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Chile

Published on Friday 21st June 2019

    • Chile

      There is no legal requirement to submit construction contracts to Chilean law and there is no express prohibition of foreign choice-of-law clauses. However, there are courts’ decisions issued on other matters that have misapplied article 16 of the Chilean Civil Code ('All inhabitants of the Chilean Republic are subject to Chilean law') and have affirmed application of local law when assets located in Chile were concerned. Thus, foreign choice-of-law clauses could be challenged in courts. If the contract has foreign elements (ie, foreign nationality of one of the parties), the safer option would be to submit the disputes arising from that contract to international arbitration. In that case, foreign choice-of-law clause would be enforceable under article 28 of Law No. 19.971 on International Commercial Arbitration.

      Last verified on Monday 29th July 2019

    • Chile

      There are no legal requirements regarding formalities applicable to private construction contracts. For the sake of greater legal certainty, the contracts are usually formalised in writing. In the public sector, pursuant to article 89 of the Regulation for Public Works Contracts Supreme Decree MOP 75, 2004, the contract requires a specific approval or decree by the public entity.

      Last verified on Monday 29th July 2019

    • Chile

      This kind of liens on work performed aimed at securing payment can be found in common law-based contracts executed in Chile. Otherwise, there are unknown to Chilean law and practice. Owing to their exceptional character, no case law addressing their enforceability is known. 

      Last verified on Monday 29th July 2019

    • Chile

      Pursuant to article 18 of the General Urbanistic and Construction Law (DFL No. 458 modified in 1996 by Law No. 19.472): “The owner first seller of a construction will be responsible for all damages and losses arising from failures or defects in it, either during its execution or after completion, without prejudice to its right to claim against those responsible for the failures or construction defects that have given rise to the damages.” This legal reform was aimed at facilitating legal actions in construction disputes, as it allows the damaged party to sue the “owner first seller” without having to identify whether the specific damage was caused by the latter or by constructor or the designer of the project. This provision also establishes limits of constructors’ and designers' liabilities. 

      Last verified on Monday 29th July 2019

    • Chile

      No, this is not the case. 

      Pass-through clauses are mainly common between general contractors and their subcontractors. Under those clauses, a general contractor will compensate its subcontractors for any additional cost only after it has received a compensation from the owner.

      Last verified on Monday 29th July 2019

    • Chile

      The prevailing pricing modality is the lump sum modality, which is often used for EPC or turnkey contracts as well as for common construction contracts.

      This modality is followed by unitary prices for direct costs and lump sum agreement for overhead and fees.

      The modality of delegated administration conducted on the open book plus fees basis, is rather exceptional and is limited to fast-track contracts. 

      Last verified on Monday 29th July 2019

    • Chile

      Pursuant to article 116 of the General Urbanistic and Construction Law, all construction works require a permit issued by a municipal works directorate. Pursuant to article 126 of that same law, the cost of permits is calculated based on the budget of the works by applying established unit costs per square metre of construction, in accordance with the types of and construction materials to be used. As a practical matter, the period for obtaining this permit may vary between four and eight months.

      Large-scale infrastructure projects will need to obtain an environmental permit called an environmental qualification resolution (RCA). The permit is issued by an Evaluation Commission established by article 86 of the Law on Ministry, Environmental Assessment Service and Environmental Agency No. 20.417, upon the proposal of the Environmental Assessment Service (SEA), an agency of the Environmental Ministry. 

      Owners interested in obtaining the RCA must submit to the SEA either an environmental impact statement (DIA) declaring that environmental regulation is met in every aspect and no additional measures are required, or an environmental impact assessment (EIA). The preparation of an EIA requires different studies, and is usually time and cost consuming. A study conducted in 2017 by the government'sChilean Copper Commission concluded that “on average, the projects remain in teh system close to 200 days, with the remaining time for approved projects an average of 289 days.” Therefore, in the case of the preparation of an EIA, the owner must estimate a time period of two to three years to obtain an RCA.

      Last verified on Monday 29th July 2019

    • Chile

      Subsurface conditions are a common source of delays. With minor exceptions, Owners tend to allocate this risk with Contractors, which is not prohibited by local law. Pursuant to article 2.003 No. 2 of the Civil Code, unknown subsurface conditions (vicio oculto del suelo) authorise constructor to claim additional cost. Sometimes, Owners request constructor to waive this right. 

