Disputes and risk allocation

Dispute resolution

How are disputes between the government and defence contractor resolved?

According to Chapter 6 of the Public Procurement Law, there are different dispute resolution procedures that may be applied to solve disputes between the government and the contractors:

  • Nonconformity procedure: this procedure is purely administrative; it is filed before the Ministry of Public Affairs when the dispute relies in procedural grounds regarding the different instances of a public bidding.
  • Conciliatory procedure: this procedure is filed before the Ministry of Public Affairs whenever a party of a public procurement agreement considers that the other party to such agreement has breached its obligations. The Ministry of Public Affairs conducts a conciliatory hearing to try to broker a solution between the parties, and this agreed solution is written in a binding special agreement.
  • Arbitration and other alternative dispute resolution methods: the parties to a certain public procurement agreement can agree to an arbitration procedure or other dispute resolution procedures, such as mediation and conciliation, with regard to the interpretation or execution of the agreements. However, parties are forbidden from agreeing to an alternative dispute resolution method with regard to disputes in connection to the early termination of the agreements, and termination by breach.
  • Administrative courts: if no alternative dispute resolution method has been agreed to by the parties, or if such methods are forbidden by law, the disputes will be resolved by the competent federal courts of Mexico.

These dispute resolution procedures are applicable only to federal public procurement processes, and such process may differ from those contained in the local public procurement laws and regulations. We strongly recommend reviewing the specific local applicable law, since each of the 32 Mexican states have a specific applicable law.

To what extent is alternative dispute resolution used to resolve conflicts? What is typical for this jurisdiction?

The alternative dispute resolution procedures are commonly used by contractors and government agencies to solve disputes. A clause stating the aforementioned is usually included in the public procurement contracts.

Indemnification

What limits exist on the government’s ability to indemnify the contractor in this jurisdiction and must the contractor indemnify the government in a defence procurement?

Governmental indemnification

All payments in favour of the contractor to be paid by the corresponding government body must not exceed 20 calendar days after delivery of the corresponding invoice, the delivery of the goods or assets, or the rendering of the corresponding services. In the case of a breach to the payment obligations of the corresponding government body, the government body must pay all financial expenses (limited to the interest rate established in the Federal Income Law, for extension regarding unpaid taxes). This financial expenses will be calculated over all unpaid amounts and counted in calendar days until the contractor is fully paid.

Contractor indemnification

As stated in the Public Procurement Law, all contractors must guarantee: the advanced payments (for their total amount); and the full compliance of the agreement. Usually, this is 10 per cent of the total amount of the agreement (this last guarantee may be waived in all public procurements related to defence and security procurements). Also, contractors are obliged to guarantee all latent defects of the goods delivered or services rendered.

Parties are allowed to agree on a contractual penalty in the case of delay in delivery by the contractor of the goods, assets or services under the corresponding public procurement agreement. Such penalty must not exceed the total amount of the agreement compliance guarantee (required to be granted by contractor in favour of corresponding government body) and be determined taking in consideration the goods and assets or services that were not timely delivered or executed.

The above-mentioned indemnification provisions are only applicable to federal procurement processes. Indemnification provisions may vary at local level and, therefore, we strongly suggest reviewing the specific local applicable law, since each of the 32 Mexican states have a specific applicable law.

Limits on liability

Can the government agree to limit the contractor’s liability under the contract? Are there limits to the contractor’s potential recovery against the government for breach?

All contractors must guarantee the full compliance of the agreement. The amount of this guarantee is determined by the corresponding government body in the bidding documents, executed in the case of non-compliance of the agreement, and will constitute the limit of the contractor’s liability under the corresponding contract.

In the case of breach to the payment obligations of the corresponding government body, the government body pays to the contractor all financial expenses (limited to the interest rate established in the Federal Income Law, for extension regarding unpaid taxes). These financial expenses will be calculated over all unpaid amounts and counted in calendar days until the contractor is fully paid.

The above-mentioned provisions are applicable only to federal procurement processes. Liability limitation provisions may vary at local level and, therefore, we strongly suggest reviewing the specific local applicable law as each of the 32 Mexican federal states have a specific applicable law.

Risk of non-payment

Is there risk of non-payment when the government enters into a contract but does not ensure there are adequate funds to meet the contractual obligations?

Yes; although all federal government expenses and contracting procedures are originally approved and stated in the Federal Expenditure Budget, there is still a minor risk of payment default. Nevertheless, by request of the contractor, the corresponding government body pays to the contractor all financial expenses in accordance with the rate established in the Federal Income Law until the contractor is fully paid.

Parent guarantee

Under what circumstances must a contractor provide a parent guarantee?

The Public Procurement Law provides that all contractors guarantee:

  • all advanced payments (for their total amount);
  • full compliance with the agreement. Usually, the corresponding guarantee is for the 10 per cent of the total amount of the agreement (this last guarantee may be waived in all public procurements related to defence and security procurements); and
  • contractors are also obliged to guarantee all latent defects of the goods delivered or services rendered.

Government officials of the corresponding government body will set the conditions and amounts on which the guarantees will be granted, taking in consideration the compliance history of the contractor.

The above-mentioned guarantees will be granted either in favour of the Treasury or in favour of the contracting government body, depending of which government body is a party to the main public procurement agreement.