Table of Contents

• Introduction
• I.- Commercial’s Rules
• 1) Definition
• 2) Contract Subcategories
• A) Lump Sum Contract
• B) By Unit-Price Contract
• C) For Determined Price Contact
• D) For an Indeterminate Price Contract
• E) Innominate Contract
• 3) Nature
• 4) Contract’s Form
• II.- Labor’s Rules
• 1) Principles and Importance
• 2) Labor Modalities
• A) Specific work
• B) For a Certain Time
• III.- Workplace Risks and Responsibilities
• A) Temporary Disability
• B) Permanent Partial Disability
• C) Total Permanent Disability
• D) Death Due to a Criminal Act

Introduction

The construction industry has suffered a boom thanks to nearshoring in the state of Chihuahua, specifically in its municipality of Ciudad Juárez, where the high demand for industrial warehouses has skyrocketed in recent years and, with it, its accelerated construction. Therefore, it’s now more important than ever for people to know the legal details of the construction industry. That’s what I will talk about in this new entry.

Notwithstanding the above, construction works in the residential and commercial fields have always played an important role in our city. However, in my experience as an attorney, I have noticed a supreme informality in this industry where, alarmingly, buildings such as the construction of swimming pools, second floors, fences, etc.) and even million-dollar or larger ones lacked something basic to guarantee their quality and conclusion: a contract.

So, in order to advise clients and, why not, the construction companies themselves, I have decided to analyze the legal aspects of the private construction contract as part of the construction industry so that they can glimpse the economic dangers that they may fall into if they do not comply with current regulations.

Contract that will be analyzed from the private sphere since there is a Public Construction Contract with which it shares similarities and is regulated by Administrative Law, which I plan to develop in a later blog entry. For now, my interest is to provide you with the minimum notions regarding the Private Construction Contract from two points of view: 1) commercial and 2) labor. But stay tuned because later, I will talk about its administrative (permits, licenses, etc.) and tax (worker-employer fees) aspects. Without further ado, let’s get started.

I.- Commercial’s Rules

1) Definition

This contract occurs when a party called a contractor undertakes to execute and direct a specific construction work, providing the materials in exchange for a fixed remuneration that another party must pay called the client, who shall be the owner of the built work.

2) Contract Subcategories

In Mexico, there are five subcategories contemplated in the law for the Private Construction Contract, namely: A) by lump sum contract; B) by unit-price contract; C) for a determined price, D) for an indeterminate price, and finally, E) innominate contract. Let’s take a lot of them:

A) Lump Sum Contract

In this contract, the work must be erected and delivered entirely in a single exhibition, and the client shall not pay any fee until the job is done. Furthermore, the contractor must complete it within the contract’s deadlines or modifications. If this is not possible to calculate, in the opinion of experts pursuant to article 2629 of the Federal Civil Code^[1].

On the other hand, if the property’s value is more than one hundred pesos, the contract shall be granted in writing, including a detailed description of the work, plan, design, and budget pursuant article 2618 of the Federal Civil Code^[2].

B) By Unit-Price Contract

In this modality, the contractor delivers the work to the client in parts that must be considered independent of each other. The part paid and delivered that was not objected shall be deemed approved, and the contractor may continue with another stage of the work. The last, according to article 2631 of the Federal Civil Code^[3].

C) For Determined Price Contact

As its name indicates, in this modality, the parties have established a fixed price that the contractor must adhere to. Even if the prices of the materials increase, he will not be able to adjust it pursuant to article 2626 of the Federal Civil Code^[4].

D) For an Indeterminate Price Contract

This subcategory is very rare, but it exists. If, for any reason, the price was omitted to be set in the contract or it was stipulated that the consideration would be based on the tariff of the federal entity in question, this is how it will be calculated. If this is not possible, in the opinion of experts according to article 2624 of the Federal Civil Code^[5].

It should be noted that nothing prevents the parties from stipulating a formula or basis for calculating the final price, which can avoid the risks for the contractor derived from the increase in the price of materials, employer fees, salary increases, etc. However, the formula must be very clear to be assessed by a court in case of controversy and thus avoid, for example, having to spend on the fees of an expert witness to determine the price of the work done.

E) Innominate Contract

Finally, there are what are known in the doctrine as innominate contracts, which in this case would actually be a contract different from that regulated as a Private Construction Contract or its subcategories, which is based on the freedom that people have to agree^[6] pursuant article 1832 of the Federal Civil Code, but with the only limitations that their will does not violate the rules of public order and the rights of third parties. This, of course, would be avoided by hiring lawyers who are effective in drafting contracts.

