Construction Law 2022

Last Updated June 09, 2022

Peru

Law and Practice

Authors



Navarro Sologuren, Paredes & Gray is a law firm that specialises in construction law, with 26 years of experience in domestic and international projects, and in ADR related to construction matters. The lawyers at NPG have the advantage of wide knowledge of the construction business and the ability to understand engineering complexities. They are focused on reducing risk for their clients, thereby making their service a solid investment. The professional practice and the core business of the firm is construction projects, where the lawyers have experience in, among others, hydropower plants, airports, highways, theatres, high complexes, underground parking lots, hotels, hospitals, water and sewerage systems, pipelines, ports, schools, universities, cities, fire systems, and sports infrastructure. The firm provides advice in engineering, construction and dispute resolution at all stages of the construction process.

Peru is a presidential representative democratic republic, divided at central and regional government levels and with provincial municipalities across the country. It operates under the Constitución Política del Perú de 1993 (Political Constitution of Peru of 1993 or the "1993 Constitution").

Since the early 1990s, the country has embarked on a series of reforms, of which fiscal consolidation, openness to trade, exchange rate flexibility, financial liberalisation, higher reliance on market signals and prudent monetary policy, including a strong build-up of reserves, have been key components, largely due to the 1993 Constitution.

Those reforms have led to several statutes aimed at attracting foreign investments into Peru and which govern different schemes in the construction industry. Some of the principal laws are listed below. 

  • Ley de Contrataciones del Estado – Ley No 30225 ("Public Procurement Law") deals with the possibility for private companies to compete under a basic scheme of design/bid/build to contract services, goods or works with the Peruvian government. 
  • Decreto Legislativo que regula la Promoción de la inversión Privada mediante Asociaciones Público Privadas y Proyectos en Activos (Legislative Decree that Regulates the Promotion of Private Investment through Public-Private Partnerships and Projects in Assets) (Peru), also known as Decreto Legislativo No 1362 ("Public-Private Partnership Law"), regulates the regime in which private companies invest and build big infrastructure projects to later recover the investment on a long-term basis by operating the infrastructure under the PPP scheme (in many kinds of modalities: BOT, BOOT, DBOT, DCMF).
  • Ley que Impulsa la Inversión Pública Regional y Local con Participación del Sector Privado (Law that Promotes Local and Regional Public Investment with Participation of the Private Sector) (Peru), also known as Ley No 29230 ("Works for Taxes Law"), deals with the implementation of priority public infrastructure projects by allowing companies to fund and implement public projects and later recover the total amount of investment from their third category income tax.

There are no specific standard construction forms in Peru; most contracts are drawn up for the specific case. Nevertheless, FIDIC formats are becoming more frequent, including the FIDIC Red Book, FIDIC Pink Book, FIDIC Yellow Book, FIDIC Silver Book, FIDIC Blue Book and FIDIC Emerald Book.

In addition, there is growing interest in other standard forms of contracts, such as the NEC3 and NEC4 suites. The New Engineering Contract (NEC) was first used in Peru for the construction of the infrastructure for the Pan American Games Lima 2019. NEC3 is being used for the Reconstruction with Changes Project – known as the ARCC for its name in Spanish – a project with many packages to rebuild schools, hospitals, roads and other works in the north of Peru. 

On the other hand, international standard contracts were regulated a couple of years ago for the first time in Peru through Emergency Decree No 021-2020 and its Regulation and – although not mandatory – the use of FIDIC, NEC, ENAA, FAC-1, PPC 2000 and others is recommended for public projects called “Special Projects of Public Investment” (Proyectos Especiales de Inversión Pública or PEIP).

Finally, the Peruvian government has contracted an international law firm to work exclusively on a standard contract for public-private partnership projects; hence, this will probably be the first standard form for infrastructure projects for the Peruvian construction industry.

The Peruvian construction market was hit hard at the very beginning of the COVID-19 crisis, due to the restrictions imposed by the Peruvian government on 15 March 2020, especially the mandatory curfew. These restrictions forced many infrastructure project activities to be suspended, and impeded the commencement of new projects. According to the Instituto Peruano de Economía, the Peruvian construction market plunged by 90.4% in April 2020, even more drastically than the global GDP (-39.9%).

Since then, the Peruvian construction market has been recovering gradually, as the restrictions imposed by the Peruvian government were lifted. In August 2020, the Peruvian construction market reached -6.5%, a dramatic increase since April’s plunge, according to the Instituto Peruano de Economía.

In 2021, the Peruvian construction market has steadily rallied, supported by mining and infrastructure construction projects, and investments from the ARCC and some regional governments, especially those of Ancash, Ica, Piura and Tacna.

As the COVID-19 pandemic subsides worldwide, there are some new opportunities in the Peruvian construction market. However, other factors – such as the Ukrainian political situation and domestic political issues – have increased prices of construction materials.

All kinds of companies and institutions act as employers of construction projects in Peru. However, the employers of the most important projects are public entities and private mine employers, concessionaires of public infrastructure and some industrial project employers.

Employer's Rights

Regarding the rights employers have under Peruvian law, they have the right to expect and demand from the contractors the specific result (eg, a building, road, hydroelectric plant, etc) agreed upon in the respective construction contract. Also, they have the right to take over the specific result referred to at the moment specified in the contract.

Employers are entitled to monitor and supervise the works during the execution phase and also have the right to ask for any defects encountered after the handover of the works to be made good. This obligation to make good defects and hold the employer blameless includes apparent and latent defects, as long as the employer provides notice to the contractor within six months of the handover of the works in the case of apparent defects, and within six months of the discovery of a latent defect within a period of five years following the handover of the works.

