Croatia: Construction Comparative Guide

1 Legal framework

1.1 Which legislative and regulatory provisions govern construction projects in your jurisdiction?

A number of laws and bylaws govern construction in Croatia. The crucial law is the Construction Act, which regulates the design, construction, use and maintenance of buildings and the implementation of administrative and other related procedures in order to ensure:

• the protection and arrangement of space in accordance with the regulations governing spatial planning; and
• the basic requirements for buildings and other conditions prescribed for buildings.

Furthermore, the Law on Spatial Planning and Construction Activities:

• regulates the performance of professional tasks and activities involving:
• • spatial planning;
  • design and/or professional supervision of construction;
  • construction;
  • construction project management and testing; and
  • previous research; and
• prescribes:
• • the tasks of the profession;
  • the professional examination and professional training requirements; and
  • conditions for foreign entities that perform tasks and activities of spatial planning and construction.

The material content of the construction agreement (ie, the agreement concluded between the investor and the constructor) is governed by the Obligations Act. This act also includes specific provisions on the liability of all parties involved.

Finally, the Croatian Civil Construction Contract, developed by the Croatian Chamber of Civil Engineers and Croatian Chamber of Employers, reflects special customs in construction. Its provisions apply as long as the parties to the construction agreement have not explicitly excluded their implementation.

1.2 What other legislative and regulatory provisions have relevance for construction projects in your jurisdiction?

From a legal standpoint, construction is an especially complex area, since the activities that are involved in the execution of any construction project fall under several legal fields. These include:

• labour law;
• acts and bylaws regarding safety in the workplace; and
• a number of laws on environmental protection.

The specific circumstances of the location must also be taken into account. Therefore, the legal status of the real estate must be thoroughly checked, including:

• the local urbanisation rules and areas; and
• cultural heritage protection rules.

1.3 Which bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?

The Ministry of Physical Planning, Construction and State Assets is the central authority for all matters regarding construction in Croatia. It also issues approvals for the construction of buildings of significant state importance. Necessary approvals for other projects are issued locally, based on the location of the real estate in question; to an extent, they can also be obtained by using the online e-citizen application.

However, the Construction Act and all relevant laws and bylaws regarding construction are enforced by the Construction Inspectorate within the State Inspectorate. Among other things, inspectors are entitled to:

• order the elimination of any and all irregularities during construction;
• suspend construction until further notice; and
• even order the removal of the building.

Other applicable laws are for the major part also enforced by the State Inspectorate (eg, labour inspection, environmental inspection).

1.4 What is the general approach in regulating the construction sector?

Croatia has invested significant efforts in regulating not only the construction sector, but all other legal areas related to construction.

In particular, this includes the legalisation of existing buildings, which ended in mid-2018 and resulted in more than 900,000 applications. Any buildings that did not go through this legalisation procedure are now very likely to be removed. Furthermore, the land registers have been digitalised. The procedure of merging cadastral data with land registry data is still ongoing. Furthermore, laws have been issued to improve safety at construction sites.

Therefore, the construction sector in Croatia is now rather heavily regulated; but is also aligned with the highest international standards.

2 Procurement methods

2.1 What procurement methods are most commonly used in your jurisdiction? Do these vary depending on whether international parties are involved?

The Public Procurement Act sets out the rules on public procurement procedures carried out by a public or sectoral contracting authority, or another entity in the cases determined by the act, with the aim of:

• entering into a contract on the public procurement of goods, works or services;
• entering into a framework agreement; or
• implementing a project tender.

Bidders in an open procedure are all interested economic entities. The foundations of public procurement are the principles of the internal market of the European Union, which govern:

• the freedom of movement of goods;
• the freedom of business establishment; and
• the freedom to provide services.

Therefore, all bidders that meet the conditions stipulated in the procurement documentation can compete in public procurement procedures.

Regarding methods, the public contracting authority can freely choose between an open and restricted public procurement procedure.

2.2 What are the advantages and disadvantages of these different methods?

The open procedure is open to anyone; it thus allows transparency in competition and may result in a variety of offers. However, the number of offers and therefore the documentation that must be reviewed can be rather time consuming.

The restricted procedure is used more rarely than the open public procurement procedure. It is not a procedure in which any interested public entity can request to participate; rather, only those economic entities invited by the contracting authority can submit a bid. This procedure lasts longer than the open procedure and involves several stages, during which competitors or bidders can appeal.

2.3 What other factors may influence the choice of procurement method?

Other procurement methods include the following:

• Competitive procedure with negotiations: This is a rarely used method whereby the contracting authority contracts with a subject of its own choice because:
• • its needs cannot be met without adapting readily available solutions, or include the design of innovative solutions; or
  • prior negotiations are not possible due to specific circumstances related to the nature, complexity or legal and financial conditions or risks associated with them.
• Competitive dialogue: Any interested economic entity can request to participate in this procedure, whereby the contracting authority conducts a dialogue with selected competitors in order to develop one or more suitable solutions that will meet its requirements, based on which the selected competitors will be invited to submit bids. The procedure is applied in cases where public contracting authorities cannot determine exactly how their needs will be met or cannot assess which solutions the market can offer.
• Partnerships for innovation: This procedure is used when it is determined that there are no suitable goods, services or works on the market that can meet the needs of the client.
• Negotiation procedures without prior announcement of invitation to tender: These are used only if certain legal preconditions are met, mostly where no suitable offer in an open or limited procedure or no request for participation has been submitted.

3 Project structures

3.1 How are construction projects typically structured in your jurisdiction? Does this vary depending on whether international parties are involved?

There is a wide variety of project types and structures. The parties to a construction agreement are free to negotiate the terms according to their needs and circumstances. The involvement of international parties is not grounds for the inclusion of any specific rules – with the exception of possible deviations regarding collateral.

Generally, the employer can either:

• appoint one (or more) parties for a certain part of the project; or
• more commonly, enter into a turnkey contract, meaning that the appointed party executes the project in its entirety.

In any case, constructors usually use a variety of subcontractors. The contractor remains liable to the employer for any faults caused by the subcontractor.

A specific rule in case of turnkey contract is that the agreed price must:

• include the value of all unforeseen works and surplus works; and
• exclude the impact of insufficiencies in completed works on the agreed price, assuming that there has been no change in the scope of the contracted works based on the agreement of the contracting parties or for reasons for which the client is responsible.

3.2 What are the advantages and disadvantages of these different structures?

As pointed out in question 3.1, liability in the case of a turnkey contract may prove to be a challenge. The agreed price will remain the same even if surplus works must be undertaken. However, the agreed price will also remain the same if the works prove to be done insufficiently.

This is why it may be preferable not to exclude the application of provisions of the Croatian Civil Construction Contract. These provide that the term 'turnkey' does not exclude changes to the agreed price due to:

• a change in circumstances;
• out-of-budget works that are not provided for in the graphic parts of the project; and/or
• changes to the technical documentation requested by the client.

One might argue that turnkey contracts are more favourable as one (albeit sometimes complex and extensive) legal document governs the majority, if not all, of the project. This may also be seen as a more practical approach to certain issues such as due diligence (eg, risks connected to supply chain liability can be reduced).

For the employer, a turnkey contract may also be more favourable from an organisational perspective. However, the employer is free to choose any structure it favours.

3.3 What other factors may influence the choice of project structure?

Aside from the legal factors as mentioned in questions 3.1 and 3.2, a number of commercial factors will influence the choice of project structure, such as:

• tax issues;
• issues regarding design and planning;
• the project timeframe;
• the availability of constructors; and
• location issues.

4 Financing

4.1 How are construction projects typically financed in your jurisdiction? Does this vary depending on whether international parties are involved?

