TERMINATION OF THE PRIVATE CONSTRUCTION CONTRACT.
I. Introduction. II. Regulation of the private construction contract. III. Regulation of the termination of the private construction contract. IV. Effects of the termination of the private construction contract. V. Conclusions and recommendations.
I. Introduction.
Termination is a way to conclude the contractual relationship due to the breach of obligations attributable to any of the contracting parties.
In the private construction contract, it is essential that the parties’ will is expressed clearly and precisely. Additionally, the annexes of the contract (budget, programs, general and particular specifications, scope of works, etc.) must be clearly indicated in the text of the contract, since they become part of the rights and obligations agreed in the contract.
II. Regulation of the private construction contract
In Mexico, the private construction contract’s regulation limited and obsolete due to its adherence to federal or statal civil legislation. Since the regulation’s only focus is the lump sum contract[1], the unitary and mixed price contracts are left aside, which is the reason why the contract and its annexes will be the basis to solve controversies -using the mentioned legislation as applicable as well as the general principles of law and jurisprudence-.
III. Regulating the termination of the private construction contract
In private construction contracts the termination of the contract is expressed directly in the clauses of the contract. Generally, it is stipulated as a right granted to the contracting party to terminate the contract when one or more breach of obligations’ events -directly attributable to the contractor- are agreed. However, if the breach of contract is attributable to the contracting party, the contract is generally omitted or in any case provides that the contractor must initiate a legal procedure, call it court, arbitration or alternative means of dispute resolution, to request the termination of the contract. In other words, this situation is an example of what the doctrine of the civil law calls "Express Commissary Agreement"[2], which plain and simple is the "express commission agreement” or the agreement between the parties to unilaterally terminate the contractual relationship due to breach of any of them without the need to go to court.
Although in common law systems, the "termination clause"[3] is used to conclude the contractual relationship, the Mexican Federal Law, in contrast, does not expressly regulate the figure of termination of the construction contract, but it does regulate the termination or contractual resolution in a general manner in article 1949 of the Federal Civil Code.
IV. Effects of the rescission of the private construction contract.
The termination of the contractual relationship is the first effect with an immediate occurrence, yet economic effects and other events are also triggered. If the termination is attributable to the contractor, he/she must deliver the part of the work performed, materials and the already paid equipment, as well as all the information delivered at the beginning of the contract. Afterwards, the settlement of the contract will be made to establish the credits in favor and against the contracting and contractor party. If there are balances against the contracting, this party must make the immediate return of the resulting balance; if she/he refuses, the contractor will enforce her/his possessed guarantees -usually bonds-. It may happen that the contractor abandons the works’ site before or after the termination of the contract, in this case, the totality of the described acts above will be notified and summoned properly, but if he/she does not attend, they will be carried out unilaterally.
If the termination is attributable to the contractor, it will be subject to the courts’ decision, arbitration or alternative means of dispute resolution. Regarding the economic effects, these will be quantified in a justified and proven manner by the contracting party, so that the contractor’s conviction can proceed. To achieve this, you must have perfectly documented all made claims, non-payment estimates, non-payment interests, requests for adjustment of direct and/or indirect costs, expenses and damages, among others.
It is important to pinpoint that, in common law, the "rescission of the contract" is a different figure than the one used in civil law, since it implies that the parties want to annul the contract and restore things to their original state.[4] Nor should rescission be confused with the "Forfeiture Clause"[5] which is understood as the rights to be charged’ waiver derived from non-performance or sanction for illegal conduct or facts.
V. Conclusion and recommendations.
- Termination of the private construction contract should be the last resort to resolve disputes between the parties, as it affects both parties, but mainly to the construction work in process.
- Termination of the private construction contract can be avoided by properly employing alternative means of dispute resolution, specifically, independent expertise, expert opinion and dispute panels.
- If the contractor is inevitably immersed in a probable termination of contract, it should immediately seek professional help to make a study and legal analysis of the documents generated in the construction work, in order to make a proper defense.
- If you have already been terminated from a private construction contract, as long as you meet the requirements, you may go to court to request the annulment or compensation payment for the economic rights in your favor -if they are well-founded and can be reliably demonstrated with full proof- (Check here the article on evidence in construction contracts -Spanish language-).
- If you are the contractor and wish to terminate the contract, you must make a legal review of the contract and annexes, as well as a validation of all the evidentiary material of the contracting party's breaches, in order to avoid a cancellation and economic claims -if applicable-.
- In both cases, the best thing to do is to call our team of experts in this subject, composed by Lawyers and Engineers, to help and assist you in all the aforementioned processes.
Construbufete Jurídico SC.
Tel. 55 91838354
[1] Chapter III. From the lump sum construction contract, articles 2612 to 2645 from the Mexican Federal Civil Code (DOF 11-enero-2021).
[2] This legal figure has its precedent over the Roman “lex comissoria”.
[3] Alex Benarroche. Level Set Blog. Consulted on September 5th 2021 from the link: https://www.levelset.com/blog/termination-clause/
[4] Construction Law-Chapter 17. Consulted on September 5th, 2021, from the link: https://constructionlawmadeeasy.com/construction-law/chapter-17/rescission/
[5] Jagdish Prasad Sharma. Breach in Construction Contracts. Linkedin. Consulted on September 5th, 2021, from the link: https://www.linkedin.com/pulse/breach-construction-contracts-jagdish-prasad-sharma/