Employer's Obligations

The employer's main obligation is to pay the contractor in accordance with the contract. Other obligations include granting access to the land on which the works will take place, etc.

Relationship Between Employer and Contractor

The employer and the contractor normally develop a non-collaborative type of relationship, but this is starting to change as the Pan American Games Lima 2019 employed the NEC3 standard form of contracts and they have proved to be a wonderful tool due, among other things, to the collaborative approach they encourage. 

National and international contractors execute public and private projects in Peru.

Contractors' Rights

In Peru, contractors' rights include being paid in accordance with the terms of the contract and to receive all costs incurred and the entire profit if the employer decides to unilaterally terminate the contract. Extensions of time are not specifically regulated in the Peruvian Civil Code, but if they are attributable to the employer, they are granted, together with the associated cost under the contractual liability regulation of the Peruvian Civil Code. 

All kinds of subcontractors act in Peru. They are necessary for projects as they are better equipped to manage the risk in the areas of their specific expertise. They normally have a direct relationship with the contractor and have no relationship with either the employer or the financiers. Their rights are not specifically regulated in the Peruvian Civil Code but the same rules of this body of law that apply to contractors in construction contracts will also apply to subcontractors. Regarding obligations, it is worth mentioning that the Peruvian Civil Code establishes that both the contractor and the subcontractor are severally and jointly liable before the employer for the part of the works executed by the subcontractor.

National and international banks, as well as multilateral development institutions, provide funds for projects in Peru. They establish a relationship with the employer and have no relationship with the contractors and subcontractors.

Financiers of construction projects usually demand that employers stipulate certain conditions in their contracts with contractors. The financiers may require that the employer establishes:

  • a single point of liability in the construction contract (including design, procurement, construction and operation of the project);
  • acceptable levels of liability (depending on the type of project, this is usually between 10% and 40%);
  • a type of contract acceptable to the financiers (normally a fixed-priced or lump-sum EPC contract); and
  • a prohibition to accept variations and/or to make changes to the contract without the prior consent of the financiers, among others.

Finally, multilateral development institutions usually oblige employers to use international construction contract model forms such as the FIDIC forms.

It is key to have a proper determination of the scope of the works. However, there is no preferred method of description of the scope of the works. While sophisticated employers establish clear requirements and specifications, the vast majority of them do not employ any type of reliable method to determine the scope of the works. Consequently, disputes associated with the scope of the works and variations are not uncommon.

However, if the employer decides to use the traditional design/bid/build project delivery system, uncertainties related to the scope of the works are clearly diminished. Design/bid/build is the preferred project delivery system of public and private employers in Peru.

Whether a variation is requested by the employer or the contractor, variations are accepted or refused in Peru in consideration of the agreed scope of the works. Typically, an exercise of comparison between the agreed scope of the works and the request for variation is made.

Parties normally negotiate in the contract the specific conditions for recognising variations. While the Peruvian Civil Code allows implied construction contracts, it does not allow variations if approval by the employer is not in writing.

There is no specific regulation on how to determine the price of variations. Typically, the prices of the originally agreed activities are used, or at least used as a reference.

The design process is determined by the employer’s decision on which project delivery system to employ in the project.

Design/Bid/Build Project Delivery System

If the employer decides to use a traditional design/bid/build project delivery system, the employer will be exclusively in charge of the design and the contractor will be exclusively responsible for the construction. Therefore, if any error or inaccuracy in the design is found during the execution of the works, the design solution is normally provided by the employer and the employer will bear the costs associated with the event. Also, an extension of time is granted in favour of the contractor if the critical path is affected.

Design/Build Project Delivery System

If the employer decides to use a design/build project delivery system, the employer will be responsible for establishing the requirements and the contractor will be in charge of designing, equipping and building the project in accordance with the employer’s requirements. That said, the employer is normally liable for the employer’s requirements and the prescriptive information the employer provided to the contractor, and the contractor is liable for meeting the employer’s requirements. As mentioned, this obligation includes designing, equipping and building the project.

Managing Project Delivery System

If the employer decides to employ a managing type of project delivery system, how the design is developed very much depends on the type of risk allocation the employer decides to negotiate with the manager. If the employer decides to use an “at risk” type of manager, the design will be the liability of the manager whether or not the manager does the design himself or subcontracts a designer. If the employer decides to use an “agency” type of manager, the design execution and its liability will be borne by the designer hired by the employer and to some extent by the employer if the employer provides prescriptive information.

Collaborative and Hybrid Project Delivery Systems

If the employer decides to employ a collaborative type of project delivery system, the design is executed as agreed by both parties and the liability is normally shared between them and other participants. However, this does not apply in the case of hybrid types of project delivery systems in which the project may start under a collaborative approach but radically changes at some point agreed by the parties, where the parties decide to employ a different type of delivery system such as design/build. Regarding collaboration, the use of a broad type of collaborative contract (such as FAC1, or an alliancing contract) is now actively being considered and employed by some sophisticated parties.

See 3.3 Design.

Responsibilities for the status of the construction site vary depending on the type of contract. The baseline is that employers are responsible for the land and its access as well as for the subsurface conditions established in the engineering studies requested by the employer. Contractors, on the other hand, are responsible for all conditions an experienced contractor may expect from a careful analysis of the information provided by the employer, or from information that should be available to any such experienced and skilled contractor.

If unforeseen ground conditions are found, the above-described test is applied. The Peruvian Civil Code regulates that the contractor is responsible for the ground conditions if the contractor carried out the design and ground studies. Archaeological and pollution regulation protect any archaeological finds, and provide the employer and the contractor with specific care standards in the event of polluted ground conditions and also guide them on preserving the environmental conditions of the site.

