The main laws regulating the construction market in Panama are as follows:

In Contracting Matters

• Civil Code of the Republic of Panama – Title VI, Chapter III, Articles 1335 to 1352: This regulation generally governs construction contracts. Link: Infojurídica (procuraduria-admon.gob.pa)
• Law 22 of 27 June 2006 (Regulating Public Procurement): This law regulates the public procurement procedure for works and services. It includes provisions on state construction contracts. Link: Infojurídica (procuraduria-admon.gob.pa)
• Law 93 of 19 September 2019 (Creating the Public-Private Partnership Regime): This law promotes private participation in the execution of infrastructure works and public services. It defines the principles and processes of public-private partnerships, and the powers of public entities to encourage investments in infrastructure through them. Link: Infojurídica (procuraduria-admon.gob.pa)

In Labour and Social Security Matters

• Cabinet Decree No. 252 of 30 December 1971 (Labour Code) – Title VII, Chapter IX, Articles 279 and 280: The Labour Code regulates the relationships between employers and workers, including construction workers’ employment contracts. It recognises these contracts as special, designating them as “Construction Contracts”. Link: Infojurídica (procuraduria-admon.gob.pa)
• Law 72 of 15 December 1975: This law complements the Labour Code by establishing measures, guidelines, duties and rights for construction industry employment contracts. It specifies the types of contracts, salaries, responsibilities and rights of the contracting parties. Link: Infojurídica (procuraduria-admon.gob.pa)
• CAPAC-SUNTRACS Agreement: This is an agreement between the Single National Union of Construction and Similar Workers (SUNTRACS) and the Panamanian Chamber of Construction (CAPAC). It regulates labour aspects, salaries and rights of construction workers affiliated with these organisations. Link: CONVENCIÓN COLECTIVA CAPAC SUNTRACS 2022 2025 Digital (sprarescue.com)
• Executive Decree No. 2 of 15 February 2008 (Regulating Safety, Health and Hygiene in the Construction Industry): This decree establishes safety, health and hygiene measures in the construction industry, specifying necessary activities for risk prevention during the execution of works. Link: Infojurídica (procuraduria-admon.gob.pa)

In Professional Competence Matters

• Law 15 of 26 January 1959 (Regulating the Practice of the Engineering and Architecture Professions): This law establishes the requirements for practising the engineering and architecture professions in Panama, both for individuals and for legal entities. Link: Infojurídica (procuraduria-admon.gob.pa)

In Environmental and Permitting Matters

• Unified Text of Law 41 of 1 July 1998 (General Environmental Law):This law includes regulations relating to environmental impact studies for construction works. Link: Infojurídica (procuraduria-admon.gob.pa)

• Agreement No. 281 of 6 December 2016 (Initial Construction Permits): This agreement requires that, before starting any construction work, a permit must be obtained from the Directorate of Works and Constructions of the Municipality of Panama, without prejudice to other permits required for the work. Each municipality has its own regulations for issuing these permits, although they generally follow guidelines similar to this agreement. Link: Infojurídica (procuraduria-admon.gob.pa)

In Panama, the use of standardised construction contracts is not common, both in public contracts with the State and in private contracts between individuals.

However, in private contracts, the use of such standardised contracts is possible since it is not prohibited. In private contracting, the parties have the freedom to impose the clauses, forms and contracting models they deem appropriate.

There is no constitutional or legal regulation in Panama that obliges or requires the parties to a construction contract, whether public (with the State) or private (between individuals), to use any of the existing standardised construction contract models.

Rights and Obligations of the Employer in Private Construction Contracts

In Panama, private construction contracts typically involve employers such as hotel companies, banks, food chains, real estate developers, and any individual interested in developing a construction project of any scale.

In contracts between private parties, the obligations and rights of the employer are usually detailed in one or more contractual clauses.

Generally, the obligations of employer include:

• paying the agreed price for the execution of the work; and
• receiving the work once the required objective is achieved.

Generally, the rights of the employer include:

• demanding the faithful fulfilment of the contracted object by the contractor;
• executing performance bonds, if they exist; and
• supervising the fulfilment of the contract during the execution of the work.

Rights and Obligations of the Employer in Public Construction Contracts

In contracts for public interest construction projects, employers are usually various governmental institutions. These institutions, often on their own initiative, decide to build, improve or modify building structures, road projects, airports or parks, among others.

