PERU PRACTICAL ADVICE – COMMERCIAL CONTRACTS FOR MINING SUPPLIERS
Peru’s mining sector has grown considerably the past few year. In 2015, copper output gained 24% and in 2016, output rose another 38% in large part due to the ramp-up of Las Bambas, Constancia and Toromocho mines, the Cerro Verde expansion and the Antapaccay brownfield project.
The upward trend will continue throughout 2017 and receive a final boost in 2018 with the startup of the Toquepala expansion, expected to take production to a rate of 2.8Mt/y from just 1.37Mt in 2014. The Peruvian central bank estimates investment of just under US$10bn in 34 mining projects over the next approximately two years.
With positive growth, many mining suppliers, engineering and service providers are taking notice and entering the Peruvian market looking to capitalise on the increased investments. Naturally, with a new jurisdiction comes new lessons, new laws, and ways of doing things. Harris Gomez Group has provided some key points that foreign companies should be aware of when looking at contracts in Peru.
Mining service providers are required to be registered as Mining Contractors with the Peruvian Energy and Mining Ministry if they perform work relating to mine exploration, mine development, mine exploitation, or mine benefit. Mining contractors are required to have a minimum fully subscribed and paid-in capital of 100 Peruvian Tax Units (UIT).
Mining and industry provider contracts subject to Peruvian Law are regulated by the Peruvian Civil Code and, when applicable, the Peruvian Mining Act to a lesser extent.
In general, mining and industrial contracts include the following provisions:
The usual currency used among mining companies is the US Dollar, and these companies usually perform payment to their contractors in that currency. Among industrial companies within other sectors, the standard currency for payment is either US Dollars or Peruvian PEN.
Currency exchange is not subject to the approval of the Peruvian Central Bank or other government agency, and Peruvian law does not provide for any currency exchange control regulations. It is usual for local and foreign company to hold US Dollar account in Peruvian banks, and wires, transfers, and payments in US Dollars are very standard.
Fees or payment terms are usually complex. If the service is performed by milestones, invoicing and payment are usually subject to acceptance of the milestone by the client. Payment may also be subject to verification of compliance with labour regulations.
If a significant advance payment is made, the client usually requests for an advance payment surety bond.
It is very rare to find a tender or a mining contract that does not require the contractor to provide surety bonds, specifically in the form of bank sureties “carta fianza bancaria”.
There are mainly two kinds of bonds: (i) performance bonds to secure performance of the contract; and (b) advance payment bonds to secure devolution of any advance payment made in consideration of the services in the event that the contract is terminated before completion of performance.
Bank surety bonds can be cashed be sole demand. The bond does not release the contractor from payment of any outstanding amount which may be due for indemnification of damages, loss, penalties, and surcharges.
The general rule is that Peruvian law is the law of a contract entered in Peru or subject to performance in Peru. Nonetheless, Peruvian law allows the parties to choose foreign law as the governing law of the contract in case either party is not Peruvian or where there is a reasonable international element in the contract, provided however that Peruvian public order and good morals rules are still mandatory and will be upheld by Peruvian courts and government authorities.
The choice of foreign law is usually stipulated within the standard terms and conditions of large international mining companies and also in the case of contracts related to large mining projects, such as the construction or expansion of mines.
Taking into account that the Courts of law are slow and the procedures extremely low, most commercial contracts add dispute resolution clauses and prefer that all disputes be solved by way of arbitration. The advantages of such procedure is mainly the specialization of the arbitrators, who are elected by the parties and usually have a sound knowledge of the subject matter in dispute.
Harris Gomez Group is a Common Law firm that supports foreign companies throughout 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 email@example.com