A construction licence is generally necessary for each and every construction project. However, a licence can only be granted for projects for which a declaration of urban status has been obtained, under which the municipality establishes that public services are available for the future users of the project. This declaration of urban status is required for projects to be built in urban areas or urban expansion areas. These two authorisations are an employer’s responsibility, but the employer could agree with the contractor that procuring these authorisations will be the responsibility of the contractor. However, in these cases the employer will remain liable under the law before the municipality and third parties as the one responsible for obtaining these authorisations. Also, depending on the type of construction project and its specific location, other prerequisites for obtaining the construction licence may be applicable, such as a certificate of non-existence of archaeological remains, an environmental impact assessment, etc. Again, the employer is responsible for obtaining these licences, but the employer could agree with the contractor that it will be the responsibility of the contractor to obtain them. 

In addition to these licences or authorisations, other licences may be required that relate to the activities of the contractor, such as authorisations for the use of explosives, the improvement of roads to transport components, the use of bridges, etc. Such licences or authorisations are naturally the responsibility of the contractor and are regulated by the law.

Employers are typically responsible for the maintenance of the works, as after the handover of the works they operate and maintain what was built by the contractors, except under certain EPC and DBO types of contract. In the first scenario, the contractor operates the works for a certain agreed period of time, while in the second scenario the contractor (generally a concessionaire) is permanently in charge of the operation and maintenance of the works.

In Peru, operation is generally controlled by the employer, while financing is in the hands of the banks and multilateral institutions such as the World Bank and the Inter-American Development Bank. Design, build, operation and transfer types of contract are normally part of concessions of PPP types of contract.

The typical process for tests for completion of the works in Peru is normally led by the contractor, who has previously made arrangements with the employer's supervisor (normally a consultant engineering company hired by the employer to monitor the works on the employer’s behalf). Typically, once the contractor considers that the works have been completed, the contractor will issue a notice to the supervisor. If the supervisor agrees that the works seem complete and that therefore the test for completion is warranted, the supervisor performs these tests together with the contractor. Defects found as a result of these tests are normally divided into major and minor defects, and if the status of the works allows regular and safe use and operation of the works, the handover will take place and the contractor must make good all the defects, whether major or minor. That said, in accordance with the Peruvian Civil Code, it is the employer’s responsibility to test the works. If the employer does not inspect or test the works and proceeds with the handover, it shall be deemed that the works have been completed to the required standard.

See 3.9 Tests.

The Peruvian Civil Code establishes that contractors shall be held liable for defects that appear in the works for up to six months after the handover occurs. However, the contractor will be liable for latent or hidden defects until five years after the handover occurs. The employer must notify the contractor of the existence of any defects within six months after the handover occurs and in the case of latent defects, the notification to the contractor by the employer should be made within six months following the discovery of the defect. In both cases, if the employer does not notify the contractor of the existence of the defects, the employer’s claim shall be deemed to have lapsed.

In addition to these periods of time, which are mandatory and part of public law, parties are contractually able to agree on defect notification periods as established in FIDIC model contracts, for instance.

The contractor is liable for construction and design defects if the contractor was also the designer. But when a design defect is found and the contractor was not responsible for the design, the employer must present a claim against the designer, who will not be covered by either the six-month or five-year time periods.

The Peruvian Civil Code regulates two modalities commonly used in construction contracts in Peru: the lump-sum and unit-price systems. However, these are not the only methods used. With the development of more specialised construction contracts, due to high demand in the mining and energy sectors and the exponential growth of the real estate sector, time and materials (reimbursable expenses), target prices, and price caps with a specific modality for certain construction activities could be used, among others.

Commonly, the contract price compensates the contractor for all expenses; direct, indirect and incidental costs; and includes profit, plus everything that is necessary for the proper execution of the work (securities, guarantees, etc), plus VAT. In the case of indirect costs, these are usually paid in proportion to the progress of the project. Another option is a fixed price for a specific period.

Milestone payments are mostly used in complex projects where separate packages are established, as in the mining and oil and gas industries. Nevertheless, progress interim payments are the most common method of payment.

Remedies for late payment are typically recognition to the contractor of legal interest for each day of delay and the right to terminate the construction contract if the maximum term for payment is exceeded. Employers do not commonly accept specific remedies such as the right to suspend or stop the works. For non-payment breaches, the same formula is used. A term of between 30 and 40 days is given to employers to make good their default. 

Advance payments are usually made in amounts between 10% and 30% of the contract price. The norm is that employers require a surety or bank bond to guarantee the contractor’s agreed utilisation and amortisation of the advance payments.

Interim payments are generally used in construction contracts, regardless of the contract price arrangement.

Invoicing is heavily regulated by the Peruvian Tax Authority, SUNAT. Consequently, any type of payment, including advance payments, is necessarily invoiced and 18% sales tax (VAT) is added to each and every payment. However, owners are obliged by the VAT law to withhold 4% of any construction contract invoice amount and pay this into the contractor’s SUNAT account, exclusively opened for taxation purposes. If the employer does not withhold the referred percentage, the employer may face a fine of up to 50% of the amount not withheld.

The employer cannot improperly withhold approval of an invoice. Timelines, automatic approvals or the consequences of delays are sometimes negotiated by the parties.

During the bidding process, the employer generally establishes specific dates for completion of the project, as well as milestones. Consequently, the contractor is sufficiently aware in advance of the milestones and completion dates stipulated and prepares a proposal matching these obligations, which are also established in the construction contract. 

