Assessing and Reinforcing Litigation in Mexico Part 1: Costs & Rewards
Contribution by Mr. Romelio Hernández
Romelio Hernández is President at HMH Legal, a professional corporation specialized in credit and collection services in Mexico. He is based in Tijuana, Baja California, México, where he works extensively with foreign exporting companies and collection agencies assisting them with their out-of-court and legal collection efforts throughout Mexico. His litigation experience of sixteen years and exposure to international commercial law has allowed him to provide guidance to foreign companies in mitigating the various risks of selling international. Romelio graduated from Universidad Autónoma de Baja California, and was admitted to practice law in Mexico since 1997. Romelio holds a Masters’ Degree in Comparative Law (LL.M.) from the University of San Diego School of Law (2011).
This is part 1 in a 3 part series.
“We want to file suit. Please provide your suit fee immediately.” I get these inquiries regularly. Many times, this is the first contact I have with the client. More often than not, the client has not even provided any information regarding the claim, or regarding the debtor. Sometimes I feel that these clients think that there is a pre-packaged one-size-fits-all complaint pleading that we have ready for sale, and once purchased and filed at the courts, the judicial system will unleash its mighty power upon the debtor, make him tremble, and subdue him to our will. Clients expecting this are up for a rude awakening.
The fact is that not all claims are candidates for litigation. A plaintiff (especially foreigners), under many situations may find that the Mexican legal system, with all its problems and nuisances, create many challenges that makes the legal process debtor-friendly. This is usually the case where creditors didn’t document the loan or sale properly (anticipating the challenges of the Mexican legal system), or didn’t do a due diligence on their debtors. Whatever the cause may be, the bottom line is that creditors should choose only the best claims for litigation, and should put a game plan in place to reduce costs and risks.
In order to filter the good candidates from the bad and put a game plan in place, I believe there are three issues that creditors should address before making a decision to sue: 1) costs and rewards; 2) risks; and 3) legal strategy. The following article will try to point out the factors that weigh into these issues, and will try to provide some guidance and recommendations for reaching the best decisions.
1. Costs and rewards
First and foremost, you have to keep in mind that going into litigation has to make business sense. You are not going to spend $4,000 dollars in legal costs for a $5,000 claim. Despite the logic, a number of clients insist on suing the debtor all while neglecting the possible costs of doing so. Thus, the first thing you need to do is determine the costs of litigation, which your local attorney should quote after reviewing the supporting documents for your claim, and after assessing the risks explained here and determining the legal strategy. These costs include the actual costs and expenses of litigation, as well as attorneys’ fees, and they vary greatly depending on a number of factors.
While it is hard to put an estimate of these costs generally, you have to keep in mind that litigation in Mexico does not come cheap. This is due to a legal system that is not efficient. Every time you have an inefficient system, transaction costs are going to be high. Each year the World Bank produces and updates guides for doing business in different countries, with information ranging from business environment to enforcing contracts. According to the 2013 world guide, Mexico ranks 76 out of 185 countries for ease of enforcing contracts. In addition, according to data from the guide, enforcing a contract in Mexico takes 415 days and costs 31.0% of the value of the claim. While these numbers may not reflect the reality in all jurisdictions or apply to every case, they are a good place to start.
The legal process in Mexico is generally lengthy, and the cost will absorb a good part of the claimed amount, but there are exceptions. The first that comes to mind are very small and very large claims. It is hard to imagine paying 30% in costs and fees out of a $10 million dollar claim. Similarly, 30% out of a $5,000 claim will not cover the costs and fees of good legal representation. Another exception is claims with good supporting documents, including collateral or security. These claims may find their way through a privileged action, which will definitely reduce costs and time. Another scenario would be complex cases (trademarks, distribution, contract disputes with counter claims, etc.), or claims subject to arbitration. These just change the rules of the game and merit different treatment.
Having said this, if I wanted to save time and discard claims from the start, those would be the small claims that have no collateral or security. These claims may not justify the costs of good legal representation, and would probably just give us headaches and further losses. If I had to put a number, I would say that the threshold would be $25,000 US dollars. A claim worth less than this would require a lot of justification to litigate. Anything above this is worth considering under evaluation against the factors explained below.
An important lesson here is that there are no shortcuts or deals to be discovered. Because litigation is tough, you will need professional and reliable legal representation to be successful, and this has a cost that does not come cheap. If you shop around long enough you will eventually find the attorney that will accept your case at the price you are asking. But is it worth it? Should you retain him? This is a question that only experience and knowledge about the legal landscape can help answer. Common sense always helps as well.
DISCLAIMER: The information you obtain in this article is not, nor is intended to be legal advice. The law office of HMH Legal will only provide legal advice after having entered into an attorney-client relationship. It is imperative that any action you undertake be done on the advice of counsel, and not based solely upon this article.