Then, an innominate contract is based on the contractual freedom of people and, therefore, considering certain limits established in the law, the parties can tailor their obligations to their liking. However, in the event of a legal controversy, the contract that they have drawn up and that has omitted to provide for certain issues, by analogy, the rules that govern the contract with which they are most similar shall be applicable pursuant to article 1858 of the Federal Civil Code^[7]. In this case, the Private Construction Contract shall be the most similar.

Accordingly, through an innominated contract, the subcategories that I have described above may be substantially modified, even combined. For example, if the client does not trust the materials that the contractor will use or the contractor cannot finance them but does have the knowledge of construction, it could well be stipulated that the client would provide the materials that the contractor needs without including the design, plan, and procedures to execute the work, etc. This is a common type of contract. However, while drafting this innominated contract, you must take great care that it doesn’t portray a labor relationship for a specific work disguised under civil legislation because it will have dire legal consequences.

In any case, the important thing is that you, as a client or contractor, can explore modalities in construction contracts according to your needs without necessarily having to stick to the subcategories set out above. All this, of course, under the advice of professionals because certain clauses might be null in themselves or nonsense that will have no legal value. Always seek professional advice.

3) Nature

The Private Construction Contract is regularly considered a civil contract. However, depending on the quality of the parties to the contract, the competent court in which the matter must be litigated will change. Sometimes, it would be a civil court, and other times a commercial court.

Thus, if you, as a client, retain a company specialized in construction—which I highly recommend—to erect the construction, repair, or modification, the court competent to hear any dispute arising from the contract will be a commercial court pursuant to the joined interpretation of articles 2#, 75#, section VI, and 1050^[8] of the Mexican Commercial Code^[9].

4) Contract’s Form

According to Mexican law, contracts have two elements: existence and validity. The first proves that the contract exists, while the second that it’s enforceable. Among the second, there is one that acquires capital relevance for the Private Construction Contract: its form.

In Mexican contract theory, form means how the consent granted by the parties is materialized. For example, it may be in writing, signed in writing before two witnesses, or signed in writing in a public deed. For the contract we are dealing with must also be written down and include the plan or design and its budget. Therefore, if the contract doesn’t comply with this requirement, it will not be enforceable in court.

Therefore, if these formal requirements are not met, even if the obligation exists, it cannot yet be enforced in court because it is tainted by an ‘imperfection’ or defect in the validity’s contract form according to article 1796^[10] of the Federal Civil Code. Consequently, in this scenario, this defect must first be corrected through a prior judicial process. That is, instead of directly suing the contractor for any civil liability, you must first prove the materiality of the contract. However, for now, I won’t explore this topic more because it’s unnecessary to understand what I’m trying to explain.

This may seem like common sense, but believe me, I have witnessed countless controversies where the client relied on a phone call or messages on mobile applications, such as WhatsApp, to agree on a private construction contract and transfer sums greater than one hundred thousand pesos without any written guarantee. Yeah, unbelievable.

Entering into a contract in this way from the outset will require your attorneys to exercise a civil action called pro forma, which basically consists of giving the form to the contract according to what the law stipulates for it. In this case, it would be putting it in writing along with the plan or design and the budget—a lawsuit that is neither simple nor cheap.

Therefore, this is why when celebrating a Private Construction Contract or, in general, starting work, you must make sure that the work and its budget are recorded in writing. Otherwise, you may not even recover your money if the contractor simply does not start or continue with the work or, in some cases, sue for civil liability for any defects it may have.

Beyond the legal ones, the reasons for this are that constructions are very technical issues that a judge, who only has a law degree, cannot grasp and understand easily. Therefore, to assess the contractor’s actions and omissions, it is essential that a plan for the final work be included in the contract. Don’t let it pass you by.

Finally, an undoubted sign that the contractor is not a serious person would be demanding an advance payment or payment for the work without entering into a contract, much less making a design of the work. There, you might start to wonder if it is a serious company or contractor.

No. It does not matter if it is a minor repair or the construction of ‘small’ civil construction such as swimming pools, walls, etc. If the contract is not in writing and does not contain the plan or design, you will not be able to sue it in court directly. First, you would have to prove the contract and try to demonstrate its scope, which, I insist, it’s extremely expensive and difficult.

II.- Labor’s Rules

1) Principles and Importance

As a client in construction contracts, it’s important that you make sure that the workers that the contractor uses have their worker-employer contributions and their salary covered because even if the contract stipulates, let’s say, that you won’t have any legal responsibility of the employed workers, you should know that a mere clause in a civil or commercial contract of such nature does not exempt you from the so-called principles of solidarity and primacy of reality in labor matters.