Diligent parties normally agree that after the contract is signed, the contractor has a period of time from the signing of the contract to prepare a detailed programme and that the contractor is obliged to submit this programme to the employer for approval. The level of detail of the programme depends on what the parties agreed in the contract.

Diligent parties also agree that the contractor has an obligation to keep up with the programme and the employer has the right to control the execution of the works and require the contractor to comply with the completion and milestone dates, as agreed. In many construction contracts, parties agree on liquidated penalties linked with such milestones and the time for completion.

The contractor is typically obliged to keep up with the programme on a weekly, bi-weekly and monthly basis. In the event of delays, the employer requests the contractor to submit a recovery plan to comply with the original time for completion. 

The contractor is obliged to submit such a plan for the employer’s approval. Once approved, if the delays are caused by the contractor, the contractor must implement the plan without delay and be responsible for any cost. If the delays are caused by the employer, the employer must recognise the cost regarding the implementation of such plan (the contractor must prove the additional cost).

In the case of delays caused by the employer, the contractor initiates the process to request an extension of time. The contractor must prove an impact on the critical path and the employer must assess the request and recognise the necessity for an extension of time when it is appropriate to do so.

The most important remedy for the employer is to apply penalties in the case of delays caused by the contractor or for events that are the responsibility of the contractor. However, in Peru there is regulation in the Peruvian Civil Code regarding penalidades, which are similar to, but not the same as, so-called “liquidated damages” in common law. It is possible in Peru, for example, to agree on penalidades as a mechanism to punish the contractor for any delays caused by it.

It is also common for the employer to execute the performance bond when the penalidades reach a maximum amount of money previously established in the contract. 

Only as an exception and as a final remedy may the employer terminate the contract if the penalidades reach the maximum amount established in the contract. Usually, this maximum amount is higher than that applicable to execute the performance bond.

Time is an important element in construction contracts. As construction lawyers, engineers, architects, designers, employers, financiers, subcontractors and the state (in public contracts) know, one of the most important issues they need to deal with is completing the works on time.

The following is an example of an extension of time clause. The contractor will have the right to an extension of time only in cases of delay where the causes are not attributable to the contractor. The request for an extension of time must be notified to the employer immediately after the contractor becomes aware or should reasonably have become aware of the circumstances necessitating the extension.

The contractor must notify the employer of the grounds for the extension of time, and this must be accompanied by the corresponding information and/or documentation so that the employer can make a decision. If the request for an extension of time proceeds, the employer shall grant to the contractor the extension of time and the costs in the event that the critical path is affected.

The problem is – and this is not new in this industry – the nature of construction is so complex and unpredictable that almost no construction projects are completed by the time initially agreed. These problems could be exacerbated by other specific factors that make construction activity more unpredictable in Peru: soil conditions are often problematic, climatic conditions are very diverse, and archaeological remains can be found in almost any province.

With this in mind, it is common practice to include clauses related to extensions of time in construction contracts. However, one of the main issues is that many contractors do not have control over the schedule and sometimes do not even have the bare minimum of accurate information about it. Consequently, when they claim for an extension of time, they do not have adequate proof to justify the time required to complete the works.

Even when contractors are entitled to an extension of time, the lack of control and negligence in updating the schedule make it difficult to prove the time claimed.

Pursuant to the Peruvian Civil Code, the party unable to duly perform their obligations due to an event of force majeure (defined as an unforeseen and irresistible event) will not be responsible for fulfilling the obligation for the duration of the event. Nonetheless, the contractor may not be excused from performing their obligations if the parties agree that a case of force majeure would not release the contractor from liability.

The concepts of force majeure and acts of God are not problematic, as they are widely known in Peru. The basic principle is that parties must not be held liable for damages arising from events beyond their control or from unforeseen acts of nature. Therefore, parties cannot be excused from performing their obligations if they are unable to prove that they did everything possible to comply with the contract.

In most cases, the issue is the recognition of an act that qualifies as force majeure or an act of God, since sufficient evidence needs to be presented to demonstrate that any given event qualifies as such. Experience shows that it is best practice to have a contractual definition of the events that are not force majeure, so as to determine which events qualify and which events do not qualify as force majeure (eg, weather conditions).

According to Article 1327 of the Peruvian Civil Code, the alleging party is under an obligation to mitigate its loss. Compensation is not due for damages that the alleging party could have avoided by employing ordinary diligence, unless otherwise agreed in the contract.

A Typical Force Majeure Clause

The following is a typical clause from a contract.

It is clearly established that the parties shall not be responsible and will not incur an event of default only if the total and/or timely delivery of the works is prevented by an act of God event or force majeure. The party affected by the occurrence of such event will be excused from performing its obligations throughout the extension of that event and its effects. To this end, the affected party shall notify the other party within 48 hours of such circumstances occurring or becoming known.

The affected party shall make every reasonable effort to remove or remedy the cause of such act of God or force majeure or mitigate its effect as quickly as may be possible. The party affected by the force majeure shall notify its counterparty of the steps it proposes to take, including any mitigation measures and reasonable alternative means for remedy and/or performance that are not prevented by the act of God or force majeure. 

Most contracts do not contain a specific clause dealing with unforeseen circumstances. If the contract does not provide for unforeseen circumstances, then the general provision under the Peruvian Civil Code is that the cost of overcoming the unforeseen circumstances must be borne by the employer. Article 1784 of the Peruvian Civil Code does, however, provide that the contractor is responsible for latent site conditions if the contractor developed the studies, drawings and other documents necessary for the execution of the works, or if the contract establishes the contractor’s responsibility.