      Last verified on Monday 29th July 2019

    • Chile

      There is no statutory protection for "unforeseeable" or similar risks and there are no limitations for contractual allocations of risk. Nevertheless, the Chilean Civil Code establishes implied principles as good faith, reasonable skill and care and full reparation, which shall be taken into consideration when interpreting the construction contract.

      Last verified on Monday 29th July 2019

    • Chile

      According to article 1.545 of the Chilean Civil Code, contracts are binding on the parties in the same way as the laws. Pursuant to article 1.546 of the Civil Code, the contracts are to be construed according to the good faith principle. However, this does not lead to a significant flexibilisation of contractual obligations as agreed by the parties. Contractual provisions receive strict interpretation unless the dispute is submitted to an arbitration ex aequo et bono. An arbitral tribunal with ex aequo et bono powers is authorised to decide according to equity and prudence. At the same time, the tribunal is deemed to be bound by contractual provisions. There are no specific rules regarding the evidence required to support cost or schedule relief claims. Usually, a strict causal relationship should be proven to exist between the facts and the relief sought.

      Last verified on Monday 29th July 2019

    • Chile

      Since a 2016 award (OHL v Chilean Treasury), the Supreme Court has determined, in the case of public works contracts, that the Public Works Contracts Regulations cannot limit compensation for damages according to the law, under the principle of full and integral reparation. The last situation is not observed in the case of the private sector.

      Last verified on Monday 29th July 2019

    • Chile

      Chilean workers tended to have low rates of participation in labour unions. Chilean laws had allowed for the replacement of workers on strike, which diminished the bargaining power of labour unions. On 8 September 2016, Law No. 20.940 aimed at modernising the labour relations was published. The reform seeks to strengthen the collective bargaining conducted by labour unions. In 2018, the mining sector, with the highest unionisation, saw the maximum number of negotiations, that is, 33.

      Last verified on Monday 29th July 2019

    • Chile

      The most important laws on that account are: Law No. 19.880 called “Establishes the Basis for the Administrative Procedures Governing the Acts of the Agencies of the State Administration”, and Law No 19.886 called “Basic Law about Administrative Procurement Contracts and Provision of Services”.

      Last verified on Monday 29th July 2019

    • Chile

      Consortia are often used by contractors, but their legal form may vary notoriously from creation a new company to a cooperation or joint venture agreement. In those latter cases, owners require consortia members to undertake their obligations jointly and severally. As a matter of practice, some owners prefer to deal with one general contractor and request other members to adopt the position of subcontractors.

      Last verified on Monday 29th July 2019

    • Chile

      Time-bar clauses for claims are generally enforceable, but after the OHL case, this interpretation has been recast under the application of the full reparation principle, prevailing a substantive approach instead a formal approach in the court's awards. At the same time, the general statutory limitation period reaches five years. In some arbitral cases, the parties have also successfully argued that excessively short time limits go against public policy and are therefore not enforceable.

      Last verified on Monday 29th July 2019

    • Chile

      Limitations of liability clauses are enforceable. The main exclusion is the prohibition on taking advantage of its own wilful misconduct as followed from articles 1.546 and 1.465 of the Civil Code. The latter states: “The forgiveness of future fraud is not valid.” As a matter of practice, parties usually limit liability to direct damage and exclude all indirect or consequential damage or loss of profit. Sometimes, contractors’ liability is limited to an amount that fluctuate between 15 per cent and 100 per cent of the contract price.

      Last verified on Monday 29th July 2019

    • Chile

      Pursuant to article 1.543, “The penalty and compensation for damages may not be requested at the same time, unless expressly stipulated; but it will always be at the discretion of the creditor to request compensation or penalty.” Therefore, considering that pre-estimation of damages called multas are sometimes conceived as “penalties”, it is common practice in construction contracts to regulate this issue, whether to authorise the owner to charge multas and to pursue general compensation or to exclude this option.

      Last verified on Monday 29th July 2019

    • Chile

      Liquidated damages do not exist as such in our legislation; however, they can be agreed upon under the principle of freedom of contract. The closest figure to the liquidated damages is the “fines” or “penalties” (incorrectly called multas) that correspond to a genuine pre-estimation of damages. Nevertheless, they are not an exclusive remedy in case of damage, since the owner has the right to use bank guarantees, retentions in parallel and, eventually, claim in court or arbitration for damages not covered by the previous instruments.

