Lion Mexico Consolidated v. Mexico: An Unprecedented Finding of Denial of Justice under NAFTA

Author: Kruthi Venkatesh*

In an unprecedented finding, the arbitral tribunal under the North American Free Trade Agreement (“NAFTA”) made a positive finding on a denial of justice claim by a Canadian investor against Mexico. This is a first such finding in the 27-year history of NAFTA. Previously, all claims of denial of justice had been rejected by NAFTA tribunals.

Denial of justice under international law was originally associated with international law violations committed by states against persons or property of an alien on its territory.[1] It was considered that a denial of justice “occurs whenever a State, through any department or agency, fails to observe with respect to an alien, any duty imposed by international law or by treaty with his country.”[2] In the context of modern-day international investment arbitration, this is a much narrower inquiry which arises where a national legal system fails to provide justice to the foreign investor.[3] However, this does not include situations when there is a single procedural irregularity or misapplication of the law at some level of the judicial system.[4] A denial of justice claim, although not explicitly mentioned under NAFTA, has been recognized as an international wrong under the fair and equitable standard under Article 1105 of NAFTA.[5] Below, we discuss the decision in Lion Mexico Consolidated v. Mexico and the tribunal’s finding of denial of justice.

Factual Background

Lion Mexico Consolidated L.P. (the “Claimant”), a Canadian company, having its principal place of business in Texas, had made investments in Mexico for several years.[6] As a part of its investment, the Claimant had provided three loans, amounting to US $32.8 million, to companies owned or controlled by Mexican businessman Sr. Héctor Cárdenas Curiel to finance certain real estate projects. In return, the Claimant had mortgages over these real estate properties.[7] However, the debtors defaulted on all initial repayment deadlines for the three loans and, despite reminders, defaulted on all subsequent payments.[8] While the Claimant was still engaged in bona fide negotiations with the debtors, the debtors filed a fraudulent lawsuit against the Claimant before a state court in Mexico where the applicable laws allowed cancellation of mortgages through a judgment by a competent judge.[9] The suit for cancellation of the mortgages was based on a settlement agreement under which the Claimant had supposedly accepted the cancellation of all pending debts.[10] Based on this agreement, the Mexican court cancelled the mortgages over the properties.[11] In addition, the debtors also obtained a declaration from the court that its judgment concerning the cancellation of the mortgages was res judicata, thereby denying the Claimant an opportunity to appeal the decision.[12] The Claimant tried to obtain a declaration from Mexican courts that the settlement agreement was forged and also filed criminal charges.[13] However, not having received any such declaration for three years, the Claimant filed an investor-state dispute under NAFTA.[14]

The Denial of Justice Claim

The Claimant argued that Mexico breached its duty to treat it in a fair and equitable manner by denying the Claimant justice in pursuing legal remedies against the debtors by not according it proper due process rights since the Claimant was not granted an opportunity to be heard and was then deprived of the legal means to defend its rights, and by the undue delay in the local proceedings against the debtors.[15]

Standard for denial of justice

The tribunal’s main concern in analyzing the denial of justice claim was differentiating between “procedural decisions properly adopted by local Courts, which are contrary to the alien’s interests, and those which amount to an international wrong and engage the responsibility of the State.”[16] In its inquiry, the tribunal relied on the standard espoused by the tribunals in Mondev International Ltd. v. United States of America (“Mondev”)[17] and Loewen Group Inc. and Raymond L. Loewen v. United States of American (“Loewen”),[18] due to the absence of a previous positive finding of denial of justice under NAFTA. The Mondev case provided a much higher standard for a denial of justice claim which is a “willful disregard of due process of law which shocks or at least surprises a sense of judicial propriety”.[19] This was heavily relied on by Mexico, arguing that the Mondev standard should be applied. Mexico also argued that the standard of “willful disregard” set by Mondev necessarily includes an “evidence of intention or malice, collusion, corruption, or flagrant abuse” by its judicial system.[20] The Claimant on the other hand argued that the tribunal should apply the standard espoused in Jan Oostergetel and Theodora Laurentius v. The Slovak Republic,[21] that is, procedural irregularities should be “severe” and affect the outcome of the dispute, and that any undue delay should be considered “excessive”.[22]

The tribunal accepted the standard adopted by Mondev as it has been adopted by several NAFTA and non-NAFTA tribunals. However, the tribunal found that Mondev’s standard of “willful disregard” does not require “evidence of intention or malice, collusion, corruption, or flagrant abuse”, contrary to Mexico’s position.[23] Relying on Mondev, the tribunal concluded that the test for denial of justice was an objective test requiring a finding of improper and egregious procedural conduct by the local courts, which does not meet the basic internationally accepted standards of administration of justice and due process, and shocks or surprises the sense of judicial propriety.[24]

