Published on Friday 21st June 2019
Are construction contracts for projects developed in your jurisdiction required to be governed by local law? Are foreign choice-of-law clauses enforceable in contracts for construction projects developed in your jurisdiction?
Mexican law allows the applicability of foreign law in construction contracts and related services as established in Mexican federal Civil Code and states civil codes. Furthermore, if a foreign law is chosen to govern in a construction contract then, a Mexican court is obligated to apply such foreign law when resolving a dispute deriving from a construction contract.
Additionally, a foreign jurisdiction may be agreed by the parties to rule any interpretation or dispute of the construction contract, meaning that a construction contact can be governed by foreign law and ruled by a foreign court. If such is the case then, ultimately, a Mexican court will enforce a foreign judgment relating to a construction contract entered into in Mexico. However, foreign law is not applicable in cases of deliberate evasion of the fundamental principles of Mexican law with intent to defraud or when the applicability of foreign law contradicts the fundamental principles of Mexican public policy.
Furthermore, foreign law will not apply on matters relating to real property in Mexico or lease or usage agreements regarding real property or to personal property located in Mexico.
Are there any formalities applicable to construction contracts?
There are no special formalities applicable to construction contracts other than the general formalities for any contract in Mexico such as consent of the parties and the subject matter being legal under Mexican law.
Are contractors entitled to impose mechanics’ or similar liens on work performed in order to secure payment in your jurisdiction? Are lien waivers from contractors and subcontractors enforceable in your jurisdiction? Are these commonly used in your jurisdiction? Can payments to contractors be contingent on receipt of lien waivers?
Pursuant to Mexican law, contractors are entitled to retain a construction project and will have a credit priority over the owner of the construction project. The exercise of the retention right must be related to a lack of payment obligation under the construction contract. The retention right may not be exercised if the construction project has been transferred to a bona fide third party.
Lien waivers are common in construction contracts in Mexico and typically, the lien waiver is a required document by the owner of the construction prior to release certain milestone payments relating to such construction contracts.
A subcontractor may claim to the owner of a construction project for lack of payment from the contractor regarding the works and materials supplied. However, the subcontractor must prove that the works and materials supplied have a direct connection with the construction project. Additionally, the owner shall only be responsible before the subcontractor when there is a claim filed by the subcontractor and, if such is the case, the owner shall only respond for the pending amounts owed to the contractor regarding such claimed works, regardless of the amounts owed to the subcontractor by the contractor.
Are there any strict liabilities that extend to owners of construction projects in your jurisdiction?
From a Mexican labour law point of view, the contractor and the owner of the construction project are presumed jointly and severally liable for the payment of the remunerations and social benefits of the personnel of the contractors and subcontractors.
Outsourcing companies are key parties that employ the construction personnel on construction projects and must comply with certain requirements such as: (i) shall not render the totality of the activities that are being rendered at the construction project; (ii) be a specialist in the construction field and grant construction services under their own risk; (iii) have its own resources to provide the service (financial, technical or material); (iv) have their workers under its exclusive subordination and (v) shall not render identical or similar tasks as those rendered by the other personnel at the construction project. The outsourcing company will be the direct party responsible before its employees but the contractor and owner will always be jointly liable for a labour construction claim since the source of the employment is the construction site. The outsourcing company must comply with the social security and housing taxes for the construction personnel.
In regard to environmental liability, Mexican environmental protection law, establishes that any individual or legal entity that by any action or omission causes directly or indirectly damage to the environment, shall be liable and shall be obligated to the reparation of damages or, when the reparation is not possible to the environmental compensation that proceeds. Likewise, in addition to the fulfillment of the previous obligations, when an environmental damage is caused by an illicit malicious act or omission, then the responsible party shall pay an economic sanction despite the criminal felonies charges that can be laid against the responsible party.
Do owners typically negotiate a full pass-through of liabilities from their revenue contracts to contractors?
Typically, the owners negotiate a full pass-through liability clause in the construction contact whereby the contractors absorb the liabilities of a construction project. Also, contractors also pass certain liabilities to their subcontractors. However, the contractor is responsible before the owner of the construction project for the liabilities relating to the construction project.
Pursuant to the Mexican federal civil code and its correlatives state civil codes establish that contractors are responsible before the owner of the construction project for violations to the ordinance laws and to any damages caused to the neighbours.
What are the most common pricing modalities in your jurisdiction? Is one modality more prevalent in certain types of projects than others?