      According to article 1.544 of the Civil Code, there is the possibility of reducing the penalty clause when it exceeds twice the main obligation (“huge penal clause”). Article 1.542 of the Civil Code also establishes that a penalty clause may be claimed in all cases in which it has been stipulated: "without it being possible for the debtor to argue that the contract breach has not caused prejudice to the creditor or has produced a benefit".

      Last verified on Monday 29th July 2019

    • Chile

      Force majeure is regulated in article 45 of the Chilean Civil Code in the following terms: "the unforeseen [event] impossible to resist, such as a shipwreck, an earthquake, capture by enemies, acts of authority exercised by a public officer, etc".

      The Civil Code gives the same treatment to the fortuitous case and force majeure, providing as requirements for both type of events that they be unforeseeable, irresistible, and prevent the fulfilment of the obligation (this latter requirement added by the doctrine).

      The effect of force majeure is that each party assumes the consequences of it. This means in practical terms that if the event of force majeure impacts the time for completion the contractor has to bear the cost of labour, equipment or subcontracts for the additional time required to fulfil its obligation, and the owner assumes the risk of not having completed the work within the original schedule, which has been delayed by force majeure.

      Nevertheless, in our contractual legislation, force majeure is a rule of private order that the parties can modify. In fact, it is common for mining construction contracts to establish situations of force majeure that in reality are not, as in the case of strikes by a business owner's workers.

      Last verified on Monday 29th July 2019

    • Chile

      The most typically used instrument is the bank guarantee, liquid and irrevocable, which is an instrument used to guarantee the complete fulfilment of the contract during its execution, such as during the defects period and to guarantee performance, in some cases. In recent times the insurance guarantee policy has been introduced, also liquid and irrevocable, but it does not generate the same reliance of the owners, since it can eventually be stopped by judicial order.

      Last verified on Monday 29th July 2019

    • Chile

      In Chile, concurrent delay is not specifically treated under the local law, so it becomes an issue of interpretation based on rules and regulations of national law combined with the decisions of a few private arbitration tribunals. Article 1.552 of the Chilean Civil Code indicates, in practical terms, that if both parties are responsible for an issue, then both defaults are cancelled. Articles 1655 and 1656 of the Civil Code address the issues of compensation; however, no jurisprudence is available addressing concurrent delays in construction projects.

      Last verified on Monday 29th July 2019

    • Chile

      The Chilean system distinguishes between negligence and wilful misconduct in article 44 of the Civil Code. Negligence corresponds to the lack of care in the fulfilment of obligations, while wilful misconduct consists in the positive intention to cause harm to other (person or property). The negligence has three classifications, depending on the level of responsibility or care required of the person who must fulfil the obligation: gross negligence (minimum level of care required), slight negligence (medium level of care) and very slight negligence (high level of care, such as that required in specialist companies).

      The Chilean Civil Code, also in its article 44, indicates that gross negligence is equivalent to wilful misconduct in civil matters; this has a certain logic as it assumes that, if the debtor did not comply even with the lowest standard of care, its level of negligence is almost malicious.

      Additionally, the law establishes a presumption, which is that the breach of contract is presumed negligent. This implies that in case of default, the debtor has the burden of demonstrating that it has not acted negligently (article 1547, subparagraph 3 of the Civil Code).

      Finally, the extension of the compensation of the losses to which the creditor is entitled will vary depending on whether the breach of contract was due to negligence or wilful misconduct, according to article 1558 of the Civil Code.

      Last verified on Monday 29th July 2019

    • Chile

      The Civil Code differentiates between direct and indirect damages, depending on the causal link between the breach and the damage. If the link is immediate or direct, the damage is payable; if the link is not direct, the damage is not compensable. In this order of ideas, consequential losses would be admitted just for direct damages.

      Last verified on Monday 29th July 2019

    • Chile

      The matter is regulated by contractual arrangements. At the same time, article 2000 provides: “The loss of the matter falls on its owner. Therefore, the loss of the material supplied by the party who ordered the work shall be borne by him or her; and the constructor shall not be responsible unless the material perishes because of him or her or the personnel. Even if the material does not perish because of the contractor or the fault of his or her staff, he or she cannot claim the price or compensation, except in the following cases:

      • if the work has been recognised and approved;
      • if it has not been recognised and approved because of a fault by the person who ordered the work; and
      • if the work perishes by defect of the material supplied by the person who ordered the work, unless the vice is of those that the constructor by way of his or her expertise must have known, or that knowing it has not given timely notice.  

