This country-specific Q&A provides an overview to construction law in Mexico.
It will cover termination requirements and obligations, permits and licence, procurement, financing and security, and disputes as well as insight and opinion on challenges and opportunities.
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/
Is your jurisdiction a common law or civil law jurisdiction?
Mexico is a civil law jurisdiction based in the Spanish and French law traditions.
What are the key statutory/legislative obligations relevant to construction and engineering projects?
As in all countries there are two kinds of contracts:
- Government Contracts (Public Works, Services Related to Public Works and Public Private Partnerships -PPPs) and
- Private Contracts.
Since Mexico is a Federation with 31 states and Mexico City, each State, Mexico City and the Federation, have their own regulations. Therefore Government Contracts, are regulated by the Federal Constitution or the Constitution of each State and/or Mexico city, the respective Public Works Law and their regulations, as well as the applicable Public Private Partnership Laws.
Private Contracts are regulated by the Commercial Code (that applies in all Mexico), as well as by the Civil Code that is applicable in each one of the 31 States and Mexico City.
Are there any specific requirements that parties should be aware of in relation to: (a) Health and safety; (b) Environmental; (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 with Health and Safety. http://dof.gob.mx/normasOficiales/4376/stps/stps.htm
(b) Environmental.- The “LEY GENERAL DEL EQUILIBRIO ECOLÓGICO Y LA PROTECCIÓN AL AMBIENTE” (“General law of Environmental Balance and the Protection to the Environment”) applies to all the country. However there are specific regulations in each state of the Federation and Mexico City.
(c) Planning; There are specific planning laws in each State that regulate the way in which land and building shall be executed.
(d) Employment: The Federal Labour Law, which applies in all the country, has specific provisions on construction; the IMSS Law (Mexican Social Security Law), which is also federal regulates the social security system, that has an important impact on the workforce of construction projects on Employers, Contractors, and Subcontractors.
(e) Anti-corruption and bribery.- The General Law of Administrative Liabilities (which is a Federal law) and the Criminal Code (Federal and the one applicable to each one of the 31 states and Mexico City), establish conducts that are considered corruption actions that are sanctions for individuals and companies including the ones related to construction projects. In the case of General Law of Administrative Liabilities, sanctions are of administrative nature (debarment, fines, liquidation of companies), while the Criminal Codes sanctions are of criminal nature (jail and fines).
What permits/licences and other documents do parties need before starting work, during work and after completion? Are there any penalties for non-compliance?
Each State has their own regulations in order to perform construction contracts. Usual licenses and permits required, include: license for construction, use of soil (if commercial, residential use, etc.), compliance with safety regulations; environmental regulations, as well as attending labor and union provisions. Non compliance of licenses and permits may lead to closing of the construction by the authority and fines.
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 respective Civil Code of each State.
Who are the typical parties to a construction and engineering project?
In Government Contracts, the typical parties are the State as an Owner; the Designer; the Contractor and the Supervisor. In mega projects such as the New Mexico City Airport, a Construction Manager can be engaged by the Owner (State), in order to have a better control of the project. The new Mexico Airport (NAIM), has a Construction manager for this purpose.
In the case of Private Contracts, the typical parties are the Owner or Developer; The Arquitect and/or Designer; the contractor, and sometimes a supervisor is required.
What are the most popular methods of procurement?
In the case of government contracts, the Mexican Constitution and the Public Works law establishes that public bid shall be the preferred procurement method. Other procurement methods included in the law are: Invitation to at least three participants (Restricted Bid), and Direct Award.
What are the most popular standard forms of contract? Do parties commonly amend these standard forms?
Mexico does not have standard forms of contracts as in other jurisdictions. Some private contracts in Mexico have used FIDIC contracts, but they are not used in general.
In the case of government contracts, since the contracts are governed by the Public Works laws or equivalente, the contracts follow a certain order and form that satisfies the laws requirements.
Are there any restrictions or legislative regimes affecting procurement?
Public Procurement of construction projects is regulated by the “Public Works Law and related Services” applicable to the Federation and to each State or Mexico City. Non compliance to applicable regulations make the public procurement and/or the contract that breaches such provisions null and void.
Do parties typically engage consultants? What forms are used?
Contractors usually engage consultants in order to advise on legal and/or technical matters. There is a Chamber of Consultants that has a strong presence in the engineering and construction sector.
Is subcontracting permitted?
In the case of government contracts, it is up to the contracting entity to decide if it allows subcontracting or not. Usually it is permitted if it is not a very special project or scope.
In the case of private contracts, it is absolutely legal possible, unless the owner does not allow it.
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.
In the case of the New Mexico City Airport (NAIm) approximately 60% of the financing will be contributed by the Mexican government through the use of public funds, and approximately 40% is expected to be funded from a combination of bank loans and the offering of debt securities.