The construction contract with a guaranteed maximum price is very common in construction projects, which is a lump sum modality agreement where specific provisions apply depending on the nature of the construction project. Other typical construction contracts for custom houses are cost of the work work plus a contractor's fee with a maximum guaranteed price construction and the cost of the work cost plus a contractor's fee under an open-book method.
There is a typical clause on construction contracts to mitigate the exchange rate fluctuations that contemplates payments in Mexican currency regarding good and services consumed from the domestic market and foreign currency regarding goods and services consumed in a foreign market.
What are the key approvals and permits required for a construction project? What is the typical cost and timing to obtain or fulfil such approvals, permits and obligations for large-scale infrastructure projects in your jurisdiction?
A construction project must comply with permits relating to:
Are subsurface conditions a common source of delays for construction projects in your jurisdiction? Do the laws of your jurisdiction permit the parties to freely allocate this risk contractually?
Subsurface conditions may delay construction projects and, typically, a specific permit is required when the construction project is located in sensitive areas relating to natural resources or archaeology. Mexican law allows the freedom of contract in allocating the risk contractually.
Does your jurisdiction provide statutory protection for ‘unforeseeable’ or similar risks? Do such statutory protections supersede contractual allocations of risk?
Mexican law contemplates events of force majeure or acts of God, which are events that cannot be the fault of either party since they are events outside their dominion that cannot have been foreseen and even if foreseen, cannot be impeded. However, the parties may contractually agree to allocate the risk to a party regarding events of force majeure or acts of God. Contractors do not typically agree in construction contracts to be responsible for events of force majeure or acts of God.
Will the laws of your jurisdiction strictly interpret contractual provisions granting cost or schedule relief? Or is there flexibility to arrive at ‘equitable’ solutions even if contrary to contractual provisions? Are there any specific rules in your jurisdiction regarding the evidence required to support cost or schedule relief claims?
The contractual provisions will be interpreted as established in the construction contract. Loss and damages must be proven to be enforced. Penalty clauses are enforceable without the need to prove the generated losses or damages regardless of whether such losses or damages were caused.
Mexican law establishes that when a party exploits the gross ignorance, notorious inexperience or extreme misery of another party obtaining excessive benefit that is clearly contractually disproportional, then the affected party may claim nullity of the agreement or a reduction equitable to its obligation plus loss and damages.
Does your jurisdiction recognise economic equilibrium clauses? Have any such clauses been utilised in practice?
The parties may elect to use economic equilibrium clauses based on the contractual freedom of the parties although certain rules of interpretation are provided in the Mexican federal Civil Code and correlating state civil codes. In our experience, an exchange rate clause is agreed by the parties by setting a low and high currency exchange rate when the construction contract is agreed in foreign currency. This exchange rate clause protects the contractor if the currency exchange rate is low (the contractor receives more US dollars to compensate for a currency devaluation) and the owner of the construction project if the currency exchange rate rises (the owner pays fewer US dollars to the contractor to offset a currency devaluation).
Additionally, the Mexican federal Civil Code and correlating state civil codes establishes that the interpretation of clauses should be made in a harmonic way taken into account the intention of the parties and the full content of the contracts. Additionally, there is another principle of law in the Civil Code and correlating state civil codes that establishes that the validity and compliance of the contracts may not be left to the decision of the other party.
How significant is the impact of labour unions on construction projects in your jurisdiction?
Labour unions have a key role on construction projects and a collective bargain agreement is typically required with a corresponding union on large and medium-sized construction projects. There are a variety of unions in Mexico specialised in a specific fields, although the largest unions in Mexico are CTM and CROC. The collective bargaining agreement consists of laying out the general conditions of employment, including general salaries. The general salaries are reviewed by the parties on a yearly basis, and the general conditions of the employment are reviewed every two years. Negotiation with the union on a construction project is a key element in achieving positive results in a working relationship.
Highlight any significant public procurement law provisions applicable to public construction project tenders.
Mexican public procurement law is very strict regarding public construction tenders. Public constructions are subject to a public bidding process that demands high level of transparency with a strict procedure to be followed by the interested parties and such parties must meet certain good standing qualifications to be deemed an eligible bidder. The interested parties may challenge any violation of the public procurement law and its regulations in regard to a bidding process.
Additionally, the public construction works are supervised by the corresponding governmental authorities whereby certain protocols must be complied and certain audits can be carried out to the contractor by such governmental authorities as part of the construction process.
Do contractors commonly carry out construction activities through consortia or other types of joint ventures? Under these arrangements in your jurisdiction, are joint venture partners jointly and severally liable for their obligations?
