Contributed By WAGEMANN | Arbitration
The construction contract in Chile is regulated in Articles 1996 and following of the Civil Code, as a type of service lease. In other words, the construction contract is classified according to which party supplies the materials for the works. When the contractor supplies the materials, it is a “sale” contract. When the materials are supplied by the employer, it is a “service lease” contract.
Other relevant laws and regulations that govern the Chilean construction activities are:
There is almost no practical experience with international standard contracts (FIDIC or NEC) in Chile. There are sporadic exceptional cases of unauthorised adaptation of FIDIC contracts.
Private investment in the construction sector accounts for 64% of employers, while public sector investments reach 36%. Within the private sector, mining and energy are the most relevant activities. Among this type of employer, the most relevant is CODELCO, an independent state-owned enterprise and the country’s main copper producer.
Being open to foreign investment, Chile has received significant inflow of foreign investments from European, Canadian, American and Australian investors. The most important public investor is the Ministry of Public Works (MOP), as well as the Ministry of Health (MINSAL).
In Chile there is no formal record of the number and features of existing construction companies. Most local contractors are small and medium-sized and tend to form consortiums to bid for bigger projects.
The concession sector (private-public-partnership or PPP) in Chile was for years mainly controlled by large Spanish construction companies that invested in roads and hospitals, among other projects. Most recently, there is strong interest amongst Chinese concession companies.
No legal obligations from the subcontractor can be transferred to the contractor and from the contractor to the employer, with the sole exception of labour and social rights obligations. Pursuant to Article 183-A of the Labour Code, the workers of a contractor are deemed to be “subcontractors” of the employer. Pursuant to Article 183-B, the latter is jointly liable for compliance with “subcontractors’” rights. The same applies to contractors, who can be made liable for their subcontractors’ personnel labour and social rights.
Subcontractors are most frequently local construction companies specialised in different construction disciplines.
It is not possible to establish a general rule applicable to the employer rights and obligations under a construction contract, as they depend on the specifics of the parties’ agreement. In any case, the employer is usually under the obligation to provide access to the site. All other obligations, eg, regarding design and permits, will vary under each particular contract.
Chile has not resorted to finance through international multilateral agencies. While the local banks provide financing to smaller projects, more significant projects are usually financed through consortiums of foreign lenders. It is not possible to establish a general rule applicable to the financiers’ rights and obligations under a construction contract, as they depend on the specifics of the parties’ agreement.
The scope of the works is usually determined through the contractual provisions that include – together with general or administrative provisions – technical specifications and requirements. The level of detail of these specifications and requirements depends on the type of contract chosen by the employer (eg, construction contract, design & build, or engineering, procurement and construction (EPC)). In the case of design & build or EPC contracts, such specifications are drafted as “referential” or as “employer requirements”, leaving room for design development by the contractor. However, sometimes those requirements are impossible to achieve through the detailed engineering, giving rise to disputes.
Usually, there is a distinction between an increase in works and extraordinary works. An increase in works describes a variation that requires the performance of more of the same works and services as those included in the list price or contractor’s bid. In that case, once the quantity is determined, the same prices from the list price or the bid will apply.
In turn, extraordinary works are those not originally included in the scope of the contractor. Once the contractor is required to perform extraordinary works, it should submit its offer regarding time and cost for the employer’s approval.
All variations proposed by the contractor require formal approval from the employer. The contractor is usually expressly prohibited from performing additional works and services that have not been formally approved by the employer. Often, additional works give rise to cost compensation, but not to an extension of time. In turn, extraordinary works would usually include both.
The responsibilities regarding the design process are usually divided depending on the delivery method used by the employer. If the delivery method is design-bid-build, the design is the responsibility of the employer and the designer. Even under this delivery method, the contractual provisions often establish contractor’s responsibility for the review of the design and, if not notified within a certain time period, the contractor becomes liable for all of the design’s omission or errors.
If the delivery method is design & build, the responsibility for the design is allocated to the contractor. Collaborative delivery forms or early contractor involvement are rarely used in Chile.
The responsibility for the construction process is generally allocated to the contractor. The contractor is always responsible and liable for its subcontractors and the contract usually has indemnity provisions in that regard.
