Common substantive issues and remediesi 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 and 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 in 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. These obligations can include remedies for delays in projects.
However, if both parties are delayed, 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 delayed (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 contractor causes the delay, 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 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 a 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 otherwise.v Penalties and liquidated damages
A party that fails to perform its obligations is liable for damages.10 The Civil Code recognises the validity of the parties' agreement in regulating civil liability, except in those cases where the law expressly provides otherwise.11 For example, civil liability arising from wilful misconduct is enforceable for all obligations, and any waiver made is void.12
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.13 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 a 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.14 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.15
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.16
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
In respect of defects or vices that only appear later, the contractor's liability in work contracts lasts for 10 years.17 In the case of public works, the prescribed liability period is one year.18vii 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 stipulate 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 a 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 the fulfilment of the accessory obligation by the guarantor.19viii Overall caps on liability
Caps on liability are discussed in Section VI.v on penalties.