Construction contracts in the public sector in Panama are regulated by Law 22 of 27 June 2006, “Regulating Public Procurement”. The rights and obligations of contracting entities are expressed in this law.

These obligations include:

• obtaining the greatest benefit for social interest through the execution of the work;
• periodically reviewing the executed works;
• objectively and fairly selecting the contractor who will execute the work;
• maintaining the technical, economic and financial conditions during the execution of the contract;
• making payments within the established timeframe; and
• monitoring strict compliance with the contract.

The rights of public entities in these contracts include:

• requiring the contractor and the guarantor to execute the contracted object; and
• requesting indemnities for contract non-compliance.

Relationship Between the Parties

In Panama, the relationship between contracting parties is typically direct. The employer has a direct relationship with the contractor, who in turn may have relationships with subcontractors. However, subcontractors generally do not have a direct relationship with the employer.

For more details, see 2.4 The Financiers.

In Panama, the companies typically contracted to execute construction projects are primarily those dedicated to this sector, including engineering project development firms and construction companies, both national and international.

Additionally, there are consortiums, which are groupings of companies that unite to execute a specific project without having legal personality. Such groupings are more commonly seen in projects contracted by the State for the construction of large-scale works.

Rights and Obligations of the Contractor in Private Construction Contracts

In addition to those agreed upon contractually, and depending on the type of contract itself, the contractor’s obligations in the vast majority of cases usually include, among others:

• executing the object of the contract;
• complying with the execution and delivery timeline of the work;
• providing the necessary services for the construction of the project;
• having the technical capacity to execute the contracted project; and
• implementing the necessary safety measures throughout the execution of the project to protect personnel, materials and structures.

Rights and Obligations of the Contractor in Public Construction Contracts

Law 22 of 2006, which regulates public procurement in Panama, also regulates the contractor’s obligations to the contracting entity, which include, among others:

• fulfilling the object of the contract;
• complying with the contracting entity’s instructions during contract execution;
• guaranteeing the works performed; and
• allowing free access to the site of the works.

Similarly, the law outlines the rights to which the contractor is entitled, including:

• receiving payments as stipulated in the terms set forth in the specifications and the respective contract;
• receiving late payment interest (if applicable);
• ensuring that entities issue the corresponding receipt document established by law once the contracted work is delivered; and
• requesting extensions deemed necessary when there may be delays in the execution of the work not attributable to the contractor.

Relationship Between the Parties

The relationship is strictly direct between the employer and the contractor, as the latter is accountable to the former for the obligations assumed under the contract.

For more details, see 2.1 The Employer, 2.3 The Subcontractors and 2.4 The Financiers.

In Panama, subcontractors are generally hired to perform specialised tasks required within the project managed by the main contractor. The subcontracting companies hired will depend strictly on the specific area in which they need to offer their services.

Obligations of Subcontractors

The obligations of subcontractors will derive from the contract through which they committed to the contractor to execute the specific work referred to in the contract under its terms and conditions.

Relationship Between the Parties

The relationship between the contractor and the subcontractor is direct. However, there can be situations where it is stipulated in the subcontract that all the obligations incumbent upon the contractor are assumed by the subcontractor, thereby making the subcontractor equally obligated.

Private Construction Contracts

In private contracts, the financiers are usually banking institutions, especially for small to medium-sized projects.

Traditionally, two models have been implemented:

1. The companies contracting the work opt to self-finance the execution of the contract.

2. In other cases, the contracting companies request the contractor to finance the execution of the project and include the cost of financing within the price.

Public Construction Contracts

In Panama, these contracts are primarily financed by the State, under the supervision of the Office of the Comptroller General of the Republic, which is responsible for managing and controlling the public resources of the country.

Occasionally, for large-scale projects that can reach hundreds of millions of dollars, the State seeks support from international entities. Sometimes, these entities offer sponsorship or specific financing as part of their international support.

The Office of the Comptroller General is the entity responsible for approving the payment of payrolls, financing, and monthly or annual payments, and for granting its endorsement.

Rights and Obligations of Financiers Under Construction Contracts

The rights of financiers under construction contracts include:

• to receive timely payments and returns as agreed upon in the financing contract;
• to monitor and ensure the proper use of the financed funds; and
• to require regular reporting on the progress and financial status of the project.