The employer is typically under the obligation to provide the construction site. The employer is also usually responsible for unknown site conditions such as pollution, underground obstacles and archaeological finds. However, employers often allocate responsibility for these conditions to the contractor. It is common for the contractual provisions to state that the contractor has analysed the site conditions and included its variables in its offer. Often the contractor accepts this kind of contractual stipulation even though it is not feasible for it to verify the information on the site conditions.
Almost all construction works – with minor exceptions – require a permit issued by a Municipal Works Directorate (Dirección de Obras Municipales).
Large-scale infrastructure projects require an environmental permit called Environmental Qualification Resolution (Resolución de Calificación Ambiental, or RCA). The permit is issued by an Evaluation Commission upon the proposal of the Environmental Assessment Service (Servicio de Evaluación Ambiental, or SEA), an agency of the Environmental Ministry.
The employer 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), which will include proposed measures for diminishing the impacts. Compliance with the environmental permits is strictly monitored by public authorities.
The contractor is typically responsible for the maintenance of the works until the moment they are taken over by the employer, which is done through a so-called provisional acceptance of the works. After the provisional acceptance, the punch list must be completed; the works enter into operation and the defect notification period begins.
In large-scale energy projects it is common for the employer to enter the operation and maintenance contract with the contractor or a contractor’s related entity.
The typical process for the tests for completion of the works includes mechanical completion, commissioning and testing. In certain cases, the commissioning and testing are conducted by the employer with the assistance of the contractor and its vendors.
In Chilean practice, two kinds of reception or acceptance of the works exist. The so-called provisional acceptance usually means that all works and tests have been completed by the contractor. After the provisional acceptance, only minor correction recorded in the punch list must be performed by the contractor.
Starting from that point, the defect notification period begins. Once that period has passed, or once the contractor has cured the defects, the so-called final acceptance of the works by the employer takes place.
After the provisional acceptance of the works, the contractor usually replaces its performance security with a security covering its liability for potential defects. As a matter of custom, the defect liability period lasts two years. The security covering the liability for defects is extended for that same period plus some additional months.
The General Law of Urbanism and Construction establishes a liability period of ten or five years, from the final acceptance of the works, depending on whether the defect is a structural failure or a failure of one of the components of the works. The liability period lasts three years from the registration of the property in the name of the buyer, in case of minor defects.
In general terms, the statutory limitation period extends for five years from the moment the obligation becomes enforceable.
The prevailing pricing modality in Chile is the lump sum price, which is often used for EPC or even for common construction contracts. In this last scenario, if the employer’s design is immature, it often leads to disputes as the contractor feels burdened with the additional costs caused by changes in design that it could not have foreseen when submitting its offer.
The second most common modality comprises unitary prices for direct costs, and lump sum agreement for overheads and fees.
Milestone payments are often used in EPC or BOP projects.
Advanced payments of between 10% and 20% of the contract price are common. In those cases, the contractors must provide a financial security in the amount of the advanced payment received from the employer. The advanced payment is deducted from monthly payments until the amount is fully paid. At that moment, the employer must return the security on the advanced payment.
Sometimes the contract gives the contractor the right to terminate the contract if the employer has defaulted on invoice payment for more than 60 days.
The frequency of payment is typically monthly, unless the payment is triggered by the achievement of a specific milestone. Additionally, in the case of the public sector, there is a legal obligation to pay contractors and suppliers no later than 30 days after issuing the corresponding invoice.
Once the invoice is posted on the Chilean Internal Revenue Services website, the debtor has up to eight days to object to the invoice as lacking entitlement. If no objection follows, the payment of the invoice can be enforced through an executive enforcement proceeding conducted before the ordinary courts.
The contractor is usually under the obligation to provide a work schedule in Microsoft Project or in Primavera, for employer’s approval. However, it is often the case that only the Base Line is submitted by the contractor and no updated programmes or as-build programmes are recorded.
The contractual provisions often allow the employer to request mitigation measures if the contractor is delayed regarding the approved schedule. In turn, the contractor is typically under the obligation to propose a mitigation plan to recover its delays. Time-related costs are mainly dealt with based on costs effectively incurred by the contractor. This has been the case for all time-related costs increased due to inflation.
In certain cases, the contractors sometimes prefer to submit their requests for compensation based on the contractual prices, unless otherwise provided in the contract.
There is no legal provision on concurrent delays. The contracts typically do not address this topic either. Article 1.552 of the Chilean Civil Code indicates that if both parties are liable for an issue in a certain case, then both defaults are mutually extinguished. Based on this provision, the parties might seek to exclude liability for concurrent delays. However, there is no known case law that could provide guidance on the suitability of this approach.
