SELECTED PUERTO RICO STATUTES ON CONSTRUCTION AND SURETY LAW

Construction Contracts

• Contracts: General Provisions, Title 31, Chapter 253, P.R. Laws Ann. (2006)
• Contracts: Requisites for Validity of Contracts, Title 31, Chapter 255, P.R. Laws Ann. (2006)
• Contracts: Effectiveness of Contracts, Title 31, Chapter 257, P.R. Laws Ann. (2006)
• Contracts: Interpretation of Contracts, Title 31, Chapter 259, P.R. Laws Ann. (2006)
• Contracts: Rescission of Contracts, Title 31, Chapter 261, P.R. Laws Ann. (2006)
• Contracts: Nullity of Contracts, Title 31, Chapter 263, P.R. Laws Ann. (2006)
• Public Works: Public Works Contracts, Title 22, Chapter 3, P.R. Laws Ann. (2006)

Construction Liens

• Labor Provisions Generally: Payment of Wages; Discharge Without Cause; Mechanic's Lien, Title 29, Chapter 9, P.R. Laws Ann. (2006)

Surety

• Insurance: Surety, Title 26, Chapter 22, P.R. Laws Ann. (2006)
• Labor: Construction Workers, Title 29, Chapter 10, P.R. Laws Ann. (2006)
• Security: Nature and Extent of Security, Title 31, Chapter 371, P.R. Laws Ann. (2006)
• Security: Effects of Security, Title 31, Chapter 373, P.R. Laws Ann. (2006)
• Security: Extinguishment of Security, Title 31, Chapter 375, P.R. Laws Ann. (2006)
• Security: Legal and Judicial Security, Title 31, Chapter 377, P.R. Laws Ann. (2006)

 

SELECTED CASES ON PUERTO RICO CONSTRUCTION AND SURETY LAW

Contracts Generally

• The principle of looking to the decisions of North American courts to fill the voids of the Puerto Rico Civil Code and jurisprudence was endorsed by the Puerto Rico Supreme Court in Futurama Import Corporation v. Trans Caribbean, 104 D.P.R. 614-615 (1974). 
• Article 1233 of the Puerto Rico Civil Code provides that where the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, they should be interpreted literally.  31 L.P.R.A. sec. 3471; Marina Industrial, Inc. v. Brown Bovery Corporation, 114 D.P.R. 64, 72 (1983).
• Where, however, the words utilized in a contract appear contrary to the evident intention of the contracting parties, the intention of the parties should prevail.  Marina Industrial, Inc. v. Brown Bovery Corporation, 114 D.P.R. 64, 70 (1983).  See also Flores v. Flores Toledo, 101 D.P.R. 61, 69 (1973); Merle v. West Bend Co., 97 D.P.R. 403, 409-10 (1969); Caribbean Insurance Services v. American Bankers Life, 754 F.2d 7 (1st Cir. 1985); Blinderman Construction Co., Inc. v. United States, 695 F.2d 552 (Fed. Cir. 1982).
• Interpretation of a contract is a matter of law, and if a plaintiff's interpretation is reasonable, it will prevail.  Ceccanti, Inc. v. United States, 6 Cl.Ct. 326 (1984).  A contractor is responsible, however, for its failure to inquire or seek clarification prior to a contract award if an ambiguity is patent or obvious.  Seville Constr., Inc. v. United States, 35 Fed.Cl. 242 (1996), aff'd. 108 F.3d 1395 (Fed. Cir. 1997)(alleged conflicts between drawings and specifications were so glaring that they should have been easily apparent to contractor at time of bid, and contractor's reliance on ambiguity was improper).
• In order to judge the intentions of the parties, attention must principally be paid to their acts, contemporaneous with and subsequent to their contract.  31 L.P.R.A. 3472 (Article 1234 of the Puerto Rico Civil Code).  See: Marina Industrial, 114 D.P.R. 64 at 70-71; Rutledge v. Gill, 78 D.P.R. 698, 706 (1955); Parachini v. Vila, 23 D.P.R. 149, 157 (1915).
• Article 1240 of the Puerto Rico Civil Code establishes that the interpretation of obscure provisions of a contract must not favor the party causing the obscurity, particularly in the case of adhesion contracts.  31 L.P.R.A. Section 3478.  An adhesion contract is one in which only one of the parties prescribes the conditions of the contract to be accepted by the other.  Zequeira v. Corporacion de Renovacion Urbana y Vivienda (CRUV), 83 D.P.R. 878, 880 (1961).  This situation is typical of construction contracts, where the general conditions are embodied in a model or form contract prepared by the owner, who also furnishes the plans and specifications pursuant to which the work is to be constructed.  In such contracts, which include AIA contracts and most government contracts, ambiguities must be interpreted in such a way as to operate in a manner least favorable to the party which drafted the contract.  Zequeira v. Corporacion de Renovacion Urbana y Vivienda (CRUV), 83 D.P.R. 878, 880 (1961); Cooperativa La Sagrada Familia v. Castillo, 107 D.P.R. 405, 418 (1978).
• Final acceptance is not measured from completion of work, but instead from the final closeout of the contract, including the date the last payment is made to the contractor.  Antonio Carro, Inc. v. Jura Construction, Inc., 107 D.P.R. 808 (1978).
• Defective construction in a construction contract means all such kinds of vices that exceed the measure of imperfections expected in a construction. Pereira v. I.B.E.C., 95 D.P.R. 28 (1967).
• Under Puerto Rico law, the doctrine of strict liability applies to defective products, but not to services, such as construction or engineering.  Vazquez-Filippetti v. Banco Popular de P.R., 504 F.3d 43 (1st Cir.2007); 31 L.P.R.A. Section 5141.