In Croatia, construction projects can be financed through a variety of sources, including:

• private financing;
• bank loans;
• government grants or subsidies; and
• foreign investment.

The choice of financing will depend on:

• the size and complexity of the project; and
• the financial resources of the owner.

The financing of construction projects in Croatia does not typically vary depending on whether international parties are involved. However, international parties may:

• prefer to use financing sources that are more familiar to them, such as international banks or lenders; or
• choose to seek out specific financing arrangements that are available only to foreign investors.

In recent years, there has been increased interest in public-private partnerships (PPPs) as a means of financing large-scale infrastructure projects in Croatia. PPPs involve collaboration between the public sector and private investors, with the private sector undertaking the financing, design, construction and operation of the infrastructure project. PPPs can provide significant benefits, including access to private sector expertise and resources; and can help to share the risks and rewards of the project between the public and private sectors.

Overall, the financing of construction projects in Croatia depends on a variety of factors, including:

• the nature of the project;
• the financial resources of the owner; and
• the availability of financing options.

4.2 What are the advantages and disadvantages of these different structures?

Different financing structures for construction projects in Croatia have their own advantages and disadvantages, which may vary depending on the specific circumstances of the project. Some general advantages and disadvantages include the following:

• Private financing:
• • Advantages: Greater control over the project; less complexity and bureaucracy; the ability to maintain confidentiality.
  • Disadvantages: Potentially higher costs; greater financial risk; limited access to large amounts of capital.
• Bank loans:
• • Advantages: Access to large amounts of capital; lower interest rates; the ability to spread the costs over a longer period of time.
  • Disadvantages: More stringent lending requirements; the potential for high fees and interest rates; the risk of default and foreclosure.
• Government grants or subsidies:
• • Advantages: Lower interest rates; longer repayment periods; access to funding that may not be available through other sources.
  • Disadvantages: Bureaucratic delays; the potential for political interference; the limited availability of funding.
• PPPs:
• • Advantages: Access to private sector expertise and resources; risk sharing between the public and private sectors; the potential for innovation and efficiency.
  • Disadvantages: Complex legal and financial structures; the potential for cost overruns and delays; the risk of disputes and conflicts between the public and private sectors.

4.3 What other factors may influence the choice of financing structure?

In addition to the factors mentioned in question 4.2, there are several other factors that may influence the choice of financing structure for a construction project in Croatia:

• Project size and complexity: The size and complexity of the project can play a significant role in determining the appropriate financing structure. Larger, more complex projects may require more financing than smaller projects; and may also require a more complex financing structure involving multiple funding sources.
• Type of construction project: Different types of construction projects may require different financing structures. For example, a public infrastructure project may be more suitable for a PPP or government financing; while a commercial development project may be more suitable for private financing or bank loans.
• Project risk: The level of risk associated with the construction project can also impact on the choice of financing structure. Projects with a higher level of risk may require more capital or a financing structure that shares risk between multiple parties.
• Interest rates: The prevailing interest rates can impact on the cost of financing for the construction project and can also influence the choice of financing structure. Higher interest rates may make it more difficult to obtain financing or may make certain financing structures less attractive.
• Regulatory environment: The regulatory environment in Croatia, including laws and regulations related to financing and construction, can also influence the choice of financing structure. For example, certain financing structures may be subject to more stringent regulatory requirements than others.
• Market conditions: Market conditions – including the availability of funding sources, investor appetite for certain types of projects and the overall economic climate – can also impact on the choice of financing structure for a construction project.

4.4 What types of security and other protections are available to lenders to safeguard their position?

In Croatia, lenders may use various types of security and other protection to safeguard their position in a construction project. Some of the common types of security and protections available to lenders include:

• Mortgages: A mortgage is a common form of security that lenders use to secure their loan against the property.
• Guarantees: Lenders may require personal or corporate guarantees from the borrower or a third party to guarantee the borrower's obligations under the loan.
• Assignment of contracts: Lenders may require the borrower to assign its rights under any relevant contracts, such as construction contracts, to the lender as a form of security.
• Insurance: Lenders may require the borrower to obtain various types of insurance – such as construction all-risk insurance or professional indemnity insurance – to protect against potential losses.
• Escrow accounts: Lenders may require the borrower to establish an escrow account, where funds are held in trust by a third party until certain conditions are met or until the funds are released.
• Performance bonds: Performance bonds may be required from contractors to ensure that they fulfil their obligations under the construction contract. This can provide additional protection to the lender if the construction is not completed as required.
• Subordination agreements: Where multiple lenders are involved in a project, they may enter into subordination agreements to prioritise their position in relation to other lenders.

4.5 What law typically governs project finance agreements in your jurisdiction? Do any specific requirements apply in this regard?

Project finance agreements are typically governed by Croatian law. However, international parties may choose to use the law of another jurisdiction.

There are no specific legal requirements that apply to project finance agreements in Croatia, as long as the agreement complies with Croatian law. However, parties should ensure that the agreement includes provisions that address any specific legal requirements that may apply to the project, such as environmental or regulatory requirements.

In addition, parties should ensure that the project finance agreement complies with any other relevant laws and regulations, such as those relating to banking, securities and anti-money laundering. The agreement should also include provisions that address any tax implications associated with the project, such as withholding taxes or transfer pricing rules.

Overall, it is important for parties to obtain legal advice from qualified lawyers to ensure that their project finance agreement complies with all relevant laws and regulations in Croatia.

5 Bribery and corruption

5.1 What measures are in place to combat bribery and corruption in your jurisdiction?

Although any trace of corruption is disturbing, one could say that in Croatia there is a significant contradiction between perception and reality when it comes to the issue of bribery and corruption. For example, research conducted by the Global Corruption Barometer reveals that while 70% of respondents in Croatia consider the judiciary to be corrupt, only 3% of respondents in Croatia have actually witnessed specific forms of corruption in the justice system.

Whatever the case may be, Croatia has implemented a very clear policy of zero tolerance towards corruption. Not only do bribery and corruption, in all of their forms, constitute a number of criminal acts as foreseen under the Criminal Act, but the state has established a specialised unit for the prosecution of corruption and organised crime – the Office for the Suppression of Corruption and Organised Crime. The office is a special state attorney office which is competent for the entire territory of Croatia.

6 Standard form contracts

6.1 Which standard form contracts are typically used for construction projects in your jurisdiction? Does this vary depending on whether international parties are involved?

In Croatia, the most commonly used standard form contracts for construction projects include the following:

• FIDIC contracts: These are widely used in Croatia, especially for large and complex projects.
• Croatian Civil Construction Contract: The Croatian Chamber of Civil Engineers and the Croatian Chamber of Employers have developed special instructions regarding the standard form of construction contract that are used on many smaller projects and by local contractors. These special instructions always apply, unless the parties have excluded their application.
• Public procurement contracts: For public sector construction projects, the Public Procurement Act prescribes the use of standard form contracts.
• Civil Obligations Act contracts: Although the Civil Obligations Act does not provide a specific standard form contract for construction projects, it sets out certain mandatory rules that must be observed in relation to construction contracts and thus has an impact on the obligatory content of the contract.

Whether international parties are involved may affect the choice of standard form contract used in a construction project. If the project involves international parties, FIDIC contracts may be preferred, as they are widely recognised and used internationally. However, if the project involves only local parties, the Croatian Civil Construction Contract may be more commonly used. Additionally, if the project is a public sector project, the standard form contracts prescribed by the Public Procurement Act will always be used regardless of the parties involved.

