The Construction Disputes Law Review: Mexico

Introduction

The legal framework governing construction disputes depends on the nature of the contract. Private contracts are traditionally governed at federal level by the Code of Commerce and the Civil Code. However, public works contracts are governed by a complex legal regime composed of the federal Constitution, free trade agreements (FTAs) with a public procurement chapter, statutory laws, regulations, guidelines and many other bodies of law. Given the different levels of government, municipal, state and federal rules all govern public procurement. Nevertheless, lawmakers have harmonised this complex system with the public procurement provisions of the Constitution and FTAs.

Arbitration continues to grow in popularity as a method to resolve construction disputes. Governmental entities and agencies frequently accept arbitration. The other widely used means of dispute resolution are mediation, negotiation and conciliation. However, dispute adjudication boards are not so commonly used.

This chapter highlights some of the private- and public-sector disputes that may arise out of construction contracts.

Year in review

In 2021, the Federal Electricity Commission (CFE), a state-owned electric utility company, paid US$270 million to a Chinese-Mexican consortium to settle a London Court of International Arbitration (LCIA) award over a hydroelectric power plant disrupted by local protests. The settlement came after the consortium enforced the award in the Southern District of New York last year.2 The contract was governed by the Public Works and Related Services Law (the Public Works Law). Below are some key takeaways from the award.

  1. A contractor cannot compel discovery of information in the possession of the owner of the work. Thus, in this case, the contractor was unable to analyse information that was not provided. The contractor has the right to receive all information related to the site. If the owner refrains from revealing any matter that may affect the execution of the works by the contractor, the contractor may claim for breach of the contract by the owner.
  2. The obligation to disclose relevant information should not be limited to litigation or proceedings but should extend to any matter known potentially to adversely affect the construction of the project concerned.
  3. The obligation of best efforts in a contract implies that the party obliged to carry out an undertaking makes every effort to obtain the best result in favour of the other contractor.
  4. The contract at issue did not expressly exclude the payment of damages and lost profits. However, the contract limited the payment of indirect and consequential damages and lost profits. The Public Works Law entitles the contractor to claim the payment of termination value and non-recoverable costs upon an early termination or termination by cause attributable to the agency. Nonetheless, those contractors' rights do not substitute for the reparation system set out by the applicable civil laws governing contractual non-performance.
  5. The Public Works Law does not contain a method to assess non-recoverable costs for disruption to construction as a consequence of, in this case, blockades and suspensions by CFE. However, this cannot impede the payment of these costs. If the expenses are reasonable, proven and related to the contract, they should be considered non-recoverable.
  6. 'The national and international practice in the construction industry also recognise the duty of the owner of the project to compensate the Contractor for effects resulting from the inefficiencies that it causes', thus 'unless the Contract or the applicable law provides otherwise, the expenses that a Contractor incurs must be reimbursed by the owner of the project, provided that the inefficiency in the construction process is not caused by the Contractor'.3

Courts and procedure

i Fora

Civil and commercial courts are empowered to hear construction disputes. In Mexico, there exist no specialist construction courts.

Mexico's judicial system is divided into federal and local courts. Civil law matters (both substantive and procedural) are governed by local regulations, while commercial matters are governed by federal legislation. Commercial matters are regulated by the Code of Commerce, which applies throughout Mexico. Although commercial matters are federal, local judges are empowered to resolve commercial disputes.

Customarily, commercial matters (including construction disputes) are heard before local courts; however, federal courts are more prepared to hear complex cases. Nonetheless, in practice, federal courts are reluctant to hear commercial cases.

ii Jurisdiction

Mexican courts generally respect the choice of jurisdiction in a contract, including such choices in multi-tier dispute resolution clauses.

For example, if parties agree to multi-tier dispute resolution, Mexican courts would usually reject jurisdiction if the plaintiff has not previously exhausted an agreed alternative dispute resolution (ADR) mechanism (i.e., negotiation, mediation or conciliation). Therefore, Mexican courts would not have jurisdiction to decide a case if a previous step had not been followed. Note that court multi-tier dispute resolution clauses (excluding arbitration) are common in construction contracts in Mexico.