Construction Liens 

• Laborers and materialmen have preference over any other general creditor under common law, commercial law and the laws of Puerto Rico, and the right of retention of the object of the work contract to secure their credits even when such funds have first been attached by an outside creditor and since surety is subrogated to these rights by its satisfaction of its payment and performance bonds, its rights are also superior to the general creditor.  Segovia Development Corp. v. Constructora Mazza, Inc. 628 F.2d 724 (1980). 
• A contractor may not exercise his right of retention over a thing, under terms of the contract and Puerto Rican statute, while he did not satisfy his responsibilities of payroll, bills for material and equipment and other matters related to the work. Segovia Development Corp. v. Constructora Mazza, Inc. 628 F.2d 724 (1980). 

Surety  

• A surety bond is not an insurance contract. Caribe Lumber v. Inter Am. Builders, 101 D.P.R. 458 (1973). 
• If the text of a bond agreement is clear, or the true meaning of its clauses can be easily discerned, the courts should adhere to its text.  Caguas Plumbing, Inc. v. Continental Constr. Corp., 2001 WL1618390 (P.R. 2001).
• In the absence of ambiguity in the language of a bond for the payment of labor and materials for the construction of a private work, which required a written notice from the supplier to the effect that the debtor had incurred default as a previous condition to the exercise of the right of action of said supplier against the surety, the application by a court of the rules of construction to achieve a different result is improper, the court not being free to ignore the plain language and intent of the contracting parties. Caribe Lumber v. Inter-Am. Builders, 101 D.P.R. 458 (1973).
• A term of ninety days established in a surety bond for labor and/or materials within which a supplier had to notify certain persons, parties to said bond, before commencing a suit against the surety is not a term of prescription, but of extinguishment. Caribe Lumber v. Inter-Am. Builders, 101 D.P.R. 458 (1973).
• Clear and precise clauses in text of contract incorporated to payment and performance bond, limiting responsibility of surety, cannot be construed to extend surety to other clauses of contract. Municipality of San Juan v. Stadium & Coliseum Opers., 113 D.P.R. 490 (1982).
• Where a lender assigned its claim on a performance bond to an assignee, a district court properly dismissed the assignee's complaint against the surety who issued the bond because the plain language of the bond explicitly limited the surety's liability to the lender and a property owner and did not provide any means by which those parties could assign their rights under the bond. Citibank v. Grupo Cupey, Inc. 382 F.3d 29 (1st Cir. 2004).
• The mention of a specific period to file a claim under the bond is binding for the parties and once the time period passes all obligations of the surety are extinguished if no proper claim is made against the surety.  Caguas Plumbing, Inc. v. Continental Constr. Corp., 2001 WL1618390 (P.R. 2001).
• Puerto Rico courts enforce penal sum limitations on performance bonds. Demas v. Builders Insurance Co., 109 D.P.R. 774 (1980).
• Generally, when an indemnity agreement gives a surety broad discretion to pay claims triggering the indemnity agreement, the only defense an indemnitor may raise against a claim by the surety for indemnification is that the surety committed fraud or collusion, or otherwise acted in bad faith in paying the claim.  Constructora Andrade Gutierrez v. Am. Int’l Ins. Co., 467 F.3d 38 (1st Cir.2006).