      Last verified on Monday 29th July 2019

    • Chile

      There is no general regulation determining the form and content of the interim or final payments. However, in the public sector there are some provisions depending on the type of work (for example, civil works managed by the Ministry of Public Works, or hospitals administered by the Ministry of Health) with specific information requirements.

      In relation to the payment of the works, Law 19.983 determines that, once the delivery of an invoice has been authorised, the owner has a term of eight days (expandable to 30 if the parties so agree) to reject it, for certain conditions expressly established in the same law. If the owner does not reject it within the legal term, the invoice must be obligatorily paid. An invoice's term of payment is not regulated, and the parties can freely agree on the term they wish; however, the industry’s usual practice is between 30 and 60 days.

      Regarding the possibility of set-offs, withholdings or deductions, there is also no general regulation; however, it is usual for construction contracts to determine back-charge clauses, withholdings (usually between 5 and 10 per cent of each payment status) and immediate deductions upon the payment certificates in the case of non-compliance with labour and social security obligations.

      Last verified on Monday 29th July 2019

    • Chile

      Construction contracts are subject to a VAT of 19 per cent. Usually, the owner withholds that VAT and pays it directly to the state. When the contracts have an onshore part and another part offshore, the norm is for the contractors to create a consortium where the onshore part corresponds to labour and subcontracts, and the offshore part to the delivery of the contract equipment, plants or spare parts. It is common, especially when dealing with EPC contracts with equipment coming from abroad, that on or offshore works are carried out by separate contractors, or else, a foreign contractor develops onshore works with its local office in Chile and offshore work with any of its offices abroad.

      In any case, regarding transfer of funds from Chile to abroad, it is important to bear in mind that the foreign contractor is subject to a tax rate of 35 per cent. For this reason, it is common for the biggest foreign contractors to set up local branches in Chile.

      Last verified on Monday 29th July 2019

    • Chile

      Under Chilean law, the parties can agree a defects notification period, for any defect, once the provisional acceptance of the works has been produced and until the definitive acceptance of the same works. Usually this period extends between one and two years from the provisional acceptance.

      In relation to the legal periods of responsibility for defects in construction, under statutory law, article 18 of the General Law of Urbanism and Construction determines the following liability periods, counted from the definitive acceptance of the works (except for defects in the terminations of the works, indicated below):

      • 10 years, in the case of failures or defects that affect the structure of the property (structural decennial liability);
      • five years, in the case of faults or defects of the constructive elements or of the installations; or
      • three years, if there were faults or defects that affect elements of completion or terminations of the works (painting, additives, covers, etc). In this case the liability arises from the registration of the property on the buyer's name.

      In the case of defects not expressly included in the above points, the liability will expire within a period of five years.

      The foregoing does not prevent the parallel application of article 2.003 No. 3 of the Civil Code, at the discretion of the creditor, which establishes a legal liability of five years, counted from the delivery of the property, for defects of the construction, of the soil or of the materials.

      Finally, it is important to note that our legislation does not determine or require proof of whether the defects are patent or latent, and does not specify defect liability periods for certain types of works (for instance, housing, power or mining).

      Last verified on Monday 29th July 2019

    • Chile

      The General Law of Urbanism and Construction establishes a period of 10 or five years in its article 18, counted from the final acceptance of the works, depending on whether it is structural failures or elements used for the construction; and three years, counted from the registration of the property in the name of the buyer, in case of defects on minor elements of terminations. This rule is complemented by the same article 18, which determines a period of five years in all cases not previously treated, and article 2.003 No. 3 of the Civil Code, which establishes an optional right to the creditor in the case of defects in the construction, the soil or the materials.

      Additionally, is important to note that the general limitation of legal actions is five years pursuant to article 2.515 of the Civil Code, and is counted since the obligation has become enforceable. This period may be suspended or interrupted in certain cases. The Civil Code does not indicate if it is necessary that the moment in which the obligation is due must be coincident with the moment in which the damage or loss occurs for the creditor.