The obligations of financiers under construction contracts include:

• to disburse funds according to the agreed schedule and terms;
• to provide financial oversight and support as necessary to ensure the project’s financial health; and
• to comply with any legal and regulatory requirements related to the financing agreement.

Relationship Between Financiers, Subcontractors, Employers and Contractors

In Panama, the relationship between financiers, subcontractors, employers and contractors is typically defined by the contractual agreements established among them. The financier’s primary relationship is with the employer or the contracting company, which in turn has direct contractual relationships with the main contractor.

The main contractor may subcontract parts of the project to specialised subcontractors, who are directly accountable to the main contractor but not to the financier.

• Employer and financier: The employer (or contracting company) arranges the financing, either through self-financing, bank loans or other financial arrangements. The financier monitors the use of funds and ensures compliance with the financial terms.
• Contractor and financier: If the contractor is providing financing as part of the contract, the contractor includes the cost of financing in the project price and is responsible for managing the financial aspects of the project.
• Contractor and subcontractor: The contractor directly manages subcontractors and ensures they fulfil their obligations. The subcontractors’ obligations are defined by their contract with the main contractor, not with the financier or the employer directly.
• Employer and contractor: The employer has a direct contractual relationship with the contractor, outlining the terms of the project’s execution, payment schedules and performance requirements. The contractor is responsible for delivering the project as per the agreed terms and ensuring that subcontractors meet their obligations.

For further details, see 2.1 The Employer, 2.2 The Contractor and 2.3 The Subcontractors.

In Panama, companies dedicated to this sector generally specialise in design and architecture. These companies are usually composed of architects specialised in executing such works.

Furthermore, both individual architects and the design firms to which they belong must be authorised by the Panamanian Board of Engineering and Architecture.

Rights and Obligations of the Designer

Generally, the obligations of the designer in a construction contract include fulfilling the object of the contract, that is, creating the design of the work to be constructed; delivering the plans and design to the employer or owner of the work with the approvals; and, upon completion of the design, transferring the ownership and rights of the design to the owner of the work.

As for their rights, the designer has the right to receive payment for the design work executed within the established timeframe.

Relationship of the Parties

The relationship in this context depends exclusively on the form of contracting, which can vary. The employer may either contract the entire work with the contractor, including its design, or the employer may first contract the design and then, with another party or the same one, contract the execution and construction of the designed infrastructure.

Complete Contracting of the Work

If the employer decides to contract the entire work with the same contractor, the relationship remains between the employer and the contractor.

Separate Contracting of Design and Construction

If the project owner contracts the design and construction of the work separately, the relationship would be between the owner and the designer, and between the owner and the contractor.

Scope of Works in Public Procurement

In public procurement, the scope is measured based on the specifications dictated by the entity requiring the execution of the work. These specifications are included in:

• Statement of Work:
1. General Conditions of the Statement.
2. Specific Conditions of the Statement.
• Work Contract.
• Addenda to the Contract.

Scope of Works in Private Procurement

To understand the specifications or the scope of the work to be contracted in private matters, they are usually provided either through private bidding or without bidding.

• Private Bidding: If the employer wishes to execute the project using this contracting method, the specifications are included in the Request for Proposal (RFP). This document contains the specifications that the work must meet, allowing interested contractors to present their proposals.
• Without Bidding: Alternatively, if no bidding process is involved, the employer establishes the scope of the work through the Terms of Reference (TOR), which include all the information and specifications the work must meet.

Generally, modifications to the scope and price of the work are stipulated in the contract. Additionally, in public contracts, they are also regulated by the law and the Bidding Terms of the respective project. These regulations apply whether the changes are requested by the employer or the contractor.

In both public and private contracts, Unilateral Modifications and Change Orders are commonly included. These documents contain the changes or variations to the scope of the contract.

Modifications to the Scope in Private Construction Contracts

These types of contracts typically stipulate that the employer has complete freedom to request or order any modification to the work, as long as these adjustments do not substantially alter the object of the contract. In cases where the employer requests the modifications, they must notify the contractor and the insurance companies (if any) of such changes.

Regarding contractors, generally, to make modifications, they must request prior consent from the employer. Once this consent is granted, usually following the procedure established in the contract for processing a change order, it authorises the contractor to execute the requested modifications according to the terms agreed upon between the employer and the contractor in the respective change order.

