Practical Guide to Contracts in Peru

When reviewing a contract in Peru, it is important to be aware of the civil laws applicable to them, and some of the relevant clauses to negotiate. 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. In this article, we provide some common guidelines to know when entering into a contract in Peru,

General Rules

According to the article 1351° and following of the Peruvian Civil Code (“PCC”), a contract is regulated as an agreement of two or more parties to create, regulate, modify or terminate a legal patrimonial relationship. In this sense, contracts are entered into by the consent of the parties. It is important to note that parties can freely determine the contents of the contract, as long as it is not contrary to an imperative legal norm and that all private law contracts, including unnamed ones, are subject to the general rules contained in the PCC.

Specific Clauses and their Regulation in the PCC:

Liability and Damages: The PCC regulate a system of civil liability for the non-performance of obligations (called contractual) and another system of extra-contractual civil liability (for violating the generic duty not to harm others). Regarding contractual responsibilities, the PCC regulates that the non-performance of the obligation can be due to slight fault of the debtor, fraud or inexcusable fault. In the first case, this type of responsibility is stated as a presumption. However, in relation to fraud and inexcusable fault that, they have to be proved by the injured party with the non-performance of the obligation (art. 1330 of the PCC).

Ax Legal Practical Advice: As a general advice, when negotiating a services contract, we try to limit responsibility to direct damages caused by a breach of an obligation. It is important to note that, depending on the subject of the contract, it is important to limit also, the extra contractual responsibility clause (if we find one) because, of the subjectivity of it.

Force Majeure or Fortuitous Event: According to the definition set out in Article 1315° of the PCC: “Fortuitous Event or Force majeure is a non-attributable cause, consisting of an extraordinary, irresistible, and unforeseeable event, which prevents performance of an obligation or determines its partial, late or defective performance.”

In general, the content of a force majeure clause or of a fortuitous event clause can be defined and regulated in the contract as the PCC permits it, but if no regulation is stated, then 1315° article is applicable. So, in this matter, it depends on the interests of the parties and the specific circumstances surrounding the contract to set the regulation, and must be respected as legally binding.

Ax Legal Practical Advice: This is an important aspect to be revised in the contract and then negotiated because in such event the counter party will not be held accountable for non-compliance of contract obligations. However, certain other obligations can be imposed on the parties as to diminish subsequent damages such as notifying that they will fail to comply, steps taken to minimize the effects, and a reasonable date as to which they will resume their activities.

Termination Clauses: Regarding “exit clauses” the PCC regulates in its article 1428° that if one of the parties is non-compliant and in breach of contract obligations, the other party will be entitled to compensation of damages or to either ask for the fulfilment of the obligations or the termination of the contract. However, it is important to note that on this matter, the PCC also regulates the possibility to terminate immediately the contract if the other party is in breach of contract obligations.

Ax Legal Practical Advice: This is a common provision in most contracts, and we therefore advise our clients, again, case by case, that apart from regulating a termination clause with a procedure, requirement,s and reasons to terminate it (such as a 30 days’ notice of the intent and specific date to terminate the contract, among others), it is important to have an exit clause of immediate effect.

Labour Obligations: When hiring third party services it is important to bear in mind that both companies will be joint and severally liable for employment obligations of those third party workers if contractor does not complies with its obligations. Furthermore, this responsibility can be extended if the company does not have authorizations, registries, and other labour documents of the contractor depending on the activity to be performed.

Ax Legal Practical Advice: In order to ensure that the hiring party will not be held liable, a common mechanism is to condition payment of services upon the issuing of a “Certificate of Compliance with Labour and Social Security Obligations”. Also a clause specifying that the company providing the services will incur and bear all costs and legal fees and that will respond for any breach in labour legislation. This is particulary important when working with subcontracters. 

Jurisdiction: If any disputes arise between the parties out of or relating to the contract, or the interpretation or validity thereof, the parties can choose to indicate in this clause that the matter will be solved in the Peruvian courts or will be subject to arbitration.

Ax Legal Practical Advice: We recommend evaluating costs and decide which jurisdiction. Although arbitrations can be quicker and more technical than courts, they are generally more expensive. In this sense, depending on the project and the investments being made, the decision must be taken.

Internal Dispute Resolution Proceedings: In line with point “5” above, a clause to look at, is the internal proceedings of dispute resolutions that often greatly diminish the chances of resorting to courts or arbitration. In this sense, if the parties follow, on good faith, these contract proceedings, they should avoid the need to have judges, arbitrators, or even lawyers involved.

Ax Legal Practical Advice: In this matter we recommend to state that if no agreement is fulfilled, then exit clause of the agreement can be activated.

Confidentiality: In regard to this, due to characteristics and nature of the activities to be performed, parties can exchange sensible information. In this sense, it is important to regulate this type of clause in order to protect the exchange of information. This clause is supported by article 1558° of the PCC.

Ax Legal Practical Advice: In this matter, we recommend to our clients to: state a term in which this obligation will be enforceable for the parties; ii) state some situations in which they will not be responsible for disclosing this information (e.g. when a court obliges to it).

Change in Contract Conditions: There are times when unpredictable events may occur causing substantial changes in the conditions that may result in obvious detriment of the other party. If the contract will have a term of 10 years, it is recommended that a clause be included indicating that if such event occurs, both parties will need to renegotiate the terms and conditions of the contract.

Ax Legal Process for Reviewing Contracts

1. We work with each client to ensure we understand the services or goods that will be provided as part of the contract.
2. We will review any internal policies that a client may have and then create a table which outlines any non-negotiables, alternative clauses, and/or other details that are important when reviewing.
3. We will review the contract and provide comments and recommendations using the table to make it easuer for everyone to review key findings.

Conclusion

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 and also a chance for us to learn more about our clients services or products. 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. 

Ax Legal is an 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 cmm@ax.legal