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The theory of imprévision

Mexico City's congress recently passed an amendment to contract law provisions of the Civil Code for the Federal District (Mexico City) introducing the theory of unpredictability or imprévision, as it is known under French law, granting debtors the right to seek relief for unpredictable circumstances. The amendment was published in the Official Gazette of the Federal District on January 22 2010 and became effective the day after. The change in the contract law provisions of the Civil Code for the Federal District, granting debtors the right to seek amendment to civil law contracts as a result of non-contractual events, is an exception to the general principle of civil law that has ruled contractual arrangements in Mexico "pacta sunt servanda": the agreements are to be kept.

Under the amended contract law provisions, a party to a contract has the right to request its counterparty to amend the terms of the contract to restore the equilibrium of their respective obligations if extraordinary, unanticipated circumstances on a national level arise, that result in the obligations becoming more onerous.

The amendment is aimed to protect debtor's economic interests and to relieve debtors, which have assumed periodic payment obligations under contracts governed by the Civil Code of the Federal District, from complying with obligations that have become too burdensome and that give unanticipated gains to the creditor, as a result of economic events that adversely a affect debtor's financial situation. Pursuant to the statement of purpose (exposición de motivos) of the amendment, inflation and the fluctuations of foreign exchange rates are considered to be economic "contingencies" pursuant to which debtors may seek the amendment of a contract.

The regulatory scope of the amended provisions is restricted to agreements governed by the Civil Code of the Federal District that are subject to a term, condition or provide for periodic obligations, expressly excluding aleatory contracts. Lease agreements in respect to real estate property located in Mexico City, movable-asset lease agreements, agreements for the rendering of services, purchase and sale of goods arrangements, among others, are subject to these new provisions. It is important to note, however, that commercial agreements entered into by and between business entities, or those in a commercial transaction, such as secured and non-secured credit facility agreements or stock purchase agreements, are excluded from the scope of these provisions because they are governed by federal commercial laws.

The right to request the amendment arises only after the unanticipated national circumstances occur and can be exercised only within 30 days of the event. The request does not grant, in itself, the right to suspend payment or performance of the relevant obligations. If the parties do not agree on the new terms of the contract within 30 days of the date the non-affected party received the request for amendment, the debtor has the right to request a judge to solve the controversy.

If the judge confirms that unanticipated circumstances of a national nature have occurred that caused the debtor's obligations to be more onerous, the non-affected party may accept the amendment to the contract to restore the equilibrium between the obligations of the parties as determined by the judge, or terminate the agreement without any liability. The equitable amendment to the contract or its termination only applies to the obligations and consideration payable after the extraordinary and unanticipated event. And termination will not apply if the affected party is in default under the relevant contract or if such party acts with bad faith.

This amendment has raised great concern within the real estate industry in Mexico City, as real estate transactions in the City are governed by the Civil Code of the Federal District. Landlords fear that the protection given to lessees and buyers whose payment obligations are denominated in foreign currency or indexed to inflation may unduly benefit. Despite this, counsels to corporations, financial services providers and others, have expressed no concern as to the legal consequences for commercial agreements because in Mexico, commercial and financial activity is regulated by federal law; consequently there is no contact point with the civil laws of Mexico City.

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