Construction 2024 Comparisons

The following chapter featured in Construction Law 2023 and is awaiting update from the firm.

Mexico follows the civil law system. Thus, it can be considered that legal regulation of the construction industry, among others, is separated into private and public law. In that regard, in public projects the principal law that governs contracts is the Public Works and Related Services Law and its rules. On the other hand, regarding private contracts, the governing law would be the Commercial Code and the Civil Code.

Additionally there are state-owned companies such as the Power Federal Commission (CFE) and Mexican Petroleum (PEMEX) among others, that have their own laws and rules to govern construction projects.

Finally, it should be borne in mind that Mexico is a federation organised into 32 states. Each state has its own local laws that can also be applicable depending on the particularities of a given project.

Such laws can be found on the website of the Mexican Congress.

Standard contracts are not generally used in Mexico. Instead, is common for each project to develop its own contract. However, there is an increasing interest in, and presence of, FIDIC contracts in the country, due to their relevance in the international industry.

In particular, mega plants developments and/or expansions are starting to use the FIDIC Red Book.

In private projects the owners are typically national and/or foreign companies with private investments. These companies commonly have construction managers or a general contractor.

The general obligations of the owners are the following:

• If a foreign company (subsidiary) will be constituted in Mexico, it will need to register it before the Tax Administration Service (SAT) and to the National Registry of Foreign Investment.
• In order to contract a contractor, the parties will need to ensure that the corporate purpose are compatible or request or obtain registration with the Registry of Special Services Providers (REPSE).
• The owner must register its workers before the Mexican Institute of Social Security (IMSS).

In public contracts, the owner is the state. In this field, there are several ways to contract the works, the administration or other services, including engineering, procurement and construction (EPC) contracts, concessions or self-financed projects.

General contractors are commonly medium-large domestic companies. It is also common for foreign companies to constitute a Mexican company in order to perform a specific project.

As for the employers, rights and obligations are practically the same:

• registration before the Tax Administration Service (SAT);
• the obtaining of the Registry of Special Services Provider (REPSE), if needed depending on its corporate purpose;
• registration of the company before the Mexican Institute of Social Security as an employer; and
• registration of its employees.

Subcontractors are commonly local companies specialised in certain construction disciplines. As for the clients and contractors, rights and obligations are practically the same:

• registration before the Tax Administration Service (SAT);
• the obtaining of the Registry of Special Services Provider (REPSE), due to the speciality of these kind of companies, must of them need this special registration;
• registration of the company before the Mexican Institute of Social Security as an employer; and
• registration of its employees.

Depending on the project, it is common to see foreign banks and/or financial institutions providing backing, most of all for large and complex projects. For projects mainly related to energy or oil and gas, it is common to see self-financed contracts. In this kind of case, there are often co-financing institutions which can be Mexican, foreign or a mix of the two.

Financiers are commonly informed of a project’s progress but are not usually directly involved. However, they typically require the contracting of specific third parties (as project managers and/or supervisors) in order to take part in a project.

When international and/or big financiers are involved in projects (even banks, financial institutions and/or funds) the antitrust and competence obligations will typically need to be observed. These obligation consist in the prior notification and approval of the Competence Federal Commission.

The scope of works will depend completely on the owner’s and project’s needs.

In private projects, the owner determines the scope of work depending completely on its needs.

Regarding public projects, the scope will depend on the public needs. In this regard, is important to say that such needs are normally determined through internal market studies. Once the necessities are determined, the state will start the public tender process in order that interested companies that prove to have the capability to develop the project can participate in such process. Finally, as a general rule, such a project shall be organised through a public tender, but in specific cases it can be awarded by a restricted invitation or – exceptionally – by a direct designation.

It is important to say that Mexican law does not prohibit any project delivery system in the private construction space, where projects can be agreed as needed.

In the case of government contracts, lump sum, unit prices and mixed contracts, are usually the accepted delivery methods.

Variations in the scope and price depend on the nature (public or private) of the project as well as of the contract. The most popular type of contracts in Mexico are unitary price and lump sum contracts. Having said the foregoing, it is important to consider the following for public projects:

• Lump sum public contracts – the general rule is that variations are not permitted in the price, nor in the scope unless general economic circumstances not attributable to the parties appear (eg, unforeseen variations in the exchange rates or changes to national or international prices).
• Unit price public contract – the review and, if applicable, the variation in direct costs shall be required by the contractor in a certain period of time (depending on the applicable law). The procedure can be reviewing cost by cost, reviewing a group of costs together and/or reviewing the inputs.

In private contracts, the parties are free to agree to any process they consider appropriate while the general rule in Mexico for private contracts follows the principle of pacta sunt servanda.

