ECUADOR Law and Practice Contributed by: Randy Arévalo, Diego F. Amen, Darío Vicuña and Sandra Touma Faytong, VIVANCO & VIVANCO
7.3 Management of Construction Risk Construction risk management in Ecuador is gov - erned by a combination of statutory liabilities and contractual safeguards rooted in civil law. While par - ties maintain the freedom to allocate commercial risks through indemnification clauses and liability caps, the legal framework imposes non-derogable obligations, such as the decennial liability, which holds contrac - tors and architects liable for structural collapse for ten years under the Civil Code. Contracts typically feature liquidated damages in the form of fixed daily penalties for delays, provided they remain “reasonable”, to avoid judicial intervention. Although sophisticated parties frequently negotiate limitations of liability to cap damages at a specific percentage of the contract, these provisions cannot waive accountability for gross negligence or wilful misconduct, as these protections are considered mat - ters of public policy and remain strictly enforceable under national law. 7.4 Management of Schedule-Related Risk The management of temporal risk in Ecuadorian con - struction projects is primarily governed by contractual autonomy, where parties establish clear timelines and financial consequences for non-compliance. These agreements utilise standardised scheduling tools and liquidated damages equivalents to ensure that delays are quantified and compensated without the need for extensive litigation. • Management: Risk is managed through detailed work schedules approved at the start. • Monetary compensation: It is standard to include penalty clauses for missing milestones or the final delivery date. These are typically calculated as a percentage of the contract value per day of delay. • Force majeure: Contractors are excused from delays caused by an “act of God” or force majeure (eg, extreme weather, social strikes or pandemics), provided they give timely notice. 7.5 Additional Forms of Security to Guarantee a Contractor’s Performance In the Ecuadorian construction sector, project owners typically mitigate performance risks through a combi - nation of insurance-backed instruments and contrac -
tual liquidity retention. Given that judicial processes for breach of contract can be lengthy, these “first- demand” or liquid securities are essential for ensur - ing that funds are immediately available to remedy defaults or cover unamortised advances. The reliance on these instruments provides a standardised layer of financial protection that is recognised by local banks and the national judicial system alike. • Performance bonds: In Ecuador, the most common form of security is the insurance policy or a bank guarantee. • Advance payment bond: If the owner provides an upfront payment (typically 20% to 30%), the con - tractor must provide a bond covering 100% of that advance. • Retention money: It is customary for the owner to withhold 5% to 10% from each progress payment as a “good-quality fund”, which is returned after final acceptance of the work. • Parent guarantees: These are used mainly when dealing with local subsidiaries of multinational construction firms. 7.6 Liens or Encumbrances in the Event of Non-Payment The protection of construction and design fees does not follow the automatic lien model common in com - mon-law jurisdictions. Instead, securing a debt against a property requires formal judicial intervention, ensur - ing that any encumbrance is backed by a court order rather than a unilateral filing. This framework balances the rights of service providers to secure payment with the property owner’s right to clear title, requiring spe - cific procedural steps for both the imposition and the removal of such measures. • Lien rights: Unlike in mechanic’s lien jurisdictions (like the USA), contractors in Ecuador cannot auto - matically record a lien on the property in the Land Registry for non-payment. • Judicial recourse: To encumber the property, the contractor must file a lawsuit and request a pre - cautionary measure from a judge. This is only granted if the debt is proven and there is a risk of the owner becoming insolvent. • Removal: The owner can remove the encumbrance by:
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