Certainly, the Mexican Federal Labor Law stipulates a series of labor principles known as the primacy of reality and labor solidarity throughout its articles 8, 10, 20, 33, and 841^[11], in relation to article 17, third paragraph^[12] of the Political Constitution of the United Mexican States.

The principle of primacy of reality means that in the event of a divergence between what happens in reality and what has been reflected in the labor’s documents, the former must take precedence. For example, not infrequently the client gives direct orders to the workers and uses their own materials and tools to build the work. In this case, although there is a Private Construction Contract, the reality is that, due to labor subordination, the client is the real employer of the workers.

On the other hand, the principle of solidarity states that the client is responsible for the payment of worker-employer contributions—insurance—, work risks, and other labor-related benefits when, despite the fact that the workers for the work are not subordinated to him, the contractor or company who has been hired to do the work, omitted to comply with his employer’s obligations.

For all of the above, it’s important that no matter how small the work you intend to carry out is, you must always hire a formal contractor who complies with his legal obligations. Thus, in the event of a labor-related issue or even a tax credit issued from the Mexican Institute of Social Security, you won’t have to be liable too.

2) Labor Modalities

Although nothing prevents certain contractors from devoting themselves permanently or sporadically to the construction activity and, therefore, from having ‘regular’ workers. That is, with an employment relationship for an indefinite period (which is the general rule in the Mexican Federal Labor Law) it’s common that for private construction contracts, employers or contractors register the employment relationship, for example, at its employees for specific work or for a certain time in accordance with the Regulations of the Social Security Law on Affiliation, Classification of Companies, Collection and Supervision. Therefore, I will briefly mention what these last two modalities consist of.

A) Specific work

This type of labor relationship and employment duration addresses a single object. Once carried out, it produces the extinction of said relationship. If the contractor stops needing the worker, it will not be understood as dismissal and will not incur liability or pay the severance payments contemplated by the wrongful termination. To know more about those payments, check our entry ‘Types of Employment Termination in Mexico’. On the other hand, the only requirement for this modality is that the nature of the work requires this type of employment relationship, which is why it must be detailed in the respective contract.

Likewise, the employment relationship lasts until the work for which the worker was hired is completed. Hence, I insist that it’s essential to express the object or work of the specific work contract since only then can its exact duration be assessed in case of litigation. Finally, this type of contract is ideal for carrying out ‘the entire work itself’ or some of its stages if it were a ‘By Unit-Price Contract’, which I already talked about before.

B) For a Certain Time

This modality in the contractual employment relationship is a little more rigid than the previous one since the only cases in which it can be carried out are the following:

I.- That is required by the nature of the work to be provided.

II.- When the purpose is to temporarily replace another worker.

III.- In other cases provided for by law (for example, articles 193^[13], 304, and 305^[14] of the Mexican Federal Labor Law)

Although analogous, the difference between these two modalities lies in the fact that in this one, the worker is not subject to one specific work but to the instructions given by the employer or, in this case, contractor for a specific period of time, during which his workers are able to collaborate on different works or tasks.

III.- Workplace Risks and Responsibilities

With the lack of care in labor relationships of the Private Construction Contract and the principle of labor solidarity comes another problem for the client: work risks and responsibilities that may arise in the construction. Of course, there is always the latent risk that one of the workers suffers an accident and, therefore, has to be compensated or retired, but the problem is who must pay.

This is why, in the face of work risks^[15], divided between accidents^[16] and work-related illnesses^[17], it’s of capital importance that the workers employed by the contractor are duly registered with the Mexican Social Security Institute in terms of article 53^[18] of the Social Security Law, both the contractor and the client would be relieved of responsibility in the event that a work risk occurs.

The above is right because if the injured worker was not registered by the contractor in the Mexican Social Security Institute, the worker, upon suffering a work risk, may sue him and you as a client for the payment and compensation contemplated in the law and other benefits^[19]. Whereas if he is registered in the ‘Mexican insurance’ (Mexican Social Security Institute), who would be in charge, but through the payment of pensions that vary their requirements and amounts in the Social Security Law, would be the institute. The last, pursuant to this biding precedent: WORK RISKS. DISTINCTION BETWEEN THE SYSTEM CONTEMPLATED BY THE FEDERAL LABOR LAW AND THE SOCIAL SECURITY LAW^[20].