Modifications to the Scope in Public Construction Contracts

As previously mentioned, in these types of contracts, the conditions for modifying the scope of the work are stipulated in the contract and the Bidding Terms. If not specified, Law 22 of 2006 establishes these conditions, which include:

1. The class and object of the contract cannot be modified.

2. The new costs will require authorisation or approval from the entities that reviewed the main contract according to the amount.

3. Any modifications made to the contract or purchase order will form part of it, considering the main contract or purchase order and its modifications as a single contractual relationship for all legal purposes.

4. When the contractor requests an addendum for a cost increase, it shall be analysed by the contracting entity in order to determine its technical and/or economic feasibility. The unit price of a line item or the total value of the contract may be revised if the modifications alter the quantities of the line item or the total or initial value of the contract by 25% or more, respectively. The sum of all modifications made to a procurement during its term shall not exceed 25% of the total amount originally agreed. In exceptional cases, when the modifications exceed 25%, the contracting entity must technically and economically justify this increase in costs, for which it shall require the approval of the National Economic Council.

Regarding the costs related to the time given for the variations, in both public and private contracts, this will depend on what is stipulated in the contract. However, all changes or variations must be technically and economically approved by the employer. Usually, for their recognition, it is required that these variations were not caused by the contractor.

In Panama, the allocation of responsibilities strictly depends on the contracting modality.

EPC Contracts (Engineering, Procurement and Construction)

In an EPC contract, the contractor assumes full responsibility for the design. The project owner can directly hold the contractor accountable for the design. Furthermore, it is generally stipulated in a contractual clause that the project owner disclaims any responsibility for the accuracy of the information provided.

Separate Design and Construction Contracts

When the design and construction of the project are contracted separately, the designer is typically responsible for the design towards the project owner, while the contractor is responsible for the execution of the work towards the project owner.

For more details, see 2.5 The Designer.

In general, in Panama, regarding the construction process, the employer is responsible for paying the contractor in the manner agreed upon in the contract.

On the other hand, the contractor, during the construction process, assumes a greater responsibility towards the employer. The contractor must fulfil the project objective according to the form and timeframe stipulated in the contract. Additionally, the contractor is liable to the employer in case the work presents any defects or flaws.

However, responsibilities may vary from one contract to another depending on the kind of the contract, as EPC, design and construction, just design or just construction. At the end, responsibilities depend on the specific type of contract.

In construction contracts, the handling of responsibility for the construction site, its cleaning and any findings that occur during the project execution is generally stipulated in the contract clauses. The contractor must inform the employer about these situations, indicating the possible impacts and providing recommendations for addressing them.

In Panama, there is no legislation that specifically determines who is responsible for the construction site. Instead, this responsibility is agreed upon between the parties to the contract.

In Panama, generally, and always depending on the type of construction, different types of permits are required both preliminarily before the start of, during, and upon completion of the construction. These permits include:

• construction permit;
• occupancy permit; and
• occupancy certificate (inspection of electrical structures and fire detection and extinguishing systems, if present).

The requirement for these permits arises from the agreements reached by the municipal authorities (municipalities) where the construction site is located. These agreements are commonly modified over the years and in accordance with new construction styles, requiring more or fewer requirements for their processing.

In construction contracts in Panama, it is generally established that the maintenance of the work is the owner’s responsibility once it has been handed over.

In situations where the work is handed over in parts (substantial completion), it is stipulated that the maintenance and care of the delivered parts fall to the owner. However, the contractor, while continuing with the execution of the remaining work, must take precautions not to deteriorate, diminish or damage the parts already delivered.

In general terms, maintenance involves the care, cleaning and supervision of the delivered asset, ensuring it remains in good condition and that periodic inspections and upkeep are carried out as established in the maintenance manuals, depending on the area, material or equipment used.

It is common for large-scale construction contracts to include clauses stipulating that the contractor is responsible for the financing of the project or its operation for a certain period once construction is completed.

The commissioning tests or execution of the work (according to the intended purpose) are usually carried out by the project inspector, who sometimes is the owner of the work or a third party hired for this purpose.

In any case, the responsibility of demonstrating that all systems, spaces, equipment, furnishings (if any) and infrastructure are in good condition and functioning properly lies with the contractor in charge of the construction. It is the contractor who requests the necessary inspections and tests to be able to deliver the work or a portion of it.