Moreover, arbitration clauses are more common nowadays for settling construction disputes in Mexico because of arbitration's main advantages: flexibility, specialisation and opportunities to present the case (evidence). If a dispute brought before a court has an arbitration clause, the courts will usually decline jurisdiction and refer the matter to arbitration upon a party's request, pursuant to Article 1423 of the Code of Commerce and Article II.3 of the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention).

iii Procedure rules

There are no specific rules of procedure for construction disputes in Mexico. The general procedure rules that govern civil and commercial matters also apply for construction disputes.

According to the Code of Commerce and local civil procedure codes, in general terms, a trial formally begins when a complaint has been filed, admitted and served, and the defendant has responded and produced a defence (and, in some proceedings, offered evidence), whereby each party has stated its factual assertions and the relief sought. Once service of process has been performed and a response received by the court, there will be a period set for offering evidence (other than the documents filed with the complaint and the response). The court will rule on whether this evidence is admissible (factual witnesses, inspections, expert witnesses and suchlike) and hold an oral hearing to examine witnesses and, if relevant, expert witnesses. After the evidentiary stage (which must be concluded within a maximum of 30 days), parties are allowed to formulate closing written or oral arguments (including a hearing), which will then enable the court to render a final judgment. Although the procedure appears relatively straightforward, in practice, it becomes more complex owing to ancillary challenges that may significantly delay the proceedings.

Having said that, the common procedural hurdles that arise in civil and commercial disputes are: (1) service to process (because it is a very formalistic procedure); (2) power of attorney for foreign companies; (3) documentary evidence – all documents must be exhibited in the original language and Spanish, along with the reply to the initial claim; and (4) the fact that electronic hearings are not common or well regulated.

iv Evidence

There are no specific rules and mechanisms applicable to the collection and submission of evidence for construction disputes because the general evidence rules that govern civil and commercial matters also apply for construction disputes.

Pretrial and discovery

In Mexico, the concept of discovery does not exist and there are only minimal opportunities to access documents under the control of a third party. There is no mechanism for party-directed document production or depositions.

Although the court may order the production of certain documents or the testimony of certain witnesses after the pleadings have been submitted, this discovery is usually minimal.

Expert witnesses

Expert witnesses are permitted – and usual – in construction disputes. Each party can appoint an expert and prepare an interrogatory report for both parties' experts to answer. If the reports are completely contradictory, the court may appoint a third expert witness. Parties can cross-examine the expert witness at the hearing. Expert reports are not binding for the court.

Documentary evidence

All documentary evidence must be submitted along with the complaint or the answer to the complaint or reply, and must be in Spanish or translated into Spanish, otherwise the evidence will not be admitted.

Factual witnesses

Statements of witnesses of fact must be presented orally during the witness examination. However, parties must identify their factual witnesses with their complaint. Both the judge and opposing counsel can cross-examine witnesses, but this is usually very limited.

Alternative dispute resolution

Under Mexican law, Article 17 of the Constitution provides that statutes will regulate alternative means of dispute resolution.

i Statutory adjudication

In Mexico, there is no 'adjudication process' as understood in the United Kingdom under the Housing Grants, Construction and Regeneration Act 1996 or as designed in the New Engineering Contract (NEC). NEC contracts have not yet been widely used in Latin America.

However, it is common for parties to agree to submit their disputes to a dispute adjudication board (DAB) before instituting arbitration, and the decision of the DAB may have a binding effect like that of an adjudication process, subject to a contractual obligation agreed upon by the parties. Submitting a dispute to a DAB is sometimes a condition precedent that parties must satisfy before starting arbitration. It is uncommon to see this condition scenario in litigation.

Most of the disputes that arise from DAB decisions will typically end in arbitration as DAB clauses are often combined with arbitration clauses. This is a convenient combination because of the lack of both regulation and expertise on DABs in Mexican courts.

ii Arbitration

Arbitration is the preferred resolution method for those disputes arising from complex construction projects in Mexico.

As stated previously, Article 17 of the Constitution provides that statutes will govern alternative means of dispute resolution. Therefore, Mexican authorities shall protect and respect the decision of the parties to arbitrate. In fact, in arbitration matters, the intervention of the courts should be minimal, with priority given to the will of the parties to arbitrate under their agreed terms.