One issue regarding unforeseen circumstances clauses occurs when employers try to place more risk on the head of the contractor, shifting the risk of the information and studies provided by the employer to the contractor. Clauses written by the employer protect them from deficiencies or inadequacies in information, requiring the contractor to review or "validate" information, even when picking up another firm’s design and carrying it through to completion.

Inclusion of the Right to Rely

However, parties are beginning to minimise ambiguity regarding how unforeseen circumstances will be dealt with, clarifying or trying to clarify the terms of the contract, whether it is at the tendering phase or before execution. Contractors try to include the right to rely on information obtained from the client or generally accepted public sources. The right to rely further defines and narrows the application of the standard of care. If the contractor is unsuccessful in obtaining these modifications to the contract, in some cases, verification of all the information provided is completed and priced into the work proposal.

Risks Involving Soil Conditions

Another issue occurs in relation to the risks involving soil. Pursuant to Article 1774.2 of the Peruvian Civil Code, the contractor is bound to inform the employer immediately about any defects in the soil if they are discovered before or during the execution of the work and affect its performance.

As mentioned above, Article 1784 of the Peruvian Civil Code also provides that the contractor will be responsible for the unforeseen circumstances only if the contractor has developed the studies, drawings and other documents necessary for the execution of the works (except if agreed otherwise). In other words, the risk regarding soil conditions belongs to the employer if the employer developed those studies (as occurs in a traditional design/bid/build project delivery system).

An Example of an Employer's Clause Shifting the Risk

The following is an example of an employer’s clause that shifts the risk of latent conditions to the contractor.

The contractor declares that the employer has provided information regarding the conditions of soil, topography, geological and soil mechanics of the site of the work. It also states that the contractor is responsible for reviewing, interpreting the information provided and making corrections as necessary at cost to comply with the contract. The parties agree that the employer is not liable for the accuracy, adequacy, completeness or reliability of the information, verbal or written, that has been provided for the purposes of, or in the contract.

In Peru, clauses to exclude or limit liability are allowed, with certain limits stated by law. The main liabilities that cannot be excluded are the following:

  • wilful misconduct;
  • gross negligence; and
  • any agreement against public order mandatory provisions.

Article 1328 of the Peruvian Civil Code clearly declares void any stipulation that excludes or limits liability due to wilful misconduct or gross negligence of the party, or its dependants, expected to fulfil the obligation. This rule was created in order to encourage parties to act in good faith and fulfil their obligations. In the absence of any such rule, parties would not be liable, with the result that it would be easier for parties to avoid fulfilling their obligations.

In addition, any agreement that goes against public order and excludes or limits liability where a party or its dependants are expected to fulfil obligations is null and void.   

Article 1762 of the Peruvian Civil Code also states that if the scope of services includes solving professional or technical problems of especial difficulty, the party expected to fulfil the obligation is not liable for damages caused, but it is liable in cases of wilful misconduct and gross negligence. Construction is a complex and risky activity, which is why some construction works require very advanced and sophisticated technology, even sometimes untested technology.

As stated in 6.1 Exclusion of Liability, the concepts of wilful misconduct and gross negligence are recognised in Peru. They are regulated mainly in the civil code, in particular to allocate liability to the party that is guilty of wilful misconduct or gross negligence when fulfilling an obligation.

These provisions are governed by mandatory law, since they relate to public order. This means that parties are not allowed to agree contractual terms that contravene these rules. 

It is possible to limit or exclude the liability of the parties in a contractual agreement provided that the behaviour of one of the parties does not constitute wilful misconduct or gross negligence. It is not permitted to limit or exclude liability in cases of wilful misconduct and gross negligence, or when these agreements go against public order rules.

There are two main ways to limit or exclude liability: directly and indirectly. In the first case, parties expressly agree to exclude or limit liability and it is very easy to identify these clauses, because the intention of the parties is very clear. In the second case, parties should pay attention to clauses that indirectly exclude or limit liability, such as complex procedures to file a claim, terms of expiry after which there is no chance to file a claim, giving an expensive bank guarantee as a requirement to file a claim, and unclear clauses, among others. In this kind of clause, it is not that easy to identify that liability may be excluded or limited, but careful consideration of these issues should be exercised.

The obligation to indemnify is regulated by Article 1321 of the Peruvian Civil Code. However, in contracts that involve large amounts of money, the obligation to indemnify is also usually regulated in the respective construction contract, establishing that the party in default must indemnify its counterparty and the limits of such obligation. Limits are normally a percentage of the construction contract price and no limits are applicable in cases of wilful misconduct and/or gross negligence, as previously mentioned in 6.1 Exclusion of Liability. Regarding the concepts that are recognised as part of the indemnification obligation, parties usually exclude loss of profit and indirect and consequential damages.

In Peru, parties normally use two types of guarantees. They are advance payment and performance guarantees, which are issued by banks or by insurance companies. Other types of guarantees are rarely used. The Peruvian Public Procurement Law regulates the types of guarantees used in public projects, while in the case of private projects parties are free to regulate the conditions of the guarantees. Bank guarantees and insurance guarantees can only be issued by authorised banks and insurance companies.

Parties usually take out civil liability and contractor all-risks insurances. These may not cover the design risk, however. Design risk should be covered by a specific insurance clause. In addition, Peruvian law regulates that employers and contractors shall take out life and health insurances for their employees. This insurance is called SCTR. Insurance programmes are not normally taken out in Peru, but parties are entitled to take out these and other types of insurance abroad, as Peruvian law relating to banking and insurance allows Peruvians to take out insurances internationally.

In Peru, parties generally agree that if any of the parties become insolvent, insolvency is sufficient reason to terminate the contract. If the contractor becomes insolvent, the employer and/or financiers are typically allowed to exercise step-in rights to try to continue with the works using the equipment, components and workforce (including the staff) of the contractors.