6.2 What are the advantages and disadvantages of using the different standard forms?

• FIDIC contracts are recognised and widely used internationally. They provide a comprehensive set of terms and conditions that cover the specific needs of construction projects and are updated periodically to reflect changes in industry best practices and legal requirements. However, they tend be complex and lengthy, and therefore are not suitable for smaller, less complex projects. Furthermore, the FIDIC forms may require some customisation to reflect local legal requirements and practices.
• The Croatian Civil Construction Contract is specifically developed for use in Croatia, so it reflects local legal requirements and practices. It is designed to be simpler and more accessible than the FIDIC forms, which may make it more suitable for smaller, less complex projects. This contract can be more easily understood by parties with limited experience in construction contracts. On the other hand, this approach may not be suitable for larger or more complex projects; and it may be less familiar to international parties than the FIDIC forms.
• Public procurement contracts are prescribed by law, so parties do not need to negotiate contract terms. These provisions are designed to be transparent and fair, with a focus on obtaining the best value for money for the public sector. However, these contracts may not be suitable for all types of construction projects, as they are designed specifically for public sector projects. They lack flexibility and generally do not provide as comprehensive a set of terms and conditions as the FIDIC or Croatian Civil Construction Contract forms.

6.3 What other factors may influence the decision to use standard form contracts and the choice of standard form?

Several factors may influence the decision to use standard form contracts and the choice of standard form in Croatia, as follows:

• Project size and complexity: FIDIC contracts can prove to be more suitable for large and complex projects; while the Croatian Civil Construction Contract may be more appropriate for smaller and less complex projects.
• Risk allocation: The allocation of risk between the parties is an important consideration in construction contracts. The FIDIC Red Book is designed to allocate risk in a fair and balanced manner, which may be an advantage for parties seeking a balanced allocation of risk.
• Experience of the parties: The experience and expertise of the parties involved in the project may influence the choice of standard form contract. Parties with limited experience in construction contracts may prefer a simpler form of contract, such as the Croatian Civil Construction Contract.
• Local legal requirements: Local legal requirements and practices may influence the choice of standard form contract. For example, the Public Procurement Act prescribes the use of standard form contracts for public sector projects in Croatia.
• International parties: If the project involves international parties, the use of a widely recognised and accepted standard form contract such as FIDIC may be advantageous, as it can provide consistency and familiarity for parties involved in international projects.
• Industry norms: The use of certain standard form contracts may be prevalent in a particular industry or sector, which may influence the choice of standard form contract.
• Time and cost: The time and cost involved in negotiating and drafting bespoke contracts may influence the decision to use standard form contracts. Standard form contracts are typically more cost effective and time efficient than bespoke contracts.

The choice of standard form contract will depend on a range of factors, and the parties should carefully consider their specific needs and requirements before selecting the most appropriate standard form contract for their project.

6.4 Where standard form contracts are used, do parties typically modify their provisions?

It is common for parties to modify the provisions of standard form contracts when using them for construction projects in Croatia. Standard form contracts are designed to provide a comprehensive set of terms and conditions that can be used as a starting point for negotiations between the parties. However, parties may have specific requirements or preferences that are not covered by the standard form; or may wish to allocate risks and obligations differently from what is provided in the standard form.

Modifications to standard form contracts may include, for example:

• changes to the payment provisions;
• variations to the scope of work;
• modifications to the dispute resolution mechanisms; or
• changes to the allocation of risk between the parties.

The extent and nature of the modifications will depend on the specific needs of the project and the parties involved.

While parties are free to modify the provisions of standard form contracts, they should ensure that any modifications:

• are consistent with the overall purpose and intent of the contract; and
• do not create unintended consequences or conflict with other provisions.

Parties should also seek legal advice to ensure that any modifications are legally valid and enforceable.

7 Contractual issues

7.1 Is a choice of foreign law or jurisdiction valid and enforceable? In the case of a choice of foreign law of jurisdiction, will any provisions of local law have mandatory application?

Yes, a choice of foreign law or jurisdiction is generally valid and enforceable in Croatia, subject to certain conditions. Under Croatian law, the parties to a contract are free to choose the governing law and jurisdiction that will apply to their agreement. This choice is typically reflected in the contract and, once agreed upon by the parties, is generally binding.

However, there are certain mandatory provisions of Croatian law that cannot be waived or modified by agreement of the parties. For example, certain provisions of the Civil Obligations Act are mandatory and cannot be overridden by a choice of foreign law or jurisdiction. These mandatory provisions may include provisions related to consumer protection, competition law and other public policy considerations.

In addition, parties should be aware that even if they choose a foreign law or jurisdiction, local courts in Croatia may still have jurisdiction over certain aspects of the dispute or transaction. For example, the Croatian courts may have jurisdiction to enforce judgments or to decide matters related to property located in Croatia.

Overall, while a choice of foreign law or jurisdiction is generally valid and enforceable in Croatia, parties should carefully consider the implications of their choice and seek legal advice to ensure that any mandatory provisions of local law are properly accounted for.

7.2 What formal, substantive and procedural requirements typically apply to construction contracts in your jurisdiction? Are there any mandatory terms? What terms are typically included? Are any terms prohibited?

In Croatia, construction contracts are subject to a number of formal, substantive and procedural requirements.

• Formal requirements:
• • Written form: Construction contracts must be in writing to be valid and enforceable.
  • Signature: Construction contracts must be signed by both parties or their authorised representatives.
  • Registration: Public procurement contracts must be registered with the Croatian Public Procurement Agency.
• Substantive requirements:
• • Performance: Construction contracts must specify the work to be performed, including the scope, quality and standards required.
  • Price: Construction contracts must specify the price to be paid, as well as the payment terms and conditions.
  • Time: Construction contracts must specify the time for completion of the work, including any milestones or deadlines.
  • Warranty: Construction contracts must specify the warranty period, which is typically two years.
• Procedural requirements:
• • Notice: The parties must give notice to each other of any claims, disputes or changes to the contract.
  • Payment: The parties must comply with payment obligations, including payment for work performed and payment for any changes or variations to the work.
  • Termination: Construction contracts may be terminated by the parties in certain circumstances, such as for breach or frustration.

Mandatory terms: Under Croatian law, certain terms are mandatory and cannot be waived or modified by agreement of the parties. For example, the Croatian Civil Obligations Act prescribes mandatory provisions related to the performance of the work, warranties and liability for defects.

Typically included terms: Construction contracts in Croatia typically include terms related to:

• the scope of work;
• payment;
• time for completion;
• variations;
• warranties;
• termination; and
• dispute resolution.

Prohibited terms: There are no specific terms that are prohibited under Croatian law, but parties should ensure that any terms included in the contract are consistent with the requirements of the law and public policy considerations.

7.3 How is risk typically allocated between the parties? What steps can the parties take to mitigate these risks?

Risk allocation in construction contracts in Croatia is typically negotiated between the parties and can vary depending on the nature and complexity of the project. However, there are some common ways in which risks are allocated between the parties:

• Scope of work: The contractor is typically responsible for the work specified in the contract and bears the risk of any defects or failures in the work.
• Time for completion: The contractor is typically responsible for completing the work within the agreed timeframe and bears the risk of any delays or extensions.
• Price: The owner is typically responsible for paying the contract price; while the contractor is responsible for any additional costs or variations to the work.
• Site conditions: The owner is typically responsible for providing a suitable site for the work; while the contractor is responsible for dealing with any unexpected site conditions or changes to the site.

To mitigate these risks, the parties can take a number of steps:

• Contractual protections: The parties can include provisions in the contract that allocate risks and provide remedies for breaches or failures.
• Insurance: The parties can obtain insurance coverage to protect against certain risks, such as construction defects, property damage or liability.
• Quality control: The parties can implement quality control measures to ensure that the work is completed to the required standard and to minimise the risk of defects or failures.
• Communication and cooperation: The parties can work together to identify and manage risks, and to address any issues that arise during the course of the project.