In 1993, Mexico adopted the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration (the UNCITRAL Model Law) (albeit with slight amendments to make it compatible with the Mexican legal framework). The Code of Commerce is the statute in which the UNCITRAL Model Law was enacted.

Mexico is a contracting party to the New York Convention and the 1975 Inter-American Convention on International Commercial Arbitration. Also, in 2018, Mexico became a contracting party to the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, supporting the legal regime for dispute resolution of an investment dispute. Mexico strengthened its commitment to investor–state dispute settlement in 2020 when the Agreement between the United States of America, the United Mexican States and Canada came into force. Mexico has been considered a pro-arbitration hub given the wide acceptance of the institution in its legal framework.

The Code of Commerce also governs the level of intervention that Mexican courts may make in arbitration proceedings. Courts may intervene in: (1) the appointment of and challenges to arbitrators; (2) rulings on the arbitral tribunal's jurisdiction; (3) interim measures; (4) the recognition and enforcement of interim measures adopted by an arbitral tribunal; (5) referrals to arbitration; and (6) the enforcement and annulment of awards. Overall, the judiciary has been supportive of arbitration.

The Code of Commerce establishes a particular procedure for the recognition, enforcement or annulment of an award and efficiency is required because of the short time frames provided by law. This procedure is called the Special Proceedings for Business Transactions and Arbitration and may be heard by a local or federal court.

Local courts in Mexico can only reject an arbitral award issued by a foreign or international tribunal if the parties have gone through the Special Proceedings for Business Transactions and Arbitration and the court has deemed that the award falls within one of the grounds outlined in Article 1462 of the Code of Commerce or Article V of the New York Convention. The content of both provisions is mostly identical. These are the only reasons for a Mexican court to reject the recognition or enforcement of a foreign or international arbitral award.

As regards public contracts, the applicable laws exclude certain matters from the scope of arbitration, such as: (1) administrative rescission (termination based on one party's failure to perform the contract); (2) early termination of the contract; and (3) other cases provided for by law.

iii Mediation

Mediation may be used to settle construction disputes in Mexico. However, there is not enough public information to determine whether mediation is typical in construction disputes in Mexico.

In 2020, the Senate submitted a bill for a General Law of Alternative Dispute Resolution Mechanisms, which aims to set minimum rules for the operation of alternative dispute resolution mechanisms throughout the country.4 This law's approval is still pending, therefore mediation is regulated locally by each state.

For instance, Mexico City has enacted the Alternative Justice Act of the Superior Court of Justice of Mexico City (the ADR Law). Under this ADR Law, mediators can be public or private. Public mediators are attached to an alternative justice centre, and private mediators are certified professionals in civil, commercial and family matters. Both types of mediators must meet the requirements established by law, such as being a lawyer, having a good reputation and having passed examinations and training courses, among other things. Additionally, mediation services provided by private certified individuals and registered with the Mexico City judicial branch under the ADR Law represent a public service supplementing traditional justice. The alternative justice centre supervises their activities to guarantee professional diligence.

The ADR Law grants res judicata effect to settlement agreements executed before a private certified mediator. A party may seek from a court enforcement of a mediated agreement as a final judgment without the need for a full trial.

Under the ADR Law, if parties partially or entirely breach a mediated agreement, or if there are circumstances that make the agreement unenforceable, the parties may re-mediate and enter into an amendment agreement or execute a new agreement.

The ADR Law grants many benefits to parties willing to settle a dispute. Thus, depending on the circumstance, parties may prefer mediation over litigation or arbitration.

iv Other ADR methods

Negotiation is another method through which parties may settle a dispute. The Civil Code governs settlement agreements as a contract that the parties may sign to terminate a current dispute or prevent a future one by agreeing to pay consideration to one another.

The Civil Code grants res judicata effect to settlement agreements between parties. However, a court could subsequently declare a settlement agreement void in cases provided for by law. For example, the court may set aside an agreement on the basis of lack of authority where an alleged representative used a void or false document.

Construction contracts

i Public procurement

The intricate legal regime governing public contracts is composed of the Constitution, FTAs with a public procurement chapter, statutory laws, regulations, guidelines and many other bodies of law. Given that the Mexican federation comprises 32 states, public procurement is governed by municipal, state and federal rules. Nevertheless, lawmakers have harmonised this complex system with the public procurement provisions of the Constitution and FTAs.

