Section 3.5.4.1 states:

<quote>
The declared-modes attribute of xsl:package determines whether or not modes that are referenced within the package must be explicitly declared. If the value is yes (the default), then it is an error to use a mode name in xsl:template or xsl:apply-templates, or in the [xsl:]default-mode attribute of any element, or to use the unnamed mode explicitly or implicitly in these contexts, unless the package contains an explicit xsl:mode declaration for that mode. If the value is no, then this is not an error.
</quote>

A superficial reading suggests that you can't write <xsl:apply-templates mode="M"/> where M is a public mode declared in a used package. That would be nonsense. The description of XTSE3085 a couple of paragraphs later gets it right. 

Change "unless the package contains an explicit xsl:mode declaration for that mode" to "unless the package either contains an explicit xsl:mode declaration for that mode, or contains a mode with the appropriate symbolic name and visibility that is exposed by a used package".