by Joel Simon
It was on a rutted highway, racing through the badlands of Mexico at 110 miles an hour, that Emilio Figueroa learned an important lesson about justice, Mexican-style.
At three in the morning on a cold October night in 1984, Figueroa and his business partner noticed two strange cars following them down the empty toad. Suddenly, the cars passed them and cut them off. Men carrying machine guns jumped out. Figueroa and his partner made a break, running their Camaro at full throttle until they reached the Texas border. There they learned from a Mexican customs official that the men following them were from the Federal Judicial Police, roughly the Mexican equivalent of the FBI.
It struck both men as more than a coincidence that they had filed charges with a government investigator only a few days before. In their complaint, Figueroa and his partner claimed a Mexican government agency had backed out of a lucrative deal to buy agricultural equipment after a corrupt official leaked confidential information to a competitor. The agency signed with another company and Figueroa figures the alleged interference of contract cost him and his company $2.3 million.
Back in the United States, Figueroa discovered that the government agency had offices in New York and he sued it in federal district court in Los Angeles, where he lives. His attorney warned him that it would be a difficult case. His friends were even more candid: You have to be crazy, or masochistic, to sue the Mexican government. Maybe they're right. Figueroa has shelled out $400,000 in the decade-long legal campaign; he has also dismissed two attorneys. "My attorney was a nice guy," says Figueroa. "But I wanted an attorney who is like a mad dog." With the help of his son, a student at Stanford Law School, Figueroa is representing himself.
Figueroa's ordeal shows the limits of the law in the era of free trade. Even after the passage of the much-ballyhooed North American Free Trade Agreement (NAFTA), which in 1994 united Mexico, the United States, and Canada in a low-tariff market, virtually nothing has been done to address the fact that Mexico remains a legal no-man's-land, especially when it comes to commercial law for small to medium-size businesses. The problem, in fact, is global. The legal infrastructure in developing countries is not keeping up with international business.
After the passage of NAFTA, expectations rose that business deals in Mexico would be made safer and easier. A number of investors rushed in, plopped their money down, and promptly lost much of it during the peso devaluation in December 1994. No figures are available for the amount of uncollected commercial debt in Mexico: The U.S. Embassy minimizes the extent of the problem, but some business analysts in Mexico claim the amount reaches into the billions.
For transnational commercial litigants, going to the Mexican courts remains little more than an exercise in frustration. And things aren't much better in the United States, where courts are expensive. time consuming. and often fruitless if the Mexican defendant has no assets in the United States. Only a few brave souls, driven more by vendetta than by a cool-headed legal analysis, have pushed the limits of the legal morass.
Several organizations have created binational arbitration systems to settle commercial disputes, but progress has been hampered by shortcomings in the Mexican judicial system. The legal deficiencies have fueled the creation of extralegal remedies on the margins --electronic bounty hunters. The most aggressive among them is the Washington, D.C.-based Legal Research International. Inc. (LRI), whose literature promises prospective clients that companies around the world can no longer "conceal themselves behind antiquated legal systems and political corruption to avoid contractual obligations."
While Figueroa complains that his lawyers were timid, he's got nothing but praise for Chris Whalen, LRI's chef financial officer. Whalen describes Mexico as a "mafia state where judges are bought and sold like chattel," adding that anyone who relies on the courts alone to collect from a Mexican debtor is throwing money away "You can't go into Mexico and expect to play by the rules," he says.
Whalen's resume includes stints working for the Federal Reserve Bank of New York and as a financial analyst; his partner, Patrick Flinn, is an ex-CIA agent who has more than a decade of experience working in Mexico. Using electronic databases and old-fashioned detective work, Whalen and Flinn investigate prospective business partners, track assets for those burned in business deals, and launch media campaigns that can get downright nasty. "We're experts in Mexican scumbags," says Whalen.
After winning a $2 million default judgment, Figueroa hired Whalen in 1995 to locate assets held by the Mexican government. Whalen tracked down bank accounts registered to Pemex, the government-owned oil monopoly as well as two government-owned banks. When Figueroa tried to levy the assets, the federal district court in Los Angeles vacated the default judgment based on the Mexican government's assertion that Figueroa had misrepresented the facts in the original complaint. Figueroa appealed to the Ninth Circuit.
