Mexico: Construction (2nd edition)

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This country-specific Q&A provides an overview to construction laws and regulations that may occur in Mexico.

This Q&A is part of the global guide to Construction. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/construction-2nd-edition/

  1. Is your jurisdiction a common law or civil law jurisdiction?

    Mexico is a civil law jurisdiction based on the Spanish and French law tradition.

  2. What are the key statutory obligations relevant to construction and engineering projects?

    The legal basis of the construction or engineering projects depend on the nature of the contract.

    If the juridical relationship is a public one (understanding by public contracts those that are entered into with the public administrations) the legislation that would govern such contract will be the Public Works and Related Services Law, and the Public and Private Partnerships (PPPs). Since Mexico is a Federation with 32 states, almost each State (and Mexico as a Federation) have their own regulations. Therefore, Government Contracts are regulated by the Federal Constitution or the Constitution od each State, the respective Public Works Law and their regulations, as well as the applicable Public Private Partnerships law.

    On the other hand, private contract are regulated by the Commercial Codes (that applies in all the Country since is a Federal subject), as well as by the Civil Code. As in the public contracts, it is worth to mention that every State has its own Civil Code and the applicable legislation will depend on what was agreed by the parties and/or the place where the contract is entered into.

  3. Are there any specific requirements that parties should be aware of in relation to: (a) health and safety; (b) environmental issues; (c) planning; (d) employment; and (e) anti-corruption and bribery.

    (a) health and safety;

    The “NORMA Oficial Mexicana NOM-031-STPS-2011, Construcción-Condiciones de seguridad y salud en el trabajo.” (Official Mexican Standard NOM-031-STPS-2011 Construction- Safety and Healthy conditions in work projects”) applies to the construction works in connection the Health and Safety. These NOM is available in the following link:

    http://dof.gob.mx/normasOficiales/4376/stps/stps.htm

    (b) environmental issues;

    The “Ley General del Equilibrio Ecológico y la Protección al Ambiente” (General Law of Environmental Balance and Environment Protection) applies to all the country. However, it must be kept in mind that every State might have specific regulations in environmental matters.

    (c) planning;

    The specific planning laws and regulations will depend on each State, since every State has the independence to determine itself issues regarding the kind of land and type of buildings are allowed.

    (d) employment;

    Laboral law is a federal matter, so the Federal Labour Law (“Ley Federal del Trabajo”) applies in all the country and has specific provisions on construction. Also the IMSS LAW (Mexican Social Security Law) that regulates the social security system, has important impact on the workforce of construction projects on Employers, Contractors and Subcontractors.

    (e) anti-corruption and bribery.

    The General Law of Administrative Liabilities (a Federal law) and the Criminal Code (Federal and the one applicable to each State) establish the conducts that are considered corruption actions that are sanctions for individuals and companies including the ones related to construction projects.
    The sanctions derived from the General Law of Administrative Liabilities have administrative nature being among others, debarment, fines, liquidation of companies, while the Criminal sanctions are jail and/or fines.

    Additionally, in 2013, the Federal Constitution was amended in monopolistic and competence issues. Since then, it is important to consider the Antitrust Legislation mostly in public projects, since the Cofece (Federal Commission of Economic Competence) has the faculty to review binding processes, and if some companies intend to participate in a consortium or if the participation of some companies imply prior mergers or acquisitions from one company to another, it becomes important to review the Antitrust Lay in order to clarify if such transaction is needed to be notified to the Cofece.

  4. What permits, licences and/or other documents do parties need before starting work, during work and after completion? Are there any penalties for non-compliance?

    The permits, licences and/or documents needed will depend on the State of the project. However, the common licenses and permits are, including but not limited: license for construction, use of land (commercial use, residential use, industrial use, etc.), safety regulations, environmental regulations, and labour and union provisions.

    To not comply with the licenses and permits may address to the closing of the construction, fines and several administrative inspections and/or constant requirements of extra/additional information or documentation.

  5. Is tort law or a law of extra-contractual obligations recognised in your jurisdiction?

    Yes. Mexican Civil Code recognizes extra contractual liabilities. These are regulated in the Civil Code of each State.

  6. Who are the typical parties involved in a construction and engineering project?

    In Government Contract, the typical parties are the State as the Owner, the Designer, the Contractor and the Supervisor. Depending on the size of the project, a Construction Manager can be engaged by the Owner.

    In Private Contracts, the typical parties are the Owner or Developer, the Architect and/or Designer, the contractor and sometimes a supervisor is required.

  7. What are the most popular methods of procurement?

    In public projects, for purposes of transparency, the bid process shall be preferred. However, exceptionally and for specific cases (mostly for complex projects) the Federal Constitution and the Public Works and Related Services Law allows other methods as the invitation to at least three participants (restricted bid) and Direct Award.

  8. What are the most popular standard forms of contract? Do parties commonly amend these standard forms?

    In Mexico, the public contracts that are governed by the Public Works and Related Services Law, does not have a “standard” form for the contract; however, it does provide the minimum of requirements that the contract shall have, and the contract might change from one contract to another.