Extras, Changes and Delays

• If a contractor reasonably relies on incorrect drawings or specifications and is injured thereby, it is entitled to all costs incurred in resolving the problem as well as all costs arising from any delay caused thereby.  Paul N. Howard v. PRASA, Slip. Op. No. 80-0743 (RA) (D.P.R. 1983).
• Once a contractor becomes aware of a defect, it should refuse to proceed with the work.  Should it choose to proceed with the work, it does so at its own risk.  Powerlite of Puerto Rico v. CRUV, 115 D.P.R. 654 (1984).
• Professionals will be held responsible for the knowledge which they should have had regarding defects by nature of their professions.  Corp. Presiding Bishop CJC of LDS v. Purcell, 117 D.P.R. 714, 725 (1986).

Defects in Performance

• Construction defects are all those that exceed the measure of imperfections expected in any construction project.  Pereira v. I.B.E.C., 95 D.P.R. 28 (1967). 
• The Supreme Court of Puerto Rico has held that only latent defects can be claimed and not patent defects.  Boyd v. Mihulka, 101 D.P.R. 651 (1973).
• Under Article 1483, it has been determined that the acceptance of a project that has patent or visible defects will preclude the owner from claiming defects.  However, if the contractor is aware of defects of the construction and has the obligation to correct them, it is not a defense that they are patent and not latent.  Gonzalez v. Centex Homes Company, 103 D.P.R. 82 (1974).
• When construction defects arise, blame for them will be apportioned between a contractor and an architect, who may be held jointly and severally liable to an owner.  Rosello Cruz v. Garcia, 116 D.P.R. 511 (1985); Richmond Steel, Inc. v. Legal and General Assurance Society, Ltd., 825 F.Supp. 443 (D.P.R. 1993) ("ruin" of building caused by defects in design or construction creates a rebuttable presumption of contractor and architect liability). 