It is important for the parties to carefully consider and allocate risks in the contract, as well as to take appropriate steps to mitigate these risks. This can help to ensure that the project is completed on time, within budget and to the required standard.

7.4 How can liability be excluded or restricted in your jurisdiction? Are parties able to cap their liability?

In Croatia, parties are generally free to agree on the extent of their liability under a contract, including the ability to cap liability or exclude liability altogether. However, the Civil Obligations Act sets out some general principles that apply to limitation of liability clauses.

Under the Civil Obligations Act, parties cannot exclude liability for:

• intentional or grossly negligent behaviour; or
• damages resulting from a breach of contract that is essential to the purpose of the contract (ie, a breach of a fundamental term).

In addition, clauses that attempt to limit or exclude liability for death or personal injury are generally not enforceable.

Parties can generally cap their liability under a contract, but there are some limitations on this ability. For example, a cap on liability may be considered unreasonable or unfair if it is disproportionately low compared to the potential damages that could result from a breach of contract. Courts may also refuse to enforce a limitation of liability clause if it is deemed to be contrary to public policy.

In practice, construction contracts in Croatia often include clauses that cap the contractor's liability for certain types of damages or losses, such as consequential or indirect damages. The specific terms of these clauses will depend on:

• the nature and complexity of the project; and
• the bargaining power of the parties.

It is important for parties to carefully consider the terms of any limitation of liability clauses and ensure that these clauses comply with the requirements of the law and public policy considerations. Parties may wish to seek legal advice to ensure that the terms of the contract adequately protect their interests while remaining legally enforceable.

7.5 In the event of delay to the project, what consequences will this typically have for the parties?

In Croatia, the consequences of a delay to a construction project will depend on the terms of the contract between the parties. Construction contracts typically include provisions that address the consequences of delays, including:

• the allocation of risk and responsibility for delays;
• the entitlement to extensions of time; and
• the payment of damages or liquidated damages for delay.

If the contractor is responsible for the delay, the owner may be entitled to claim damages or liquidated damages for any losses suffered as a result of the delay. The amount of damages will depend on the specific terms of the contract, but may include compensation for:

• increased costs;
• lost revenue; or
• additional financing costs.

Alternatively, the contract may provide for liquidated damages, which are a pre-agreed amount that the contractor must pay for each day that the project is delayed beyond the agreed completion date.

If the owner is responsible for the delay, the contractor may be entitled to claim an extension of time to complete the project. The contract may specify:

• the circumstances under which the contractor is entitled to an extension of time; and
• the procedures for making such a claim.

In some cases, the contract may provide for both liquidated damages and extensions of time, allowing the parties to balance the risks and consequences of delay.

In addition to the financial consequences of delay, there may be other impacts on the project, such as:

• reputational damage;
• loss of productivity; or
• increased safety risks.

It is important for parties to carefully consider the potential consequences of delay when negotiating and drafting the contract, and to take appropriate steps to mitigate the risk of delay and to manage any delays that do occur.

7.6 Is the concept of force majeure recognised in your jurisdiction? If so, what are the typical implications for the parties?

Yes, the concept of force majeure is recognised in Croatia. The Civil Obligations Act provides that a party is not liable for non-performance of its obligations if the non-performance is due to a force majeure event that was unforeseeable and could not have been prevented by reasonable measures.

Force majeure events typically include events that are beyond the control of the parties, such as:

• natural disasters;
• war;
• terrorism; and
• government actions.

The specific events that qualify as force majeure will depend on the terms of the contract and the circumstances of the case.

If a force majeure event occurs, the parties will typically be excused from performing their obligations for the duration of the event. The contract may also provide for additional rights and obligations in the event of a force majeure event, such as:

• the right to terminate the contract;
• the obligation to give notice of the force majeure event; or
• the obligation to mitigate the effects of the event.

In practice, force majeure clauses are commonly included in construction contracts in Croatia. These clauses will typically define:

• the events that qualify as force majeure; and
• the consequences of a force majeure event, including any extensions of time or other relief that may be available to the parties.

It is important for parties to carefully consider the potential for force majeure events when negotiating and drafting the contract, and to ensure that the force majeure clause is sufficiently clear and comprehensive to provide for the parties' needs and expectations. Parties may also wish to seek legal advice to ensure that the force majeure clause complies with the requirements of the law and is enforceable in the event of a dispute.

7.7 What scope do the parties typically have to make material variations to the works?

The scope for making material variations to the works will depend on the terms of the construction contract between the parties. In Croatia, the Civil Obligations Act provides that a contract can be amended by mutual agreement of the parties; and the parties to a construction contract may agree to vary the scope of the works, the contract price or other key terms.

However, the contract will typically provide for specific procedures for making changes to the scope of work, including:

• the approval process for changes;
• the timing and documentation requirements; and
• any pricing adjustments that may be required.

In many cases, the contract may provide for a formal change order process, which requires the parties to agree on any changes in writing before they can be implemented. The change order will typically specify the details of the change, including:

• the new scope of work;
• any changes to the contract price or schedule; and
• any other relevant details.

It is important for parties to carefully consider the potential for changes to the scope of work when negotiating and drafting the contract, and to ensure that the contract includes clear and comprehensive provisions for making changes, including any approvals or notifications that may be required. Parties may also wish to seek legal advice to ensure that any changes to the contract comply with the requirements of the law and are enforceable in the event of a dispute.

7.8 Are there any particular requirements for completion or taking-over in your jurisdiction?

In Croatia, the requirements for completion and taking over will depend on the terms of the construction contract between the parties. However, there are some general legal requirements that apply to all construction contracts.

Under the Civil Obligations Act:

• a construction contract must be completed in accordance with the agreed terms; and
• the contractor must deliver the completed works to the owner in a condition that is fit for their intended purpose.

The owner must then take over the completed works and pay the contractor the agreed price.

The contract will typically provide for specific procedures for completion and taking over, including:

• the timing of completion;
• any inspections or tests that may be required; and
• the documentation required for acceptance of the works.

Once the works are completed, the parties will typically conduct a final inspection to ensure that the works have been completed in accordance with the contract and are fit for their intended purpose. If any defects or deficiencies are identified during the inspection, the contractor will be required to remedy these before the works can be accepted.

Once the works have been accepted by the owner, the contract price will become due and payable. The contract may also provide for retention of a portion of the contract price as security against any defects or deficiencies that may arise during the defect liability period.

It is important for parties to carefully consider the requirements for completion and taking over when negotiating and drafting the contract, and to ensure that the contract includes clear and comprehensive provisions for these processes, including any inspections, tests or documentation that may be required. Parties may also wish to seek legal advice to ensure that the completion and taking-over processes comply with the requirements of the law and are enforceable in the event of a dispute.

7.9 What requirements and restrictions typically apply to the termination of the construction contract in your jurisdiction?

In Croatia, the requirements and restrictions that apply to the termination of a construction contract will depend on the terms of the contract between the parties. However, the Croatian Civil Obligations Act provides some general principles that apply to all contracts, including construction contracts.

Under the Civil Obligations Act, a construction contract can be terminated by:

• mutual agreement of the parties;
• operation of law; or
• court order.

The contract may also provide for specific termination provisions, including:

• the circumstances under which the contract can be terminated;
• the notice periods required; and
• the consequences of termination.

In addition, the Civil Obligations Act provides that a contract can be terminated for breach of contract by one of the parties. If one party breaches a material term of the contract, the other party may have the right to terminate the contract and seek damages or other remedies for the breach. However, termination for breach will generally require a prior notice and opportunity to cure the breach.

