Practical Guide to Contracts in Chile
When contracting in Chile there are several clauses that you will come across and others that you will want to add because they are not specifically regulated by law. Typical clauses that you will find in Chilean contracts that are important refer to penalties, insurance, limit of liability, indemnities, Industrial relations, and performance bonds.
For companies that originate from common law countries, you may not find some of the clauses you would typically be concerned with and may be important to negotiate (and/or add) are those relating to Liquidated Damages and Consequential Losses
Key points about each of these:
Consequential Losses: Many companies from common law countries are accustomed to having consequential losses specifically regulated and often worry when a client provides them a contract that does not mention it.
It is important to note that in accordance with Chilean law, if consequential losses are not directly regulated and agreed upon by the parties in the contact, then it is understood that neither party responds for such types of losses. It must be indicated expressly in writing and accepted by the parties in the contract. The only caveat is consequential losses can be considered if their willful misconduct, fraud or negligence.
On the other hand, where consequential losses are mentioned in the contract or it may be important to the contracting party so it needs to be added, it is recommendable to regulate the matter, being possible to agree to a certain amount or cap under certain conditions or specific eventualities.
Limit of Liability: You will find clauses that limit the contractual liability of the parties, indicating a certain amount or cap. Certain exceptions usually apply that refer to personal injury, death, property damage, IP infringements, fraud, deliberate misconduct, and insurance proceeds. However, these are usually not considered contractual breaches but more within the realm of extra-contractual liability.
In most standard mining service contracts in Chile, the limit of liability is either the price of the contract, a specific amount determined by the parties, or a percentage of the price of the contract.
Liquidated Damages: In Chile, it is rare to find a clause that regulates this matter specifically as understood by many common-law countries. You will not come across a clause that will indicate a sum of money, agreed-to and written into a contract, specified as the total amount of compensation an aggrieved party should receive, if the other party breaches certain part(s) of the contract. The main reason is because most contracts in Chile allow the accumulation of damages, penalties, and cashing-in of the performance bond.
Penalties: In Chile, it is of common practice for there to be fines that can issued due to delays. These penalties can be due to a delay in the handing over of documentation, a delay in the provision of services or goods, or any other reason indicated in the contract.
Generally, these penalties will be deducted or retained from any payment that the Principal owes to the Supplier, they are even deductible from the guarantee. In many cases, the Principal may enforce these penalties without prejudice to exercising other actions provided by law.
The fines fluctuant between an equivalent to 1% to 2% of the total or partial value of the goods or services not delivered or provisioned.
Industrial Relations: Another matter that needs to be taken into consideration by all foreign companies especially if they will subcontracting to other companies in Chile is the obligations that arise within industrial relations.
Chilean Law N° 20.123, regulates the relationship between the principal company and its subcontractors. The current labor regulations establish two types of responsibilities for the main or principal company which includes subsidiary liability and joint liability. The difference between one and the other is that subsidiary liability takes place only when the principal company exercises the “right of information” and the “right to withhold”, with respect to contractors or subcontractors, in contrast the joint liability occurs when the principal company does not exercise those rights.
The “right of information“, or also known as “control and payment”, is the one that allows the principal company to request reports from contractors and subcontractors on the fulfillment of labor and social security obligations with respect to their workers.
The “right to withhold” is the one that allows the principal company to withhold the payments that must be made to contractors who do not prove they are in full compliance with their labor and social security obligations for workers.
It is of great importance to add certain and specific clauses that regulate this matter which will allow you to determine if you are to respond with joint liability instead of subsidiary liability. For more information and tips on how subcontractors are regulated in Chile – view a previous blog post we did on the topic.
It is important for international companies to understand how contracts and specific clauses are dealt with in each country they are operating in. For many of our clients, we look at contracts as a teaching opportunity for their management teams. We also support our clients with putting in place proper contractual procedures for future contracts. Our team can provide a legal translations of the contract, explanations of legal concepts that may be unique to the region, and/or provide a summary and sign off for your Board of Directors.
Ax Legal is a legal and business advisory firm that works with foreign companies in Latin America. Our team of legal and commercial advisors have a distinguished track record of helping foreign technology and services companies to grow and operate in Latin America. Over the years, we have worked with starts up, mid-size businesses, and publicly listed companies. The one common factor that connects are clients is that they are leaders in their field, providing innovative technologies and services to the industrial sectors.
To better understand how we can support you in the Region, please contact Cody Mcfarlane at firstname.lastname@example.org