To carry out these tests, the contractor must have completed the execution of the work, whether totally or partially (if only a part of the work is to be delivered), and subsequently request that the owner and/or their inspector proceed with the inspection to verify that the work, its equipment and its systems meet the contractual objectives.

All these processes are developed according to what is agreed upon in the contract, following an order in which each stage directly influences the next.

The process of completing the work is generally finalised when all necessary inspections and tests (equipment, systems, structures) have been conducted to determine whether the work meets the objective for which it was contracted. If it does not meet or only partially meets the objective, the owner of the work can decide whether to request the contractor to remedy the errors or, alternatively, accept the work as is and enforce the corresponding warranties depending on the severity of the defect. If the work meets the contracted objective, the next step is the acceptance of the work.

This process can be applied to both the partial and total delivery and acceptance of the work.

Once the work, or a part of it, is delivered to the owner’s satisfaction, the contract settlement can proceed according to the agreed terms. This process involves terminating the contractual relationship between the parties, settling any outstanding payments, and fulfilling the final obligations and formalities of the contract, resulting in its completion.

Generally, the owner of the work would have the following methods of claiming against the contractor for the existence of defects in the work:

• Direct claim to the contractor: The owner can directly request the contractor to remedy the defects found.
• Execution of performance bond: If a performance bond is available, the owner can request its execution, so the insurance company either undertakes the remediation work or provides the owner with the necessary amount to carry out the remediation.
• Judicial or arbitral claim: The owner can pursue a claim against the contractor through judicial or arbitral means, depending on what the contract specifies for dispute resolution.

These claims are directed at the contractor if they were responsible for both construction and design. If the design was contracted separately, the owner would claim against the contractor for construction defects and/or against the designer for design defects.

The methods of claim for the owner do not presumptively change once the work is accepted, as the periods for claims start to be counted only after acceptance. Once these legal and contractual periods for the owner to claim have expired, the right to claim will be time-barred.

The structure of the contract and the methodology employed will strictly depend on the type of contracting, whether it be EPC, construction-only, or construction and supply, among others.

In private construction contracts, the price is established through prior negotiation with the contractor, who specifies the total amount to be charged for the execution of the work, taking into account the obligations according to the type of contract.

Conversely, in public construction contracts, the price is determined based on the bids submitted by the bidding contractors, following the contractor selection procedure proposed in the terms of reference.

The price of the work may include the costs of materials, labour, supplies and equipment, among others, as stipulated in the terms of reference and the contract.

In Panama, it is very common for both private and public construction contracts to use the methodology of payment by work progress.

In Panama, construction contracts generally use indexing to calculate certain price indices, such as those for materials or supply equipment. Initially, these prices are calculated in a specific manner, but due to fluctuations in costs, they must be adjusted to avoid imbalances between the parties.

It is common to use price indexing to calculate the costs of cement, metals and equipment used in the project, due to the significant and constant price variations.

In general terms, upon signing the contract, the contractor assumes the general risk of the price of the work, as they commit to the agreed price. However, at times, the owner assumes the risks caused by price fluctuations due to situations beyond the contractor’s control, provided that this is stipulated in the contract.

In case of non-payment by the employer, the contractor will have the right to apply the measures agreed upon in the contract.

These measures may include anything from the payment of late interest to the suspension of the execution of the work. Nevertheless, there are instances where the contracting parties agree that, in the event of disputes relating to payment, the contractor is obligated to continue the work.

Generally, when the employer is in arrears regarding payment, before suspending the execution of the works, the contractor usually communicates this situation to the employer, requesting that the breach be remedied so that the execution of the contract is not affected. If no agreement is reached, the contractor may claim the amounts owed from the employer using the dispute resolution or claim method agreed upon in the contract.

At the time of signing the contract, it is usually agreed that the employer will provide an advance payment to the contractor for the initiation of the project. Once the project has commenced, payments will be made as partial monthly invoices are issued based on the progress of the work. See 4.1 Contract Price.

The most common billing method in construction contracts is monthly partial billing by work progress. In this method, the contractor submits a monthly invoice to the employer, which includes the construction milestones achieved during the billing period.