Under Article 134 of the Constitution, the federation, states, municipalities and other entities must manage economic resources with efficiency, effectiveness, economy, transparency and honesty. In this section, we constrain our analysis solely to the federal Public Works Law, leaving aside other laws such as the Public Acquisitions Law or the Public–Private Partnerships Law.

The Ministry of Public Administration (SFP) is the competent authority with jurisdiction to review disputes arising out of tendering procedures related to the tender call and clarification meetings, the filing and review of offers, the award, cancellation of the tender, and acts of the agency impeding the execution of the contract. An aggrieved party may request an order with suspensive effect blocking the continuation of the procurement procedure or any other related acts provided that this request is not contrary to the public interest or public order.

The Public Works Law provides for the option to resolve disputes concerning public contracts by conciliation administered by the SFP and this avenue is frequently used by contractors and agencies. If conciliation of the parties is achieved, the resultant agreement will be binding and its performance may be demanded through the corresponding judicial channels.

Additionally, the Public Works Law provides for arbitration as an alternative means of dispute resolution. However, the Public Works Law limits the arbitrability of disputes. Thus, administrative rescission and early termination of contracts are expressly excluded from the scope of arbitration. The Law also provides for the option to agree other means of ADR. If parties do not agree upon an ADR mechanism, federal courts will have jurisdiction. The Federal Court of Administrative Justice has jurisdiction in disputes arising out of public works contracts.

ii Contract interpretation

There are no special rules on interpreting construction contracts thus the general rules of interpretation shall apply.

Courts have found that negotiations are binding 'when parties have reached the point where they foresee that they could enter into a contract'. Thus, if a party decides not to conclude negotiations or conclude the contract, there may be a liability. Negotiation minutes or draft agreements, in principle, are 'not binding because the parties are aware of their provisional or interlocutory nature and a formal understanding will be reached regarding all the points once [a contract] is duly formed, so a minute, although it is signed, is not a source of obligation or acquisition of rights'. Precisely so that the parties understand that an offer is not firm, they may insert in the document 'a clause with the wording “without commitment”, “remaining free” or an equivalent term; however, such terms serve only as a precaution for the offeror, and even without a clause of this kind, in the event of any doubt, the pure and simple proposals must be considered ultimately to be “not firm”, and therefore revocable'.5

Courts have also found that 'the conduct observed by the parties before, during and in the performance phase of the contract has significant value as a means of interpretation, because of the principle of coherence and continuity of the contract'. To employ this means of interpretation, it is necessary for the parties' actions to 'be significant in relation to the contractual intention deducible from them and the meaning of the contract. It is also necessary that these acts be mutual or, if they are executed by a single party, that there is the express or tacit acceptance of the other.' The intention prevails over the words and the parties' conduct during the term of the contract is a valuable source of interpretation.6

Courts have confirmed that the odiosa sunt restricted principle should be applied in the interpretation of penalty clauses or liquidated damages clauses. In this respect, the interpretation must be made in a restrictive or limited way 'for the beneficiary, and in favour of the debtor, since it is a stipulation that, in one aspect, fulfils a sanctioning function, and the very nature of this prevents it from being extended to situations other than those specified by the interested parties'. In this regard, if the contracting parties agree to a penalty for a certain event and for a certain purpose, it is not admissible to presume the intention to agree to it for a similar situation, and even less to impose it on the grounds that the parties did not exclude or were silent about the possibility of its application. It is not possible to impose contractual obligations without being able to attribute a certain consent to them, especially in the case of a penalty clause.7

Common substantive issues and remedies

i Time bars as condition precedent to entitlement

Time bars as a condition precedent to entitlement are generally upheld by Mexican courts.

The Code of Commerce stipulates that the parties are bound in the way that it seems they wanted to bind themselves under the terms agreed. This Code does not restrict the validity of the commercial act on account of formalities or determined requirements.

The Civil Code provides that the parties are bound not only to what they expressly agreed in the contract but also to the consequences, which, according to their nature, should be in accordance with good faith, custom or the law.