Contractors do not generally get involved in the process of design. On the other hand, it is common that the owner has its own design or it gives it to the contractors in order to perform the works according to such design.

Third-parties are commonly the ones that  perform the construction. For big and complex projects, is usual to have construction managers that are in charge of the tender processes in order to contract with third parties the specific scopes of the project.

There are different mandatory laws regarding the environment and pollution and depending on the place where a construction project takes place, there are also archaeological laws.

Generally, the owner shall obtain the environmental impact statement prior to initiating the project. Contractors and subcontractors shall comply with the environmental laws.

It is important to mention that depending on the zone where the project will be built there shall be different rules to comply with different subjects such as water treatment, land use and treatment of waste.

Violation of such laws and rules is punished with high fines and even closure of the project for major breaches.

There are several permits that need to be obtained in order to initiate a project and these can change from site to site depending on whether the project will be located in a federal area, in a protected area, etc.

The most common situation is that the owner of the project is in charge of the permits needed for the use of the ground, water treatment, waste treatment, etc. In public projects, the state is generally responsible for this, so a lack of all the permits needed gives the contractor the right to request a suspension and, if the suspension is too prolonged, termination for cause.

The minimum requirements are to comply with the land use, the treatment of water and waste treatment obligations related to the permits. Again, it will depend on the area of development of the project.

It is common that the parties agree that the contractor is responsible for the maintenance of the works until the works are delivered to the owner. In the case of hidden/latent defects, the contractor has to respond for one year counted from the delivery date. After such year and according to the Civil Code (speaking of lump sum contracts) the owner holds the risk.

Depending on the speciality of the owner a third party can be in charge of the operation.

In industries such as mining, railways, and green energy (where the state has no know-how), is common to see concessions and/or permits awarded to third parties who have expertise in the relevant industry.

Tests for completion follow the rules of the contract, but of course they will have to comply with the applicable law and standards of each project.

The most common process for completion and delivery in Mexico is that the contractor obtains a preliminary or substantial completion certificate that indicates that the project is being functionally delivered but there are still some issues pending. Such certificate can be identified as the “punch list”. With a substantial completion certificate, the contractor is usually empowered to start the process of obtaining the hidden/latent defects bond.

Once the punch list is completed, the contractor obtains the final completion certificate, which indicates that the project is accepted by the owner and it starts to count the lapse of hidden/latent defects.

In public projects there is additionally the “rights and obligation extinction certificate”, which as its name indicates contains the release of the parties from their rights and obligations.

The time frame in which the contractor must respond to hidden/latent defects will depend on the applicable law. However, these commonly range are from six months to a year from the date of the appearance of the defect.

On the other hand, hidden/latent defects bond are commonly valid during the following year counting from the date of the final completion.

There are interesting and current examples in Mexico where, because the liability period has expired, the owner must search for the responsible parties, whether supervisors, contractors or subcontractors.

In Mexico, construction contracts are classified according to the pricing of the project; ie, lump sum, unitary price or maximum guaranteed price. So pricing is a substantial element in construction contracts in Mexico.

It is commonly agreed that payments will be made on a monthly basis through an estimation review process in order to allow a healthy cash-flow.

In general terms, delayed payments (without a justified cause) extend the schedule in accordance with the time of the delay and/or give the contractor a right to late payment interest.

Advance payments, and interim payments are usually considered in a contract.

Regarding advance payment, the general rule is that in order to pay it, the contractor shall deliver the advance payment bond. The lack of its delivery will release the owner from the obligation to pay the advance payment.

The most common practice is that once the estimation is issued by the contractor, the owner will have a certain period to review it and approve or reject it.

If the estimation is approved, then the contractor can issue a tax invoice which shall contain the elements required by the tax law.

The most typical planning arrangement is that owners will have the phases of their projects mapped out in advance (in some cases the development of the plan is contracted to experts).

With the plan in hand, the owner will commonly launch a tender process allowing interested parties to submit proposals and the owner to decide who will execute the works.

As may be obvious, timing obligations are, on the one hand, to pay punctually and, on the other, to deliver the works on time. In this regard, contracts are tied to work programmes and payment schedules.

The most common way to punish delays in the work programme is through retentions for the difference between the original completion date and the real completion date, using a simple formula.

Delays on payment are compensated through the extension of the work programme.

It is very important to note that in most cases, the contractor or subcontractors have the burden of notifying the delay in the payment as well as the request of the adjustment in the schedule.

There are two main remedies to compensate delays:

• to retain the amount corresponding to the works delay; or
• for the contractor to perform the uncompleted works itself or for third parties to do so at the contractor’s expense.

Third-party expert procedures are being implemented in order to solve disputes in this regard.

