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Participation and ownership

Restrictions on foreign participation and investment

Is the shipbuilding industry in your country open to foreign participation and investment? If it is open, please specify any restrictions on foreign participation.

The shipbuilding industry in Croatia is open to foreign participation and investment. Buyers of vessels built in Croatian shipyards are mostly foreign. There do not appear to be any restrictions on such participation.

Government ownership of shipbuilding facilities

Does government retain ownership or control of any shipbuilding facilities and if so, why? Are there any plans for the government divesting itself of that participation or control?

The government used to retain ownership or control of five large Croatian shipyards (Uljanik, 3 Maj, Kraljevica, Brodotrogir and Brodosplit). This was a vestige of socialist times, and the government has been determined to divest itself of that control. In fact, privatisation of all large Croatian shipyards (except Uljanik) was an obligation undertaken in the accession documents signed with the European Union. As a consequence, Uljanik, 3 Maj, Brodotrogir and Brodosplit have been privatised. Kraljevica shipyard, the oldest shipyard in the country and one of the oldest in Europe, has gone into bankruptcy.

Key contractual considerations

Statutory formalities

Are there any statutory formalities in your jurisdiction that must be complied with in entering into a shipbuilding contract?

A shipbuilding contract must be made in writing, failing which it shall be null and void.

Choice of law

May the parties to a shipbuilding contract select the law to apply to the contract and is this choice of law upheld by the courts?

The parties to a shipbuilding contract are free to select the law to apply to the contract. Such choice of law is normally upheld by the courts. In fact, shipbuilding contracts entered into by the five large Croatian shipyards regularly provide English law as the law applicable to the contract and English courts or arbitration institutions as having jurisdiction over the disputes.

Nature of shipbuilding contracts

Is a shipbuilding contract regarded as a contract for the sale of goods, as a contract for the supply of workmanship and materials, or as a contract sui generis?

A shipbuilding contract is generally regarded as a contract sui generis, combining the features of a contract for the sale of goods, and the Roman law concept of locatio conductio operis (ie, a contract for the manufacturing and supply of a product).

Hull number

Is the hull number stated in the contract essential to the vessel’s description or is it a mere label?

The hull number is essential to the vessel’s description. It is one of the particulars to be entered into the Register of Ships Under Construction. It is also important for a number of other reasons.

Deviation from description

Do ‘approximate’ dimensions and description of the vessel allow the builder to deviate from the figure stated? If so, what latitude does the builder have?

Approximate dimensions and description of the vessel do allow the builder to deviate from the figure stated. The degree of latitude has not been clearly defined in Croatian law, and will depend on the circumstances of each particular case.

Guaranteed standards of performance

May parties incorporate guaranteed standards of performance whose breach entitles the buyer to liquidated damages or rescission? Are there any trade standards for coating, noise and vibration in your jurisdiction, etc?

The parties may, and usually do, incorporate such guaranteed standards of performance.

The trade standards used to be unified and collected in the Croatian Shipbuilding Norms (see question 9). Nevertheless, the Croatian shipyards do not seem to follow the Croatian Shipbuilding Norms as closely as they used to, but rather create their own standards and stick to them.

Quality standards

Do statutory provisions or previous cases in your jurisdiction give greater definition to contractual quality standards?

There are no statutory provisions in Croatia dealing with this issue and, to the best of our knowledge, no case law. There are, however, the Croatian Shipbuilding Norms, promulgated by the Croatian Shipbuilding Corporation, which cover some (but not all) components of a newbuilding, including the hull. They are taken to represent the Croatian shipbuilding standards.

Classification society

Where the builder contracts with the classification society to ensure that construction of the vessel leads to the buyer’s desired class notation, does the society owe a duty of care to the buyer, or can the buyer successfully sue the classification society, if certain defects in the vessel escape the attention of the class surveyors?

There are no specific rules on this issue, nor are there any court cases concerning it. According to the general rules on liability in tort, the classification society should owe a duty of care to the buyer or whoever else suffers damage as the consequence of the failure by the classification society to identify the defects that should have been identified with due diligence. In its general terms and conditions, the Croatian Register of Shipping (CRS) limits its liability for all damages possibly arising as a consequence of the acts or omissions of its representatives at an amount corresponding to five times the fees charged for the service in question. In addition, it excludes its liability for consequential damages. The validity of these limitations and exclusions towards third parties (ie, those who did not engage the CRS to perform the services) is very questionable.

In addition, the CRS, as well as any other classification society in the European Union, is subject to certain EU rules, including in particular the Regulation (EC) No. 391/2009 of the European Parliament and of the Council of 23 April 2009 on common rules and standards for ship inspection and survey organisations.

Flag-state authorities

Have the flag-state authorities of your jurisdiction outsourced compliance with flag-state legislation to the classification societies? If so, to what extent?