It is important for parties to carefully consider the requirements and restrictions that may apply to termination when negotiating and drafting the contract, and to ensure that the contract includes clear and comprehensive provisions for termination, including any notice periods, cure periods or other requirements. Parties may also wish to seek legal advice to ensure that the termination provisions comply with the requirements of the law and are enforceable in the event of a dispute.

7.10 How are delay or liquidated provisions dealt with in your jurisdictions?

In Croatia, delay or liquidated damages provisions in construction contracts are generally enforceable, subject to certain limitations.

The parties to a construction contract can agree to include provisions for liquidated damages in the event of delay or non-performance by one of the parties. These provisions will typically provide for a specified amount of damages to be paid by the defaulting party for each day or week of delay beyond the agreed completion date.

Under Croatian law, liquidated damages provisions must be reasonable and proportionate to the actual losses suffered by the non-breaching party as a result of the delay. If the amount of liquidated damages is excessive or not reasonably related to the actual losses, it may be deemed a penalty and may be unenforceable.

In addition to liquidated damages, the parties may agree to include provisions for extension of time in the event of delay, giving the contractor additional time to complete the works without penalty. These provisions will typically specify the circumstances in which an extension of time can be granted, such as in the event of unforeseen circumstances or delays caused by the owner or other third parties.

It is important for parties to carefully consider the provisions for delay or liquidated damages when negotiating and drafting the contract, and to ensure that the provisions are reasonable, proportionate and compliant with the requirements of the law. Parties may also wish to seek legal advice to ensure that the delay or liquidated damages provisions are enforceable in the event of a dispute.

8 Subcontractors and suppliers

8.1 Are there any particular issues which arise when dealing with subcontracts and/or subcontractors which are different from the issues discussed elsewhere?

Yes, there may be some specific issues that arise when dealing with subcontracts and subcontractors in Croatia that may be different from other countries. Some potential issues to consider include the following:

• Language barriers: Subcontractors in Croatia may not be fluent in English or other languages commonly used in business. This can make communication more difficult and increase the risk of misunderstandings.
• Legal requirements: Croatian law has specific requirements for subcontracting agreements and failure to comply with these requirements can result in legal consequences. It is important to ensure that subcontracting agreements comply with the applicable laws and regulations.
• Payment issues: Some subcontractors in Croatia may require payment in advance or have specific payment terms. It is important to clarify payment terms and ensure that they are acceptable before entering into a subcontracting agreement.
• Quality control: Ensuring that subcontractors in Croatia meet the required quality standards may be more challenging than in other countries. It is important to establish clear quality control procedures and regularly monitor subcontractor performance to ensure that quality standards are met.
• Cultural differences: Differences in business culture and practices between Croatia and other countries may also impact subcontracting relationships. It is important to be aware of these differences and adjust communication and expectations accordingly.

8.2 Are there nominated subcontractors in your jurisdiction?

Yes, nominated subcontractors are commonly used in Croatia. In construction projects, for example, the main contractor may nominate specific subcontractors to carry out certain aspects of the work, such as electrical installation, plumbing or security systems. This allows the main contractor to ensure that the subcontractor has the necessary skills and experience to carry out the work to a high standard.

9 Payment

9.1 Are there any statutory or other requirements which govern how parties are paid?

If the contract does not stipulate anything else regarding the price change, a contractor which has fulfilled its obligation within the stipulated period can demand an increase in the price of the works if, in the time between the conclusion of the contract and its fulfilment, and without its influence, the prices of the elements on the basis of which the price was determined have increased so that the price of the works should be higher by more than 2%.

If it has been agreed that the price of the works will not change if, after the conclusion of the contract, the prices of the elements on the basis of which it was determined increase, the contractor may, despite such a provision, demand a change in the price of the works if the prices of the elements, without its influence, have increased to such an extent that the price of the works should be higher by more than 10%.

It is very common – and actually prescribed by the Croatian Civil Construction Contract – that the performed works are paid based on temporary situations and the finished situation. Temporary situations and the finished situation are determined on the basis of the performed quantities of contracted works and the contracted prices, unless the contracting parties have agreed on payment according to the financial plan or in another way.

9.2 Are 'pay when paid' clauses valid? In what circumstances?

There is no provision explicitly prohibiting such a clause; therefore, one is free to include such a clause in a contract. However, such a clause can be removed by a court and/or deemed null and void, as one can reasonably interpret such a clause as burdensome and unfair.

9.3 How are retentions typically dealt with?

Typically, the investor is entitled to retain a proportional part of the amount of the contracted price for the remediation of defects mutually determined during the handover of the works, up to 5% of the value of the works, unless the contract provides for another means of insurance.

The retained part of the contracted price is to be used to remedy identified defects in the performed works, if the contractor does not remedy these defects within a reasonable time upon the written request of the customer.

10 Health and safety

10.1 What key health and safety requirements apply to construction projects in your jurisdiction?

Construction projects in Croatia are subject to a variety of health and safety requirements that are designed to protect workers and the public from potential hazards. Some of the key requirements include the following:

• Occupational Health and Safety Act: This act establishes the basic principles of safety and health protection at work, and sets out the responsibilities of employers and employees.
• Construction Products Regulation: This regulation establishes the conditions for placing construction products on the market, including the essential safety and health requirements that must be met.
• Personal protective equipment: All workers on a construction site must wear appropriate personal protective equipment, such as hard hats, safety glasses and gloves.
• Risk assessment: Employers must identify and assess the risks associated with a construction project and take appropriate measures to eliminate or reduce them.
• Fire safety: Construction sites must have adequate fire safety measures in place, including fire extinguishers, fire alarms and escape routes.
• Machinery and equipment: All machinery and equipment used on a construction site must be inspected and maintained regularly to ensure that it is safe to use.
• Working at height: Workers who work at height must be trained and provided with appropriate safety equipment such as harnesses and safety nets.
• Hazardous substances: Employers must identify and assess the risks associated with hazardous substances on a construction site and take appropriate measures to control or eliminate them.
• Noise and vibrations: Employers must identify and assess the risks associated with noise and vibrations on a construction site and take appropriate measures to control or eliminate them.
• First aid: There must be a sufficient number of trained first aiders on a construction site, and first aid equipment and facilities must be readily available.

It is essential to comply with these requirements to ensure the safety and health of everyone involved in a construction project.

10.2 What reporting requirements apply with regard to construction site accidents in your jurisdiction?

In Croatia, there are certain reporting requirements that apply to construction site accidents. These requirements aim to ensure that accidents are promptly reported and that appropriate measures are taken to prevent similar incidents in the future:

• Reporting to the employer: In the event of an accident on a construction site, the worker involved in the accident must report the incident to the employer as soon as possible.
• Reporting to the health and safety representative: The employer must inform the health and safety representative of the incident and ensure that he or she investigates the incident and takes any necessary corrective measures.
• Reporting to the Croatian Health Insurance Fund: In the event of a minor incident at work, the employer must report it to the Croatian Health Insurance Fund within eight days of the date on which the injury occurs.
• Reporting to the Labour Inspectorate: Employers must also report all accidents resulting with serious and fatal consequences to the Labour Inspectorate immediately after the incident occurs.
• Reporting to the police: In the event of a fatal accident on a construction site, the employer is required to report the incident to the police.

It is essential to comply with these reporting requirements to ensure that:

• accidents are investigated;
• appropriate measures are taken to prevent similar incidents; and
• workers are protected from future hazards.

Failure to comply with reporting requirements can result in fines or other legal consequences.

10.3 What are the potential consequences of breach of these requirements – both for the contractor itself and for directors, managers and employees?