Tribunal’s Findings of Denial of Justice

In applying the standard discussed above, the tribunal found that the Claimant was denied procedural justice in the following respects:

1. Denying the Claimant access to justice: This includes the absence of access to national court proceedings and the absence of notification about the proceedings as a procedural denial of justice. The tribunal noted that the Claimant was never given an opportunity to defend itself before the state courts in Mexico because it was never properly served.[25] While not notifying the Claimant by itself is not denial of justice, the Mexican state court never corrected this situation despite multiple requests by the Claimant.[26]

2. Denying the Claimant the right to appeal: The Mexican state court, after cancelling the mortgages, declared that its judgment has become res judicata, barring any opportunity for the Claimant to appeal the judgment. The tribunal found that arbitrary closing of an avenue of appeal otherwise guaranteed to it by the law as a denial of justice.[27]

3. Denying the Claimant, the right to allege and prove forgery of the forged settlement agreement: The Claimant was denied the opportunity to present material and relevant evidence to defend its case that the settlement agreement was forged. The tribunal found that not allowing an alien to produce evidence in municipal courts amounts to denial of justice.[28]

The tribunal concluded that despite three years of fighting within the municipal judicial system, the Claimant could not get, or expect to get, a fair decision within a reasonable timeframe.[29] Therefore, the tribunal was convinced that there was a willful disregard of due process of law which shocks, or at least surprises, a sense of judicial propriety. Having held that the Claimant was denied justice by restricting access to justice, and its right to defend itself and present evidence were consequently undermined, the tribunal found that it did not need to look into whether there was undue delay by the municipal courts of Mexico to determine that there was a denial of justice here.

Conclusion

This decision will certainly pave the way for future denial of justice claims under NAFTA. While these claims have to be decided on a case-by-case basis, it will be interesting to see how subsequent NAFTA tribunals approach such claims.

* Kruthi Venkatesh is an LL.M. Candidate at Columbia Law School and a Student Editor of the American Review of International Arbitration.

[1] G. G. Fitzmaurice, The Meaning of the Term Denial of Justice, 13 Brit. Y.B. Int’l L. 93, 95 (1932).

[2] Id., citing Charles Cheney Hyde. 

[3] Andrew Newcombe & Luis Paradell, Law and Practice of Investment Treaties: Standards of Treatment 239 (2009).

[4] Id., ¶ 242.

[5] See Waste Management, Inc. v. Mexico (“Number 2”), ICSID No. ARB(AF)/00/3, Award ¶ 98 (Apr. 30, 2004); Glamis Gold, Ltd. v. United States, UNCITRAL, Award ¶ 627 (June 8, 2009).

[6] Lion Mexico Consolidated L.P. v. United Mexican States, ICSID Case No. ARB(AF)/15/2, Award ¶ 57 (Sep. 20, 2021).

[7] Id. ¶ 59-62.

[8] Id. ¶ 85-90.

[9] Id. ¶ 93.

[10] Id. ¶ 93-95.

[11] Id. ¶ 93-95.

[12] Id. ¶ 309.

[13] Id. ¶ 180-183.

[14] Id.

[15] Id. ¶ 300.

[16] Id. ¶ 246.

[17] Mondev Int’l Ltd. v United States of America, ICSID Case No. ARB(AF)/99/2, Award (Oct. 11, 2002)

[18] Loewen Group, Inc. and Raymond L. Loewen v. United States of America, ICSID Case No. ARB(AF)/98/3, Award (June 23, 2003).

[19] Mondev Int’l, ICSID Case No. ARB(AF)/99/2, Award ¶ 125.

[20] Lion Mexico, ICSID Case No. ARB(AF)/15/2, Award ¶ 290.

[21] Jan Oostergetel and Theodora Laurentius v. The Slovak Republic, UNCITRAL Final Award (Apr. 23, 2012).

[22] Lion Mexico, ICSID Case No. ARB(AF)/15/2, Award ¶¶ 276-278.

[23] Id. ¶ 290.

[24] Id. ¶ 299.

[25] Id. ¶ 302.

[26] Id. ¶¶ 372-373.

[27] Id. ¶ 432.

[28] Id. ¶¶ 505, 506-509.

[29] Id. ¶¶ 506-509.