METS Practical Advice: Basics about Contracting with Mining Companies in Chile
Signing a contract with a mining company in Chile can be an exciting time for foreign companies. It often comes after many trips to Chile, meetings with operational and senior management teams, site demonstrations, follow-ups, and whatever else is required to get to the point where a contract is being discussed.
After a long sales process, it is no surprise that you just want to get on with it but there are still a few steps before you are home free. Today we will start with reviewing and negotiating the contract clauses. Later in the week we will cover bank guarantees and registering with the different mining suppliers’ associations.
TYPICAL CLAUSES IN CHILEAN MINING CONTRACTS
When contracting with mining companies in Chile, there are several clauses that you will come across and others that you will want to add because it is not regulated by the agreement.
Typical clauses included in Chilean contracts are performance bonds, penalties, insurances, limit of liability, indemnities, industrial relations, performance bonds.
Some of the clauses you may not find that tend to be important to foreign suppliers are Liquidated Damages and Consequential Loss.
Key points about each of these:
Consequential Loss: It is important to note that in accordance to Chilean law, if the consequential loss is not directly regulated and imposed or agreed upon by the parties, 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 unless there is willful misconduct, fraud or negligence, in which case you will find yourself liable.
For this reason, we recommend regulating the matter by agreeing to a certain amount or cap or solely under certain conditions or specific eventualities.
Penalties: In Chile, it is common practice within contacts to include fines that are 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 circumstance indicated in the contract.
They are generally deducted or retained from any payment that the Principal owes the Supplier. They are even deductible from the guarantee. In many cases, the principal may enforce these penalties without prejudice to exercising other actions that provided by law.
The fines fluctuate but are generally equivalent to 1% to 2% of the total or partial value of the goods or services not delivered or provisioned.
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 or deliberate misconduct. However, these are usually not considered contractual breaches but more in the realm of extra-contractual liability.
In most contracts with Chilean mining companies, the limit of liability is either the price of the contract, a specific amount determined by the parties or a percentage of the contract price.
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 get if the other party breaches certain part(s) of the contract. The main reason is that most contracts in Chile allow the accumulation of damages, penalties, and cashing in the performance bond.
Industrial Relations: Another matter that needs to be taken into consideration by all foreign companies, especially if they are subcontracting in Chile, is the obligations that arise from 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 – subsidiary liability and/or joint liability. The difference between the two is that subsidiary liability takes place only when the principal company exercises the ¨right of information¨ and the ¨right to withhold¨, with respect to its contractors or subcontractors. In contrast, joint liability occurs in the context of which the principal company does not exercise those rights.
The right of information, or also called control and payment, allows the principal company to request reports from contractors and subcontractors that prove the fulfillment of labor and social security obligations with respect to their workers.
The right to withhold allows the principal company to withhold payments to contractors who do not prove full compliance with their labor and social security obligations.
So, 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 a joint liability instead of the subsidiary liability.
How does Harris Gomez Group help with contract reviews?
How we help and how much support we provide generally depends on the client. Regardless, the first step when working with a client is to ensure we understand their products/services. This is an important step that helps us understand how and why certain clauses in a contract would be more relevant than others.
The next stage is determining how much support the client needs. Do they want a simple translation of the contract? Just certain clauses? Maybe Spanish is not an issue? Do they want a full explanation of each clause or only focus on the core clauses that are considered deal breakers?
From there, we can provide guidance on what is likely to be accepted by the other party and can assist with creating a strategy for the negotiations. We are able to do this because, after 16 years of working with METS companies, we have negotiated contracts throughout Latin America and Australia with all the major mining companies. This experience has allowed us to learn about the specific sticking points of certain mining companies while also understanding where they have flexibility and under what circumstances
Lastly, with many of our clients, we work with the corporate counsel and/or senior managers to streamline the contract review process. One way we do this is by working with the sales teams helping them understand the various taxes that may be relevant depending on the country. We do this by creating a ¨tax cheat sheet¨ that can be utilized by the sales team when drafting their proposals and determining the price. The idea is that by doing some work on the front end, we can help the sales teams get their proposals out faster.
Another way we help streamline the process is by creating a ¨deal breaker template¨. Essentially, we take the typical clauses that are relevant to the client and create a template that can be used throughout the Latin American Region. This template is used to highlight certain ¨deal breakers¨ that may be in the contract. This helps streamline the process because typically the client will no longer need us to translate the whole contract, it ensures we are not providing explanations regarding clauses that may not be important to the client, and the template is easier to pass around, discuss, and comment then the contract itself.
If you are interested in other articles regarding contract reviews, we highly recommend the following past blog posts we have done:
Harris Gomez Group is a Common Law firm, with offices in Santiago, Bogotá, and Sydney. Over the last 16 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 firstname.lastname@example.org