    In the case of private contracts, the Parties can choose the type of contract provided in the legislation (Civil and/or Commercial Code) that can be lump sum contracts, unitary prices contracts, or even FIDIC contracts. Those kinds of contracts are not “generally” used, but it will depend on the specific case.

  9. Are there any restrictions or legislative regimes affecting procurement?

    For Public Contracts that are governed by the Public Works and Related Services Law, if the contract does not comply with the law, it can be fully or partially null.

  10. Do parties typically engage consultants? What forms are used?

    It is common for contractors to engage consultants in order to be advised on legal, financial and/or technical matters. Mexico counts with a Chamber of Consultant that has strong presence on the engineering and construction sector.

  11. Is subcontracting permitted?

    There is not a legal provision that reject the subcontracting in any scenario (public and private contracts). However in both cases will depend on the Owner if they permit or not, to subcontract some works.

  12. How are projects typically financed?

    Most of the Public Works Projects are financed and paid with Public Sources. In certain areas such as Energy (Transmission and Distribution) a Financed Public Works Scheme has been very successful for more than 20 years.

  13. What kind of security is available for employers, e.g. performance bonds, advance payment bonds, parent company guarantees? How long are these typically held for?

    It is very common that in both kind of contracts, public and private, the owner request to the contractor to engage different kind of bonds, in order to guarantee its project. The must common bonds usually required are:

    • Advance payment (known as “anticipo”): are often used and remains until the end of the performance of the works when the anticipo has been fully amortized and used appropriately.
    • Performance bond: this kind of bond are used in order to guarantee the exact fulfilment with the contract stipulations. The amount will depend on the specific project, but in public projects commonly cover around the 10-20% of the project value. In private contracts the performance bonds do not have a limit and in some cases can reach the 50% of the total value of the contract. This kind of bonds are usually cancelled once the Owner issues the “reception letter” indicating that is fully agreed with the jobs.
    • Social and security: in order to comply with the law of social security in Mexico, the contractors shall have an insurance for its employees that cover some working risks.

    Finally, it is common that in both, public and private contracts, after the reception of the works, the employer usually request a hidden defects bond issued by a bonding company, generally up to 10% of the contract value.

  14. Is there any specific legislation relating to payment in the industry?

    In the case of government contracts, the Public Works and related Services Law establishes a process of estimating the works, authorizations of the estimates, invoicing and payment. Payment is also regulated by the tax laws that define the ways of invoicing under a specific electronic regime.

    In the case of private contracts, the terms of payment are free to be determined. Also, the payment has to satisfy the tax laws and regulations such as the issuance of electronic invoices (CFDIs).

  15. Are pay-when-paid clauses (i.e clauses permitting payment to be made by a contractor only when it has been paid by the employer) permitted? Are they commonly used?

    This kind of clauses were not used until recent years. Recently, in private projects such clauses have been included. Since they are not forbidden, there is no issue on including it and there has not been judicial decision stating its illegality.

  16. Do your contracts contain retention provisions and, if so, how do they operate?

    Yes. Retentions are provisions that allows to the Owner to retain a percentage (usually 10%) of a monthly invoice in order that the Owner can face unexpected situations derived form incorrect performance of the contract by the contractor (including breaches to the contract).

    The retention can be executed for different situations established in the contract such as defects during the construction, lack of compliance of workers compensation, claims from sub subs, etc.
    If the retention is not used by the Owner, it has to be returned to the contractor at the time of the reception of the works.

  17. Do contracts commonly contain liquidated delay damages provisions and are these upheld by the courts?

    It is common that Owner imposes liquidated damages to contractors for delays in the milestones or if the date of completion is not reached.

    In recent years, in public and private contracts, a retention/liquidated damages provision has been used. This means that in each month there is a comparison between expected works and performed works. The Owner is allowed to establish a retention on the delta (difference between planned and performed) per month. However only in the case that the final completion date is not fulfilled, liquidated damages shall apply.

    Liquidates Damages in Mexico are similar to the US penalty. This, is that in the contract parties determine a specific amount that will be paid by the party that breaches the obligation. This is absolutely legal. The only limitation is that the amount agreed for liquidated damages does not exceed the obligation that is subject to liquidated damages. For example if the value of an obligation under a contract is 100, liquidated damages cannot exceed 100, but a percentage of 100.

  18. Are the parties able to exclude or limit liability?

    It is possible to exclude liability if both parties agree expressly on it.

  19. Are there any restrictions on termination? Can parties terminate for convenience? Force majeure?

    For public contracts, the Government is able to terminate the contract without a judicial final sentence in specific cases such as contractor breaches to the contract, or public order issues. On the other hand, contractors have to sue the contractual entity for breach of contract. It its important to mention that since May 2018, by an obligatory judicial criteria, every issue derived from an administrative contract have to be solved by the Federal Tribunal of Administrative Justice (a legality tribunal) including but not limited the interpretation of the contract, its execution etc. Before May 2018, those faculties were carried by the common tribunals.

