MEXICO: An Introduction to Projects

CHALLENGES IN THE CONSTRUCTION INDUSTRY IN MEXICO

Worldwide the construction industry has experienced several challenges. Not only the pandemic, which affected the global market, but also the rise in several prices, such as the price of steel, which was a global trend.

Mexico has been no exception from these events. Indeed, most of projects, whether public or private, have dealt with the negotiations (or even claims in the “amicable” field) for the recognition of costs for suspensions, extraordinary works, growth of prices derived from the pandemic, and dead times.

To further complicate the situation, Mexico has faced several legal matters, starting with last year's “outsourcing amendment”, passing through new disposition on tax matters that entered into force at the very end of 2021; and, finally, the legislative omission to discuss and approve the mediation amendment which has been pending since 2020.

Despite the technical global issues, the construction industry in Mexico is facing legal changes that may complicate investments.

The outsourcing amendment 

The outsourcing amendment entered into force in the second half of last year, in September 2021. This amendment had a social purpose. Its main aim was to prohibit outsourcing, understood as the subcontracting of “specialised services” if such services were part of the corporate purpose of the companies.

To clarify, with these new rules, the administration tried to protect the workers who were contracted by providers of services, such as cleaning services. Cleaning services are a good example, as it was common for company providers of cleaning services to create and close companies in short periods of time in order to avoid having workers with long labour seniority and, consequently, to save greater social benefits.

In other words, from the labour and social perspective, this amendment had a good cause.

However, the amendment’s effects did not stop there.

As is well known, there are big construction companies with broad corporate purposes. Indeed, it is still a common practice of the notaries when constituting a new Mexican company to request “two or three specific activities to be performed and the rest are the ‘general’ ones” that will shape the complete corporate purpose of the company.

On the other hand, there are medium or small-sized companies, mostly local entities, whose real practice is mainly addressed to two or three special activities that also have a broad corporate purpose in its deeds.

In both cases, the amendment impacted businesses, as one effect of the amendment was to prohibit the subcontracting of activities established in companies’ corporate purposes.

In that regard, companies with broad corporate purposes could not subcontract special services while such services were deemed in their corporate objectives. On the other hand, companies which perform specific activities needed to obtain a registration in order to perform such special services.

It is worth mentioning that at the beginning of the application of this amendment, and even now, there is not a unified administrative criterion regarding who needs to obtain the registry as “Special Service Provider”. Indeed, the administrative advice was to submit the request of the registry whether being a special servicer provider or not.

An immediate step taken was to perform amendments to the Act of Incorporation of several companies in order to let them continue subcontracting specialised services; and with regards to the special services providers, to start the submissions needed in order to obtain the registry as a special services provider.

Despite this issue not representing an obstacle to the construction industry, it does represent, and continues to be, a challenge to the sector industries, since it represents economic charges: the notary costs of changing Deeds of Incorporations, as well as the administrative fees to get the registries.

Also, it is currently common to stop, delay or even step out of negotiations due to the obtaining of such requirements, as there are companies that refuse to perform such efforts.

Tax regulation 

It is a global trend to comply with anti-corruption and anti-money laundering regulations. This is a reality to celebrate. Complying with the regulations in this regard is not easy or fast, but there is a goal that no matter how long it takes, it is necessary to comply with every requirement in order to get to it.

At the end of 2021, new tax regulations in order to detect transactions with illicit funds entered into force. Due to the foregoing, public notaries empowered to give accuracy and validity to corporate transactions are forced to request, among other things, personal ID and information of the partners or shareholders of the companies involved in the transactions.

This regulation is very strict with public notaries to the extent that if they do not comply they can be punished with high fines and even with the withdrawal of the notary licence.

While notaries are not willing to lose their licence, they are requesting in-depth information about partners and/or shareholders of the parties involved in transactions. Some of the information required is the tax licence or tax ID of partners and/or shareholders of the parties involved in transactions.

Even though in Mexico it is common to provide tax ID (known as a “fiscal card”), in some other jurisdictions, such as the US, the social security number is such personal information that many people are not willing to provide it.

These kinds of requirements are also a big challenge for the industry, and for investments in general, because a lot of people will not provide them even when it can result in dropping the transaction.

The Notaries Bar have been very active in trying to unify the criterion in order to comply with the requirements established by such recent tax rules jointly with the correspondent authorities without causing more dropping of transactions.

Pending Mediation Amendment 

Since July 2020 an initiative of a Law on Alternative Dispute Resolution (ADR) was submitted to the Congress in order to be discussed.

Although such initiative of law was improvable, a lot of sectors were enthusiastic about the efforts made for putting in the agenda the amicable dispute resolution procedure. However, there is no real update in that regard.

The lack in the specific regulation of mediation and conciliation for the commerce in general discourages the parties to use alternative dispute resolution procedures and forces the parties to continue to litigate under State Courts any dispute that may arrive during the execution of a construction contract.

The real issue in the construction industry is that most of the disputes shall be solved immediately or in a reasonable time in order to avoid risk to the project itself. However, not having ADR legislation alienates the parties and prevents them from reaching agreements in that regard, especially when they are already in disagreement.

The institutional ADRs have gained space in Mexico. Global institutions like ICC or LCIA have important performance in Mexico. Also, domestic institutions like CAM or CANACO have also improved in their arbitration services. However, it is necessary to start to educate the parties in Mexico about amicable ways to solve disputes, not only for their benefit, but for the benefit of the project itself.

Despite the abovementioned, not everything is bad news.

In April 2021, the ADR matter was resumed and another initiative of law on Alternative Dispute Resolution was submitted to Congress in order to be studied. Let’s see if on this occasion the initiative is taken seriously and discussed in depth in order for free mediation to be provided by the State with benefits for several sectors, but specifically for the construction industry.

From the private sector, we will continue the efforts to use not only mediation, but also different mechanisms like Dispute Boards in order to try to reach better solutions, in less time and for the benefit of the project itself.