Due to the constitutional reform published in the Official Journal of the Federation on June 10, 2011, the protection of human rights was expanded through the “Pro Homine” principle, to include provisions that require that international treaties be observed when they result in a favorable outcome. The foregoing applies despite the fact that prior to such reform, Article 133 of the Constitution already incorporated the provisions of the treaties to which Mexico was a party under Mexican law. One of the international agreements that is of significant importance in this area is the American Convention on Human Rights, also known as the Pact of San Jose. Article 63 of said convention establishes the fundamental right to “total reparation” or “fair compensation,” where the State must take the necessary actions to ensure that any violation of fundamental rights, including ones caused by individuals, is repaired entirely or compensated in a fair manner given the damage caused.

The concept of reparation consists of restoration of the victim to their situation prior to the violation of their rights. Fair compensation applies when reparation is not possible, and consists of reparation through monetary compensation that is sufficient given the damage caused.

Based on the fundamental right of fair compensation, Mexico’s Supreme Court Justice has begun to issue criteria that lay out the process for incorporating the theory of “Punitive Damages” into Mexican law.

As its name indicates, the theory of punitive damages can generally be defined as an economic punishment imposed on the party responsible for said damage, by the judge, in an extraordinary amount, as a result of acting in bad faith or with malicious conduct. The theory has two objectives: (i) to provide relief for the victim and punish the responsible party for their conduct; and (ii) at the same time serve as an example.

Traditionally, the notion of “damages” that has prevailed in Mexico has been limited to the reparation for direct and immediate consequences of harmful conduct against the victim, without any other objectives.

Accordingly, by means of the two recent criteria issued by the First Chamber of the Mexican Supreme Court of Justice, Mexican law has been extended to allow for the issuance of punitive damages.

It remains to be seen if Mexican courts will be cautious when applying these criteria, given that the expansion to allow for punitive damages may result in an increase in frivolous lawsuits. Additionally, it is desirable that legal reforms be enacted to provide for civil provisions on such damages, thereby establishing the guidelines for the application of the theory of punitive damages in Mexico.

Sources of information and disclaimer: The following sources of information, among others, have been used in preparing this document: Official Journal of the Federation, the Bank of Mexico, Supreme Court of Justice of the Nation, Department of Finance and Public Credit. The CCN MéxicoReport ™ does not constitute legal or tax advice and should not be used for purposes other than as purely informative for the general public. For more information on the CCN MéxicoReport ™, any of the issues mentioned therein or to inquire about legal services, please contact Rob Barnett (rbarnett@ccn-law.com) or Mario Melgar (mmelgar@ccn-law.com), phone (210) 222-1642.

© Copyright 2015, CCN. All Rights Reserved.

One of the most important developments that the energy reform has brought to Mexican law is the creation of a new institution known as the National Agency for Industrial Safety and Environmental Protection in the hydrocarbons sector. Due to its lengthy name, in April 2015, it was announced that such agency will be officially identified as the Safety, Energy and Environment Agency (ASEA for its Spanish acronym).

The constitutional reform of December 2013 ordered Congress to create a decentralized agency of the Department of the Environment and Natural Resources (SEMARNAT for its Spanish acronym), with technical and administrative autonomy, and a certain degree of budget autonomy. Contrary to the National Hydrocarbons Commission (CNH for its Spanish acronym) and the Energy Regulatory Commission (CRE for its Spanish acronym), ASEA is not configured as a coordinated regulatory agency, independent from any other state department. According to transitory Article 19 of the constitutional reform decree, this agency is granted the authority to regulate and supervise the installations and activities of the hydrocarbons sector on matters of industrial and operational safety, and the protection of the environment, including dismantling and abandoning the installations, and integrated control of waste. In this manner, an institutional guarantee was conceived for the new Article 25 of the Constitution, in accordance with which companies will be subject to the use of productive resources for the common good, monitoring its conservation and protecting the environment. In addition, there will be a national policy for sustainable industrial development.

The most recent reference to the creation of ASEA comes from the United States, where in 2011, the Bureau of Safety and Environmental Enforcement separated from the Bureau of Ocean Energy Management, with both separating from the Department of the Interior following the Deepwater Horizon platform disaster that, in 2010, took 11 lives and provoked the leak of 4.9 million barrels of oil into the Gulf of Mexico. The first of these offices is in charge of industrial safety and environmental regulation, and the latter is in charge of the responsible development of offshore energy resources, including the assignment of blocks that are federal property. The intent here was to avoid conflicts of interest following accusations of certain favorable regulatory treatment for the oil industry. Following the same premise, in Mexico it was believed that the CNH should not be in charge of safety and environmental matters. However, Mexico went a step further than its northern neighbors given that ASEA not only supervises ocean activities, but also everything that forms a part of the hydrocarbons value chain.

During the debates held on the new energy laws that took place in 2014, one of the main topics of concern and that took up most of the discussion time was the impact fracking had on the environment as a method of extracting oil and gas from the ground. The possible negative effects of this technology have been analyzed in the United States from a legal and civil liability stand point. Given the legal tradition in Mexico, it is safe to assume that the regulation will be scrupulous, one that incorporates the better practices of the U.S. industry and, above all, making such regulations easily enforceable with efficiency.

ASEA’s mission does not end there. It will be responsible for the supervision of thousands of kilometers of pipelines that transport and distribute all types of combustibles, flammables, and explosives, the huge refinery facilities in the country, gas stations and the pipelines that distribute liquefied petroleum gas (consider the recent tragedy where a hospital in Cuajimalpa in Mexico City collapsed). Petroleos Mexicanos (Pemex), an entity accustomed to self-regulation, will surely be the main entity being regulated. It is known that the first Executive Director of ASEA will come from Pemex, due to its accumulated expertise; however, such individual should look to assert its independence from Pemex in order to gain credibility.

As far as other environmental matters, the SEMARNAT has transferred some of its authorities to ASEA. For instance, matters such as the evaluation of environmental impact, integrated waste management and also control of pollution emissions and greenhouse gasses are now under ASEA’s jurisdiction. In accordance with the latter, strict regulations on methane venting and leaks in both upstream and the midstream are important. The ASEA is going to be a smaller SEMARNAT that specializes in oil and gas activities and their related products.

On the other hand, it will be interesting to see how the ASEA will coordinate with the CRE. According to the Hydrocarbons Law, to grant transportation, storage and distribution permits, the CRE must ensure that the applicant utilizes facility designs and equipment in accordance with the applicable regulations and the best possible practices, with the appropriate conditions to guarantee the continuity of said regulated activities.

The ASEA will require dozens of men and women with vast expertise on the matter and some knowledge on administrative procedures. The concern of a lack in human resources in the energy sector is justified to this effect. Nonetheless, it is worth noting that the internal organizational regulations of the agency have created many units and general administrative departments to be occupied by high level public servants. This is not about forming an army of generals but rather an army of soldiers and lieutenants that work well, both on the field and in the office.

According to the transitory regime of the energy regulation, on March 2, 2015, the ASEA assumed all its authorities. It is important to be aware of general administrative-law regulations that might be issued from this change. The expectation is that the new regulatory entity that Mexico is debuting will be up to par with the responsibilities it is being tasked with.