Top Ten Recommendations When Negotiating Material Contracts in Mexico
Feb 03, 2016 Top Ten Download PDF
By Elena Robles, Partner at Cuesta Campos y Asociados S.C
Over recent years, Mexico has enacted new laws, ordinances and decrees oriented –among others – to comply with certain international commitments assumed by government in different areas (data protection, anti-money laundering, anticorruption practices, specific recommendations from the OECD in order to avoid base erosion and profit sharing, as well as tax treaty abuse, foreign trade regulations, antitrust regulations, etc.). Most of these regulations were also created to offer companies transacting business in Mexico the warranty to be doing business in a clean legal environment, however this has driven us to an important challenge in terms of identification and compliance of legal dispositions in the agreement being executed, and has also opened the door to new criteria and interpretations from judicial courts. Even though we can accurately say that the legal environment in Mexico has incorporated new legal figures and instruments to provide such warranties, we can also say that this is in fact a more complex legal environment than former years. The purpose of this brief publication is to provide specific recommendations to be considered in addition to commercial terms and conditions when an international company is negotiating and executing contracts in Mexico.
1. Who are we transacting with?
Considering there is important information that companies need to keep in their files, not only for anti-money laundering and anticorruption purposes, but also for tax purposes, it is advisable to understand who is the company that we are transacting with. Specifically the following information is important: Who are the shareholders of the company? Are they related to political parties or governmental authorities? Is the company involved in open litigations? Does the company have internal policies related to anticorruption practices and data protection policies?
Having timely information on these aspects allows us to incorporate certain representations and clauses in our agreements to prevent future liabilities. For instance, if we are doing business with a company that has been commonly involved in public bidding processes and has been awarded with contracts to be executed with the government, it is important to understand the current status of such agreements and if the company has fully complied with its terms.
2. Nature of the agreement, whether it is commercial or civil.
This may appear somehow obvious if we are dealing with companies that are executing transactions and agreements that are directly related to their corporate purposes or their core business. However, since the criteria to grade a relationship as commercial or civil has not always been so clear, in certain cases it has been a matter of controversy (i.e. individuals involved, render of professional services by a company, etc.). Considering this, it is always advisable to clearly state in the agreement its nature, and to clearly express that parties are assuming the commercial laws of Mexico. This is also relevant since there are substantive procedural differences if we are in front of a conflict that arises from a civil agreement than a commercial agreement.
3. Consider and analyze the tax treatment of the transaction.
We usually concentrate our efforts, when dealing with material agreements executed with customers or service providers, in understanding the commercial terms of the transaction. We have seen, in many cases, that the lack of regulations associated with specific definition of tax treatment of the transactions leads to conflicts when the agreement is being executed and payments are done. Parties consider that establishing the following “each Party will pay its taxes according to applicable laws” may suffice. However, in our experience, this is not always the case. The following are specific considerations to be agreed, stated and analyzed when preparing a contract.
4. Foreign Trade considerations.
If products being sold or distributed under the terms of an agreement are imported, they are subject to specific foreign trade regimes. It is important to clearly state:
5. Labor matters.
Considering that under labor laws in Mexico a labor relationship is created without a specific labor agreement executed if certain conditions are met (dependence and subordination), specifically when we are dealing with agreements where services or activities of individuals are involved, it is advisable to clearly state labor responsibilities of each party specifying the information and payment of statutory benefits and taxes that are assumed by parties with such individuals. Also, it is advisable to establish certain rules to individuals participating in the execution of such agreements in order to forbid that he/she may declare, for commercial reasons, that he/she is acting on behalf of certain company when he/she in fact is working or depending on the other party. In any case, depending on the terms and conditions of each agreement, it is important to review the labor implications of such commercial relationship from a labor standpoint.
6. Data protection regulations.
It is important to understand if as part of the execution of the agreement, the parties and/or individuals involved are using and disclosing private data in order to consider specific sections to set forth responsibilities and obligations in this regard. In some cases, specifically when we are dealing with services agreements, there is information of employees of one of the parties that needs to be disclosed for purposes of the services being rendered, and it is advisable to accurately establish the process and proper authorizations in this regard.
7. Identification of notices under anti-money laundering regulations.
It is important to identify, if under Anti-money Laundering Mexican Law (Ley para Prevenir Operaciones con Recursos de Procedencia Ilícita), activities being executed under the terms of the agreement, and the terms and conditions established therein, are considered as vulnerable activities. In such case, parties may need to provide certain information and collaborate with each other in order to comply with the law.
8. Anticorruption reviews.
Specifically when we are dealing with contracts (subcontract) that may be part of a main contract agreement executed with the government, a section specifically stating that parties are not and have not been involved in corruption practices for the execution of such agreement will be important. Furthermore, an accurate review on how the main contract was awarded is always advisable. If the companies involved have their own internal policies associated with prevention of corruption practices, we suggest incorporating a reference to such policies as a minimum acceptable standard.
9. Intellectual property review and protection of confidential information.
It is very common to incorporate standardized sections related to intellectual property protection to commercial agreements considering sometimes, the long standing relationship companies have with its customers and service providers. However, we have seen that if one of the parties is trying, for any reason, to assign the rights derived from such agreement, the lack of a tailored reference to intellectual property rights, and information derived from the agreement, represent a problem that cannot be reverted. In this regard, our recommendation is to try to identify in each case whether some information, for intellectual property reasons, needs to be specifically protected and referred to therein.
10. Local laws and specific regulations for administrative purposes.
The analysis of specific regulations and laws associated to the execution of the agreement in certain jurisdictions is relevant to accurately establish terms and obligations of the parties. The granting of certain licenses permits and notices may in some cases represent an obstacle when executing the terms of the agreement, and the lack of cooperation of parties with clear scope of involvement and costs associated to them, can be a matter of conflict. If we better understand legal administrative needs of a project, it will be easier to anticipate any contingencies in these regards.
As a conclusion, we can say that when dealing with material contracts executed by companies in Mexico, it is important not to ignore compliance, tax and labor matters associated with the transaction and that are crucial to avoid delays in case of any controversy in the future. Do not leave certain terms associated to these considerations to the apparently obvious understanding of the parties and try to be (as long as permitted by commercial negotiation) as clear as possible in this regard.
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