That said, it’s now important to clarify that a work risk may produce: A) temporary disability; B) permanent partial disability; C) total permanent disability, and D) death due to a criminal act, whose concepts and characteristics are the following:

A) Temporary Disability

This disability is the loss of faculties or skills that partially or totally prevents a person from performing their job for some time and results in the contractor or you as a client having to pay the worker’s full salary while the temporary disability persists. This disability may last at least three months until the worker can be forced to undergo the necessary medical studies to evaluate whether there is a greater degree of disability.

B) Permanent Partial Disability

This disability consists of a decrease in the faculties or aptitudes of a person to work, and as a consequence, compensation must be paid that shall consist of the payment of the percentage established by the disability valuation table^[21], calculated on the amount that would have to be paid if the disability were been total permanent—1095 days of daily wage or minimum wage if the ordinary wage is less than this—. The percentage that corresponds between the maximum and the minimum established shall be considered taking into consideration the age of the worker, the importance of the disability, and the greater or lesser aptitude to carry out paid activities similar to their profession or trade.

If the partial disability consists of the absolute loss of the worker’s faculties or abilities to perform his profession, the labor court may increase the compensation up to the amount that would correspond to total permanent disability, taking into consideration the importance of the profession and the possibility of performing a job of a similar category, likely to produce similar income.

C) Total Permanent Disability

Total permanent disability is the loss of a person’s faculties or abilities that makes it impossible for them to perform any job for the rest of their life and results in the payment of compensation of one thousand ninety-five days of their daily salary and if it is less to the minimum wage, calculated on this.

D) Death Due to a Criminal Act

Surprisingly, on June 22, 2018, articles 501 and 502 of the Mexican Federal Labor Law were reformed, and a new compensation was created that, in my opinion, seems unfortunate due to the damage that Mexico, as such a violent country, could cause on employers and to the Mexican Social Security Institute itself.

The compensation I’m talking about consists of the payment of five thousand days’ salary when a worker has been murdered in the workplace. Huge compensation that the contractor and, jointly, the client would have to pay if the construction worker who was murdered is not registered for the work itself in the Mexican Social Security Institute.

To give you an idea of ​​the economic impact, in Ciudad Juárez, the minimum daily wage is 374.89 pesos, which, if it were the salary of the murdered worker and multiplied by the five thousand salaries, would give the amount of 1,874,450 pesos (ONE MILLION EIGHT HUNDRED SEVENTY-FOUR THOUSAND FOUR HUNDRED AND FIFTY 00/100 NATIONAL CURRENCY) amount that, in itself, is another compelling reason to ensure that the construction workers in the Private Construction Contract are with their rights in force before the Institute Mexican Social Security.

By Omar Gómez

Partner

beLegal abogados S.C

Abogados en Ciudad Juárez, Chihuahua, México

Mexican Tax and Administrative Attorney

Visit my personal website at www.ogomezabogado.com

Contact me at: [email protected]

For English or Spanish assistance, contact the firm at (656) 774-75-73 or (656) 271-41-43.

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^[1] Article 2629.- Whoever is obliged to do a work by a lump sum contract, must begin and conclude in the terms designated in the contract, and otherwise, in those that are sufficient, in the opinion of experts.

^[2] Article 2618.- Whenever the contractor is in charge of the work on real estate whose value is more than one hundred pesos by lump sum, the contract shall be granted in writing, including a detailed description, and in cases that require it, a plan, design or budget for the work.

^[3] Article 2630.- The contractor who is obliged to do a work in pieces or units may demand that the owner receive it in parts and paythem in proportion to what he receives.

^[4] Article 2626.- The contractor who is in charge of executing a work for a specific price does not have the right to demand any increase later, even if the price of materials or wages has had an increase.

^[5] Article 2624.- When a price has not been set when a work is commissioned, the price designated by the local tariffs in the law shall be deemed to be such, if the contracting parties do not agree later, or, in the absence of them, the price shall be assessed by experts.

^[6] Article 1832.- In civil contracts each person is bound in the manner and terms that appear to have been bound, without specific formalities being required for the validity of the contract, outside of the cases expressly designated by law.

^[7] Article 1858.- Contracts that are not specially regulated in this Code shall be governed by the general rules of contracts; by the stipulations of the parties, and in what were omitted, by the provisions of the contract with which they have the most analogy, than those regulated in this order.

^[8] Article 1050.- When, in accordance with commercial provisions, for one of the parties involved in an act it is commercial in nature and for the other it is civil in nature, the controversy arising from it shalll be governed in accordance with commercial laws.