In the past, the sharing of responsibility was limited to the reimbursement of costs if certain events occurred, such as the discovery of different site or subsurface conditions. However, after the experience of using NEC3 contract forms for the execution of the infrastructure necessary for the Pan American Games Lima 2019, the sharing of responsibility was seen to be a useful tool for the parties and the project. However, more collaborative types of contract are under evaluation by some parties as the NEC3 option F type of contract adopted for the Pan American Games Lima 2019 did not use Clause X 12 – Partnership, and consequently, sophisticated parties believe that using collaborative project delivery systems, and not only collaborative tools, could only benefit them.

Also, during the COVID-19 pandemic, parties have decided to adopt a collaborative approach by using open book and reimbursement-based types of contract in order to avoid the high-risk premiums contractors may charge for bearing COVID-19-associated risks.

There is usually an agreement between the contractor and its personnel, but not between the employer and that same personnel. Employers and contractors almost always include a clause that stipulates the employer has no relationship with the contractor’s personnel. As a consequence of this, the contractor is responsible for the dependent personnel’s actions during the construction works.

Another typical contract provision related to personnel is the contractor’s payroll obligations and all other labour obligations imposed under the law.

In addition, it is mandatory by law that all personnel have complementary risk insurance in order to cover all risks during construction work. There is a specific provision related to this in construction contracts.

It is also common to include a provision that states that, in the case of changes to the personnel without prior approval of the employer, the contractor will be penalised. To avoid incurring such penalties, the replacement personnel must have the same skills and qualifications as those who are being replaced. 

Confidential stipulations are typical, and the contractor’s personnel must comply with them.

Limitations on subcontracting are stated in Article 1772 of the Peruvian Civil Code. In accordance with this article, the contractor is not allowed to fully subcontract the execution of the works, except if the employer permits this.

If this is the case, the contractor and subcontractor have joint and several liability before the employer.

Due to work specialisation, it is common to have subcontractors involved in construction projects. Provisions related to communicating the list of subcontractors to the employer for approval are common.

The general rule is that all the designs and intellectual property related to the construction belong to the employer, and the contractor is obliged to transfer these by signing the contract. In addition, the contractor is forbidden to use that intellectual property or derive any benefit related to it for any purpose other than that specified in the contract. 

These clauses are typically seen in concession contracts, where the employer is the state.

Other provisions relate to ensuring that the works executed by the contractor do not in any way affect the intellectual property of third parties.

There are four main legal remedies available when entering a construction contract:

  • the enforcement of the breached obligation;
  • the execution of the obligation by a third party;
  • compensation for damages; and,
  • termination of the contract.

Regarding the enforcement of the breached obligation by either contractual party, the Peruvian Civil Code enables the affected party to claim the fulfilment of the breached obligation either in an arbitration or in a judicial procedure.

Furthermore, the affected party is entitled by the Peruvian Civil Code to contract a third party to execute the breached obligation, claiming those costs from the breaching party.

Besides the remedies that pursue the fulfilment of the obligation, the affected party is alternatively entitled by the Peruvian Civil Code to claim the direct damages.

Regarding contract termination, Peruvian Civil Code states that, in the event of a breach of contract by any party, the affected party (employer, contractor or designer) must send notice requiring the fulfilment of the breached obligations within 15 days. Should the breaching party fail to comply with this requirement within those 15 days, the affected party will be entitled to terminate the contract, as well as claim the direct damages that the termination entails. In addition, the Peruvian Civil Code allows parties to agree specific scenarios in which the affected party may terminate the agreement, as well as different procedures for this.

It is not common to limit the remedies available to a party, but it is possible in some cases for the parties to modify the procedure of those remedies.

For example, the parties can agree to modify the procedure of the remedies by establishing different notice and response terms and conditions. It is not possible, however, to completely restrict the exercise of the contractual remedies established in the Peruvian Civil Code.

This is clearly stated in the Peruvian Civil Code (Article 1354), which establishes that parties are allowed to set the contract terms, as long as these do not go against mandatory provisions, such as the remedies previously mentioned.

Contractual sole remedy clauses are not typically used in construction contracts in Peru, given that the parties are not willing to restrict their options when it comes to possible breaches of contract. 

Furthermore, as explained in 9.2 Restricting Remedies, it is not possible for parties to restrict their counterparty’s access to the remedies established in the Peruvian Civil Code. Even if a clause is included in the contract stating that a party waives a mandatory remedy, this would be rendered void, as previously explained.

According to the Peruvian Civil Code Article 1321, the party affected by a breach of contract is only entitled to claim both direct damages and loss of profit. 

Indirect damages, consequential, exemplary and punitive damages are excluded in Peru. 

Retention and suspension rights are not usually excluded in Peruvian construction contracts. They are already established in the Peruvian Civil Code. In case of a breach of contract, the affected party could retain the equipment, materials or any other goods under its control, and is entitled to suspend the execution of its obligations.

In addition to the ordinary justice system managed by the state, arbitral tribunals and dispute boards are competent to settle and adjudicate disputes in Peru.

The main institutions are the Chamber of Commerce Arbitration Centre, the Arbitration Centre of the Pontificia Universidad Católica del Perú, the International Chamber of Commerce and the American Chamber of Commerce Arbitration Centre. The first and the second of these already have dispute board rules and are prepared to manage that kind of procedure. Investment arbitrations before the International Centre for Settlement of Investment Disputes (CIADI) are also very common in Peru.