Whatever the merits of the case, Whalen calls it a "classic example of how the Mexican government runs away from its financial obligations" and why he feels justified in his aggressive tactics. NAFTA or not, he argues, Mexican debtors, private and governmental, still feel that as long as they are in Mexico they are beyond the reach of international law. As long as that attitude persists, Whalen says, his services will be in demand. "We have enough work to keep us busy for 100 years," he boasts.
LEADING LAW OFFICES around the world favor a clear corporate aesthetic, producing a reassuring sameness for international clients. U.S. investors who visit the offices Jauregui, Navarrete, Nader y Rojas in Mexico City are comforted by black leather couches in the waiting area, a copy of the Wall Street Journal, modular cubicles, glass offices, and a sweeping view of the city. Among the firm's U.S. clients are AT&T, GTE Corp., Compaq Computer Corp., Sun Microsystems, and The Walt Disney Co.
Even the corner office of Rogelio Lopez Velarde, one of the firm's young attorneys, is designed to make his foreign clients feel at ease. On the wall above his desk are degrees from Mexico City's Universidad Iberoamericana and the University of Houston Law Center.
Like many legal professionals in the United States and Mexico, Lopez-Velarde finds Whalen's views exaggerated and offensive. He rattles off the legal reforms that have made Mexico a mote secure place to invest-growing legal standing for international arbitration, new intellectual property and antimonopoly laws. and NAFTA-mandated arbitration in business-government disputes.
Lopez-Velarde acknowledges, however, his clients' unease about the vastly different legal systems and the unreliability of Mexican courts. "One of the biggest problems I have with my clients is that they say `We see you have many good laws, but what about enforcement? What about corruption? What about influence peddling?" Lopez-Velarde, speaking in Spanish, says the word enforcement in English. To the extent the problem is partly cultural is suggested by the absence of an equivalent word in Spanish that would convey the legal nuances the English word does.
Jorge Santistevan, one of the leading attorneys in the growing field of international commercial law, says that courts work more slowly in Mexico, and he counsels patience. "If you are doing business in Mexico, you have to be open minded," he argues. "You can't come down here and have a John Wayne approach. That's not the way you get things done."
But away from the close-knit legal community there's a different analysis. "The Mexican legal system has a long way to go to reach international standards," argues Emilio Zebadua, a political scientist at the Colegio de Mexico in Mexico City. "There is still an enormous amount of discretion in terms of compliance with the law -- politics, corruption, influence peddling all continue to play a role. A functioning, impartial legal system is the best method ever devised by the market for resolving business disputes. But if the legal system does not function properly, then companies will look for other alternatives."
Anecdotal evidence supports Zebadua. Phoenix business-man Charles Harris was so frustrated by his inability to collect a decade-old $110,000 debt that he flew to Mexico City in 1993 and offered a $300,000 reward to anyone who could collect the debt without bribing a Mexican judge.
In another well-publicized example, judicial police in 1990 burst into the Mexico City hotel room of Tucson businessman Alex Argueta and arrested him because of a commercial dispute with a Mexican bank. Argueta was not released until he agreed to the terms of the bank's repayment schedule.
The lack of an effective means of settling transnational commercial disputes is slowing the economic integration between the United States and Mexico, says Raul Hinojosa, the research director of the North American Integration and Development Center at the University of California at Los Angeles. Large multinational corporations that trade between divisions of their own company or between each other have little need for an international forum because most disputes can he handled in U.S. courts. But small and medium-size firms that try to do contract work in Mexico or sell their products in the Mexican market are exposed to enormous risk because they have no viable legal recourse if the deal falls apart.
As currently structured, NAFTA cannot resolve private commercial disputes. The treaty was designed to foment and regulate commerce throughout the continent; language dealing with "dispute resolutions" was incorporated late in the game and addresses only business-government disputes. Nevertheless, trade between the United States and Mexico continues to grow despite the l4-month-long economic crisis (in fact, the cheap peso has boded a massive increase in Mexican exports). For Hinojosa, the most alarming statistic is that more than 65 percent of the 1995 manufactured exports from Mexico are from American multinationals trading among themselves. That means smaller firms are getting shut out of the economic transformation.
One small Los Angeles retail supplier that recently braved the waters ended up writing off a sizable debt after it concluded that litigation in Mexican courts would be fruitless. Says one executive from the company; "We learned that a contract in Mexico doesn't really mean anything."