However, Mexican courts tend to adopt a very formalistic approach to resolving disputes and will review any written provisions agreed by the parties.

ii Right to payment for variations and varied scope of work

As a general rule, the contract is the principal source of obligations to bind the parties. However, if the parties did not agree on a specific treatment for the payment of variations and varied scope of work, the Civil Code provides specific rules. If the price of the project was initially determined by the parties, the constructor shall not have the right to claim any variation or increase on the price, even if the price of the materials or the price of the wages increased. The same rule shall apply when there has been any change or increase in the plan or design, unless this was authorised in writing by the owner and with an express designation of the price.

Under Article 59 of the Public Works Law, government entities may, within their authorised budget and the scope of their responsibility, and with a reasoned justification, modify the scope of the project as long as the amendment: (1) does not exceed 25 per cent of the amount or the term agreed in the contract; (2) does not imply substantial variations to the original project; and (3) is not entered to evade in any way compliance with the law or treaties.

iii Concurrent delay

There is a lack of regulation on concurrent delay in Mexico. However, the parties are free to agree terms on this subject in their contract. Under Article 1840 of the Civil Code, parties can agree on liquidated damages if one of them does not comply with its obligations under the contract and these obligations can include remedies for delays in projects.

However, if both parties are in delay, one party may not be able to assert the liability of the other. Article 1949 of the Civil Code enshrines the principle that the injured party must be in full compliance to claim redress for the consequences of that injury. In theory, therefore, if both parties are in delay (and depending on the circumstances), neither party could claim liability from the other. Regarding public contracts, Article 46 bis of the Public Works Law provides that if the delay is caused by the contractor, the contractual penalties will apply, as long as they do not exceed the total price of the contract, and they will be determined solely based on the amount of work not executed as at the date agreed in the contract for the total completion of the project.

Under Article 52 of the Public Works Law, the contractor is entitled to an extension of the final deadline in proportion to the delay if the delay is caused by the client.

iv Suspension and termination

Parties may agree for specific procedures to suspend obligations or terminate the contract. Usually, the contracts include a clause that requires the party wishing to terminate or suspend any obligation in the contract to give timely notice to the counterparty before taking any of the above actions.

Suspension

Mexican law does not contain specific regulations regarding the suspension of obligations in private contracts. However, the parties are not bound to comply with their obligations during a force majeure event unless they contributed to the event or have expressly accepted liability in such an event or the law imposes this duty on them. The force majeure event will only exclude liability for not performing an obligation but will not extinguish it.

Public contracts are subject to more specific regulation. The Public Works Law provides that government entities may temporarily suspend, in whole or in part, the work contracted for any justifiable cause. The heads of the relevant government entities shall designate the public servants who may order a suspension and determine the duration of the suspension, which may not be indefinite.

Termination

For private contracts, the Civil Code regulates certain scenarios in which the parties may request the termination of their construction contract.

In cases of contractual breach, the aggrieved party has the option to: (1) require the breaching party to comply with the completion of the project; or (2) terminate the contract. In both cases, the affected party may claim the damages arising from the termination.

In most cases, the contract will provide a time frame for the injured party to give notice of the termination to the counterparty.

As regards public contracts, specific provisions regulate contract termination. The Public Works Law provides that contracts may be terminated when there are reasons of general interest; there are justified causes that prevent the continuation of the project; and it is proven that the continuation of the project would cause severe damage or harm to the state.

In cases of breach in public contracts, government entities may also terminate the contract. The public entity will give notice to the contractor about the breach and the impending termination. The contractor will have the right to challenge the breach and the potential termination. Thereafter the public entity shall render its decision on terminating the agreement or not.

v Penalties and liquidated damages

A party that fails to perform its obligations is liable for damages.8 The Civil Code recognises the validity of the parties' agreement in regulating civil liability, except in those cases where the law expressly provides otherwise.9 For example, civil liability arising from wilful misconduct is enforceable for all obligations and any waiver made is void.10

Consequently, the parties may agree on a specific benefit as the penalty due in the event that an obligation is not fulfilled. If the parties enter into such an agreement, they will not be able to claim additional damages.11 This agreement, whereby the parties fix in advance the quantum of damages to be paid in the event of non-performance of the contracted obligations, is usually called a penalty clause or liquidated damages clause. Its limit is fixed by law as the value or amount of the main obligation. In other words, the penalty cannot exceed the main obligation in value or amount.12 Subject to this restriction, the parties may validly establish in advance the benefit that guarantees the payment of damages arising from a breach of the agreed obligations.13