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?
In public and private projects that have advance payments (anticipo), anticipo bonds issued by a bonding company are often used. This remains until the end of the performance of the works when the advance payment (anticipo) has been amortized and used adequately.
In public and private projects there is usually a performance bond that guarantees the correct performance of the projects. In the case of government contracts, performance bonds cover approximately 10-20% of the project value. In the case of private contracts, performance bonds does not have a limit, and in some cases reach up to 50% of the value of the contract.
In public and private projects, after the reception of the works, the employer usually requests a hidden defects bond issued by a bonding company. Usually up to the 10% of the contract value.
Is there any specific legislation relating to payment in the industry?
In the case of government contracts, the Public Works Laws establish a process of estimating the works, authorization of the estimates, invoicing and payment. Payment is also regulated by the tax laws that define the ways of invoicing under a specific regime (electronic invoicing).
In the case of private contracts, the terms of payment are free to determine. Payment has to satisfy the tax laws and regulations such as the issuance of electronic invoices (CFDIs).
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?
These kind of clauses were not used until recent years. However in recent private projects, they have been included. Since they are not forbidden, there is no issue on including them and there has been no judicial decision stating their illegality or alike.
Do your contracts contain retention provisions and, if so, how do they operate?
Yes. Retentions are a provision that allows the Employers to retain a percentage (usually 10%) of a monthly invoice in order that the Employer can face breaches, unexpected conditions and other situations that derive of non correct performance of the contract by contractor. This retention can be used in a series of cases, that are established in the contract such as defects during the construction, lack of compliance of workers compensation, claims from sub subs, etc. In the case that the retention is not used by Employer, the Employer shall return the retention to the contractor at the time of the reception of the works.
Do contracts commonly contain delay liquidated damages provisions and are these upheld by the courts?
It is common that Employer imposes liquidated damages to contractors for delay 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 each month there is a comparison between expected works and performed works. The Employer is able 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.
Are the parties able to exclude or limit liability?
It is possible to exclude liability if both parties agree expressly on it.
Are there any restrictions on termination? Can parties terminate for convenience? Force majeure?
In the case of government contracts, the Government can terminate for breach without the intervention of a court or arbitration, while contractors have to sue the government to terminate for breach of government; Likewise the Government can terminate for convenience in the case of public order reasons.
In the case of government contracts, the private Owner can terminate for breach and for convenience if parties expressly agree on it in the contract.
What rights are commonly granted to third parties (e.g. funders, purchasers, renters) and, if so, how is this achieved?
In general in a construction contract, there are no rights granted to third parties. For example there are no liens nor similar provisions in the law.
Do contracts typically contain strict provisions governing notices 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.
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.
How are construction and engineering disputes typically resolved in your jurisdiction (e.g. arbitration, litigation, adjudication)? What alternatives are available?
In the case of government contracts, the most used dispute resolution method is litigation. In certain projects mostly in the energy sector, arbitration is used under ICC or LCIA Rules, except in the case of unilateral termination of breach, and termination for convenience of the State. Adjudication does not exist, and dispute boards are not used except for the so called Technical Committees in Public Private Projects which are similar.
In the case of private contracts, parties are free to choose any dispute resolution method that they consider appropriate.
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 of arbitration awards. This has taken a lot of time and effort from society organizations in order to make the judiciary conscious about the validity and enforcement of arbitral awards.
A relevant arbitration in the oil industry in recent years caused an international award to be declared nulled and void (The COMMISA case). The case arose awareness on the legal and judiciary community about the validity of arbitral awards.
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.
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?
Multy party disputes are not very common. However in the case of government contracts, where there is a joint and several clause, the liability is applied according to the civil law provisions and decisions of the court.
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. Our firm has been very active in promoting the improvement of this areas, through participation in different for a and organizations.
What types of project are currently attracting the most investment in your jurisdiction (e.g. infrastructure, power, commercial property, offshore)?
Currently the New Mexico City Airport is the most important project, having an estimated value of US$13.3 billion. This project has by the time of the writing of this contribution approximately 300 companies, generating 160 thousand work positions.
Another relevant project is the Mexico City-Toluca Project (38 thousand million pesos). A project of 58 kilometres, including 4.7 kilometres of tunnels, six stations which expect to have 230 thousand passengers per day.
Another relevant transportation Project is the Fast train in Guadalajara which will cover 21.5 kilometres with 18 stations, to provide a daily Service to 233 thousand passengers.
In the areas of ports, the capacity will be duplicated from 260 to 520 million tons. The completion of 25 mayor strategic ports.
in the areas of transmission and distribution and power generation important projects are developing too.
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.