Breach of health and safety requirements on construction projects in Croatia can have serious consequences for the contractor, directors, managers and employees. Some potential consequences include the following:

• Fines: Breach of health and safety requirements can result in the imposition of fines by the regulatory authorities. The amount of the fine will depend on:
• • the severity of the breach; and
  • the number of workers affected.
• Criminal prosecution: In case of serious breaches, criminal charges may be brought against the contractor, directors, managers and employees responsible for the breach. Criminal penalties can include imprisonment, fines or both.
• Civil claims: Workers who suffer injuries or illnesses as a result of a breach of health and safety requirements may bring civil claims against the contractor, directors, managers and employees responsible for the breach. This can result in significant compensation pay-outs and legal costs.
• Reputation damage: Breach of health and safety requirements can damage the reputation of the contractor, directors, managers and employees responsible for the breach. This can result in a loss of business opportunities and damage to future earnings.
• Legal liability: Breach of health and safety requirements can also result in legal liability for the contractor, directors, managers and employees responsible for the breach. This can have significant financial and legal consequences, including the possibility of bankruptcy.

It is important for contractors, directors, managers and employees to take health and safety requirements seriously to ensure the safety of workers and to avoid potential legal and financial consequences.

10.4 What best practices in relation to health and safety should construction contractors consider adopting in your jurisdiction?

Construction contractors in Croatia should consider adopting the following best practices in relation to health and safety:

• Appoint a health and safety officer: Appointing a health and safety officer responsible for implementing and monitoring health and safety policies and procedures can ensure that safety is a priority on the construction site.
• Develop a health and safety policy: A comprehensive health and safety policy that outlines the procedures, guidelines and responsibilities for all workers can ensure that everyone is aware of the safety requirements and how to comply with them.
• Provide training: Providing adequate training to workers can help prevent accidents and ensure that everyone understands the safety requirements and how to use safety equipment.
• Conduct regular safety inspections: Regular safety inspections of the construction site can help to identify potential hazards and ensure that appropriate measures are taken to control or eliminate them.
• Provide personal protective equipment: Appropriate personal protective equipment such as hard hats, safety glasses and gloves can help workers avoid accidents and protect them from potential hazards.
• Implement a risk assessment system: This can help to identify potential hazards and ensure that appropriate measures are taken to control or eliminate them.
• Maintain machinery and equipment: Regular maintenance of machinery and equipment can help to ensure that they are safe to use and prevent accidents caused by equipment failure.
• Promote a culture of safety: This can help to ensure that safety is a priority for all workers and encourage them to report potential hazards or unsafe conditions.

10.5 Which bodies are responsible for enforcement of health and safety obligations?

In Croatia, health and safety obligations on construction sites are enforced by several bodies, including the following:

• Ministry of Labour, Pension System, Family and Social Policy: The ministry is responsible for developing and enforcing policies and regulations related to health and safety in the workplace, including those applicable to construction sites.
• Institute of Public Health Department of Occupational Health: The institute is responsible for:
• • providing information and guidance on health and safety at work;
  • conducting inspections; and
  • issuing certificates and licences for companies and individuals that work in hazardous industries, including construction.
• Labour Inspectorate: The Labour Inspectorate is responsible for enforcing health and safety laws and regulations in the workplace, including:
• • conducting inspections and investigations; and
  • imposing penalties for non-compliance.
• Health Insurance Fund: The fund is responsible for providing insurance coverage against accidents at work and occupational diseases for workers in Croatia.

These bodies work together to ensure that:

• health and safety obligations are enforced on construction sites in Croatia; and
• employers are held accountable for any breaches of health and safety laws and regulations.

10.6 What is the general approach in regulating the construction sector from a health and safety perspective?

The general approach in regulating the construction sector from a health and safety perspective in Croatia is to prioritise worker safety and ensure that all workers are protected from potential hazards on construction sites.

The legal framework for health and safety in the construction sector is set out in the Occupational Health and Safety Act and the Construction Act, which establish a range of health and safety requirements that must be met on construction sites. These requirements cover areas such as:

• risk assessment;
• safety planning;
• worker training;
• personal protective equipment; and
• reporting of accidents and incidents.

To ensure compliance with these requirements, the Croatian government has established a system of inspections and penalties to enforce health and safety regulations on construction sites. This includes:

• regular inspections by the Labour Inspectorate and other relevant authorities; and
• penalties for non-compliance, which can include:
• • fines;
  • suspension of work; and
  • even criminal charges in case of serious breaches.

In addition to enforcing health and safety regulations, the Croatian government provides support to construction companies to help them meet their health and safety obligations. This includes resources such as:

• guidance documents;
• training programmes; and
• access to technical expertise and best practices.

Overall, the general approach in regulating the construction sector from a health and safety perspective in Croatia is to prioritise worker safety and ensure that all construction work is carried out in a safe and responsible manner, with a focus on prevention and continuous improvement.

11 Environmental and sustainable development issues

11.1 What environmental authorisations are required for construction projects in your jurisdiction? Do these vary depending on the type of project or the location of the site?

The (environmental) authorisations required for construction projects vary depending on issues such as the size, complexity and location of the construction. Such authorisations may relate to:

• the actual construction;
• drilling and groundwater;
• wastewater;
• pollution in the soil; and
• other relevant factors.

Projects that are likely to have a significant effect on the environment require an environmental impact assessment (EIA).

11.2 What is the process for obtaining environmental authorisations?

The requests for environmental authorisations are usually submitted to the relevant municipality before the activity begins. Permits are granted only if the construction project is effected in accordance with the relevant laws, local development plans and other relevant requirements. For projects that require an EIA due to their possible significant effect on the environment, no permits will be issued if the EIA is not included in the project documentation.

11.3 What environmental requirements must the contractor observe while the site is operational?

There are many different environmental requirements that a contractor must observe while the site is operational; these will depend on issues such as the size of the building site and the location of the construction. The contractor must comply with all requirements relevant to the project, including waste management, recycling and noise control. The contractor must set forth and enforce measures to ensure that any pollution of air, soil or underground waters on the constructions site or related to the construction site is minimal.

11.4 What are the potential consequences of breach of these requirements – both for the contractor and for directors, managers and employees?

The consequences of a breach of the environmental requirements will depend on the specific breach. Typical consequences may include an order to stop a certain activity or a fine.

The issue of identification of the responsible actor according to the applicable legislation should also be borne in mind. For instance, it may be agreed between an employer and a contractor that the contractor will be responsible for adhering to certain environmental requirements. However, if the relevant act prescribes that the entity to be charged is the employer, the employer will nonetheless be responsible for the breach towards the relevant public authority.

The responsibility is not limited only to the employer and the contractor; for certain infractions, it extends to:

• investors;
• architects;
• planners and designers of the building;
• supervising engineers;
• auditors; and
• owners of the building.

11.5 What environmental requirements apply to new buildings?

New buildings must achieve specified energy-efficiency standards and lower carbon emissions. The investor or the owner of a new building is obliged to obtain an energy certificate for a new building in order for a use permit to be issued for such building. An energy certificate will not be issued for a new building if it does not meet the 'nearly zero-energy building' standard, which means that the building must consume a low amount of energy, mostly obtained from renewable sources.

11.6 Which bodies are responsible for enforcement of environmental obligations?

In construction, the environmental obligations are primarily enforced by the construction inspection of the Ministry of Physical Planning, Construction and State Assets. For certain simple projects as defined by the relevant law, the supervision of environmental obligations has been delegated by the Ministry of Physical Planning, Construction and State Assets to the municipality in which the construction is performed.

11.7 What is the regulators' general approach in regulating the construction sector from an environmental perspective?

As an EU member, Croatia follows the European Union's 'green' policy in all sectors of the economy, including the construction sector. The Croatian government's targets are to:

• reduce the total amount of carbon dioxide emissions by approximately 45% by 2030; and
• phase out the use of coal by 2033.