This billing is reviewed by the contractor and, in the case of public contracts, also by the Office of the Comptroller General of the Republic. The Office of the Comptroller General verifies both economically and technically that these milestones have been met before approving the payment of the invoice to the contractor.

Planning in construction contracts begins with the contractor presenting an initial schedule for the approval of the client.

After approval, the client oversees its compliance, while the contractor is responsible for its monthly updates.

To ensure effective planning, practices such as stage payments are used, where the contract includes specific milestones that trigger progressive payments. Progress certificates, which are periodic documents that validate the progress of the work and serve as the basis for payments, are also employed.

The start date is generally the date of the notice to proceed, and payment is made as agreed upon by the parties to the contract.

In construction contracts used in Panama, penalty clauses are generally agreed upon, and applied to the contractor for delays in the delivery of the work.

The contractor is obligated to make the necessary adjustments and provisions to mitigate delays in the work as soon as possible, in order not to affect the execution of the established schedule and to deliver the work within the agreed timeframe.

In the event of delays, the contractor assumes the costs caused by these delays, provided they are attributable to the contractor.

When the contract stipulates that continuous delay in the execution of the work may be considered a contractual breach, as it prevents the delivery of the work within the stipulated timeframe, this may lead to the termination or rescission of the contract.

The employer may enforce the obligation and request that the contractor make the necessary adjustments and modifications to the work to complete the project within the stipulated timeframe.

If there is indeed a delay in the delivery of the work, the employer may apply the corresponding penalties stipulated in the contract or seek compensation for damages as appropriate.

Additionally, it is common in construction contracts to require the contractor to provide bonds to guarantee the obligation, which the employer has the right to execute if the obligation has not been fulfilled. This enables the employer to complete the execution of the work or the missing milestones.

The contractor often requests extensions to the contract through letters or communications in which they present arguments and evidence justifying the extension of the contractual period.

Contractual extensions are generally granted when the project cannot be completed by the scheduled date, mostly due to causes not attributable to the contractor, such as force majeure, unforeseen events or unexpected situations.

The extension of the period is regularly established by considering the facts that caused it, allowing for a determined time for the extension and including the necessary adjustments and plans to execute the contract in the shortest possible time.

Force majeure is defined in Article 34-D of the Civil Code as a situation caused by human actions that cannot be resisted, such as acts of authority exercised by public officials or capture by enemies. Fortuitous events, on the other hand, arise from unpredictable natural occurrences such as earthquakes or fires.

Panamanian law distinguishes between force majeure and fortuitous events, although both have the same effect of releasing the debtor from liability for non-compliance due to the event.

It is possible to limit or exclude certain circumstances from being classified as force majeure through specific contractual provisions. For example, the parties may agree that labour strikes, material shortages or the contractor’s financial problems will not be considered as force majeure.

The typical consequences of force majeure include the release of the debtor from liability for non-compliance and the possible extension of the contractual period. If the force majeure event makes it impossible to fulfil the obligation, the debtor is exempt from fulfilling that obligation until the force majeure ceases.

The law establishes general parameters, but the contracting parties have the freedom to agree on specific events that will be considered unforeseen circumstances.

The Civil Code, in its Articles 1161-A, 1161-B and 1161-C, allows one of the parties to request the termination or modification of the contract if an extraordinary and unforeseeable event makes its fulfilment excessively burdensome. These parameters are used for bilateral contracts of continuous or periodic execution and aim to restore contractual balance.

In construction contracts, the parties typically agree on the conditions under which certain events will be considered unforeseen circumstances and establish mechanisms for the termination, modification or renegotiation of the contract.

Disruption is not specifically regulated by law as a reason for extending the period or compensating. The extension of a period due to disruption depends on what is contractually agreed upon between the parties.

In construction contracts, disruption is typically established, measured and demonstrated through the collection and analysis of project schedules (initial and updated), work records, progress reports, contractual correspondence or documentation of additional costs.

In Panama, there are three types of liabilities that cannot be contractually excluded.

The decennial liability, according to Article 1343 of the Civil Code, is one of them. This liability obliges the builder to compensate for damages caused by the ruin of a building due to construction defects within a period of ten years from the completion of the work, and 15 years if the defect is due to the contractor’s failure to meet the requirements or guidelines specified in the contract.

Additionally, liability arising from fraud is enforceable in all obligations according to Article 987 of the Civil Code, and any waiver of the right to take action to enforce it is null and void. Liability for negligence, established in Article 988, is also enforceable in the breach of all kinds of obligations, although the courts may moderate it depending on the case.