      Finally, in non-contractual matters, the limitation for legal actions is four years, counted from the commission of the act, in accordance with article 2.332 of the Civil Code. There is discussion in the doctrine about whether this term starts from the moment the event causing the damage occurs, or from the moment when the damage begins to occur; in our opinion, the term should start from the occurrence of the event causing the damage.

      Last verified on Monday 29th July 2019

    • Chile

      In our country, there are no specialist courts in the field of construction law.

      In matters of public works, the resolution of disputes is resolved through the ordinary courts of justice.

      In the case of public–private partnerships (PPP), the Law of Concessions 20.410 of 2010 determines a technical panel, authorised to rule on technical-economic matters only, as a prerequisite to entering into the system of conflict resolution. The same law establishes the arbitration as a dispute resolution method for technical-economic matters (which must pass previously by the technical panel) and non-technical-economic matters, which can go directly to arbitration.

      The main local arbitral institution is the Arbitration and Mediation Centre of the Santiago Chamber of Commerce (CAM Santiago) established in 1992. Nowadays, approximately 21 per cent of all cases correspond to the construction sector. 

      Last verified on Monday 29th July 2019

    • Chile

      The parties may, under the principle of freedom of contract, determine mediation as a condition precedent through a multi-tiered clause. However, there are no mandatory legal provisions to enforce mediation in our jurisdiction.

      Last verified on Monday 29th July 2019

    • Chile

      As in the case of mediation, the selection of a dispute adjudication board (DAB) in Chile as a condition precedent may be voluntarily agreed upon by the parties under the principle of freedom of contract, through a multi-tiered clause. Nevertheless, there are discussions in the Chilean doctrine about the enforceability of the decisions of the DAB, in particular, its res iudicata effect, since it would be affecting in some way the legal framework of the judicial system in Chile where only the judgments of the courts or the arbitrator’s awards can generate the effect of res iudicata. For this reason, construction contracts in Chile consider dispute review boards over dispute adjudication boards.

      Last verified on Monday 29th July 2019

    • Chile

      In the public sector, large-scale projects are being carried out through public–private partnerships, under the Law of Concessions 20.410. The terms of the concession contract have more balanced risks than public works contracts; in particular, considering in the same law the financial-economic equilibrium of the contract as a cause of claim, installing a technical panel as a precondition for avoiding controversy and considering a robust arbitration system. This scheme has generated a lot of interest and a high level of reliance on investors and large foreign construction companies, so the system in general works well, other than the need to make some adjustments.

      In terms of public works with direct investment by the state, the level of conflict has increased in recent years. In a study commissioned by the Chilean Chamber of Construction for our firm where we reviewed about 30,000 cases, we were able to determine that in the period 2010–2015 the number of construction processes, although not many in relation to the total of them in the system, multiplied almost fourfold. This has meant that all the parties participating in infrastructure projects – the state, contractors and engineers – have begun to search for alternative solutions. One of these alternatives has been the constitution of an executive committee for the implementation of dispute boards in public works contracts, sponsored by the Ministry of Public Works of Chile and the Chilean Chamber of Construction, in which our partner Alex Wagemann participates as a member. In 2019, a pilot programme has been started and a legal framework to regulate it is expected in 2020.

      In international projects, Chile does not use multilateral financing, so the implementation of particular standards has not so far been observed, as in the case of FIDIC, except in two binational projects with Argentina.

      In the private sector, large-scale projects lie mainly in the areas of mining and energy. Usually, the contracts for these projects have been written at the owners' headquarters, and many of them are regulated under common law principles. This situation has generated many problems of interpretation and the need to standardise, since Chile is a country under a civil law system and there are features that are not directly applicable and must be adapted, such as time bars, liquidated damages or the scope of fitness for purpose. Also, there are implied terms in Chilean laws that are applied subsidiary to construction contracts, which makes it necessary for large investors and owners of mining and energy projects to be advised by specialists who know both legal systems.

      Finally, it should be noted that in recent years, large-scale projects underwent certain delays regarding the permits necessary for their implementation. To combat this problem, in 2018, the government created the Office of Sustainable Projects, whose objective is precisely to facilitate the development of large-scale projects, coordinating the different sectorial authorities and fight against the excessive bureaucracy in the issuance of permits.

      Last verified on Monday 29th July 2019

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