2008-2009 Recent Decisions of the Puerto Rico Supreme Court

• A contractor is not released from liability related to "undesirable construction practices"--as defined in the "Office of the Construction Officer Act," Act 130 of June 13, 1967, and the Regulations for the Construction of Private Housing in Puerto Rico--simply because the developer and buyer have have executed a purchase and sale deed.  Moreover, the buyer who executes a purchase and sale deed in which it is stated that said buyer acquires the property "as is", does not waive his claim against the contractor for undesirable construction practices, when the claim had been notified prior to the execution of the deed and was pending adjudication at that time.  The Court will not give effect to an "as is" clause which is not the product of bilateral negotitations between buyer and seller and was merely a generic clause included in a deed.  Suárez-Figueroa v. Sabanera Real, Inc., 2008 DTS 071.
• The Supreme Court reaffirms its holding in the case of Colón-Cortés v. Pesquera, 150 P.R. Dec. 724 (2000), which states that construction/development projects cannot be fractioned in order to obtain the approval of the necessary building permits, because this action deprives the agencies concerned from correctly evaluating the necessary factors and consequences of the projects before their consideration.  In this case, the partial approval of the developer's "Alternate Preliminary Development Request" by the Regulations and Permits Administration had the effect of fractioning the project to the detriment of the Planning Board's statutory authority to establish public policy with respect to the orderly and integrated planification of  land use and development in Puerto Rico.  Any significant change to the project, or any part thereof, such as its extension or location, has to be resubmitted to the Planning Board.  Hatillo Cash & Carry v. ARPE, 2008 DTS 097.
• As a general rule, in cases where the plaintiff sues an insurance company, a court should analyze whether a liberal reading of the complaint shows that the damages alleged therein are covered by the policy, or to the contrary, the policy's coverage clearly excludes them.  Echanti-Otero v. Stewart Title, 2008 DTS 127.
• The dismissal with prejudice of a collection of money action filed by the general contractor against the project owner, for lack of service of process, does not constitute collateral estoppel in a subsequent action commenced by second-tier materialsmen against the owner.  Puerto Rico Wire Products, Inc., et al. v. C. Crespo & Asoc., Inc., et al., 2008 DTS 189. 
• The project at issue was not under "real and effective construction" --as required by Law No. 91 of 1998--by the date provided in the Planning Board's approved "consulta de ubicación" building permit.  As a result of this the permit expired and no construction could take place.  Without a valid unexpired "consulta de ubicación" permit, the subsequent permits issued the Regulations and Permits Adminstration were ineffective to authorize continued construction. By having a real and effective construction begin within the time frame provided by the Planning Board, a beneficial planification process for the community, the good of society and the economy of the country can be achieved.  FW Assoc., et al. v. JP and ARPE, 2009 DTS 008.

 2008-2009 Decisions of the First Circuit Court of Appeals

• Interpreting the American Arbitration Association's Construction Industry Arbitration Rules (AAA), specifically, Rule 47 on the modification of an award, the Court determined that an arbitrator does not exceed his authority by revisiting his initial award to clarify that the amount remaining on the subcontract should be offset against the prime contractor's award for the subcontractor's abandonment.  Awards may omit information or overlook contingencies, failures that AAA Rule 47 would allow the arbitrator to remedy.  Consequetly, the arbitrator's issuance of an amended award did not exceed his authority. Eastern Seaboard Constr. Co., Inc. v. Gray Constr., Inc., 553 F.3d 1 (1st Cir. 2008).
• A surety has a claim against the indemnitor at the time of indemnitor's filing for Chapter 7 bankruptcy, even though default on bonded projects covered under the indemnification agreement does not occur until after the indemnitor is discharge from bankruptcy.  The indemnitor's discharge in bankruptcy does not include surety's claim, where the indemnitor/bankruptcy debtor does not list surety as a creditor on his schedule of debts or mention the indemnity obligations.  Colonial Surety Co. Weizman, 564 F.3d 526 (1st Cir. 2009).
  