The penal clause constitutes an accessory agreement that involves the obligation to carry out a specific service in the event of non-performance of the main obligation. It has the function of determining in advance the amount of damages that the debtor must pay for failure to perform that obligation or for a simple delay and, given its conventional nature, the penalty is due regardless of whether or not damage has been effectively caused, its proof or the amount; but precisely for this reason, the penalty clause limits at the same time the quantification of the damage or lost profits. In other words, it operates as an anticipated conventional cap on damages, as a settlement of the amount. It should be noted that it is within the court's discretion to grant the creditor or debtor the option to claim payment of either the penalty or the cost of the damage actually caused.14

In conclusion, from Articles 1840, 1843, 1949 and 2117 of the Civil Code, liability for non-performance gives rise to damages, which may be regulated in advance by the parties, by stipulating a specific provision as a sanction. This penalty is valid because it is provided for by law and has the following limits: (1) it cannot exceed the value of the principal obligation; (2) it operates as a cap on damages; and (3) a party cannot claim payment of the penalty amount and additionally damages. A legal precedent supports the idea that neither the creditor nor the debtor can choose between penalty and damages.

vi Defects correction and liabilities

With respect to defects or vices that only appear later, the contractor's liability in work contracts lasts for 10 years.15 In the case of public works, the prescribed liability period is one year.16

vii Bonds and guarantees

The Supreme Court has held that a bond may be called after a notice of rescission (termination based on one party's failure to perform the agreement), upon payment of the corresponding release.

In the event that the beneficiary of the surety bond has claimed payment of the amount guaranteed by the surety institution but the main obligation is subject to a pending trial (i.e., despite the fact that the guarantor has filed for a remedy against the rescission and the relevant judicial or administrative authority has yet to issue a final resolution recognising the validity of the administrative act), the enforceability of the bond does not disappear. An exception exists in those cases in which parties have agreed expressly in the surety policy that enforceability of the surety is subject to a final court decision on the main obligation.

The aforesaid circumstances are provided for in Articles 8 and 9 of the Federal Law of Administrative Procedure, which stipulates that, being an administrative act, the duly notified termination remains effective and enforceable as long as it has not been declared invalid by an administrative or judicial authority, as the case may be. However, it must be taken into account that where a rescission is contended and the challenging party obtains suspension of the enforcement of the rescission (either through an administrative appeal or in a corresponding contentious trial), the suspensive measure will, as a general rule, also prevent fulfilment of the accessory obligation by the guarantor.17

viii Overall caps on liability

Caps on liability are discussed above in Section VI.v on penalties.

Outlook

It is certain that the number of disputes with state-owned companies will continue to rise. There are frequently public news reports about major disputes with CFE and Petróleos Mexicanos (Pemex). Moreover, these disputes may be exacerbated by the lack of payment affecting most Pemex contractors, with recent news reports stating that Pemex has stopped paying its contractors and has debts of around US$2.6 billion.18

Footnotes

1 Luis Enrique Graham Tapia is a partner, Juan Arturo Dueñas Rodríguez and Orlando F Cabrera C are senior associates and Anna García-Morineau is an associate at Hogan Lovells.

2 See Cosmo Sanderson, 'Mexican state utility pays hydro award', Global Arbitration Review 7 July 2021 https://globalarbitrationreview.com/mexican-state-utility-pays-hydro-award.

3 Omega Construcciones Industriales, S.A de C.V., Sinohydro Costa Rica, S.A., Desarrollo y Construcciones Urbanas, S.A. de C.V. and Caabsa Infraestructura, S.A. de C.V. v. Comisión Federal de Electricidad, LCIA Case No. 163471, Final Award, 22 June 2020.

5 Non-binding court precedent 177335.

6 Binding court precedent 180917.

7 Non-binding court precedent 166466.

8 Article 1949.

9 Article 2117.

10 Article 2106.

11 Article 1840.

12 Article 1843.

13 Non-binding court precedent 239436.

14 Non-binding court precedent 187461.

15 Articles 1159 and 2634, Civil Code.

16 Article 66, Public Works Law.

17 Binding court precedent 2015251.

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