Requests for extension must be grounded on a solid basis and with the documentation proving the causes the delay and the impact of such event on the schedule. In fact, for public projects, there are additional mandatory requirements to extend the time of the contract such as a technical report containing the justification for the extension, and if the extension is longer than a certain percentage of the original time it will be necessary to gain the approval of the auditing entity.

Force majeure causes in Mexico are very similar to those in other jurisdictions. Circumstances such as unforeseen natural events (earthquakes, tsunamis, natural disasters, etc). Since 2020, force majeure clauses started to consider a COVID-19 section, which provides the parties with the right to request the suspension or the termination of a contract, depending on circumstances of each case.

Also, as a general rule, civil codes do not allow adjustment due to rising costs derived from economic fluctuations as these are not considered as force majeure events. However, inflation has become part of the conversation since prices have been experiencing historic rises.

A force majeure event will normally entitle the affected party to request the suspension of the contract, or depending on the duration of the delay, its termination for cause.

As in 5.5 Force Majeure, unforeseen events are normally agreed by the parties and also can have as a consequence the suspension or termination for cause of a contract.

Some examples of unforeseen events include (the same as for force majeure events) earthquakes, tornados and changes in the law. In any case, there is a rule under the common law Mexican Principles (non-written source of law) that says that “nobody is obliged to do what is impossible to comply with.”

Disruption can be seen from two sides: social events and criminal events. While social events usually suspend the execution of a contract, the effect of criminal events will depend on what is agreed by the parties. In some regions, for example, drug dealing events can have contractual considerations in favour of the affected party.

In Mexico, the parties can agree whatever clause they consider appropriate, public order being the only limitation. In this regard, as long as the exclusion of liability does not affect public order, it can be agreed.

Mexican legislation contains concepts of “good faith” and “negligence”. While parties are entitled to act with good faith, acting with negligence would typically be regarded as lacking professionalism and even against official technical rules. In this last case, the offended party will be able to claim compensation in which it might include (and prove) damages and losses.

As mentioned in 6.1 Exclusion of Liability, in Mexico the parties are free to agree on terms and conditions they consider convenient with the only limitation being that those conditions must not be contrary to public order and/or general interest. In this regard, in connection with private contracts, parties can agree the liabilities and limitations they consider appropriate.

On the other hand, regarding public projects, the liabilities are specified in the law and cannot be agreed in the contrary since public works are understood precisely as public order matter. However, it is important to note that, in general terms regarding public projects, risks and liabilities are hold by the contractor.

Indemnities are used in pretty much every contract in Mexico. Subjects that are commonly the object of indemnification are civil responsibility as well as force majeure or acts of God through the corresponding insurance.

Guarantees in Mexico are usually bonds issued by bonding companies (not insurance companies) that become relevant in the case of a breach of contract. Guarantees include:

• advance payment guarantees (to ensure good use of the advance payment);
• performance guarantees (in order to confirm the completion of the project);
• hidden defects bonds (to guarantee the defects after completion); and
• labour and social contingencies (to cover labour claims and/or social security obligations breached).

Insurance is governed in Mexico by the Insurance Law as well as the Insurance and Bond Institutes Law.

It is common that the owners take out risk insurance that guarantees the site of the works for any damage suffered owing to acts of God and/or force majeure events. On the other hand, contractors usually need civil liability insurance, as well as several bonds that guarantee, among other things, down payments/advance payments, performance, labour risks and hidden defects.

Also, depending on each contact and its scope, the contractor will need to have different types of insurance, such as transport or shipment.

It is very common in Mexican construction contracts to see a termination clause that states that if the contractor goes into bankruptcy, then the contract can be terminated for cause. However, according to the Bankruptcy Law, such a clause may be invalid. When a party enters into insolvency it shall start a complex procedure established in the Bankruptcy Law and its creditors must qualify in order to become part of the mentioned process.

As in other topics, since in Mexico the governing law between the parties is the contracts and its clauses, the parties can share the risk in any manner they wish. However, under the Federal Civil Code, in lump sum contracts the contractor holds the risk until the project is delivered. At this moment, the risk is transmitted to the owner.

Personnel is one of the most complex topics in the contemporary Mexican construction industry. Personnel in Mexico needs to be contracted directly by the company that will perform the work, and once a worker is engaged, the employer shall register them before the Mexican Institute of Social Security (IMSS) and the employer is also required to pay its fees not only to the IMSS but to the Housing Institute (Infonavit) too. Finally, workers are empowered to become part of a union, in this case union fess shall also be paid.

In general, the relationship between the employer and employee is regulated under the Federal Labour Law and it is very strict with employers.

It is important to be aware that in the case of a labour dispute the employer has the burden of proof.

Since 2021 the subcontracting of personnel has not been allowed by law. This represents a major challenge in the construction industry.

