Mexico’s Controversial Judicial Reform Takes Effect: Assessing its Impact

15 September 2024 was a landmark day for Mexico as President López Obrador’s controversial judicial reform (the “Judicial Reform”) was signed into law, making Mexico one of the few countries in the world to elect its judiciary (including Supreme Court justices) by popular vote. This move from an appointment-based judicial system has sparked protests within the federal judiciary and may have a significant impact on companies and international stakeholders operating in Mexico, as well as global ramifications. This Legal Update will explain what you need to know about this reform and outline its potential impact.

BACKGROUND TO THE JUDICIAL REFORM

During his administration, President López Obrador attempted several reforms that were rejected by the Mexican courts as unconstitutional. President López Obrador argued that these reforms represented the will of the Mexican people, and that the existing judiciary is largely corrupt, necessitating a reset through the election of judges by popular vote. He proposed the Judicial Reform as the best way to address nepotism and corruption within the judiciary, infusing it with principles of humanism, justice, honesty, austerity and democracy. The approval of the Judicial Reform became possible after López Obrador’s party won a legislative majority last June.

The Judicial Reform faced opposition from various parties, including the US and Canadian Embassies, professors, academics, law students, and NGOs. Critics argued that the reform would undermine the independence of Mexican courts and violate the checks and balances established in the Constitution. While part of the expressed criticism is well-reasoned and based on the text of the Constitutional amendments, some criticism should be taken with caution.

KEY FEATURES OF THE JUDICIAL REFORM

1. Reorganization of the Mexican Supreme Court

The Judicial Reform will reduce Supreme Court seats from 11 to 9 and limit justices' tenure to 12 years (instead of the current 15), with no possibility of being re-elected. Further, the Supreme Court will no longer be able to universally suspend the application of unconstitutional laws that are challenged through a constitutional injunction (amparo) (i.e., the effects of an amparo protection will be limited to the plaintiff); before this reform, Mexican judges could extend the protection of a constitutional injunction to any third parties likely to be affected by the challenged law whether or not they were a party to the procedure. The Supreme Court will now need 6 of 9 votes (instead of 8 out of 11) to declare laws unconstitutional.

2. Election of Justices and Federal Judges by popular vote

Supreme Court justices, Circuit Court magistrates, and District Court judges will be elected via popular vote in general elections and require prior candidacy selections by each of the Executive, Legislative and Judicial branches and particular commissions to validate them. They will need to run a campaign. This means that approximately 1,600 judges will have to run for office. The changes will be put into effect gradually, with a large portion of the judiciary up for election in June 2025 and the rest in 2027.

Candidates will no longer need to have a career in the judicial branch but will continue to need a law degree with an average of 9/10 in courses  with related areas of expertise. Applicants will also need to have practiced law for at least five years and to submit an essay and recommendation letters from individuals attesting to their qualifications. Other existing requisites will continue to be applicable. Candidates will be submitted by members of Congress (by a 66.66% majority vote), the Supreme Court and the President. A lottery will then reduce the number of candidates to be voted and selected by popular vote. The Constitution maintains the existing principles of independence of the judiciary. Finally, secondary laws (to be prepared by the New Administration and then proposed to Congress) shall continue specifying the terms for the career path (carrera judicial) and other requirements applicable to all judges. 

3. New Judicial Administration Body and New Judicial Discipline Tribunal

Prior to the Judicial Reform, the Federal Judiciary Council (“CJF”) was the body responsible for the administration, discipline, and judicial career of the federal judiciary. This council was in charge of aspects such as the appointment, supervision, promotion and dismissal of judges and magistrates, in addition to the management of the resources of the judicial branch.

With the Judicial Reform, the control and administrative powers of the CJF will be replaced by the Judicial Administration Body, which will be in charge of the administration of resources, the management of the judicial career (excluding judges and magistrates) and internal control. On the other hand, the functions of supervision of discipline, performance and sanctions of judicial officials will be carried out by the new Judicial Discipline Tribunal (“JDT”), which will comprise five members. The JDT will also have the power to impose sanctions (including suspension, fines, dismissal and disqualification), file criminal charges and request the impeachment of judges.

The members of the JDT will be elected by popular vote and serve a six-year term, with no possibility of re-election. The JDT’s decisions will be final and unappealable.

IMPACT OF THE JUDICIAL REFORM

This Judicial Reform is likely to have short-term and long-term implications for many stakeholders. The implementation of the Judicial Reform is still dependent on the preparation and enactment of secondary laws that will need to be analysed to get a full picture of the impact it will have. However, some initial ramifications are outlined below:

1. Short term disruption of ongoing legal proceedings

On 19 August 2024, federal judges and magistrates in Mexico began striking over the reform plans, disrupting ongoing legal proceedings. The strike is expected to end today (2 October 2024), but it is uncertain when judicial proceedings will return to normal.