MISTRUST OF THE Mexican judicial system has led most businesses to look for a back door into U.S. courts once they decide to litigate. The best-known case involves Houston businessman Bill Flanigan. In 1984 Flanigan formed a Bahamian corporation to buy "slop" oil from the Mexican oil workers union and then sell it in the United States.
The problems started when union officials defaulted on the contract, asked for kickbacks, then twice assaulted Flanigan when he refused to pay. Flanigan spent a year living in a Mexico City hotel attempting to have the contract honored. Because the contract was signed in Houston, Flanigan brought suit after the deal fell apart, later adding the government-owned Pemex. He won two default judgments worth more than $300 million, of which he has received less than $2 million. He has seized three airplanes belonging to the Mexican government, including the presidential jet, which was later returned. In 1992 the Filth Circuit ruled that the Mexican oil company was protected under the Foreign Sovereign Immunities Act, which generally forbids suits against foreign states unless certain exceptions apply -- one of which is engaging in commercial activities. The court said Flanigan's company failed to prove it had a commercial arrangement with Pemex. Arriba Ltd. v Petroleos Mexicanos, 962 F2d 528. The frustrated Flanigan continues to pursue his claim under another legal theory and says his case "could impact the upcoming U.S. presidential election."
Whalen cut his teeth working on Flanigan's case, and the experience helped shape his perceptions of how business is done in Mexico. "We tell our clients not give any credence at all to the Mexican court system," says Whalen. "Make sure you draw up a contract that's enforceable in New York or London."
Whalen has made a name for himself by being aggressively self-promoting in a business where most companies prefer discretion. About a dozen other large firms provide the same kinds of services (Kroll Associates in New York and the Control Risk Group in London are two of the best known), as do a host of smaller companies.
Bruce Goslin, a director with Kroll Associates in Miami, advises clients to investigate all potential partners in Mexico. "You have to know who you're doing business with," he says. "Is these a middleman? Are all partners in the deal fully represented? Has a potential partner been involved in corruption or misuse of public funds? A lot of U.S. investors don't realize that if a middleman asks for a commission and uses it to pay bribes, then they could he liable under U.S. law."
Decision Strategies International, a New York-based corporate security firm, provides investigations, asset search and seizure, and consulting services for companies and individuals with foreign investments. Its a growing business, says Brian P. Hollstein, who handles the Latin America practice from the company's Connecticut office. "Laws and contracts are not necessarily enforceable [in Mexico]," he says. "The idea that you can accomplish anything through litigation is ludicrous."
Michael Mandig, an Arizona attorney with specialties in international litigation and Mexican commercial law agrees with Hollstein's dire assessment. "If you're a U.S. creditor, there's no point in trying to collect through the Mexican court system unless the amount is very substantial," he says. Mandig represents a Fortune 500 company that has won a $21 million judgment in Arizona courts and has three suits worth more than $20 million pending in Mexican courts. At the other end of the spectrum, he also represents a small Arizona printer who is owed $25,000 by a Mexican client. So far, neither the Fortune 500 client nor the printer has collected one peso.
Nevertheless, Mandig and others are hopeful that emerging international arbitration organizations can help resolve commercial disputes. In 1994 Mandig founded NAFTA Arbitration and Mediation to help resolve business disputes on the border. And last December the New York City-based American Arbitration Association, the Mexico City National Chamber of Commerce, and two leading Canadian arbitration associations formed the Commercial Arbitration and Mediation Center for the Americas, or CAMCA, to address NAFTA-related disputes. Meanwhile, San Diego attorney Richard W. Page put together in 1995 a binational arbitration commission to deal with commercial disputes in the California border area.
Despite the ongoing problems with debt collection, many attorneys who specialize in international commercial law are cautiously optimistic about some recent changes that give arbitration awards greater legal standing in Mexican courts. In 1993 Mexico modified its commercial code to reflect the United Nations' standards for the enforcement of arbitration awards. Although a money judgment gained in U.S. courts must meet a series of rigorous legal standards before a Mexican court will convert it, arbitration awards are theoretically enforceable because they are covered by international treaty.
Arbitration also offers a compromise in terms of legal venue. If U.S. firms are reluctant to litigate in Mexican courts because of fears of corruption, influence trafficking, and nonenforcement, Mexicans are equally resistant to the U.S. court system because of its enormous-legal fees, huge jury awards, and the quagmire of discovery.