In addition, the Procurement Law has provisions that allow Peruvian government institutions to settle controversies through arbitration and dispute boards, which typically resolve controversies much faster than the state judicial system does.

Dispute boards also contribute to reducing and even avoiding controversies altogether, because these are dealt with at a very early stage.   

Arbitration

Arbitration is very common for companies in Peru, and even for the Peruvian government, which is required by law to settle its controversies through arbitration, in accordance with Law 30225. The general regulation is in Legislative Decree 1071. Peru has one of the most up-to-date practices in arbitration in the world. The rules have been designed to be neutral, to generate an independent environment and, especially, to encourage investment in Peru. In addition, arbitration law has changed many traditional views on how to manage arbitral stages in order to be more flexible, efficient, economic and faster by distancing itself as far as possible from the Peruvian Code of Civil Procedures. Since construction is a risky activity with many opposing interests between the contractor and the employer in the majority of cases, controversies in construction frequently arise. Engineering prepared by Peruvian institutions for construction works often produces many problems. All of this makes construction arbitration frequent in Peru.

Dispute Boards

The use of dispute boards is increasingly being seen by companies and the Peruvian government as a good way to settle controversies. In a very large number of cases, they are used in work contracts between companies, but they are also used by the Peruvian government. During the past few years, dispute boards have been used in very important construction projects in Peru in an attempt to ensure completion of the works on time and within budget. Some parties and their lawyers have had difficulty understanding this “new method” in Peru, because they are tempted to think that it is like arbitration, but dispute boards are not meant to function like that. A dispute board starts its work at the very beginning of the works and co-operates with the parties to tackle problems together, encouraging frequent meetings with the parties, going to the work site and “getting its shoes dirty”.

Mediation

This method is seldom used, even though it could help settle controversies by approaching parties’ arguments to find out common points of view. 

Negotiation

This is frequently used for resolving controversies and is usually the first step in contracts prior to arbitration. A term is generally negotiated and if the controversy cannot be settled, one of the parties can submit the dispute to arbitration. This kind of clause allows parties to attempt to solve controversies within the negotiation process, helping to reduce the number of disputes, and, in some cases, avoid arbitration.

Navarro Sologuren, Paredes & Gray

Canaval y Moreyra 452
Piso 13
San Isidro
Peru

+51 1 706 3333

jgray@npg.pe www.npg.pe
Author Business Card

Trends and Developments


Author



Navarro Sologuren, Paredes & Gray is a law firm that specialises in construction law, with 26 years of experience in domestic and international projects, and in ADR related to construction matters. The lawyers at NPG have the advantage of wide knowledge of the construction business and the ability to understand engineering complexities. They are focused on reducing risk for their clients, thereby making their service a solid investment. The professional practice and the core business of Navarro Sologuren, Paredes & Gray is construction projects, where the lawyers have experience in, among others, hydropower plants, airports, highways, theatres, high complexes, underground parking lots, hotels, hospitals, water and sewerage systems, pipelines, ports, schools, universities, cities, fire systems and sports infrastructure. The firm provides advice in engineering, construction and dispute resolution at all stages of the construction process.

Background

Over the years, the construction sector has been one of the main contributors to the economic growth of Peru. Investment in infrastructure has been developed in two main ways: state or public investment and private investment. The sector has been severely affected by the COVID-19 pandemic, which can be seen in the projections of the Ministry of Economy and Finance, showing a drop in private investment of 4.4% and 1.3% in public investment (García, E. 2022. Oferta de vivienda caería 24% este año y sector construcción se paralizaría hasta el 2023. Diario Gestión, 2.), because of the sustained rise in prices and the exchange rate in relation to the US dollar. However, this has not meant a total paralysis of investment; for example, there are significant port and airport projects such as the expansion of the Jorge Chávez International Airport.

Furthermore, it is relevant to highlight the increase in the use of PPPs with the usage of Project Management Offices (PMOs) in the formulation and structuring stage. With the promulgation of Legislative Decree 1543, the application of PMOs in the PPPs is now regulated. Additionally, the Obras por Impuestos (Works for Taxes), have been given a boost from ProInversión (the Private Investment Promotion Agency) to improve the contracting system and project portfolio exposure.

Likewise, due to different circumstances that affect public infrastructure, the government has a project of reconstruction works resulting from El Niño, as well as continuously improving traditional public procurement and using more NEC contracts on projects. These projects, which make public infrastructure more resilient to climate change, are carried out by the Reconstruction with Changes Authority (ARCC).

Public Investment Developments

The government is seeking to close the infrastructure gap through the execution of projects. In this context, PPPs, Works for Taxes and Public Procurement Law are being used. Although they have had some success, there have also been problems with delay, abandoned works and management problems. Thus, the government has looking to remedy the deficiencies of traditional projects, which enables it to be at the forefront of new regulations and investments. In this sense, the government has set its sights on describing these new projects as government-to-government contracts, international contracts such as NEC and FIDIC, and ARCC projects (Reconstruction Authority). The relevance of the projects is noteworthy for their resilience to climate change.

PMO in PPP projects

Project Management Offices (PMOs) are in charge of maintaining project management standards, maintaining an institutional security standard that takes on relevance in the context of PPP infrastructure projects.

As a result, in March 2022, Legislative Decree 1543 was enacted to dictate measures to improve project management and private investment promotion processes, in which the creation of Specialised Bodies for the Management and Project Execution (OEGEP) aimed to introduce PMOs so that they perform the functions attributed to the public entities that own PPP projects.