These liabilities cannot be contractually excluded and must be assumed in accordance with the law.

The concepts of fraud and gross negligence are clearly defined and governed by the provisions of the Civil Code.

Article 34-C of the Civil Code defines gross fault, gross negligence or culpa lata as the lack of care in managing the affairs of others with the same care that even negligent or imprudent people would use in their own matters. In civil matters, this fault is equivalent to wilful misconduct.

Wilful misconduct, on the other hand, is described as the positive intention to cause harm to another person or their property.

The parties may restrict their liability contractually. However, these limitations are generally not applicable when the party reducing its liability acts with fraud or gross negligence.

Liability limitations often include clauses that set compensation that does not exceed certain percentages of the contract value, as well as penalties for non-compliance.

Article 1040 of the Civil Code establishes that penalties and compensation for damages cannot be simultaneously requested, unless expressly stipulated in the contract. It is always at the creditor’s discretion to request either compensation or penalties.

Therefore, it is crucial that the contract clearly specifies that both sanctions – compensation and penalties – can be applied simultaneously. If the contract does not establish this, the rule could compel the application of only one of the sanctions.

In Panama, typical compensation usually covers damages and losses caused by one party to another.

Article 986 of the Civil Code establishes that those who commit wilful misconduct, negligence or delay in fulfilling their obligations, or in any way contravene their terms, are subject to compensation for the damages and losses caused.

Likewise, Article 991 specifies that reparation includes both the value of the loss suffered and the gain that the creditor has failed to obtain.

Various guarantees are used to limit the risk of the parties to construction contracts. Some examples of commonly used guarantees are:

• Parent company guarantee: The parent company may be required to guarantee the joint fulfilment of the contractual obligations of its subsidiary.
• Performance bond: This ensures that the contractor will complete the project according to the terms of the contract.
• Advance payment bond: This guarantees the correct use of advances received by the contractor.
• Warranty or defect bond: This ensures that any construction defect or flaw will be repaired during a specific period after the project’s completion (see 6.1 Exclusion of Liability).

The use of these guarantees depends on what the parties agree upon contractually. There is no specific restriction on the possibility of establishing guarantees, and the parties may agree on the guarantees they deem necessary.

In the case of public contracts, guarantees are mandatory according to the applicable regulations. These guarantees must comply with the requirements established in the Public Procurement Law.

The scope of these guarantees generally includes the obligation to cover any contractual breach, ensure the correct use of advanced funds, and guarantee the repair of any construction defect identified during the warranty period.

In construction contracts in Panama, it is common for the parties to contract insurance policies to protect themselves against specific risks. The most common insurance type is Construction All Risks (CAR) insurance, which is generally provided by the contractor and covers material damage to the insured properties during the construction process. The interested party can seek the inclusion of additional coverages such as earthquakes, cyclones, damage caused by the contractor, and non-contractual civil liability, protecting against claims for third-party damages that may arise during construction.

The contractual provisions of a construction contract regarding the consequences of the insolvency of one of the parties are regulated by Law 12 of 2016, Article 39.

This law establishes several financial protection measures during the reorganisation bankruptcy process. Below is a detailed description of the regulatory provision:

• Maintenance of ongoing contracts: All contracts signed by the debtor will remain in force along with their payment conditions. They cannot be unilaterally terminated early, nor can their early fulfilment be demanded, nor can the guarantees contracted be enforced by invoking the initiation of a reorganisation bankruptcy process as the cause.
• Authorisation to contract with the state: The debtor cannot be disqualified or prohibited from contracting with state entities due to undergoing a reorganisation bankruptcy process, nor can this situation be invoked as a cause for the administrative termination of the contract.

The judge of the case will declare the nullity of actions that contravene these provisions, through an order that is not subject to appeal.

The allocation of risks in construction contracts is negotiated between the parties and can vary depending on the project. Although risks are generally assumed individually and independently, the parties may agree to share certain risks, such as variations in material costs, delays due to unforeseen weather conditions, or changes in government regulations.

To share risks, the contract must clearly specify the terms and conditions, including how additional costs and responsibilities will be managed.

Shared risks are evaluated considering factors such as additional construction time, increased project value and possible alterations in project conditions, ensuring an equitable distribution of contingencies as agreed upon by the parties.