It is common for the employer to have the right to demand a recovery plan and recovery measures. Fines or delay liquidated damages are included in all construction contracts executed in Chile. The employer usually must notify the contractor that the works have been delayed.
The employer is usually authorised to deduct or set off the amount of money corresponding to the fines or delay liquidated damages from any of the payments owed to the contractor. The employer can usually collect the performance security in case of contractor’s delays. As a matter of custom, the contract often allows the employer to terminate the contract if the contractor is delayed 10% or 15% behind the official schedule.
In order to request an extension of time, the contractor must follow the contractually established procedure, which can vary significantly from one contract to another. It is common for the parties to provide that the contractor must give notice of the event that causes the extension of time, and then submit a formal claim or request for an extension of time within a separate timeframe.
Article 45 of the Civil Code regulates force majeure as an unforeseeable event that is impossible to resist. Force majeure allows the party that relies upon it to justify its failure to perform its contractual obligations. Unless otherwise agreed by the parties, force majeure does not give a right to claim for costs incurred during the force majeure event. The acts of public authorities could come within the definition of force majeure if they prohibit the party from performing its obligations. It is also typical for the parties to add additional definition to force majeure by excluding specific events (extreme weather or labour strike) from the array of circumstances constituting force majeure.
It is not common to include a definition of unforeseen circumstances in construction contracts. Unless the unforeseen event can be defined as force majeure, it does not liberate the party from its contractual obligations.
Disruption is not acknowledged as a legal ground for extension of time or compensation. Contractors that invoke disruptions try to subsume them under the concept of loss of productivity; however, it is not legally recognised either.
The parties cannot waive the liability for wilful misconduct (dolo). Pursuant to Article 1465 of the Chilean Civil Code, “the waiver of future fraud is not valid”. This has been generally understood as limiting the possibility of excluding the liability for wilful misconduct.
The Chilean Civil Code distinguishes between negligence and wilful misconduct. Negligence means the lack of care in the fulfilment of obligations. Negligence has three degrees, depending on the level of care required: gross negligence (minimum standard of care is required); slight negligence (medium standard of care is required); and very light negligence (high level of care is required).
Gross negligence is deemed equivalent to wilful misconduct. Wilful misconduct consists in the positive intention to cause harm to another person or property.
Breach of contract is presumed to be negligent. Thus, the debtor has the burden of demonstrating that they have not acted negligently. The compensation awarded will vary depending on whether the breach of contract was due to negligence or wilful misconduct.
It is common to establish a limitation on contractor’s liability: up to 15% of the contract price for delays; and up to 100% of the contract price in the case of reworks and correction of defects. It is also common for the parties to exclude liability for lost profit.
The contractor usually undertakes broad indemnity obligations towards the employer and must keep it indemnified in cases of damages to third parties, fines imposed by the authorities, breaches of intellectual property rights, labour disputes, etc.
The contractor is usually under obligation to provide a performance security in the form of an on-demand bank guarantee. The amount covered by such security usually reaches 10% of the contract price. After the provisional acceptance of the works, the performance security must be returned to the contractor in exchange for a defect liability security.
In addition to the above, the employer usually deducts 5% or 10% of the retention money from each payment. Typically, the retention money could be used for any purpose that the employer deems fit, such as correction of the defects, payment of the indemnities, etc.
The most common insurance required by employers is an insurance against All Construction Risks, regulated by the Commercial Code. However, because there are no legal provisions that define construction risks, the specific scope of this insurance may vary.
The second most common insurance form is the so-called Civil Liability Insurance. This insurance protects the employer or contractor against claims from third parties who may suffer property damage or personal injury as a result of the construction site: for example, neighbours adjacent to the project, passers-by or the construction site workers themselves.
Typically, the insolvency of one of the parties to the contract gives the other party the right to terminate the contract. However, often this right is established for the employer only in case the contractor becomes insolvent.
Risk sharing is not a common practice in Chile. The employers tend to allocate to the contractor the broadest array of risks possible, even though in certain cases it is not feasible for the contractor to foresee or to manage those risks. For example, the contractor is sometimes forced to bid on a lump-sum basis after having received referential information from the employer, that later proves to be wrong. Nonetheless, the contractual provisions might stipulate that the contractor is responsible for errors and omissions in the referential information.