The flag-state authorities of Croatia have outsourced compliance with flag-state legislation to the classification society, the CRS. The CRS’s survey during construction, with regard to statutory items, comprises an inspection of the design and construction of the relevant structure, machinery and equipment of the ship to ensure that it complies with the requirements of numerous international regulations and is fit for the purpose for which the ship is intended.

Registration in the name of the builder or the buyer

Does your jurisdiction allow for registration of the vessel under construction in the local ships register in the name of the builder or the buyer? If this possibility exists, what are the legal consequences of this registration?

Croatia allows for registration of the vessel under construction in the local ships register (registers of ships under construction) in the name of the builder or the buyer. Registration in the Croatian Register of Ships under Construction, which is a public register, is compulsory for each ship under construction that is wholly owned by a Croatian citizen domiciled in Croatia or a Croatian legal entity. In other cases, registration is optional. Croatia is a party to the International Convention Relating to Registration of Rights in Respect of Vessels under Construction 1967. If a ship under construction is entered into the Croatian Register of Ships Under Construction, it may be generally acquired, transferred or encumbered only by way of corresponding entries in the register.

Title to the vessel

May the parties contract that title will pass from the builder to the buyer during construction? Will title pass gradually, upon the progress of the vessel’s construction, or at a certain stage? What is the earliest stage a buyer can obtain title to the vessel?

Unless the parties to a shipbuilding contract have agreed otherwise, a vessel under construction is in the ownership of the builder. The parties may contract that title will pass from the builder to the buyer during construction. The method and pace at which the title will pass is open to agreement between the parties. The earliest stage a buyer can obtain title to the vessel is the keel-laying, because it is from that moment that an asset is considered to be a vessel under construction.

Passing of risk

Will risk pass to the buyer with title, or will the risk remain with the builder until delivery and acceptance?

This is largely open for the parties to agree. In the absence of such agreement, the passing of risk depends on who supplied the material. If the material was supplied by the builder and the vessel is destroyed or damaged before delivery, the risk falls upon the builder, which will not be entitled to any compensation for the material or for its work. If, on the other hand, the material was supplied by the buyer, the buyer will bear the risk.

Subcontracting

May a shipbuilder subcontract part or all of the contract and, if so, will this have a bearing on the builder’s liability towards the buyer? Is there a custom to include a maker’s list of major suppliers and subcontractors in the contract?

Unless agreed otherwise, a shipbuilder may subcontract part or all of the contract. This will not have a bearing on the builder’s liability towards the buyer, as it will continue to be liable to the buyer as if it had performed all the work itself.

It is usual practice to include a maker’s list of major suppliers and subcontractors in the contract.

Extraterritorial construction

Must the builder inform the buyer of any intention to have certain main items constructed in another country than that where the builder is located, or is it immaterial where and by whom certain performance of the contract is made?

There is no rule of law compelling the builder to inform the buyer of such intention. However, shipbuilding contracts entered into by large Croatian shipyards usually contain clauses specifying that the newbuild shall be built in the builder’s yard.

Pricing, payment and financing

Fixed-price and labour-and-cost-plus contracts

Does the law in your country have different provisions for ‘fixed price’ contracts and ‘labour and cost plus’ contracts?

Yes. With regard to fixed-price contracts, the builder may not require a price increase even if more labour has been performed or more material used than planned.

Price increases

Does the builder have any statutory remedies available to charge the buyer for price increases of labour and materials despite the contract having a fixed price?

If the contract provides that the price will not change even if the market prices of materials and equipment have risen, the builder will only be entitled to seek an increase in the price if the prices of those elements have risen so as to increase the overall costs of building by more than 10 per cent. In such a case, the increase in price that the builder may seek corresponds only to the portion of the increased costs above the said 10 per cent.

Retracting consent to a price increase

Can a buyer retract consent to an increase in price by arguing that consent was induced by economic duress?

It is unlikely that this argument would be successful. If the request for an increase in price is the result of an actual increase of costs of labour or material, economic duress would not be possible to argue without an element of unlawfulness.

Exclusions of buyers’ rights

May the builder and the buyer agree to exclude the buyer’s right to set off, suspend payment or deduct certain amounts?

Yes.

Refund guarantees

If the contract price is payable by the buyer in pre-delivery instalments, are there any rules in regard to the form and wording of refund guarantees? Is permission from any authority required for the builder to have the refund guarantees issued?

According to Croatian law, all guarantees, including a refund guarantee, must be made in a written form. No other formalities are required. In the case of state guarantees, for the Ministry of Finance to issue such a guarantee, it should be approved by the government.

Advance payment and parent company guarantees

What formalities govern issuance of advance payment guarantees and parent company guarantees?

Those are usually governed by the internal statutes of the issuer.

Financing of construction with a mortgage

Can the builder or buyer create and register a mortgage over the vessel under construction to secure construction financing?