Since it is estimated that buildings in the European Union are responsible for 36% of carbon dioxide emissions, Croatia requires all new buildings to adhere to the 'nearly zero-energy building' standard; while older buildings cannot be sold, rented or leased without undergoing an energy assessment and certification process.

11.8 What is the impact of Net Zero in your jurisdiction?

The Low-Carbon Development Strategy of the Republic of Croatia by 2030 with a View to 2050 aims to achieve carbon neutrality by 2050. The Ministry of Physical Planning, Construction and State Assets has initiated the Charter on Cooperation for the Decarbonisation of Buildings by 2050. The contents of the charter relate to the achievement of energy and climate goals at the national and EU level through:

• the decarbonisation of the building stock, renovation of buildings and construction of nearly-zero energy building;
• heightened awareness of the importance of further reducing greenhouse gas emissions;
• an increase in the share of renewable energy sources;
• improved energy security; and
• the introduction of innovations and smart technologies that enable buildings to support the overall decarbonisation of the economy.

12 Insurance

12.1 What types of insurance arrangements - whether compulsory or optional - are typically put in place for construction projects in your jurisdiction?

In Croatia, several types of insurance arrangements are typically put in place for construction projects:

• Insurance against liability for damages caused to third parties: This is designed to protect third parties that may be injured or suffer property damage as a result of construction activities.
• Insurance against accidents at work: This is designed to protect workers who may be injured or suffer from an occupational disease while working on a construction site.
• Construction all-risk insurance: This covers the risks of damage to the works, materials and equipment, as well as third-party liability. It is usually taken out by the contractor or the owner of the construction project.
• Professional indemnity insurance: This is typically taken out by architects, engineers and other construction professionals to protect against claims for damages arising from professional negligence or errors.
• Environmental liability insurance: This covers environmental damage caused by construction activities, including pollution and contamination.
• Delay in start-up insurance: This covers the financial losses incurred due to delays in the completion of a construction project, including costs for financing, leasing and other expenses.

The types and extent of insurance required may vary depending on:

• the nature and scale of the construction project; and
• other factors such as:
• • the contractual arrangements; and
  • the involvement of multiple parties.

Therefore, it is recommended that all parties involved in a construction project seek professional advice to determine the appropriate insurance coverage for their specific situation.

12.2 If local insurance is required, can local insurers assign reinsurance contracts in your jurisdiction?

Yes, local insurers in Croatia can assign reinsurance contracts to other insurers, including those located outside of Croatia. In Croatia, the Insurance Act allows local insurers to cede their risks to reinsurers, subject to certain conditions and requirements. These requirements include:

• obtaining prior approval from the Croatian Financial Services Supervisory Agency for all reinsurance contracts; and
• complying with various reporting and disclosure obligations.

Reinsurance contracts can be assigned to insurers located outside of Croatia, provided that they meet the requirements and conditions set out in the Insurance Act and other relevant regulations. In practice, many insurers in Croatia obtain reinsurance coverage from international reinsurers, as this can provide access to a broader range of risk management tools and products.

12.3 Is it possible to obtain insurance for fitness for purpose design obligations?

Yes, it is possible to obtain insurance for fitness for purpose design obligations. This type of insurance is often referred to as 'professional indemnity insurance' or 'errors and omissions insurance'.

12.4 What other forms of insurance feature in construction projects in your jurisdiction?

Even though they are not a form of insurance, but rather a form of financial guarantee, promissory notes are another form of financial instrument that can be used in construction projects as a type of security to the parties involved in a construction projects.

13 Employment

13.1 What legislation must employers and contractors be aware of when hiring labour?

The Labour Act prescribes the ground rules regarding issues such as:

• the content of the labour agreement;
• working hours; and
• annual holidays.

However, rules that are already encompassed in the Labour Act are set out in even more detail in the Collective Agreement for Construction, which applies to all construction activities and all employers/contractors within Croatia. The collective agreement includes specific rules on:

• trial periods;
• working hours;
• leave and holidays;
• salaries and salary additions;
• night work; and
• overtime

The collective agreement is executed for an undetermined period of time and is revised every other year.

14 Tax

14.1 What issues must be considered from a taxation perspective in relation to construction projects in your jurisdiction?

From a taxation perspective, the most important issue that must be considered in relation to construction projects in Croatia is the value added tax (VAT) calculation. In Croatia, construction services are generally subject to VAT at a standard rate of 25%. However, when a VAT taxpayer (the contractor) performs construction services for another VAT taxpayer (the client), there is a transfer of tax liability (reverse charge) from the contractor to the client (investor). The idea behind this method of VAT calculation is to reduce the tax burden in the construction industry:

• The contractor as the service provider is exempt from paying VAT; and
• The investor (on which the VAT liability has been transferred) declares the VAT liability and input tax in the same amount on the same VAT return.

It is important to consult with a tax professional to ensure compliance with the applicable tax rules and requirements in relation to construction projects in Croatia.

14.2 Are any exemptions or incentives available to encourage construction in your jurisdiction?

The Croatian government offers various incentives for strategic investments in the country. One such incentive is the possibility to obtain a tax exemption or reduction for certain types of investments. The specific tax incentives available to strategic investors depend on:

• the type and location of the investment; and
• the size and nature of the investment project.

Incentives may include exemptions or reductions in:

• corporate income tax;
• VAT; and
• various other taxes and fees.

To qualify for these incentives, investors must meet certain criteria and apply for them to the relevant government authorities. Incentives are typically granted on a case-by-case basis, and the decision on whether to grant them is at the discretion of the government.

These exemptions and incentives are subject to certain conditions and criteria, and investors should carefully review and meet the requirements to take advantage of them.

14.3 What strategies might parties consider to mitigate their tax liabilities in the construction context?

There are several strategies that parties can consider to mitigate their tax liabilities in the construction context:

• Structuring the transaction: Parties can structure the transaction in a way that minimises their tax liability. This may involve using tax-efficient structures, such as joint ventures or partnerships, to share the tax burden.
• Timing of payments: Parties can consider the timing of payments to optimise their tax position. For example, deferring payments until a later date may help to defer the tax liability.
• Claiming deductions: Parties should ensure that they claim all relevant deductions, such as depreciation and interest expense deductions, to reduce their taxable income.
• Tax incentives: Parties can take advantage of tax incentives available for construction activities, such as tax credits for energy-efficient buildings, to reduce their overall tax liability.
• Negotiating contracts: Parties can negotiate contracts that allocate tax liabilities in a way that is favourable to them. For example, subcontractors may be able to negotiate contracts that require the general contractor to assume the tax liability.

It is important for parties to consult with tax professionals and obtain advice specific to their situation to ensure that they are taking advantage of all available strategies and are in compliance with applicable tax laws and regulations.

15 Technology

15.1 How is Building Information Management (BIM) dealt with in your jurisdiction? Does the government mandate any particular BIM standards or other requirements?

Since 2017, the Ministry of Construction and Spatial Planning has been an equal member of the EU BIM Task Group, and has actively participated in the promotion and implementation of BIM. Also, with the aim of implementing BIM in Croatia, the ministry formed the HR BIM Task Group, which consists of representatives of architectural and engineering chambers and state administration bodies.

While at the moment the government does not mandate any particular BIM standards, a significant number of major construction firms, architects and other interested parties have long recognised the importance of BIM and adhere to these standards voluntarily.

15.2 Are smart contracts used in your jurisdiction? Are there any special restrictions or regulations?

Smart contracts are for the most part not used in Croatia. There are no specific rules prohibiting them; but there is also no legal ruling recognising such contracts. Therefore, parties prefer to conclude classic contracts.