In order for arbitration to work, it generally has to have been incorporated into a preexisting agreement between two parties, a process that is only starting to gain acceptance in Mexico. Mandig's NAFTA Arbitration and Mediation has handled only about ten cases, and he is clearly disappointed. "The Mexican legal and business community doesn't have a lot of experience with this sort of thing," he says.
Ultimately, arbitration must also be backed up by a more reliable court system. "I'm not meaning to hurt any feelings," says Whalen, "but arbitration is not a solution. Let's say you win an arbitration award and go waltzing into a Mexican court to enforce it. If Mexico fails to perform, you'll he back in the U.S. courts, with few options."
MEXICO IS only one example of an emerging market where the legal infrastructure has not kept up with the flow of capital. What makes Mexico unique is the size of its trading relationship with the United States-- $l08 billion in 1995 -- and NAFTA was developed to try to regulate the terms of that trade.
But Mexico's plummeting peso, economic and political volatility, and slow pace of legal reform show that NAFTA has so far failed to provide the promised security for commercial transactions. The two years since NAFTA have seen the worst economic contraction in Mexico since the Great Depression. As a consequence of a crushing devaluation, the Mexican gross domestic product shrank almost 7 percent in 1995. Meanwhile, a series of unsolved political murders and high-profile corruption scandals have pulled back the curtain on Mexican political culture, revealing a country in which the powerful operated above the law.
Mexico's president, Ernesto Zedillo Ponce de Leon, who took office at the end of 1994, is well aware that restoring investor confidence in Mexico requires the creation of what is commonly referred to as "a state of law." Zedillo vowed to make legal reform the top priority of his administration, but he seems to have backed down from his most ambitious reforms in the midst of the economic crisis. Virtually no progress has been made in the investigations into the 1994 political assasination of PRI presidential candidate Luis Donaldo Colosio. Last year, prominent Mexico City judge Abraham Polo Uscanga, who ruled against the government in a number of controversial cases, was executed in his office by unknown gunmen.
These shortcomings in the justice system impact the investment environment and the development of commercial law. The government's effort to sell off the state-owned petrochemical industry for example, has been hampered by its inability to establish who will be responsible for an environmental cleanup.
The lack of a viable mechanism for resolving commercial disputes is a problem for U.S. and Mexican companies alike. Many U.S. companies are unwilling to extend credit to their Mexican clients, and Mexican interest rates have been known to reach more than 100 percent. Gauging how much uncollected debt is floating around in Mexico is impossible because it is not reported. Estimates range from nothing to $3 billion. One attorney with expertise in Mexico says he advises his clients to write off any debt less than $1 million.
That kind of money serves as a powerful incentive for electronic bounty hunters to find and seize assets in the United States. Business should only improve for these new bounty hunters, as the changing economy pushes small and medium-size companies into world markets. "Companies with very little experience are being thrown into the international markets" says Hollstein of Decision Strategies International. "They come to me after things fall apart and say, 'But I was there for two days, we ate sheeps' eyeballs together and rode camels in the desert.' They don't understand that a contract may only be a statement of good intentions."
The Figueroa case shows why international bounty hunting -- even when backed by the U.S. courts -- is no substitute for effective international litigation. Under the current system, relatively simple legal procedure like serving papers and enforcing a judgment can become logistical nightmares. "It's exasperating," says Walker F Todd, a Cleveland attorney who handled part of the Figueroa case. "You can take an ice pick and nail the papers to the tire of the Mexican ambassador's limousine and he won't appear and defend. Then his lawyers come into court and say they never got the notice."
And if the case is against a foreign government, you can count on the defendant claiming sovereign immunity. After an arduous legal battle, the Ninth Circuit Court of Appeals last year ruled that the sovereign immunity limitations did not apply to Figueroa's business because he was able to demonstrate a commercial relationship with the Mexican government. Export Group v Reef Indus. Inc., 54 F3d 1466. In April the U.S. District Court in Los Angeles dismissed Figueroa's case, saying it was barred by the statute of limitations.
Figueroa is disgusted and disillusioned. He came to the United States from Mexico 15 years ago with an immigrants faith in the U.S. justice system. "I realized I had more rights in the U.S. than I did in my native county," he says. "[But] to tell you the truth, I am getting tired of this fight. I want to get on with my life."