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Compliance with the Contractual Line in the Construction Sector (Part 2)



| By: José H. Fung D. |

Risk related to Suppliers

One might think that a supplier, for the purposes, is a simple contractor or sub-contractor, however, its importance is accentuated if we consider the role that it can play in the execution of a construction. For practical purposes, we can say that there are two types of suppliers (at least for the execution of the work) these are, suppliers of materials, who do not perform any work and those who, being contractors or subcontractors, become suppliers of Personal property such as supply and installation contractors that perform both tasks.

The reason why these contractors must be treated independently is precisely with regard to the personal property they provide, basically because said property generally belongs to someone else who can maintain ownership rights over them and who could execute in the event of a non-payment, that, on the one hand, and on the other, would be the situation that occurs when the Owner of the Work has advanced sums of money so that goods are acquired in construction benefit, goods that often consist of raw materials that require processing, which implies that the Owner may be supplying the funds to acquire said materials without ever having them in real possession, either because the Sub Contractor deposits them in his Factory or Deposit or because being imported, it is the Contractor who appears as the recipient of the goods, therefore, it is easy to understand that if the Owner does not control the purchase of the materials, he is exposed to losing his investment, either because the Contractor does not comply or because destines the materials to another project and fails to replace them in time to comply with whoever paid for them. Examples we have several, but the most emblematic are located in the supply and installation of furniture, glass, facades, elevators, escalators, finishes, floors, taps among many other materials destined to be part of the construction.

Although there are many associated risks, – among which we could mention those related to consumer protection in case of guarantees – the most important undoubtedly is the lack of compliance of the supply and installation contractor that causes the economic loss of the Owner. Let us consider that a contractor does not necessarily receive payments for the execution of the work, most of them charge for progress (of course, if the contractor charges an advance or not it is a situation directly consistent with the negotiation of the terms of the contract), except when it comes to of works in which the materials are supplied by the Owner, a situation in which the Contractor receives advance payments to acquire materials that are gradually and proportionally discounted in each advance invoice, such as in the case of cabinetmaking, finishes, etc., a situation that adds an element of risk in addition to simple non-compliance, and to understand it better, let’s take an example: When it comes to a usual work contract, the contractor charges against advance so that the risk of a default is assumed by the contractor or sub-contractor, without However, when there is money paid in advance, if the contractor does not comply, the Owner will not only be affected by the delay but by the loss. The way that means the money that you will not get back and if we add to that that the material you bought does not exist then the damage literally multiplies.

That said, it is clear that this is a situation that degenerates from the contract between the Owner and the Contractor and between the Contractor with any sub-contractor, where the damage in the end is inevitably faced by the Owner.

Those clauses that appear in the contracts that imply the waiver of the contractor or sub-contractor to the right of retention on the materials or goods supplied are usual, this seeks that, in the event of a contractual breach, the contractor cannot require the materials back claiming ownership over the However, this “waiver” has no effect against third parties, so that to be effective, who must waive the right of retention in the original supplier of the material since if the Contractor or Sub Contractor bought on credit, the original supplier will have the right a claim as stated in art. 1349 of the Civil Code, at least up to the amount owed to the contractor.

In the end, only if the contract provides for the Owner’s discretionary right to pay with the credit that the Contractor may have to any supplier that has become a creditor for default, can it slow down the risk, but only if it complements this with additional obligations on the Contractor to provide evidence payment and / or settlements with each of the providers before returning the withheld or executing the next payment.
A default by a supply and installation contractor will easily cause the owner a considerable financial loss not only for the delay but for the replacement value of the materials.

Risk for Environmental Damage

One of the most important sources of risk is that associated with violations of environmental regulations, in principle because the violation of an environmental regulation can lead to civil, administrative and criminal sanctions for the project owner. Law 41 of 1998 is the fundamental pillar of the regulations applicable to the subject. Title VIII, Chapter I of the aforementioned Law, establishes the obligations that every person must comply with in relation to the care of the environment, including Article 105 of the regulation, directly establishes the solidarity between who generates a hazardous waste and who transports it. In the construction industry there is another source of environmental obligations that emanate from the Environmental Impact Study which generates obligations, acts, omissions and mitigation measures of damage and risks to the environment that must be fulfilled and whose neglect results in administrative sanctions , and the possibility of civil compensation in addition to criminal prosecution if the offense is classified as a crime under the Penal Code. In the administrative sphere, the risk faced by the Owner of a project stoppage due to non-compliance with the environmental impact study (EIA) as well as the corresponding administrative sanction (article 15 of Law 41) stands out.