15.3 What developments in digital technology do you see having a major impact on the construction industry?

We expect the mandatory implementation of BIM standards in the coming years. Meanwhile, Croatia has also invested significantly in overall digitalisation, such as in relation to:

• land registries;
• court registers and the entire court system (through e-predmet, e-komunikacija and e-ovrhe); and
• the connection of all legal and natural entities as e-citizens.

16 Disputes

16.1 In which forums are construction disputes typically heard in your jurisdiction?

Construction disputes in Croatia are typically heard in the courts or through alternative dispute resolution (ADR) mechanisms.

• Courts: Construction disputes can be heard in the commercial courts, which have specialised judges and procedures for commercial disputes. In addition, disputes can be heard in the general courts, depending on the nature of the dispute.
• Arbitration: Parties can choose to resolve their disputes through arbitration, which is a private form of dispute resolution. The Croatian Chamber of Commerce is the main provider of arbitration services in Croatia and there are several other arbitral institutions that parties can choose from.
• Mediation: Parties can also choose to resolve their disputes through mediation, which is a voluntary, confidential and non-binding form of dispute resolution. The Croatian Chamber of Economy is the main provider of mediation services in Croatia.

Parties can include dispute resolution clauses in their construction contracts, specifying the forum and procedures for resolving disputes. This can help to avoid disputes or facilitate their resolution in a timely and cost-effective manner.

16.2 What issues do such disputes typically involve?

Construction disputes in Croatia can involve a range of issues, including the following:

• Payment disputes: These can arise when there are disagreements over the amount or timing of payments due under a construction contract, such as:
• • progress payments;
  • retention payments; or
  • final payments.
• Design or specification disputes: These can arise when there are disagreements over the design or specifications of the construction project, such as errors or omissions in the plans and specifications.
• Delay or disruption claims: These can arise when there are delays or disruptions to the construction project, such as unforeseen circumstances or changes to the project scope.
• Quality or performance issues: These can arise when there are defects or deficiencies in the construction work, such as:
• • poor workmanship;
  • non-compliance with specifications; or
  • failure to meet building codes or regulations.
• Breach of contract claims: These can arise when one party fails to perform its obligations under the construction contract, such as failure to complete the work on time or in accordance with the specifications.
• Insurance or indemnification disputes: These can arise when there are disputes over insurance coverage or indemnification obligations, such as claims for damages or losses arising from the construction work.

It is important for parties to have clear and comprehensive construction contracts that address these issues and provide a framework for resolving disputes.

16.3 How are disputes typically resolved?

In Croatia, construction disputes are usually resolved through litigation (ie, before the courts).

16.4 Is the use of alternative dispute resolution common and/or encouraged by legislation or the courts?

ADR methods, although not yet widely accepted by the parties involved in a construction disputes, are encouraged by the legislature and the courts in Croatia. The Croatian legislature provides for various ADR mechanisms – such as mediation, arbitration and expert determination – which parties can use to resolve their disputes without going to court.

16.5 Is the use of dispute boards common in your jurisdiction?

The use of dispute boards is not very common in Croatia, but it is becoming more popular, especially in larger construction projects.

Dispute boards are a type of alternative dispute resolution mechanism where a panel of experts is appointed at the outset of a project to make decisions and provide recommendations in case of disputes. The goal of a dispute board is to resolve disputes quickly and efficiently, without the need for litigation or arbitration.

While dispute boards are not yet widely used in Croatia, there is growing interest in their potential benefits, particularly in resolving disputes in construction projects. In fact, some large infrastructure projects in Croatia have started to use dispute boards to manage and resolve disputes during the construction phase.

As a relatively new concept in Croatia, the use of dispute boards is not yet regulated by legislation. However, parties can agree to use a dispute board in their contract and define its powers and procedures.

16.6 Have there been any recent cases of note?

Like any other country, Croatia sees its fair share of legal disputes and the construction industry is no exception. Disputes in the construction industry in Croatia can involve various issues, such as:

• project delays;
• defects;
• payment disputes; and
• breach of contract.

It is thus difficult to highlight any recent cases of note in Croatia related to the construction industry.

17 Trends and predictions

17.1 What has been the impact of the COVID-19 pandemic on construction in your jurisdiction?

In 2021 – due to the general alarming situation in the construction industry, which was partly because of COVID-19, and in particular to the uncontrolled rise in the prices of construction materials – the Croatian government issued its Conclusion on Actions to Mitigate the Consequences of Disruptions in the Prices of Construction Materials and Products. This calls on contracting authorities which have concluded contracts through public procurement procedures to approach the analysis of the contracted unit prices of construction materials and products for unexecuted public procurement contracts together with the contractors, in order to:

• identify those items that were affected by a price change of more than 10%; and
• amend the contracts to the extent that they are justified in mitigating the consequences of the current situation and determined by the analysis, while ensuring an audit trail that justifies the requested change.

However, this call was not binding.

The lifting of COVID-19-related security measures has significantly improved the overall situation in construction, and in 2022 there was no need for state intervention of any kind in this sector.

17.2 How would you describe the current construction landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

The current construction landscape is favourable. The state has invested significant efforts into making the realization of projects easier and quicker. This also includes the state expanding the limits of import of foreign workers.

On the legal side, no major changes are expected other than amendments with the purpose of further facilitating the legal procedures accompanying construction. For example, amendments to the Law on Construction are expected. Namely, it was observed that certain institutes of the Law make it difficult, or slow down, the possibility of starting construction and the issuing of user permits for the construction of buildings in the Republic of Croatia. By upgrading the spatial planning information system through the eConstruction Diary module, the efficiency and transparency of procedures in the field of construction should increase. In addition, this Law will regulate certain issues that will influence the removal of barriers to the realization of the construction of linear transport infrastructure of national importance, which is financed with EU funds primarily related to railway and road infrastructure.

18 Tips and traps

18.1 What are your top tips for smooth completion of construction projects in your jurisdiction and what potential sticking points would you highlight?

Our top tips for the smooth completion of construction projects in Croatia are as follows:

• Understand the regulatory framework: Ensure you have a good understanding of the regulatory framework governing construction projects in Croatia. This includes understanding the permitting process, zoning regulations and building codes. Failure to comply with these regulations can result in significant delays, fines and legal issues.
• Carefully review contracts: Review all contracts carefully, including those with subcontractors and suppliers. Ensure that all terms and conditions are clearly defined, and that there is a dispute resolution mechanism in place. Be aware of potential tax liabilities and always seek legal advice.
• Maintain open communication: Effective communication is key to the success of any construction project. Keep all parties informed of project timelines, milestones and any issues that arise. This includes regular meetings with stakeholders such as project managers, architects, contractors and subcontractors.
• Manage risks: Identify potential risks and have a risk management plan in place. This should include contingencies for unexpected events, such as delays, cost overruns and legal disputes.
• Engage reputable contractors: Choose reputable contractors with a track record of delivering high-quality work on time and within budget. Verify references and credentials before awarding contracts.

Sticking points to consider include the following:

• Delays: Construction projects can be delayed by a variety of factors, including bad weather, material and labour shortages, as well as labour disputes. Plan for contingencies to minimise the impact of delays.
• Legal disputes: Legal disputes can arise during any construction project, including disputes over contracts, payments and quality of work. Having a dispute resolution mechanism in place can help to minimise the impact of such disputes.
• Cost overruns: Unexpected costs can arise during construction projects, such as changes in materials or unforeseen issues with the site. Make sure you have a contingency plan in place to address such issues.
• Permits and approvals: Obtaining permits and approvals can be a lengthy and complex process in Croatia. Be sure to allow enough time to obtain all necessary permits and approvals before starting construction.
• Language barriers: If you are not fluent in Croatian, language barriers can pose a challenge. Consider engaging local translators or interpreters to facilitate communication with stakeholders.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.