Contractor Can Blackmail Investor with Certificates

During construction, the contractor must produce certificates detailing what and how much has been incorporated into the building, which costs them minimally. If a misunderstanding occurs with the investor, the contractor can halt work but also retain the certificates. The investor must obtain them again, which can cost millions of kuna for larger projects.

Investments, investments, investments… This is the mantra repeated by the new government and is among the priorities of the new prime minister. Concrete steps will be taken for this purpose, including some adjustments in public administration and the judiciary, but this field is full of mines, sometimes completely unexpected ones. Croatian regulations, and perhaps even more so Croatian practice, are full of examples of real absurdities, and few are willing to tackle the discovery of real legal problems and work on their resolution, whether it is merely about improving legal norms or changing practices. One example can be stated without exaggeration as legally grotesque, affecting precisely those who decide to invest in, for example, a shopping center.

Huge Losses

Thus, every construction contractor produces or orders the appropriate certificates during their work, which are proof of what and in what quantities has been incorporated into the building. Without them, a usage permit cannot be obtained, meaning that a building cannot be used (legally). In practice, we can now say often, it happens that contractors, who have a range of security instruments available for their engagement when contracting, from promissory notes, debt securities, liens, retentions to bank guarantees, use such certificates as a form of blackmail if they clash with the investor.

If they fail to find common ground with the investor, they simply retain those certificates for themselves, thus creating an impossible situation. Namely, such certificates cost the contractor little during construction, but if the contractor who possesses them withdraws from the job or the investor for various reasons does not want to continue cooperating with them, then the investor must obtain new certificates, i.e., engage another authorized company or institution. Since they did not conduct the work to determine the type of materials and their quantities, they must drill in many places, which means enormous costs in both money and time. Many investors in this case find themselves in a difficult dilemma and often agree to the contractor’s terms because new certificates are a much more expensive option.

The Solution is Simple

In several recent such events, there were millions in costs, but also significant time expenditure, which unnecessarily prolonged construction and brought additional losses. When it comes to a large shopping center planned to open before the Christmas holidays and New Year celebrations, that is, at a time when everyone prepares their goods for that occasion, such delays are a real disaster.

In this regard, I believe that the real culprit is not the business partners who are the actors in the misunderstanding, nor the blackmailing contractor who does not want to provide ‘their’ certificates, but the state that has not established the proper legal framework. And that it could and should have, is certainly true. It is no problem to stipulate that the contractor must submit a copy of each certificate to the office that issued the building permit, with clear sanctions; it is even less of a problem to prescribe the obligation of a bank or personal guarantee in case of any manipulation with certificates that are not and must not be in the status of being the property of the contractor, because it is logical that all information about what and how much has been incorporated into the building should be available to the one who financed the construction, i.e., paid for what has been built up to that point. All of the above does not mean that the contractor may not be right, and the investor wrong; it only means that their problem should not be resolved in such a way that the certificate becomes a means of blackmailing.

A Training Ground for the Legislator

It is a notorious truth that every government practices on contractors by enacting and changing regulations like on a conveyor belt, often just when they have somehow managed to adapt to crisis conditions and too often without any explanation of what happened, for example, with the infamous construction licenses. And construction is, without a doubt, the economic sector that has been most damaged by the current crisis, and only in the future will the true extent of that damage be seen. In the end, both domestic and foreign investments most often begin with construction, and if they can get stuck on the first conflict with the contractor and the unjust withholding of certificates, it is hard to believe that Croatia will be a favored country for investment.