Guidelines for effective debt recovery in Mexico

The collection of outstanding debts from Mexican customers is unfortunately a frequent occurrence and often turns out to be more difficult than expected. The most important thing in these cases is prevention: good contract design and collateral measures can mean the difference between recovering the debt or writing it off due to uncollectibility.

The following are therefore general guidelines to make the recovery of claims against a Mexican customer more effective.

International contract drafting

Contract: A good international sales contract should be signed.

If there are only e-mails and purchase orders, the enforcement of the claim will be considerably more difficult. Therefore at least a framework contract should be signed. The details of current orders can be covered by Purchase Orders.

Furthermore, it is recommended to apply UN purchase law. Since Mexico and Germany are signatories of the United Nations Convention on Contracts for the International Sale of Goods, concluded in Vienna on April 11, 1980, this applies automatically. Only if the UN Convention on Contracts for the International Sale of Goods has been explicitly excluded by contract, it does not apply between the contracting parties.

The sales contract should always be include the following provisions:

Retention of ownership: Allows the machine, for example, to be segregated in the event of insolvency. The retention of ownership should be registered in the Mexican register of guarantees (Registro Único de Garantías, RUG). This excludes the acquisition of ownership by a third party in good faith. Likewise, action can be taken against the debtor for resale.

Promissory notes: The purchase price claim should be secured by one or more promissory notes customary in Mexico, so-called ‘’pagarés’’. This allows claims to be enforced under facilitated conditions, because it is an abstract security that establishes claims against the Mexican buyer independent of the underlying legal transaction. If the promissory note was issued correctly, the buyer cannot assert any objections arising from the contract of sale of goods (e.g. defective or incomplete goods, warranty claims or claims for damages).

It is very important that the main owner(s) of the Mexican company is/are held liable as guarantor of the promissory note, because often the owners extract all capital from the company, so it has little assets (principle: "poor company, rich owner"). The company as a contracting party is then only an empty shell. Without the owner's guarantee, no action can be taken against him. The seizure of the owner's private assets as a promissory note guarantor is a considerable incentive to repay the debts.

Choice of law and jurisdiction clause: German law and German courts can be agreed upon. However, Mexican law, or at least Mexican courts, should be agreed upon for the enforcement of the judgement in Mexico.

UN sales law can be applied by Mexican judges and party representatives without an expert legal witness. Otherwise, both parties must find and pay an expert for the applicable foreign law in each case.  In case of divergent opinions, the court appoints an independent third party, whose fees must also be paid by the parties. If the parties do not wish to agree on UN sales law, they must expressly exclude it. Otherwise it applies automatically.

Arbitration clause: the advantage of arbitration proceedings is the relative brevity of the proceedings compared to multi-instance court proceedings and the focus of the arbitrators on the case and not on formalities. However, the arbitration clause should include a so-called "carve out" for actions on bills of exchange based on the promissory note.

Early repayment clause: in the case of payment by instalments, it should be agreed that all instalments, or the total price becomes due immediately if the buyer is in default with an installment, so that each installment does not have to be claimed individually. This clause should be entered in the warranty register (RUG).

Premature termination of the contract: In connection with the previous point, it should be agreed that if the buyer is in default with one installment, the entire contract can be terminated. If there are several contractual relationships with the same buyer, it should also be agreed that further contractual relationships can be terminated in order to increase the pressure.

Interest rates: These should always be above inflation and the base rate of the Mexican Central Bank. Ideally far above it, so that the debtor does not have the interest to refinance at a favorable rate with the foreign seller.

Separation of contracts: When selling machinery and equipment, ensure that the purchase contract is signed separately from the maintenance and service contract. This way, the debtor cannot raise objections from the maintenance and service when paying the purchase price.

Advantages of the bill of exchange procedure:

Accelerated procedure and thus faster achievement of an enforceable title. Right at the beginning of the procedure, the assets of the debtor and the bill guarantor are seized. A promissory note should be issued for each installment payment. However, to avoid having to enforce them individually, they should contain a prepayment clause so that in the event of default on one installment, all future installments can also be enforced by means of the promissory note.                                                                                                         

UN Purchase Law, in contrast to Mexican law, the UN Convention on Contracts for the International Sale of Goods in Art. 71 offers the possibility of a right of retention. The seller can stop further deliveries or services and link them to the payment of the remaining purchase price. This can lead to a renegotiation of the contract which is advantageous for the creditor and takes into account the current situation of both parties.

Non-possessory pledge: Especially when selling machines, the agreement of a non-possessory pledge is recommended. This must be entered in the guarantee register (RUG).

Practical means of pressure: Since Mexico does not have any extrajudicial  collection and enforcement procedures, there are only two ways to collect debts: out of court and in court. Basically, sufficient pressure must be built up on the debtor so that he is able to meet the seller’s (with priority) payments. In this case the notary can help by delivering a collection letter as an extrajudicial means. Other means of exerting pressure include withholding or stopping maintenance and service work, updating software and not supplying materials, tools and spare parts.

Written by Mauricio Foeth, Mowat.