Now, companies must transfer and recognise as their own employees, all those workers who carry out the main activities related to their corporate purpose and predominant economic activity.

The subcontracting of specialised services or works that are not part of the corporate purpose or of the predominant economic activity is allowed, but those companies that wish to provide these specialised services must be in a registry under the charge of the Ministry of Labour and Social Welfare, with prior accreditation of compliance with labour, social security and tax obligations.

It is important to note that the companies that receive the specialised services must respond to the workers in the event of any non-compliance by the subcontracted company.

In general terms, the parties agree that they may not use without prior written consent the name, denomination, trade mark or any other registered element as an element in their advertising or communications to the general public.

The parties undertake that all information provided that is not public knowledge will be kept confidential, which means that it will not be disclosed to third parties outside the contractual relationship and that – within the staff – only those persons who are deemed strictly necessary for the proper execution of the contracted work will be involved.

The parties agree that the non-fulfilment by any of the parties of the obligations contained in the clauses of the contract shall be cause for termination of the contract. In addition to the termination, the parties may take legal action to recover the damages caused by such breach including the call for the performance bond.

Additionally, there is the possibility of an affected party cancelling a private contract arguing breach of that contract. In public contracts, the administration can cancel the contract through the corresponding procedure.

The parties may agree that in case of a breach by one if the parties of the obligations contained in the contract, the contract may be rescinded (plus a claim for damages). For the cancellation to be effective, however, the parties must indicate in the same contract the grounds for the rescission, as well as the manner in which prior notice must be given to the other party so that before initiating the rescission, the breaching party can correct or remedy the breach; only if the breach is nor remedied may the contract be rescinded.

Single recourse clauses are generally used in contracts. These clauses are inserted in the contract and are in accordance with what is established by the parties, since they are the ones who agree on the grounds on which the termination of the contract is appropriate.

It is common to see contracts that state that if the contractor breaches a particular clause, the contracting party can remedy the breach with its own resources and then the contractor will pay for it.

The damages that are usually excluded from liability in construction contracts are those that are affected by hidden defects that make the thing unsuitable for the use for which it is intended or due to unforeseen circumstances or force majeure, since it follows the rule that no one is obliged to do the impossible.

In Mexico, retention and suspension rights are not contractually excluded; in fact, retention rights are regulated in certain civil and commercial law contracts and these are actually the most common remedies in construction contracts, in particular in public contracts.

The termination of the contract may be agreed for breach by the parties to the clauses of the contract, plus compensation for damages that have been suffered as a result of the breach.

If the termination is “for cause” the contactor can request the payment of the works performed and the non-refundable costs as well.

If the termination is for convenience, the affected party will have the right to claim damages.

It is important for parties to public contracts to have in mind that the administration can terminate the contract “for cause” arguing that the termination is food for public order and in the general interest. A good example of this was the cancellation of the new Mexico City airport.

The jurisdiction can be agreed as the parties prefer.

This means that local or federal courts can be selected as the parties prefer. Thus, the general rule in private contracts is that the parties can agree as they prefer. If the parties do not agree the applicable jurisdiction, the rule pursuant to the Civil Code is that the competent court will be:

• the competent court in the location agreed for the respondent to comply with its obligations;
• the competent court in the place agreed for the execution;
• the competent court in the place where the site is; or
• the competent court for the respondent’s address.

For public contracts the rule is a little different. The parties can indeed agree on the jurisdiction unless regarding the cancellation of the contract. In this specific scenario, the competent court is the Administrative Court competent for the tax address of the claimant (whether federal or local depending on the nature of the contract).

In both cases (with the exception of cancellation of a public contract as outlined in the paragraph above), the parties can agree an arbitration clause. The most common arbitration clauses are ICC (International Chamber of Commerce), CAM (a Mexican Arbitration Chamber) and LCIA (London Court of International Arbitration) clauses.

The most popular form of ADR is arbitration. The parties commonly agree to arbitration clauses such as those of the ICC, CAM and LCIA.

Arbitration in Mexico is regulated in the Commerce Code according to the UNCITRAL Model Law.

Some other forms of ADR such as mediation and conciliation are common through mutual agreement of the parties. Indeed, in the ordinary commercial and civil processes, there is an initial hearing of conciliation, where the parties can reach an agreement before an official conciliator, which will have the nature of an award. Also, during the oral processes of a trial, judges are empowered to push the parties to reach an agreement through mediation, and even recommend them to solve the controversy at the Mediation Institute.

However, there is no law on commercial mediation (as there is for commercial arbitration). In this regard, several chambers are promoting mediation in order to save litigation for the cases that really require it.

Finally, other forms of ADR, such as dispute boards (whether Dispute Adjudication Boards or Dispute Avoidance/Adjudication Boards) are not yet used in Mexico.