From a criminal perspective, the fact that Panama has a broad classification of the acts that can be punished is relevant, reaching prison sentences of 3 to 6 years. Title XIII, which deals with “Crimes against the Environment and Territorial Regulation” in article 399, provides that whoever violates the established environmental protection standards, destroys, extracts, pollutes or degrades natural resources, will be punished with imprisonment ”in fact , the established penalty is increased by a third if the industry or activity works without having obtained the respective authorization or approval of the competent authority, so that the breach of the contractor or subcontractor in almost any issue related to the environment exposes the Owner of the Project to economic losses due to the civil liability that is generated, the fines that can be faced and the most serious to criminal sanctions.

Risk derived from the Consumer Relationship: End user and consumers

The most relevant part in terms of risks derived from the consumption relationship can be simplified into those that originate from the guarantee conditions, product suitability, delivery times and hidden defects. Although there are several concepts, the theory of how responsibility is transferred between the different parties is quite simple. The first thing to understand is that in these cases, the Owner or the Promoter is the one who assumes the front role since they are first in the hiring line, since they are the ones who contract directly with the end user. It is important to consider that in the rest of the cases treated here, the main actuary is not necessarily the Owner or Promoter and the involvement in the form of liability comes to him by derivation, while in these cases the responsibility is direct and may arise from acts of the contractor and sub-contractor, therefore, if we want redress we must ensure that we have the contractual basis to bring a return action against who is primarily responsible; To clarify, an example: A real estate developer who sells a unit responds to the buyer for the guarantee of the kitchen furniture, therefore, if they present a defect, it will be the developer who will be required to repair or change, however the Promoter did not manufacture or install the furniture, this was done by the contractor or sub-contractor as the case may be, therefore, the Promoter assumes the cost in front of the client and must resort to the Contractor or Sub-contractor for reimbursement. The same applies in any type of situation in which warranty issues, product suitability, delivery times or hidden defects mediate, a situation that leads us to clarify that not all customer-related issues apply as a consumer relationship and therefore subject to Law 45 of 2007, which is much more comprehensive and coercive, but for the purposes of liability and return actions for compensation, the situation is the same, therefore, if the Owner does not contractually take provisions, it may happen that the responsibility that the Promoter assumes by law is greater than that contractually assumed by the contractor and / or the sub-contractor towards him, in which case the Owner may end up assuming an obligation without the possibility of compensation even when it is correct that he must obtain it.

Reputational Risk

If we consider that in most cases a project is destined, at least in part, to be commercialized, we immediately understand the weight that reputation has in the success or failure of a development. Nowadays, the existence of social networks and technological resources that are easy to use and access, subject the Owner, Developer or Promoter to constant public scrutiny in an environment where a bad image can ruin a project and even more serious can ruin a company. Any potentially risky image situation must be handled with great care, which will not be possible if there is not total control of the incidents that influence it. It is a complicated issue to understand and control, however, there is no company that, correctly situated in the reality of today’s society, does not understand the need to control reputational risk. Managing image and reputation risk does not imply an unrestricted subjugation to the opinion emanating from society, it really implies risk management that allows the company to prevent it from occurring, recognize the situation, handle it, and resolve it in the best possible way. benefit of your image. It is wrong to think that accessing everything that a person does or says is to deal with the problem correctly, since giving in is not necessarily preventing the image problem from persisting, in fact it can worsen therefore the best way to manage reputational risk is avoiding that there are situations that affect negatively, in which case, if measures are taken to protect themselves from occupational, criminal, environmental risks, consumer protection etc. the occurrence of contingencies generating reputational risk will be avoided.


So, it is obvious that if the Owner of a Work does not take care of ensuring that all the provisions that are agreed to protect themselves from all these contingencies are transferred to each of the actors with whom they interact, they are exposing themselves to assume responsibility. that in the best of cases it will be shared; Provisions that should be focused then, to prevent the occurrence of situations that generate risks, ensure that if such situations occur, the cause is contractually obliged to face them and of course that, if it is the case, said cause is contractually obligated to compensate the Owner, which leads us to mention that all these contractual provisions must be designed so that there are effective means of compliance since it will be of little use for a contractor or sub-contractor to be contractually obligated to respond to a third party or to the Owner if they do not have equity to support This obligation and that is where the importance of having a contractual structure designed so that the guarantees and performance guarantees (bonds, retained, etc.) are effective, which basically again implies that said provisions exist in the contractual relationship between owner and contractor and in turn with each sub-contractor. The best way to achieve this objective is to impose directly on the Contractor the obligation to agree in their contract’s clauses provided for this objective to be met. In fact, this is not a new idea since, for example, the CAPAC-SUNTRACS Convention already contains provisions that encourage the use of sub-contracts in a standardized format to ensure compliance with certain provisions.
The contingencies that a Promoter or even the contractor faces that cannot be controlled are many and varied, however, respecting the contractual line, added to good and strong contracts, is a good formula to prevent and minimize the occurrence of damages.

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