The Chilean Labour Code provides that 85% of employees must be Chileans. However, employers are exempted from the above-mentioned restriction when they employ fewer than 25 workers.
Employers that fail to comply with their labour obligations could be sanctioned with administrative fines or the closure of the establishment or operation. The so-called labour inspectors may order the immediate suspension of work which, in their opinion, constitutes a danger to the health or life of workers and when they find that work is being carried out in violation of labour legislation.
It is common for employers to establish specific requirements regarding the professional qualifications of key personnel. Once approved by the employer, the contractor cannot remove key personnel without obtaining prior approval for the replacement.
Many contracts limit the contractor’s ability to subcontract the entirety of the works or limit the percentage of the works that could be subcontracted, up to 30% or 50%. It is also customary to establish that prior approval of the subcontractors by the employer is required.
It does not seem feasible to establish a general rule on how intellectual property in construction is treated, as the contractual regulation may vary significantly depending on the nature of the project.
In case of breach of the contract, the party affected has the alternative right to terminate the contract or request its specific performance, in both cases with compensation of damages. This right must be exercised before ordinary tribunals or arbitration, depending on the dispute resolution mechanism agreed in the contract. However, it is not unusual for the contract expressly to enshrine the employer’s right to terminate the contract immediately in case of the contractor’s breach, thus avoiding the need to resort to a competent court or tribunal.
It is not common for the parties to contractually limit the remedies available to a party. The diligent party can always request that the tribunal order specific performance of the counterparty’s obligations, or contract termination, with damages.
Contemporary doctrine and case law consider it feasible for the diligent party to claim for damages only, with the exclusion of other remedies.
It is common for the parties to establish that the cap on delay or performance damages is the only compensation the employer can receive in the case of the contractor’s breach.
In general terms, pursuant to Article 1543 of the Chilean Civil Code, a party cannot claim fines and liquidated damages while claiming, at the same time, a total compensation for damages, unless this right has been expressly reserved in the contract. This kind of reservation is also frequent, in which case, the “sole remedy clause” would be overridden. In any case, it remains always at the discretion of the interested party to claim either for fines and liquidated damages or for total compensation.
The contractual provisions usually exclude parties’ liability for loss of profit. Sometimes, indirect or consequential damages are also excluded. However, the Chilean 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 direct and compensable. If the link is not direct, the damage is not compensable. Thus, consequential losses would be admitted just for direct damages. Chilean law does not recognise punitive damages.
The employer is usually authorised to deduct a certain percentage from each payment to the contractor as retention money. The employer is also usually authorised to deduct any amount due by the contractor from any payment owed by the employer.
The employer typically has the right to suspend the works for a certain period of time, in which case the contract would regulate the compensation due.
The contractor usually has no right to suspend the works. The contract typically provides that if the contractor suspends the work for a certain number of days, usually between two and 15, it will be deemed as abandonment of the works and a cause for contract termination.
Chilean law does not provide for the unilateral termination of the contract by way of a party’s declaration. Rather, the compliant party must claim for the termination to be declared by a tribunal. The interested party may request either the termination or the specific performance of the contract, with compensation of damages.
However, it is common practice in Chile to include in construction contracts clauses on contract termination in case of contractual breaches or defaults by one of the parties. Nonetheless, usually the employer is entitled to terminate the contract due to an ample list of contractor’s contractual breaches, while the contractor rarely achieves an equivalent right. In those cases, the employer can terminate the contract by sending an official communication, while the contractor is forced to resort to the arbitral or ordinary tribunal.
There are no specialised courts in the field of construction law. In matters of public works, disputes are resolved through the ordinary courts of justice.
In the case of PPP, each of the parties can submit the issue to a standing interdisciplinary board called the Concessions Technical Panel, with jurisdiction only in technical and economic matters. Its decision is not binding on the parties. Afterwards, the parties can resort to an ad hoc arbitration tribunal, appointed from a pre-established list of publicly pre-approved professionals.
In the private sector, parties tend to agree on institutional arbitration as the final dispute resolution mechanism. The most relevant local arbitral institution is the Arbitration and Mediation Centre of the Santiago Chamber of Commerce (CAM Santiago).
Commercial mediation is not regulated by law and is rarely used. The same applies to Dispute Boards, which have been put into practice only on exceptional occasions.