 2008-2009 Statutory Changes of Note

• Law No. 32 of 2008. This Law adds new Chapter 45 to the Insurance Code.  Chapter 45 has been added to establish the new parameters of capital computed as a function of risk ("risk-based capital"), above which must be found the capital of every insurer that does business in Puerto Rico.  This Law also provides the corrective measures available to protect and or increase the economic capital, so as to ensure the solvency of insurers.  
• Law No. 149 of 2008. This Law amends Section 2 and 3 of Law No. 79 of 2002, with the purpose of specifying that every government agency, public instrumentality, municipal government and contractor has the obligation of requiring in every contract the raising of meters, sewers, valve covers belonging to the Acueduct and Sewer Authority, and other elements that form part of the electric, telephonic and Cable TV infrastructure to roadway level, in all repaving work in the roadways of Puerto Rico, and to provide for a penalty upon non-compliance.
• Law No. 155 of 2008. This Law amends Insurance Code Articles 8.010 (Deposits of Insurers), 8.020 (Assets Eligible for Deposit), 8.030 (Registration of Securities), and 8.070 (Depletion of Deposit) to adapt them to cuurent Insurance Code terminology and to permit the utilization of electronic mecanisms for the deposit of funds with the Insurance Commissioner; and amends Articles 26.040 (Reports), 26.050 (Notice of Unclaimed Funds; publication), 26.060 (Payment to Commissioner) to  ensure that unclaimed funds are not consumed in their entirety in the process of attempting to notify the beneficiaries of the existence of said funds; and repeals Article 26.120 (Inapplicability of Other Statutes).
• Law No. 230 of 2008. This Law repeals Insurance Code Articles 27.090, 27.120, 27.140, 27.170, 27.180, 27.210, 27.210A, 27.220, 27.230, 27.240, 27.250, 27.290, 27.300, 27.340 y 27.360 of the Insurance Code; renumbers Article 27.150 as 27.030, 27.050 as 27.060, 27.070 as 27.080, 27.080 as 27.130 and 27.130 as 27.141; amends Article 27.081 (Prohibited Property Insurance Practices), 27.100 (Other Illegal Inducements Prohibited), 27.110 (Exceptions to Discrimination and Rebate Prohibition), 27.160 (Illegal Dealings in Premiums), 27.161 (Unfair Practices in Claims Adjustments); and amends Article 27.040 (Advertisements) and renumbers it 27.050, 27.030 (Boycott, Coercion, Intimidation, and Conditioned Subscritption) and renumbers it 27.070, 27.060 (False Financial Statements) and renumbers it 27.090, 27.131 (Financial Institutions, their subsidiaries, or affiliates; methods and practices for the sale of insurance) and renumbers it 27.140, 27.200 (False Claims or Evidence) and renumbers it 27.180, Article 27.260 (Requirmennt to Inform Fraudulent Acts in the Insurance Business) and renumbers it 27.200, 27.280 (Civil Immunity) and renumbers it 27.210, 27.310 (False Information on Fraudulent Acts) and renumbers it 27.220, 27.320 (Action Plan) and renumbers it 27.230, 27.270 (Requirement to Provide Information to a Central Data Bank) and renumbers it 27.240, 27.330 (Notice) and renumbers it 27.250, and 27.350 (Penalty for Violations) and renumbers 27.260; and adds new Articles 27.040 (Obligation to Inform Coverage; Copy of Policy), 27.120 (Conservation of Documents), 27.150 (Notification of Claims), 27.163 (Methods for Resolving Claims), 27.190 (Illegal Appropriation), and 27.270 (Penalty for Fraud).  Among the Articles amended and added there are several of significance to sureties.  New Article 27.040 requires the insurer to provide a copy of the insurance policy to the Insurance Commissioner, insured, beneficiary, or claimant within ten days of its request.  Failure to do so could result in a sanction accompanied by an administrative fine.  The insurer may not charge more that 10 cents per page.  Copies to the Commissioner shall be free of charge.  New Article 27.120 requires all insurers to conserve for a period of five years and as provided by the Commisioner in regulations, its accounting books, registries and all documents related to its insurance business, in physical or electronic format.  Failure to conserve these documents is subject to penalties.  New Article 27.150 requires all insurers, after having been notified of a claim against them, to acknowledge receipt of said claim.  The notification made to a person authorized by the insurer to receive claims in its name, shall be deemed to be proper notice to the insurer, as long as the authorization or agreement to receive claims is valid and has not been revoked.  All persons who are not authorized to receive claims are required to notify the claimant of that fact within seven days, and must indicate to whom notifcation must be made and to what address.  Failure to comply with these notification requirements could result in administrative fine.  