    In the case of private contracts, the Owner can terminate the contract for breach of the contractor if the parties agreed it expressly. It is important to notify the termination of the contract appropriately.

  20. What rights are commonly granted to third parties (e.g. funders, purchasers, renters) and, if so, how is this achieved?

    In general construction contracts there are no rights granted to third parties.

  21. Do contracts typically contain strict provisions governing notification of claims for additional time and money which act as conditions precedent to bringing claims? Does your jurisdiction recognise such notices as conditions precedent?

    It is not common either in government contracts nor in private contracts in Mexico to have this kind of provisions such as clause 20 of FIDIC contracts or equivalent, however it is advisable to notify every intention of the parties to amend the contract by writing.

  22. What insurances are the parties required to hold? And how long for?

    In most of the cases, all risk insurance, civil liability insurance and in certain situations, auto and professional liability insurances are requested. All these insurances have to remain valid during the term of the contract.

  23. How are construction and engineering disputes typically resolved in your jurisdiction (e.g. arbitration, litigation, adjudication)? What alternatives are available?

    In public contract when the dispute is about the termination of the contract by law, it has to be solved, if the case, by litigation before the Federal Tribunal of Administrative Justice. Generally, for administrative contracts, the most used method is litigation; however, for complex projects (as the NAIM Project or energy sector projects) arbitration is used under ICC or LCIA Rules. Adjudication does not exist, and dispute boards are not used except for the so called Technical Committees in Public Private Projects which are similar.

    For private contracts parties are free to choose any dispute resolution method that they consider appropriate, actually there is a chamber of the construction industry (Mexican Chamber of the Construction Industry) which has its on rules for arbitration and mediation to solve disputes derived from construction projects.

  24. How supportive are the local courts of arbitration (domestic and international)? How long does it typically take to enforce an award?

    Local courts are very supportive to arbitration. Society organizations and people dedicated to arbitration have done very strong efforts in order to empower the arbitration alternative method to resolve disputes. Actually, legislation is very strict and does not allow the Judges to review the essence of the cases and obligate them to have as valid arbitration awards. The exceptions of the foregoing are very restricted.

    In general the proceeding to execute an arbitration award lasts no longer than a year (between 6 and 9 months).

  25. Are there any limitation periods for commencing disputes in your jurisdiction?

    In Federal Government contracts, where the Mexican Federal Tribunal of Administrative Justice is competent, there is a statute of limitations of 30 working days. In the case of federal government contracts, where the Federal Judiciary is competent, the statute of limitations is 10 years. However, this will be an exception according to recent decisions of the court.

    In the case of Private contracts, most statute of limitations is 10 years, which is the general rule for statute of limitations.

  26. How common are multi-party disputes? How is liability apportioned between multiple defendants? Does your jurisdiction recognise net contribution clauses (which limit the liability of a defaulting party to a “fair and reasonable” proportion of the innocent party’s losses), and are these commonly used?

    Multi-parties disputes are not very common. However, in the case of government contracts, where there is a joint and several clauses, the liability is applied according to the civil law provisions and decisions of the court.

  27. What are the biggest challenges and opportunities facing the construction sector in your jurisdiction?

    Mexico has important areas of opportunity on: (i) administration of contracts; (ii) growing and understanding of Construction Law by engineers and lawyers; (iii) Improving dispute resolution mechanisms being more effective and efficient.

    Nowadays, Mexican government tendency is not precisely the most favourable and is going to be a challenge for both, lawyers and engineers to fight for the legality and transparency in the construction sector. Specially in the adjudication of the projects, as well as its termination (as can be seen in the Mexico City New Airport project, which was unilaterally cancelled).

    Our firm has been very active in promoting the improvement of this areas, through participation in different forums and organizations.

  28. What types of project are currently attracting the most investment in your jurisdiction (e.g. infrastructure, power, commercial property, offshore)?

    Since the cancellation of the Mexico City New Airport, the most attractive projects are the “Refinería de Dos Bocas” and the “Tren Maya”.

    According to official communications, the construction of the “Refinería de Dos Bocas” will result in an investment of around 150,000 and 160,000 million pesos, with the purpose of rescuing the oil sector. This project intent to generate 340 thousand of oil barrels per day and will generate around 23 thousand direct jobs and 100 thousand indirect jobs.

    The “Tren Maya” is the principal infrastructure project and consist in a new service of rail transport that will connect the principal cities and touristic zones of the Yucatan Peninsula. The investment of this project is estimated in around 120,000 and 150,000 million pesos to be obtained by a mix investment scheme.

  29. How do you envisage technology affecting the construction and engineering industry in your jurisdiction over the next five years?

    We expect a disruption in the classic development of construction as a consequence of technology. It is a matter of time and cost, and it is a worldwide trend that we cannot ignore.

    Our firm is devoted to help clients face these challenges.