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Compliance with the Contractual Line in the Construction Sector (Part 1)



| By: José H. Fung D. |

By a fortunate coincidence, my professional life has led me to interact with the construction sector, enough to consolidate several concepts very typical of the industry, including a lot of treatment with the different parts of the operation, which has gained me a lot of experience in what the contractual relationship refers to.

In this writing I would like to refer specifically to the contractual line that is materialized between the owner of the work, the contractor and the subcontractor, in order to show the importance of having the appropriate contracts that perfect the different legal relationships that are originate, including the obligations and rights that are transferred when there are “additional” contractors

Promoter, Contractor, Sub Contractor, or Supplier; A situation that obviously prevents a correct determination of the risk sources, mainly because, if we do not understand well the role of all those involved, One of the things that attracts the most attention is the frequency with which the roles are confused in the contractual relationship. , a situation that is denoted when the parts of the contract are not correctly arranged in relation to the activity they carry out, mainly when it is not so easy to identify who acts as Owner, Promoter, Contractor, Sub Contractor, or Supplier; a situation that obviously prevents a correct determination of the sources of risk, mainly because, if we do not fully understand the role of all those involved, we will poorly understand what type of risks we should be concerned about. Let us take note that in a construction project the same entity can play several roles, a situation that is more complicated when it is the owner of the project who assumes opposite roles in the same contract.

It is common to confuse, for example, the owner of a farm with the promoter of a project or the main contractor with the sub-contractor, supplier etc. in which case we must also consider the possibility that they are companies that are part of the same economic group.

Regardless of the type of contract in question, there will always be a mutual consideration between the owner of the project and its main contractor, so that it does not matter if we are dealing with a contract for work, supply, services, etc. since what changes is the object of the provision, not its existence. Once the execution of a project is contracted, it is usual that part of the obligations assumed by the Contractor are subcontracted, so it is not uncommon for a work to have several subcontractors from different branches, working simultaneously, in fact, many contracts include regulations in place to provide order in the way that all these subcontractors operate so that the work of one does not interfere with those of others, regulations that become stricter if it is work in sequence where the work one depends on the completion of the other’s work.

That said, it is striking that many promoters and construction owners do not pay attention to the way in which the main contractor hires the sub-contractor, in fact, many think that in the end the easiest way is to enforce the Main Contractor and let it is in charge of regulating and controlling the different operators of the subcontracted tasks, which in the end will turn out to be a serious error.

To understand where the risk lies when the hiring (formality) of subcontractors is neglected, we must understand that the construction sector has several peculiarities, among which, one of the most important, is the solidarity bond that exists in some cases (and may exist in others) between the Project Owner and the contractor, a link that of course extends in the same way to the different subcontractors.

Suppose that the owner of the project has made an effort to have a very robust contract that protects it against the contractor, and incidentally assumes that by having the assignment restricted and with that the subcontracting has ensured control, but what happens If the contractor does not exercise the same care when contracting with the subcontractor and therefore fails to transfer the same obligations that it acquired with the Owner? If we endeavor to ensure that the Contractor pays his employees and maintains peace and safety with the Social Security Fund, what is the use of that if it does not do the same with its subcontractors. Another important example would be the accumulation of obligations destined to the prevention of risks where the “risk” refers to all those contingencies that
the owner of the work faces in front of the National or municipal Authorities or in front of third parties. Failure to comply with environmental, municipal, labor and civil liability regulations will result in serious administrative and / or economic sanctions for the Owner, and all of them may have their origin in acts or omissions of the Contractor and its subcontractors.

Let us consider that in fact there is a joint and several bond between the Owner of the Work, the Contractor, and the Sub Contractor, with which any claim action will pass until reaching the Owner if the previous ones do not respond, except for those sanctions that fall directly on the Owner and for which he responds directly, even if they are acts of the contractor.

Occupational Hazard

In this regard, it is well known that the owner of the project, the contractor and the sub-contractors, by law, and social achievements assume jointly and severally responsibilities towards the worker, we have situations regarding payment of wages, professional risk and occupational safety. Article 5 of Law 67 of October 30, 2015 establishes the solidarity between the Promoter, the Main Contractor and the Sub Contractor regarding compliance with the recommendations of the designated Security officer, it is even a shared responsibility between the promoter and the main contractor (art. 12) provide the conditions to the appointed Officials. Another interesting case is the joint and several liability that exists between Contractor and Sub Contractor towards their workers regarding the payment of rights. The CAPAC-SUNTRACS Convention (in force) expressly establishes the solidarity between the Main Contractor and the Sub Contractor so that in these cases the risk for the Owner is materialized in the possibility of a strike due to non-compliance by the Construction Company, so we could To say that its affectation, although direct, comes from contractual relationships of which it is not necessarily a party, despite this, nothing says that a worker cannot through a labor process affect the credits of the contractor and the subcontractor related to the sums that the Owner o Promoter still owes them for the contract, in fact, although it sounds strange, it is the Civil Code and not the Labor Code, (art. 1349 of the Civil Code) which establishes that those who put their work and materials in a work raised by the contractor, they have action against the owner but only up to the amount that he owes them (to the contractor).