Sustainable projects: ARCC

The Authority for Reconstruction with Changes (ARCC) is in charge of managing projects for the reconstruction of works that have been damaged by El Niño. Because of this, the ARCC has to rebuild damaged infrastructure, thus finding itself in the paradox of construction and sustainability (Doe, J., & Healey, T. 2021. Charting a new course towards sustainable construction. Construction Law International, 21–27.). Faced with this, the ARCC not only seeks to rebuild, but also to implement substantial improvements, which is why it includes the word "changes" in its name; in this way, it not only guarantees reconstruction but also permanence over time and being able to withstand El Niño when it appears.

G2G and use of NEC contracts

G2G contracts are a new type of contract that have been implemented recently in Peru. They make an agreement between two governments without the governance of the usual Peruvian contracting parameters, but rather by a faster selection process that is carried out among the participating states. Currently, two G2G contracts are being carried out between the Peruvian and French governments, where the latter is providing technical assistance in the execution of investment projects related to the improvement of the Sergio E. Bernales National Hospital in Lima and the Antonio Lorena Hospital in Cusco.

Another important international contract as a result of the Pan American Games in Lima is NEC contracts, which are innovative because they eliminate the existing situation of "rivalry" between the state and contractors, since they establish innovative tools that promote a co-operative attitude between the parties. Due to NEC contracts' success, they are being used for the second time for projects carried out by the ARCC.

Use of Junta de Resolución de Disputas in public procurement works

For some years, the so-called Junta de Resolución de Disputas (JRD) have been implemented to resolve disputes in public works. This dispute resolution mechanism is inspired by dispute boards, conceived in this scenario as an alternative method of efficient conflict resolution in public projects. Since a panel of experts efficiently resolves the controversies that arise during the execution of a work contract while it is under way, the decisions given by these experts are binding and are a condition of arbitrability. Further, if discrepancies regarding the decisions of the Dispute Resolution Board are resolved at the end of the project in a single arbitration, it widely benefits the completion of projects. 

Private Investment Trends 

Due to the political context in Peru, the private sector is cautious in investing in new projects. Added to this is the increase in prices across the construction sector (Musarat, M. A., Alaloul, W. S., & Liew, M. S. 2020. Impact of inflation rate on construction projects budget: A review. Ain Shams Engineering Journal, 407–413.) However, with the aim of once again attracting the attention of investments in the private sector, there are efforts by certain business groups, such as the Association of Real Estate Companies (ASEI), which seek to implement collaborative contracting schemes both at the contract level and in management of projects.

Increased collaboration

ASEI is looking to implement Integrated Project Delivery (IPD) and collaborative contracts to promote private investment in the projects of its associates. "Early contractor involvement" is also used, with the aim of involving builders early in the development of the project so that they can give their perspectives and points of view, as well as collaborate using their experience.

Emergency arbitration

The lack of growth in the construction sector has also brought with it an increase in conflict. In this regard, dispute resolution methods and tools to protect rights have appeared. One of these is emergency arbitration, known mainly for its short duration and effectiveness. It is regulated in leading arbitration centres in Peru such as the Arbitration Center of the Chamber of Commerce of Lima (LCC), the AmCham Peru International Arbitration Center (AmCham) and Conflict Analysis and Resolution Center of the Pontifical Catholic University of Peru.

In turn, the emergency arbitrator is appointed by the arbitration institution that manages the arbitration, which must resolve the requests for interim measures that are presented before the start of the arbitration.

It is pertinent to mention that its application has served to avoid the paralysis of a project, the execution of guarantees, or the loss of valuable evidence for the subsequent arbitration that will be carried out.

Inflation and COVID-19

After many negotiations in the construction sector, COVID-19 has been stated as a natural condition of the execution of projects, hence contracts contain clauses that define COVID-19 as a known and mitigatable risk, although months ago it was conceived as a fortuitous event or force majeure.

The increase in prices in the construction sector is different because this is set with the end of a fortuitous event, since even contractors have had to resort to claiming increases in prices more significant than those, they recognised the forms of readjustments agreed upon in the contracts; that is, we are facing an inflation scenario that has been totally impossible to mitigate.

Navarro Sologuren, Paredes & Gray

Canaval y Moreyra 452
Piso 13
San Isidro
Peru

+51 1 706 3333

enavarro@npg.pe www.npg.pe
Author Business Card

Law and Practice

Authors



Navarro Sologuren, Paredes & Gray is a law firm that specialises in construction law, with 26 years of experience in domestic and international projects, and in ADR related to construction matters. The lawyers at NPG have the advantage of wide knowledge of the construction business and the ability to understand engineering complexities. They are focused on reducing risk for their clients, thereby making their service a solid investment. The professional practice and the core business of the firm is construction projects, where the lawyers have experience in, among others, hydropower plants, airports, highways, theatres, high complexes, underground parking lots, hotels, hospitals, water and sewerage systems, pipelines, ports, schools, universities, cities, fire systems, and sports infrastructure. The firm provides advice in engineering, construction and dispute resolution at all stages of the construction process.

Trends and Development

Author



Navarro Sologuren, Paredes & Gray is a law firm that specialises in construction law, with 26 years of experience in domestic and international projects, and in ADR related to construction matters. The lawyers at NPG have the advantage of wide knowledge of the construction business and the ability to understand engineering complexities. They are focused on reducing risk for their clients, thereby making their service a solid investment. The professional practice and the core business of Navarro Sologuren, Paredes & Gray is construction projects, where the lawyers have experience in, among others, hydropower plants, airports, highways, theatres, high complexes, underground parking lots, hotels, hospitals, water and sewerage systems, pipelines, ports, schools, universities, cities, fire systems and sports infrastructure. The firm provides advice in engineering, construction and dispute resolution at all stages of the construction process.

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