Yes.

Default, liability and remedies

Liability for defective design (after delivery)

Do courts consider defective design to fall within the scope of poor workmanship for which the shipbuilder is liable under the warranty clause of the contract?

We are not aware of any Croatian court decisions dealing with this issue. Under Croatian law, where the builder has not produced the designs for the ship and the ship has a defect as the result of defective design, the builder shall be liable for such defect if the defective design could have been discovered by exercising due diligence.

Remedies for defectiveness (after delivery)

Are there any remedies available to third parties against the shipbuilder for defectiveness?

Croatian law does contain provisions on product liability, but these provisions are mostly concerned with personal products. The special rules on liability for a defective product as part of a sale and purchase contract apply only between the shipbuilder and the buyer. Consequently, the only remedies available to third parties against the shipbuilder for defectiveness would be those based on general liability in tort.

Liquidated damages clauses

If the contract contains a liquidated damages clause or a penalty provision for late delivery or not meeting guaranteed performance criteria, must the agreed level of compensation represent a genuine link with the damage suffered? Can courts mitigate liquidated damages or penalties agreed in the contract and for what reasons?

The court may mitigate the agreed amount of penalties if it finds it excessively high considering the value and significance of the underlying obligation. Subject to that, the claimant may claim the agreed amount of penalties although it exceeds the actual amount of damages suffered as the consequence of the failure.

Preclusion from claiming higher actual damages

If the building contract contains a liquidated damages provision, for example, for late delivery, is the buyer then precluded from claiming proven higher damages?

No. If the agreed amount of penalties is lower than the actual damage, the claimant may, in addition to the penalties, claim the balance.

Force majeure

Are the parties free to design the force majeure clause of the contract?

In principle they are free to do so, as long as the events contained in the clause satisfy the basic prerequisites of force majeure, that is, that they:

  • are external;
  • occur after the contract’s entry into force and before the maturity of the relevant obligation;
  • were unforeseeable at the time of entering into the contract;
  • could not be prevented or avoided by the party invoking the events; and
  • are not within the scope of responsibility of any of the contractual parties.

Umbrella insurance

Is certain ‘umbrella’ insurance available in the market covering the builder and all subcontractors of a particular project for the builder’s risks?

Not all Croatian insurers offer insurance of builders’ risks, but those who do offer it on the terms corresponding to the Institute Clauses for Builders’ Risks, and those are based on ‘all-risks’ coverage.

Disagreement on modifications

Will courts or arbitration tribunals in your jurisdiction be prepared to set terms if the parties are unable to reach agreement on alteration to key terms of the contract or a modification to the specification?

We do not believe so.

Acceptance of the vessel

Does the buyer’s signature of a protocol of delivery and acceptance, stating that the buyer’s acceptance of the vessel shall be final and binding so far as conformity of the vessel to the contract and specifications is concerned preclude a subsequent claim for breach of performance warranties or for defects latent at the time of delivery?

Insofar as the performance warranties have or should have been ascertained before delivery, the signature of a protocol of delivery and acceptance does preclude a subsequent claim for breach of performance warranties. With regard to defects latent at the time of delivery, the builder shall be liable for those for a period of one year after delivery notwithstanding the signature of the protocol of delivery and acceptance.

Liens and encumbrances

Can suppliers or subcontractors of the shipbuilder exercise a lien over the vessel or work or equipment ready to be incorporated in the vessel for any unpaid invoices? Is there an implied term or statutory provision that at the time of delivery the vessel shall be free from all liens, charges and encumbrances?

Suppliers or subcontractors cannot exercise a lien over the vessel. They can exercise a ‘right of retention’ over the equipment ready to be incorporated in the vessel, but only as long as they have physical control over the said equipment.

There is a statutory provision (dealing with contracts of sale) that the seller shall be responsible if the item sold is subject to any right of a third party that affects the buyer’s rights in any way, if the buyer was not notified of such right and has not agreed to take delivery of the item subject to such right. It is implied, therefore, that the item sold should be free and clear of all such rights.

Reservation of title in materials and equipment

Does a reservation of title by a subcontractor or supplier of materials and equipment survive affixing to or incorporation in the vessel under construction?

It does not, except where the reservation of title has been registered in the register of ships under construction.

Third-party creditors’ security

Assuming title to the vessel under construction vests with the builder, can third-party creditors of the builder obtain a security attachment or enforcement lien over the vessel or equipment to be incorporated in the vessel to secure their claim against the builder?

Third-party creditors of the builder can obtain such security attachment or enforcement lien over the vessel or equipment to be incorporated in the vessel as long as the vessel or the equipment is in the ownership of the builder as the entity that owes money to the creditors.

