interests—without granting the supplier a real opportunity to match such price—was unlawful, as it placed the supplier at a structural disadvantage vis-à-vis the customer. Such imbalance is precisely what Article 1797 of the Federal Civil Code seeks to prohibit.
The Court further determined that the term “inform” implied that the customer was required to disclose to the supplier all elements inherent to the competing offer, including, among others, the object and price, the identity of the offeror, delivery and payment terms, quality of the materials, volumes, etc., so as to ensure that the supplier was genuinely placed on an equal footing to assess whether it could match the offer.
Likewise, the Court deemed the twenty-four-hour period to match or improve the offer to be unlawful, as the general term applicable in commercial matters is three days.
Comments
The key takeaway from the case-law decision issued by the Court is that freely negotiated clauses allowing either party to terminate a contract prior to its expiration are, in principle, admissible.
However, the party terminating the contractual relationship must exercise particular care in fully informing the counterparty of the terms and conditions of such termination, specifically identifying the circumstances of manner, place, and time that legitimize the exercise of such right.
Ideally, both the mechanism for providing notice of termination and the content thereof should be expressly and thoroughly regulated in the contract.
With respect to certain periods granted for submitting counteroffers—such as the twenty-four-hour term analyzed—the Court has held that such periods are excessively short and contrary to the general three-day term established under commercial legislation.
Beyond this specific holding, the Court’s criterion invites a broader question:
To what extent is judicial intervention in private contracts legitimate when courts invalidate or declare unconstitutional clauses freely agreed upon by the parties?
This question is particularly relevant in commercial matters, where the contracting parties, by virtue of their status as merchants, pursue profit, unlike other areas such as civil law or consumer law, where additional fundamental rights may be at stake. In those fields, regulatory or judicial intervention to rebalance contractual relationships is more clearly justified.
Conversely, merchants generally have access to specialized legal counsel, enabling them to identify the legal risks associated with accepting certain clauses or agreeing to specific conditions. They therefore retain the freedom to reject contractual offers they consider contrary to their interests.
In the case examined by the Court, the supplier knowingly accepted the clauses that were subsequently invalidated by the Supreme Court, having determined that the benefit to be obtained by entering into the contract under such terms outweighed the risk that the customer might find a more competitive market offer, which the supplier might be unable to match within the brief twenty-four-hour period it had also agreed to.
Finally, although such criteria are not surprising in jurisdictions such as Mexico, which seek to prevent abuses in contractual relationships [3], particularly when compared to systems such as English law—where judicial intervention to invalidate freely negotiated clauses is more limited [4]—one cannot avoid questioning whether decisions of this nature may undermine the predictability that merchants seek when entering into contractual arrangements.
The analyzed Jurisprudential Thesis may be accessed at the following link (in Spanish):
https://sjfsemanal.scjn.gob.mx/detalle/tesis/2027621
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[1] Jurisprudential Thesis 178/2023 (11th.).
[2] This article provides the following: “The validity and performance of contracts may not be left to the discretion of one of the contracting parties.”
[3] Mexico is part of the family of private law legal systems that have been greatly influenced by the French Civil Code of 1804 (Napoleonic Code).
[4] See Monday/Friday of the Laconia [1977] AC 850.