Typically, a large contractor sub-hires a subcontractor for a construction project and this is the preferred model for owners of construction projects to keep liability with one party. However, joint venture partners are not uncommon and joint and several liability must be expressed in the construction agreement. Joint ventures or consortiums are mostly seen on large construction projects or on those projects that require unique specialisation and there is no limit on foreign investment for contractors under Mexican law.
Are time-bar clauses for claims enforceable in your jurisdiction? Do courts in your jurisdiction interpret these provisions strictly?
Time-bar clauses are not enforceable in Mexico since such clauses contradict statutory law for being a of public interest.
Are limitations of liability enforceable in your jurisdiction? What are the exclusions for such limitations?
Pursuant to Mexican law, civil liability may be waived except when there is wilful misconduct by the other party. The Civil Code and correlated state civil codes establishes that a penalty clause may not exceed in value or quantity the principal obligation. When a penalty clause is enforced the losses do not need to be proven. A penalty clause can be reduced if the obligation was partially completed and this penalty reduction should be proportionate to the partial completion of the obligation.
Are exclusive remedy clauses enforceable in your jurisdiction?
Mexican law provides as a remedythe termination of a contract or specific performance when there is a breach of contract.
Are liquidated damage provisions enforceable in your jurisdiction? Are there any limitations on the formulation of such liquidated damages? Does local law allow courts in your jurisdiction to reduce the amount of liquidated damages provided in a construction contract?
There are several remedies that can be established in a construction contract, namely, penalty clauses. Penalty clauses can be agreed in lieu of seeking loss and damages unless the parties agree to a penalty for simply being late with the completion of an obligation or if the obligation was not completed in the form it was agreed by the parties.
Additionally, the affected party can always elect to seek for loss and damages in lieu of enforcing the penalty clauses or loss and damages. A damage is defined by the Mexican federal civil code and correlated state civil codes as the loss or detriment to the patrimony of a party for the lack of an obligation of the other party. The losses are defined as the privation of a licit earning that would have been obtained if an obligation had been completed.
How is force majeure governed in your jurisdiction? Are carve outs to general force majeure provisions provided by law enforceable?
The Civil Code and correlated state civil codes establish that a party is relieved from breaches of contract caused by force majeure events unless the party has caused or contributed to the force majeure event or when a party has expressly agreed to assume the liability. Such liability can be assumed partially or totally.
What instruments are typically used as performance security in your jurisdiction? Are such instruments liquid?
Typically, the security bond is the preferred security instrument used on construction agreements. Also, the mortgage or pledge agreements upon contractor’s assets are another way to guarantee the performance of the construction agreements as well as none collateralised personal guarantee from the principals of the contractor’s company.
How is concurrent delay in construction projects treated in your jurisdiction?
Concurrent delays by both contractor and owners are treated as a breach of contract by both parties, which does not allow the other party to claim for breach of contract. A party must first fulfil its obligations prior to being able to claim for breach of contract from the other party.
Does your jurisdiction recognise degrees of negligence and culpability?
There is no specific degree of culpability or negligence under Mexican law although that a court will measure a degree of culpability or negligence when issuing a ruling. The Civil Code and correlated state civil codes establish that there is culpability or negligence when a party carries out acts contrary to the conservation of a good or ceases to carry out acts necessary for such conservation. This provision may apply to a contractor during a construction project.
Is there a distinction in your jurisdiction between consequential losses and those resulting ‘naturally’ from a breach of contract?
There is no specific distinction of losses, although Mexican law impliedly recognises losses as instantaneous if caused by a sole action of a party, or consequential if they are caused as consequence of actions or omissions of the contractor as continual or consequential losses.
Are there mandatory provisions in connection with the transfer of title of works or materials delivered in your jurisdiction?
There is no specific title of works or materials followed in construction projects other than the invoices given by the contractor during the construction project. Construction works for real estate are considered part of such real property. However, the construction works must have a termination work notice issued by the local authorities at the completion of the construction works. Additionally, if the construction project comprises ares of private property (condominiums) it will require the incorporation of a condominium regime to set out the legal descriptions of such private property areas and its corresponding common areas.
Must a contractor fulfil specific requirements when presenting an application for payment in your jurisdiction? What is the maximum time provided by law to pay an invoice from a contractor? Do local laws allow owners to make set-offs, deductions, withholdings or retentions from payments due to contractors, and are there any limitations on the circumstances in which owners can exercise these rights?