2. Risk of erosion of key checks and balances

The International Bar Association (“IBA”) has expressed concern about the potential impact of the reform on an independent, professional and fair judiciary, as the election process, like any other election of public servants, may expose the judiciary to outside influence from political parties (and, potentially, organized crime groups). The Inter-American Commission on Human Rights has also expressed concerns that the new JDT may “threaten judicial independence” and points to the “lack of due process guarantees” in the disciplinary system. Importantly, yesterday (1 October 2024) when the new President, Claudia Sheinbaum, took office she confirmed in her oath speech to respect and enhance absolute autonomy and independence of the judicial branch from the President; this strong message should provide comfort to stakeholders.

3. Risk of damage to Mexico’s business landscape and economy

Mexico's business landscape and economy, Latin America's second largest one, is facing a crisis of confidence due to the lack of clarity pending implementation of the Judicial Reform through secondary legislation.

This legal uncertainty has already negatively impacted Mexican markets as Morgan Stanley downgraded Mexico to UW (underweight) status in August amid the striking premised on increased risk and negative investment impact. The Mexican peso fell to a two-year low against the dollar before returning to standard levels. Foreign investment is also being impacted with foreign firms supposedly holding back some $35 billion in investment projects. Moody's Ratings have warned that the Judicial Reform will be "particularly harmful to future investment in nearshoring opportunities." Consultancy firm Oxford Economics Read says that investment could fall 12 percent below its baseline forecast and another expert predicts that the Judicial Reform "increases the likelihood that the Mexican economy will fall into recession."

4. Impact on sectors heavily reliant on foreign investment

Investors in key sectors like power and electricity were previously able to seek protection from Mexican courts when faced with controversial reform proposals from the government. For example, in January 2024, injunctive proceedings were pursued in relation to proposed electricity reforms, leading to its rejection by the Supreme Court on the basis that they "violated the principles of competition, free concurrence and sustainable development" of the industry.

The Judicial Reform may influence the ability of investors to challenge State actions in Mexico, as it introduces changes that could potentially narrow the judiciary's scope of intervention. Several factors may contribute to this shift, including (i) the possibility of the election process affecting judicial independence, as justices and judges will now be subject to popular vote; (ii) the reduction in judicial powers, particularly the courts’ ability to suspend the enforcement of laws deemed unconstitutional through the amparo process and extend protections to third parties impacted by such laws; and (iii) the introduction of stricter judicial sanctions, which may affect the decision-making processes within the judiciary. These changes may influence investors’ confidence in the judicial system and impact future investment decisions in Mexico.

5. Increased risk of investment disputes

Changes are also expected in the energy and mining sectors due to President López Obrador's February 2024 reform package (including the Judicial Reform). If reforms are introduced which create significant regulatory and operational challenges for foreign investors, investment disputes are likely to follow.

While those disputes could have been taken to the Mexican courts for resolution, the climate of uncertainty and potential crisis of confidence in the judicial system may push foreign investors protected by Bilateral Investment Treaties or Multilateral Investment Treaties to rely further on international tribunals.

Mayer Brown recently represented the claimant in the case of Lion Mexico Consolidated v. United Mexican States, where an ICSID Additional Facility panel found Mexico internationally liable for denial of justice under the North American Free Trade Agreement (“NAFTA”). This is a landmark decision, as it is the first successful denial of justice claim under NAFTA and one of the few under international law as a whole. This case highlights concerns about the effectiveness and impartiality of the current judicial system, issues that the Judicial Reform intends to address. While it remains uncertain whether this and other reforms will increase or reduce risks for investors, treaty-based international arbitration may be the best alternative until the impact of the Judicial Reform can be assessed in practice.

6. Potential trade disputes under United States-Mexico-Canada Agreement

Mexico’s diplomatic tensions with the US and Canada may continue. Trade disputes may arise under the United States-Mexico-Canada Agreement, (“USMCA”) - which took effect on 1 July 2020, replacing NAFTA - particularly if the judiciary places heavy weight on outcomes which they perceive will resonate well with voters. Further, a review of USMCA is due in 2026 and this reform may become a topic of debate during that ratification process.

WHAT NEXT?

A considerable level of uncertainty is likely to dominate the Mexican legal landscape for the foreseeable future, with potential impacts on the timing, consistency and nature of legal decisions. Foreign investors and commercial parties who have pending (or anticipated) disputes which involve Mexican courts now need to analyse the particular risks they face and may need to adopt new strategies and/or manage their legal risks differently. Foreign investors in particular may prefer to mitigate risks associated with regulatory uncertainty by understanding the protections offered to them by investment treaties and other dispute resolution mechanisms.

Affected parties should act quickly to ensure they make the right legal and business decisions to suit their particular needs. The authors are well-placed to provide tailored advice and help you navigate the opportunities and challenges that lie ahead.