The Challenges for the Mexican Automotive Industry in the Face of Potential Trump Tariffs: A Contractual-Commercial Perspective. How to Prepare for Potential Noncompliance?

The Trump Administration's threats to impose tariffs on vehicles and auto parts manufactured in Mexico –among other products and services– are still ongoing, so the Mexican automotive industry is on the cusp of a potential trade crisis. If any of these measures are implemented, companies in the sector (from automakers to Tier 1 suppliers) could face a considerable financial impact, but also a legal challenge in their contractual relationships. How could they prepare from a legal perspective to mitigate the effects of this scenario?

Breach of Contract as an imminent risk

It's no secret that automotive companies operate under commercial contracts with customers and suppliers that establish very specific prices, delivery times, and obligations. Specifically, fixed prices, available part numbers, delivery times, and penalties for delays are part of everyday life for both the manufacturing companies and the various suppliers that work around them. In the automotive industry in general, there is no room for distractions, noncompliance, or unforeseen events.

A tariff increase could drastically alter production and logistics costs, which could even render some contracts between companies in the sector unviable, for example, in relation to production costs or even transportation and shipping costs. All of this could lead to contractual breaches, either due to the impossibility of delivering on the agreed terms or due to the lack of profitability of existing contracts.

Prevention and Mitigation Strategies

To prepare for the potential imposition of tariffs, automotive companies can adopt several legal strategies:

1. Review and renegotiation of current contracts: Incorporate force majeure clauses that allow for contractual adjustments in the event of significant tariff changes.
2. Contractual protection in new agreements: Include price adjustment and automatic renegotiation mechanisms in the event of extraordinary events.
3. Preparation of legal strategies regarding current contractsAnalyze the obligations, terms, and scope of current commercial agreements and/or contracts to anticipate potential noncompliance and begin preparing the respective legal strategies.

While potential tariffs pose a real threat to the Mexican automotive industry, adequate legal preparation can help mitigate their impact. The key lies in anticipation and contractual flexibility to adapt to an increasingly uncertain trade environment.

Specifically, regarding the legal strategies to be analyzed, developed, and implemented in response to Trump's tariffs, particularly in relation to existing commercial and contractual relationships, it is worth asking:

Can tariffs be considered an unforeseeable act that allows for the modification of trade agreements?

Theory of unforeseen events.

The theory of unforeseen events (rebus sic stantibus) is the exception to the principle pacta sunt servanda, which establishes the binding nature of contracts.

Therefore, the theory of unforeseen events can be defined as: “…that which allows the review of what was agreed by the contracting parties, to resolve or modify it when for extraordinary circumstances, unforeseeable y unrelated to the parties, the conditions of its execution are significantly altered, making the fulfillment of the obligation excessively onerous due to the imbalance between the considerations…” (Tapia, Javier. Theory of Unforeseen Events).

The civil codifications of some states in our country have incorporated provisions that reflect the theory of unforeseen events (rebus sic stantibus), which allows us to maintain that the change in circumstances due to unforeseeable events gives the right to renegotiate the terms of a contract. This issue can be observed in the local civil ordinances of Mexico City (article 1796 Bis), Aguascalientes (article 1733), Jalisco (article 1795), Guanajuato (article 1351), Coahuila (article 2147), Sinaloa (1735), Tamaulipas (article 1261) Veracruz (article 1792) and the State of Mexico (article 7.35).

However, the theory of unforeseen circumstances is not regulated in the Federal Civil Code and the Commercial Code, and the judicial opinions issued in this regard are largely in line with a conservative and legalistic position tending to reject the applicability of this theory in commercial matters.

Consequently, at first glance it seems that in federal civil and commercial matters it is not possible to allege a "change of circumstances" as a fact generating the power to renegotiate a contract due to excessive burden or imbalance in the contractual relationship, although the position of the Mexican Courts could change, especially in the framework of the election of Judges derived from the Judicial Reform of 2024.

Acts of God and force majeure

In the legal field, the concepts of unforeseeable circumstances and force majeure are essential for understanding situations in which a party cannot fulfill its contractual obligations due to unforeseeable and unavoidable external events. Generally, legal doctrine has defined these concepts as follows:

• Fortuitous event: Refers to events of natural origin that cannot be avoided, such as earthquakes, hurricanes or floods.

• Force majeure: It involves events caused by third parties or by the authority that make the fulfillment of a contract impossible, such as wars, embargoes or drastic changes in legislation.

Both of these circumstances can exempt the affected party from liability, provided it is proven that the event in question was unforeseeable and actually prevents the fulfillment of the obligation in question.

From a legal perspective, the question arises: Can this new tariff policy be considered a fortuitous event or force majeure in commercial contracts?

While the imposition of a tariff does not directly impede the performance of a contract, it can significantly alter its economic terms, making it excessively burdensome for one of the parties. In some contracts, a regulatory modification of this type could be interpreted within a force majeure clause, allowing for the renegotiation or suspension of certain obligations. In other cases, the theory of unforeseen circumstances, which has already been described earlier in this article, could be used.

The UNIDROIT Principles and Contract Renegotiation

The UNIDROIT Principles on International Commercial Contracts can provide guidance in addressing these challenges. In particular, the principle of “hardship" establishes that when an unforeseen event fundamentally alters the contractual balance, the affected party may request renegotiation. Although these principles are not binding in themselves, they can be used as a reference in international commercial disputes.

For their part, the uses and customs of the merchants are concentrated in the lex mercatoria, and international practice and doctrine have confirmed that the UNIDROIT Principles are part of it. These principles regulate the general rules applicable to international commercial contracts, providing for the concept of "undue hardship" and its effects on contracts, particularly the right to: "…The disadvantaged party may request renegotiation of the contract... ".

In addition, the American Convention on Human Rights defines usury as any other form of exploitation of man by man, which must be prohibited by law.. This principle has been adopted by our highest courts and applied in their rulings, to the point of issuing jurisprudence that empowers judges to examine ex officio the interest agreed upon in civil and commercial contracts, in order to prudentially reduce it when the interest is considered excessive and abusive.

Considering the above, companies could attempt to renegotiate their contracts under the theory of unforeseen circumstances. To do so, it is extremely important to consider:

(a) The time limits within which the affected party has to notify and assert extraordinary, unforeseeable circumstances beyond the control of the parties (in our case, the entry into force of Trump's tariffs);

(B) Proper notification to the other party; and

(C) The specific terms agreed upon in each contract determine the application of said theory, as well as the scope it could have in modifying the obligations agreed upon in the contracts.

At Santamarina+Steta, we are already analyzing and working on strategies for our clients to implement. Therefore, we believe it is important that if you believe your business may be affected, you seek prompt and immediate advice.