Pursuant to the tax laws the contractor must present an invoice complying with the tax requirements to collect their fees. The invoice is a key document for the owner to have deductible expenses for tax purposes, otherwise such payment shall not be considered tax-deductible.
There is no specific time limit in law to pay a contractor's invoice. However, the statute of limitations to legally claim a contractor’s fee is two years from the date that the services were rendered. There is no retention or withholding from payments to contractors unless otherwise agreed on the construction contract. Owners generally retain around 5 per cent of the contractor’s fees as a guarantee in case of any breach or construction inaccuracy and such retention is given to the contractor at the end of the construction project.
There are certain tax withholding obligations relating to construction services when paying foreign entities or individuals that owners must comply with otherwise the owner of a construction project will be liable for such taxes that should have been withheld. Payments between Mexican entities do not require tax withholdings and each entity is independently liable for tax.
Must insurance policies for construction projects in your jurisdiction be placed with local insurers? Are there restrictions in your jurisdiction regarding the payment of insurance proceeds offshore or to third parties?
Mexican law allows that the parties have a freedom of contract regarding the insurance companies that they wish to hire. There are no restrictions imposed by Mexican law regarding the payment of insurance proceeds. The insurers can be any third parties elected by the insurer and such payment process is governed by the insurance policy and the Mexican insurance laws.
Briefly describe the tax regime applicable to construction projects. Are withholding and value added taxes applicable? Are construction contracts typically structured so that onshore and offshore work are performed by separate contractors?
Contractors have certain special tax provisions whereby the deductions can be in some way anticipated based on the cost projections of the construction project. There are income tax obligations as well as value added tax obligations with which the contract must comply. Corporate tax is 30 per cent in Mexico and the value added tax is 16 per cent.
The construction of residential (dwelling) houses does not trigger value added tax when paying to the contractor nor when selling the dwelling to a third-party purchaser. However, constructions destined for commercial or industrial purposes trigger value added tax.
Are there any statutorily mandated or implied warranties under the laws of your jurisdiction? What is the minimum defect liability period in your jurisdiction? Are there specific minimum defect liability periods for certain types of works?
There are certain warranties imposed by the Mexican consumer protect agency law regarding structural, impermeabilisation and general construction matters. Additionally, the federal Civil Code and correlated state civil codes establish that when a property is transferred by any legal means there is a hidden defect guarantee for the acquirer of a property.
Notwithstanding the above, the owner of a construction project shall have a claim for breach of contract against the contractor regarding incomplete construction works, defects in the construction works, whether evident or hidden, or inaccuracy in the performance of the construction obligations.
What is the statute of limitations for contractual and non-contractual claims in your jurisdiction?
The Mexican Consumer Protect Law establishes that the statute of limitations for structural damages is five years, impermeabilisation damages three years and general construction damages is one year. The Civil Code and correlated state civil codes establish that the statute of limitations for hidden defects is six months.
Typically, construction contracts establish a one-year guarantee for any type of construction defects.
Describe any local arbitration institutions and any specialised construction law courts in your jurisdiction.
There are no specialised construction courts and the civil courts are the competent courts to rule upon any construction dispute. Typically, the arbitration institutions that are elected in construction agreements are the American Arbitration Association, International Chamber of Commerce, Instituto Mexican del Arbitraje y Centro de Arbitraje en Mexico.
Are agreements to mediate enforceable? Are there any mandatory mediation provisions for construction contracts in your jurisdiction?
The agreements to mediate are not enforceable under Mexican law but the parties may agree to exhaust a mediation process prior to going to any trial dispute. Additionally, a settlement executed before an authorised mediator shall have binding legal effects and the enforcement of the settlement shall be made as a quick claim judgment on a summary procedure.
How prevalent are dispute adjudication boards appointed by the parties in construction contracts in your jurisdiction? Are agreements to submit disputes to dispute adjudication boards enforceable?
Dispute adjudication boards are not common in construction contracts but they can be appointed if the parties wish to do so. Any ruling from a dispute adjudication board should be enforceable provided that certain constitutional rights were taken into account within the procedure carried out by the dispute adjudication board, such as the right of to be heard at trial and respecting the principles of procedural law. In any case, the adjudication board ruling must be enforced in a court of law.
Discuss recent trends in your jurisdiction affecting large-scale construction projects.
There are several trending construction projects throughout Mexico consisting of infrastructure projects such as airports, highways, energy projects and mixed-use tourist development. Most infrastructure projects are subject to the public procurement law. Most of the large mixed-use tourist developments are subject to private laws since the investments have been strictly private funds.