In Panama, when discussing construction contracts, the provisions relating to personnel are generally intended to be handled by the contractor, as the contractor is typically entrusted with the total execution of the project, including the provision of human resources responsible for carrying out the project.

Thus, the contractor is responsible for hiring, supervising and paying their personnel, including any subcontractors (if any); likewise, these individuals report to the contractor regarding the execution of their work.

See also 2.3 The Subcontractors.

In Panama, the trend in public and private construction contracts is generally more inclined to accept subcontracting, as subcontractor companies are often specialised in technical and structural work where the main contractor needs support.

In some public construction contracts, a percentage cap on the amount of construction work that can be subcontracted is often stipulated.

See also 2.3 The Subcontractors.

In the vast majority of construction contracts executed in Panama, one or more clauses relating to the intellectual property rights of the work are included.

These clauses stipulate that the contractor, whether they are responsible for the design or for the separate construction, or whether they are the general contractor, commits to transferring to the owner of the work both the executed project and the rights over it.

This transfer implies not only the construction rights but also the related design and creation rights associated with the project.

As a general rule, according to Article 1009 of the Civil Code, an aggrieved party may choose between performance or termination of the obligation, with damages and interest in both cases.

If no penalty is established in the contract, then the affected party may seek the complete reparation of the damage. If a penalty is established in the contract, the affected party must consider Article 1040 of the Civil Code. See also 6.3 Limitation of Liability and 9.3 Sole Remedy Clauses.

It is a common practice for the parties to contractually limit the remedies available to them; the ability of the parties to limit the damages is quite broad in Panama and will depend on what is contractually agreed upon. See 7.1 Indemnities and 9.4 Excluded Damages.

In Panama, sole remedy clauses are not commonly used in construction contracts, but it is common to establish penalty for delay clauses. If this type of clause is included in the contract, the parties must take into account Article 1040 of the Civil Code, which establishes that penalties and compensation for damages cannot be simultaneously requested, unless expressly stipulated in the contract. It is always at the creditor’s discretion to request either compensation or penalties.

The parties are free to agree on or exclude liability in the contract, except for wilful misconduct and gross negligence (see 6.1 Exclusion of Liability and 6.2 Wilful Misconduct and Gross Negligence).

The parties may agree to exclude certain types of damages, such as indirect, consequential or punitive damages. However, there is no fixed standard for the exclusion of damages, and each contract can have specific provisions tailored to the needs and agreements of the parties.

Retention and suspension rights are not generally excluded contractually; their application depends on what the parties have agreed.

The Civil Code establishes certain grounds for the termination of a construction contract. Article 1346 states that the owner has the right to withdraw from the construction at any time, even if the work has already begun.

This right is subject to the obligation to compensate the contractor for all incurred expenses, the work performed, and the profit that the contractor would have obtained from the completed work.

Additionally, Article 1347 of the same Code provides for the termination of the contract in the event of the contractor’s death, when the assignment was made based on the contractor’s personal qualities, or if the contractor cannot complete the work for reasons beyond their control.

This is without prejudice to the termination grounds agreed upon by the parties and the compensations that may have been stipulated, as the case may be.

In Panama, the courts that initially have jurisdiction to resolve disputes arising from construction contracts are the “Civil Jurisdiction Courts”. This is because the relationship derived from these types of contracts involves civil and commercial obligations, and according to Panamanian law, the competent courts to handle these types of obligations are the Civil Courts and, in the case of appeals, all higher instances of these (Civil Superior Courts, Supreme Court of Justice).

Additionally, in public contracts, the contracting entity has the authority to administratively terminate the contract if it considers that the contractor has incurred any of the grounds for termination contained in the law, the Terms of Reference and the contract.

In this case, the court responsible for resolving such a dispute (solely arising from the administrative termination of the contract) is the Administrative Tribunal for Public Procurement.

In Panamanian jurisdiction, there are alternative dispute resolution methods, which can be:

• arbitration;
• mediation; or
• conciliation.

Arbitration is regulated by Article 202 of the Political Constitution of Panama and by Law 131 of 31 December 2013 (which regulates national and international commercial arbitration in Panama).

Mediation and conciliation are regulated starting from Title II of Decree Law No. 5 of 8 July 1999.