Subcontractor’s and manufacturer’s warranties

Can a subcontractor’s or manufacturer’s warranty be assigned to the buyer? Does legislation entitle the buyer to make a direct claim under the subcontractor’s or manufacturer’s warranty?

A subcontractor’s or manufacturer’s warranty can be assigned to the buyer.

The general law of contracts entitles the buyer to make a direct claim under the subcontractor’s or manufacturer’s warranty.

Default of the builder

Where a builder defaults in the performance of the contract, is there a legal requirement to put the builder in default by sending an official notice before the buyer’s remedies begin to accrue? What remedies will be open to the buyer?

Such legal requirement does exist, except where time is of the essence (by virtue of express term of the contract or as an implied term), in which case the builder’s default will lead to an automatic termination of the contract.

Remedies for protracted non-performance

Are there any remedies available to the shipowner in the event of protracted failure to construct or continue construction by the shipbuilder apart from the contractual provisions?

If it is obvious that the shipbuilder will not fulfil its obligations, the shipowner has the right to rescind the contract and claim damages.

Builder’s insolvency

Would a buyer’s contractual right to terminate for the builder’s insolvency be enforceable in your jurisdiction?

Yes.

Judicial proceedings or arbitration

What institution will most commonly be agreed on by the parties to decide disputes?

The institutions most commonly agreed by the parties are UK courts or London-based arbitration.

In Croatia, shipbuilding disputes are dealt with by commercial courts.

Buyer’s right to complete construction

Would a buyer’s contractual right to take possession of the vessel under construction and continue construction survive the bankruptcy or moratorium of creditors of the builder?

Generally, outside of the bankruptcy, the buyer’s contractual right to take possession of the hull is a right in contract, and not a right in rem. Enforcement of such right therefore depends on the builder’s attitude. If the builder does not allow the buyer to take possession of the hull, the buyer will have to sue the builder in order to obtain a judgment or arbitral award ordering the builder to allow the buyer’s taking possession of the hull. If the conditions (as envisaged in the contract) for a buyer’s taking possession of the hull are fulfilled, the court or arbitration will probably order the builder to allow the buyer to take possession of the hull.

In case of a builder’s bankruptcy, the receiver in bankruptcy would have power to decide whether to fulfil the builder’s obligations under the shipbuilding contract or not (including the obligation to allow the buyer to take possession of the hull). If the receiver decides not to allow this, the buyer can try to enforce this right only as a bankruptcy creditor. Given that the right to take possession of the hull is only a right in contract, but not a right in rem, the buyer would not have a possibility to enforce this right independently from the bankruptcy proceedings.

It would be otherwise in situations where based on the shipbuilding contract the buyer has become the owner of the hull during the construction (for example, at the keel laying). In such a case, if at the time of the builder bankruptcy the buyer has already become the owner of the hull, the builder’s bankruptcy should not prevent the buyer from exercising its ownership rights over the hull.

ADR/mediation

In your jurisdiction do parties tend to incorporate an ADR clause in shipbuilding contracts?

The parties often agree London arbitration as a dispute resolution mechanism. They sometimes agree to mediation as a precursor.

Default of the buyer

Where the buyer defaults in the performance of the contract, what remedies will be available to the builder? What are the consequences of the builder’s cancellation of the contract?

Those remedies are, by and large, dealt with in the shipbuilding contract. Failing specific contractual provisions to that effect, the builder will, under Croatian law, have the right to seek specific performance. If the specific performance is not furnished within the deadline defined in the builder’s notice, the builder will also have the right to rescind the contract. Whether or not the builder rescinds the contract, it will also have the right to claim damages.

Contract forms and assignment

Standard contract forms

Are any standard forms predominantly used in your jurisdiction as a starting point for drafting a shipbuilding contract?

There is a standard form developed by an umbrella shipbuilding organisation (Croatian Shipbuilding Corporation - Jadranbrod). That form is predominantly used in Croatia as a starting point for drafting a shipbuilding contract.

Assignment of the contract

What are the statutory requirements for assigning the contract to a third party?

In Croatian law, assignment of the contract is an instrument whereby the entire contractual position of one contractual party (ie, both the rights and obligations) is transferred to another person. The original contractual party ceases to be a party to the contract, as it is fully replaced by the new contractual party.

A contractual party cannot assign the contract without a proper consent from the other contractual party. The assignment of a contract without such consent would render the assignment null and void. Accordingly, if the shipbuilding contract contains a prohibition of assignment, it would mean that the consent is a priori denied.

An assignment need not take the form of a tripartite agreement. It can be done in the form of an agreement between the assignor and assignee, with a notice to the other contractual party.

The assignment takes effect from the moment the other contractual party has given its consent to the assignment. If the consent was given in advance, the assignment takes effect from the moment the other party receives a notice of assignment. The new contractual party assumes all the rights that have not been consumed, and all the obligations that have not been fulfilled, by the original party until the assignment takes effect.