^[9] Finally, consult this non binding precedent which clarifies the issue: PRIVATE CONSTRUCTION CONTRACT. THE ORDINARY COMMERCIAL VENUE IS APPROPIATE TO FILE A DISPUTE DERIVED FROM SUCH ACT, WHEN THE CONTRACTOR DECLARES TO BE A LEGAL PERSON WITH ACTIVITY IN THE BRANCHES OF CONSTRUCTION AND RESTORATION, EVEN IF FOR THE CONTRACTING PARTY IT IS A CIVIL ACT.

^[10] Article 1796.- Contracts are perfected by mere consent, except those that must take a form established by law. Since they are perfected, they obligate the contracting parties, not only to comply with what is expressly agreed, but also to the consequences that, according to their nature, are in accordance with good faith, custom or the law.

^[11] Article 8.- Worker is the natural person who provides subordinate personal work to another, individuall or legal entity.

For the purposes of this provision, work is understood to be any human, intellectual or material activity, regardless of the degree of technical preparation required by each profession or trade.

Article 10.- Employer is the natural or legal person who uses the services of one or more workers.

If the worker, in accordance with the agreement or custom, uses the services of other workers, the former’s employer shall also be the employer of these.

Article 14.- The subcontracting of specialized services or the execution of specialized works must be formalized through a written contract that indicates the purpose of the services to be provided or the works to be executed, as well as the approximate number of workers who shall participate in the fulfillment of said contract.

The natural or legal person who subcontracts specialized services or the execution of works

specialized companies with a contractor who fails to comply with the obligations arising from the relationships with their workers, shall be jointly and severally liable in relation to the workers used for said contracts.

Article 33.- It’s null all waives done by workers of wages earned, compensation and other benefits derived from the services provided, whatever the form or name given, is void. […].

Article 841.- The judgments shall be issued based on known truth and good faith, and appreciating the facts conscientiously, without the need to be subject to rules or formulas regarding the estimation of evidence, but the courts are obliged to study in detail the rendered ones, evaluating them. Likewise, they shall express the reasons and legal foundations on which they are based on.

^[12] Article 17.- […] As long as the equality between the parties, due process or other rights is not affected in the trials or procedures followed in the form of a trial, the authorities must prioritize the resolution of the conflict over procedural formalities. […].

^[13] Article 193.- People who provide their services on board exclusively for the time in which the ship is in port, are subject to the provisions of this chapter insofar as they are

applicable.

When ships put to sea without the persons to whom they have been able to disembark

referred to in the previous paragraph, they shall be considered workers until they are returned to their place of origin, and they shall have the rights and obligations set forth in this chapter.

^[14] Article 304.- The provisions of this chapter apply to actor workers and musicians who perform in theaters, cinemas, nightclubs or variety clubs, circuses, radio and television, theaters dubbing and recording, or in any other place where the image of the actor or the musician is transmitted or photographed or the voice or music is transmitted or recorded, whatever the procedure use.

Article 305.- Employment relationships can be for a specific period, for an indeterminate period, for several seasons or for the celebration of one or several functions or performances.

^[15] Article 473.- Work risks are accidents and illnesses to which workers in exercise or in connection with work are exposed.

^[16] Article 474.- Work accident is any organic injury or functional disturbance, immediate or subsequent, death or disappearance resulting from a criminal act, produced suddenly in the exercise or on the occasion of work, regardless of the place and time in which it occurs.

Included in the previous definition are accidents that occur when the worker travels directly from his home to the workplace and from this to that.

^[17] Article 475.- Work-related illness is any pathological state derived from the continued action of a cause that has its origin or reason at work or in the environment in which the worker is forced to provide his services.

^[18] Article 53.- The employer who has insured the workers in his service against work risks shall be relieved, in the terms established by this Law, of compliance with the obligations regarding responsibility for this type of risks established by the Federal Labor Law.

^[19] Which are contemplated in article 487 of the Mexican Federal Labor Law, which has the following literal wording:

Article 487.- Workers who suffer a work risk shall have the right to:

 I. Medical and surgical assistance;

 II. Rehabilitation;

III. Hospitalization, when the case requires it;

IV. Medicines and healing materials; V. The necessary prosthetic and orthopedic devices; and

VI. The compensation established in this title.

^[20] Title: VIII.1o. J/12. FIRST COLLEGIATE COURT OF THE EIGHTH CIRCUIT. Ninth Judicial Epoch. Biding Precedent (Jurisprudencia) Digital Record: 193462.

^[21] Which it’s contemplated in the Mexican Federal Labor Law.