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Formation of Contracts: Comparison between Australia and Chile

The formation of contracts is both an exciting and stressful period for any construction project, and those without a legal background can often be left unsure of the formalities and statutory requirements needed to be complied with. This situation is exacerbated when the project is to take place in a foreign jurisdiction, where the terminology, language and practice may all be very different to what the party to a contract is accustomed to. It is essential that the variances between the Australian and Chilean jurisdictions are understood and appreciated, so each party is able to enforce and comply with their rights and obligations.

The most immediate difference is that Australia operates under a common law system, whereas Chile works as a civil law jurisdiction. Under Australian common law, each of the principles of contract law comes from individual cases, which means the person drafting the contract should be familiar with the cases, which give us these principles. At the most basic level, there are four essential elements needed for a contract to be valid: offer, acceptance, intention to create a legal relationship, and consideration (normally money). A contract will only be enforceable when formed with sufficient clarity and agreement has been reached on all essential terms. A contract does not have to be in writing and can in fact be oral. Of course, for a large-scale project this would not only be extremely unusual but also highly inadvisable.

In Chile, in general terms the only crucial elements required for a legally binding contract are offer and acceptance. Obviously though, construction contracts would normally be highly detailed and evidenced in written form. As a key exception to this, public work contracts have a number of specific legislative requirements that make them more complex.

Standards Australia has published a series of standard form contracts for use in Australian jurisdiction. It is also very commonplace for other public authorities and government bodies to use their own standard forms. The Chilean market has no equivalent regulating body that provides the private sector such a service, however, the terms and conditions of contracts are largely constant and disputes in this area are uncommon.

In Australia, “letters of intent” will sometimes be employed in circumstances where delaying the start date of a project until contracts have been signed isn’t practical. They represent a somewhat awkward aspect of contract law, as often they themselves will be determined to be binding contracts, something which is decided objectively based on the terminology used and whether the essential terms are agreed upon. For this reason, they need to be drafted with the utmost care and skill. In Chile, such preliminary agreements are much less common. In the private sector, they do exist and can be legally enforceable when they contain the specific terms and conditions that the employer agrees to comply with. In the private sector, on the other hand, there is generally no recognition of preliminary agreements or subsequent acts.

In regards to statutory requirements, Australia presents as the more convoluted framework, because in effect there are nine different legal systems in place—eight state and territory systems and the overarching federal system. Each jurisdiction has different (but broadly comparable) legislation in place for factors such as security for payment, employment laws, tax and allowances and health and safety. Chile has a much more uniform framework. The main requirement in public works is that the contractor be registered in the relevant public registry, as kept by the Ministry of Public Works. There are a number of different categories of registries, and which one a specific project will be designated to will depend on a few factors such as its nature and size. Private works do not have this requirement, and only require the relevant sectoral permits. As with Australia, a person drafting contracts needs to keep in mind the applicable labour, tax and health and safety laws.

The formation of contracts can be convoluted and confusing process. It is essential that at this initial stage everything is completed correctly to avoid any unpleasant surprises further down the track that could lead to costly disputes. This is especially true for companies working in foreign countries, where the advice and guidance of lawyers skilled in both jurisdictions can mean the difference between a successful outcome for all or a costly misstep.

Harris Gomez Group is a Common Law firm, with offices in Santiago, Bogotá, and Sydney. Over the last 15 years we have been supporting foreign companies with their growth in Latin America. Many of our clients are technology companies, service providers and engineering companies that focus on the mining, energy and infrastructure markets. 

To better understand how we can support your management team in the Region, please contact Cody Mcfarlane at cmm@hgomezgroup.com