October 14, 2020

Supreme Court of Justice of Mexico Issues Jurisprudence on Actions Based on Negotiable Instruments

Holland & Knight Alert
Alejandro Landa Thierry | Daniel Jimenez

The First Chamber of the Supreme Court of Justice of Mexico issued on Oct. 9, 2020, a jurisprudence that clarifies a recent contradiction of precedents regarding actions based on negotiable instruments. Under Mexican law, the holder of a negotiable instrument (bill of exchange, promissory note, etc.) has the right to exercise a special "exchange" action to claim payment.

This type of action has several advantages. For example, the defendant can only raise a limited number of defenses, or the claimant can access commercial "executive proceedings." These proceedings are characterized by the possibility of seizing property from the outset of the dispute to ensure payment of a future judgment.

However, when it is not possible to exercise the exchange action, for example, where the statute of limitations has expired, the only alternative is to bring a claim according to the underlying agreement. In other words, it would only be possible to exercise the underlying action derived from the contract or act that gave rise to the negotiable instrument in accordance with article 168 of the General Law of Credit Instruments and Operations. This entails a possibility of inconsistencies between the obligations contained in the negotiable instrument and those in the contract.

It is precisely under these types of situations that the contradiction resolved by the Supreme Court arose. The Second Collegiate Court in Civil Matters for the Third Circuit considered that, when the claim was filed based on the underlying contract, it was not necessary to address the literal text of the negotiable instrument. It was only necessary to consider the obligations contained in the agreement. Alternatively, the Seventh Collegiate Court in Civil Matters for the First Circuit stated that, when the action based on the underlying agreement was exercised because the exchange action was unavailable due to the statute of limitations, only the benefits consigned in the negotiable instrument and not in the contract could be claimed.

The Supreme Court resolved this contradiction in favor of the criteria of the Second Collegiate Court. The Supreme Court considered that when the action based on the underlying contract must be exercised, and there is a contradiction between what is stated in the agreement and the negotiable instrument, judges must consider the text of the contract. This is because the action is, effectively, based on the underlying agreement, and from which the negotiable instrument eventually is derived. That is, the obligation that is being claimed derives from the contract and not from the negotiable instrument. Therefore, what is agreed in the contract must govern. 

This is an important decision for businesses in which the parties resort to negotiable instruments. Since it gives certainty and security that, even if it is not possible to bring a claim based on the negotiable instrument, it will be possible to demand compliance of contractual obligations.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

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