Amended Article 27.161 now adds that an insurer may not incur or carry out the following unfair practices while adjusting claims: (1) fail to acknowledge receipt and act with reasonable diligence within 90 days after a claim has been filed and/or notified under the terms of a policy; (2) Force the insureds or claimants to file a lawsuit to recover under the terms of a policy, because the claimant or insured has been given a sum substantially less than the sum that could be reasonably recovered after litigation, or because the claimant or insured has been incorrectly denied coverage under the the terms of the policy; (3)  attempt to settle a claim for an amount less than the amount the claimant or insured is entitled to based on the literature or printed matter sent to him or that was made part of the application; (4) deny the existence of policy coverage when the insured rejected an offer of payment of a claim under said policy; (5) deny payment of a valid claim based on mere suspicion that fraud has been committed or that false representations were made; (6) deny payment of a claim under the pretext that information is insufficient, when said information could be obtained under ordinary investigation methods; (7) require an insured or claimant to sign a release that can be interpreted as releasing the insurer from those contractual obligations that were not the subject of the settlement; and (8) require the insured or claimant to meet unreasonable conditions  in order to adjust a claim or delay it. Amended Article 27.162 now states that the investigation, adjustment and resolution of any claim shall be made in the reasonably shortest period within 90 days of after the claim has been submitted to the insurer. In the event the insurer cannot resolve a claim within 90 days, the insurer shall maintain in its files the documents that demonstrate the existence of just cause to exceed this period.   New Article 27.163 states that the following acts constitute resolving a claim: (1) total payment of the claim; (2) written denial of the claim and the grounds therefor; and (3) the closing of the claim due to inactivity of the claimant, when the claimant does not cooperate or does not deliver the information necessary for the insurer to adjust the claim; the insurer shall provide immediate notice to the claimant of the closing, unless the closing is without prejudice to the refiling of the claim. 
• Law No. 263 of 2008.  This Law amends Articles 1.030 (Insurer, defined), 1.040 (Person, defined) and 1.050 (Contracting Insurance) of the Insurance Code of Puerto Rico; adds Articles 1.100 (Office, definition) y 1.110 (Caveat); repeals Articles 1.051 (Court of Competent Jurisdiction), 1.082 (Consulting Board, definition), 1.090 (Existing Officers), 1.110 (Existing Forms and Rates), 1.120 (Existing Actions and Violations) y 1.170 (General Penalty); renumbers Article 1.081 (Secreatary, defined)as Article 1.090 of Chapter 1; and repeals Chapter 2 substituting it with a new Chapter 2, with the purpose of harminizing the Insurance Code with the provisions of Law No. 170 of 1988, as amended, known as the "Uniform Administrative Procedures Act"; and other ends.  These are the changes of significance to sureties: (1) New Article 2.110 (old Article 2.140) on "Investigation or Examination of Insurers" requires the Commissioner to investigate or examine the operations, transactions, accounts, files, documents, and capital of Insurers no less than every five years; (2) new Article 2.150 on "Cease and Desist Orders" authorizes the Insurance Commissioner  to issue (in addition to other authorized remedies and penalties) a "cease and desist" order against a person when he determines, after notice and a hearing, that the person is undertaking or has undertaken acts or practices prohibited by the Insurance Code; (3) new Article 2.180 on "Alternate Dispute Resolution Procedures" authorizes the Commissioner of Insurance to submit to ADR, including mediation, any dispute arising from an investigation or which is before the Commissioner's consideration; (4) new Article 2.230 on "Compliance" states that should the the Commissioner of Insurance have cause to believe that a person is violating or intends to violate a provision of the Insurance Code or legal order issued by him, he can in his discretion certify the facts regarding said violation to the Puerto Rico Secretary of Justice so as to obtain compliance through the Courts, or commence the legal action via the administrative process; and (5) new Article 2.250 on "Penalties" states that violations of the Insurance Code, and Regulations, for which no penalty has been specifically prescribed in the Insurance Code, shall be subject to an administrative fine no less than $500.00 and no greater than $10,000.00 per violation. 
• Law No. 281 of 2008. This Law amends Articles 3 and 11 of the 2003 Condominiums Act to clarify that the measurement of superficial area of the areas assigned in the main deed and/or constitutive drawings of a condominium, as annexes for the particular and exclusive use of a unit, shall not be included to compute the superficial area of said unit or its percentage of participation in the common elements of the condominium, unless the main deed or the drawings of the condominium state otherwise; and to establish the requirement of unanimity in enclosure or roofing of patios, terraces and open areas of a unit, unless the the original drawings state otherwise.  This requirement of unanimity shall not apply to the enclosure or roofing of patios, terraces or open areas located in grounds destined for the exclusive use of units constituted under the condominium regime prior to July 4, 2003, and for other ends.

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