Risk for extra-contractual Civil Liability.1

Understanding that a lack of suitability is a problem that may entail responsibility for the Owner of the work, it is justified that he makes sure to demand irrefutable evidence of said suitability from his contractor, being the certification of the Technical Board of Engineering and Architecture the proof maximum that may be required, however, how does the Owner ensure that the contractor in turn only subcontracts a company that has said suitability ?; The only way to do this is through a control of the sub-contract that is finally signed with the one who is delegated for the execution of the accessory or partial work. If it is considered that a job done by someone not suitable is presumed badly done and potentially generating damages derived from fault, in the same way it will be presumed that any problem or defect that it presents is due to the inexperience of the person who executed it, it is clear that we cannot allow an unsuitable person to execute any type of work within our work, simply because although the work is correctly done, and the causes of damage are due to non-attributable factors, the lack of suitability of the person who did the work will act against him and of course against the main Contractor and the Owner for having allowed someone unsuitable to carry out the work. This type of situation is potentially generating civil and criminal liability for wrongful conduct.

Risks related to offenses related to Permits. 2

Another aspect that entails a potential existence of risk is that which refers to compliance with the permit. In our country, the processing of construction, occupancy and related permits is a complex issue to say the least, and part of that complexity is due to the existence of multiple regulations that vary according to the Municipality in which we find ourselves, which implies different Agreements Municipal. Taking into account that according to Municipal Agreement No. 116 of 1996 of the Municipality of Panama, all construction (concept that includes the realization of improvements, additions, demolitions, earthworks) requires a permit from the Municipality; It is relevant to say that said authorization empowers both the owner of the land and the responsible constructor to build (note that it is not an alternative phrase) that is to say that according to a strict interpretation this is a permit that is granted to both, therefore the consequence of not obtaining it affects said parts as a whole. Another relevant aspect that fits the subject much more closely refers to the fact that construction plans are made up of several segments that make up a “whole”, this means that there are other plans within it that must be submitted independently, according to hence  the existence of a single window at the Municipality level that resulted from the need to centralize the process so  that all regulatory administrative instances could assess the “plans as a whole”, but why is this relevant? simply  because the requirements of the Law require that each sub-plan (we take this small license for explanatory  purposes), depending on its nature, requires the validation of the appropriate professional in each case, this means  that the electrical, plumbing, fire system , etc. must be approved with the intervention of each of the sub-contractors  who abrogate the responsibility of said construction / installation, ergo, any failure or failure to obtain these permits  will have a direct impact on the project and thus will unequivocally affect the Owner, since either due to stoppage or  penalty, in which case, the worst consequence will be that the demolition of the Work or part of it built in contravention  of the approved permits or without these having been processed (art. 83 of the Municipal Agreement) No. 116 of  1996). The sanctions also apply to the owner or builder who occupies a work without the corresponding permit, in  fact, article 25 of Executive Decree No. 23 of May 16, 2007 that regulates Law 6 of February 1, 2006 sanctions with  fines. that can reach up to 1% of the value of the construction to Owners, qualified professionals or construction  companies that carry out work in contravention of current legal provisions. The Municipal Engineer is, by delegation  of the mayor, the authority that ensures compliance with the construction and urban development regulations within  the Municipality, that is, this official will be the one who, with the help of the justice of the peace, in the event of a  fault, will suspend the work first and then sanction whoever is responsible for the permits in the project, which in the  end is irrelevant for the effects of the damage – because regardless of who is at fault – if the work is paralyzed the  damages derived for the Owner are huge since progress stops but financial and execution expenses do not, without  counting the contingencies that late deliveries can generate. This, without mentioning the possibility of the existence  of a fine. Although environmental issues also apply as far as permits are concerned, they are treated separately.

In the second part of this article, we will address the risk derived from Suppliers, Damage to the  Environment, Consumption Relationship, Reputation and Conclusions.

1 As far as civil liability corresponds, the link that arises from the duty of care that the Promoter or Owner of a work must have in the face of damages caused to third parties when, for example, a work is commissioned to an unsuitable agent and this causes damages due to his lack of skill, in which case the responsibility arises from negligence, this being only one of the possible causes of responsibility.  

2 Set of permissions necessary to execute a work.

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