The Bulgarian legislative structure is contained in primary legislation adopted by the National Assembly and secondary legislation (regulations, ordinances, decrees) adopted by the Council of Ministers and respective Ministers.

Essential laws regulating construction relations, outside of the applicable EU legislation, are:

• Spatial Development Act (SDA);
• Development of Black Sea Coast Act;
• Concessions Act;
• Public Procurements Act (PPA);
• Technical Requirements to Products Act;
• Bulgarian Construction Chamber Act;
• Obligations and Contracts Act (OCA);
• Commerce Act;
• Code of Civil Procedure (CCP);
• International Commercial Arbitration Act (ICAA);
• Mediation Act (MA); and
• Multiple sector-specific laws in the fields of telecoms, agriculture, forests, waters and environment protection.

The construction contract is regulated by the SDA, which specifies the essential responsibilities of the parties. A large part of the responsibilities regulated by the SDA is of an administrative nature, and their fulfilment is necessary for the due and accurate performance of construction contracts. Matters such as payment, non-performance, liability for default, damages, compensation and penalties are regulated by the provisions of the OCA and the Commerce Act.

Ordinances regulating specific construction-related matters are:

• Ordinance No 3/31.07.2003 on the Drawing up of Acts and Protocols During Construction (“Ordinance No 3”);
• Ordinance No 2/31.07.2003 on the Commissioning of Constructions in the Republic of Bulgaria and the Minimal Warranty Periods for Executed Construction and Installation Works, Facilities, and Construction Sites (“Ordinance No 2”); and
• Ordinance No 4/21.05.2001 on the Scope and Contents of Investment Designs (“Ordinance No 4”).

The use of standard contracts, such as FIDIC Conditions of Contract, is not a common practice for small and/or privately commissioned construction projects in Bulgaria.

When it comes to public projects which are financed in whole or in part by international financing institutions or through funds of the European Union, the SDA expressly provides that FIDIC conditions of contract may be used by the parties. Thus, and especially in large infrastructure projects, the use of the first editions of the Red and Yellow books is relatively common and the Particular Conditions are modified in accordance with the mandatory provisions of the Bulgarian construction legislation.

Standardised documents and requirements are applicable to certain public procurement contracts.

The employer is the owner of the plot of land on which the construction is to be performed, or the person possessing an in rem right to construction or the right to construct on another person’s property by virtue of the SDA or of another special law.

In the private sector, the employer can be any privately owned legal entity or legally capable natural person(s). In the public sector, the employer is usually a governmental (minister, agency) or municipal (mayor) authority, or a publicly owned company having the right and/or charged with the operation or development of the relevant infrastructure or facilities.

The essential obligations of the employer are to:

• procure everything necessary for the initiation of the construction;
• provide the designs needed for the construction (in contracts for construction);
• furnish the construction permit;
• provide access to the site;
• approve the works executed in accordance with the designs; and
• pay the agreed remuneration.

Under the SDA, the employer is also responsible for:

• carrying out all necessary co-ordination and permission procedures with the relevant urban development, traffic safety, environmental safety, cultural heritage and other authorities and utility companies;
• procuring documents necessary for the design conformity assessment;
• initiating the construction only after the necessary construction, construction supervision and author supervision agreements are concluded;
• drawing up of all acts and protocols during construction in accordance with Ordinance No 3;
• commissioning the construction; and
• adhering to the provisions of the technical passport of the construction.

The employer has the right to:

• inspect the works at any time, without hindering the activities of the contractor; and
• accept the construction works, executed in accordance with the approved designs.

The employer generally has no direct contractual relation with the subcontractors.

Construction works are assigned by the employer on the basis of a written contract between the employer and the contractor.

The contractor is a legal entity (or a natural person), having engaged natural persons with the necessary technical legal capacity. Joint ventures are often contractors of complex infrastructure projects.

With the exception of the simplest projects, construction can be performed only by contractors – traders registered in the Central Register of Professional Builders (CRPB) with the Bulgarian Construction Chamber.

The contractor is responsible for:

• carrying out the construction, at its own risk and with its own means, in accordance with the approved designs;
• the quality and due performance of the construction works and their fitness for purpose;
• the quality of the materials used for the construction, where it is agreed that the materials will be procured by the contractor;
• immediately notifying the employer if the design or the materials provided by the employer are inappropriate for the due performance of the construction;
• any deviations from the assignment or defects of the works; and
• providing warranty for the performed construction for the duration of the statutory warranty period under Ordinance No 2,

and has to ensure that:

• the construction is executed in compliance with the issued construction documents and the essential requirements for constructions and in conformity with the relevant health and safety, environmental protection, noise, waste disposal, hygiene, fire safety, accessibility and sustainability requirements;
• the materials, articles, products, etc, compliant with the essential requirements for construction are used in accordance with the respective technological requirements;
• the acts and protocols during construction are drawn up in a timely manner;
• the executive and other technical documentation is duly prepared and appropriately stored;
• the order book and the construction acts and protocols are appropriately stored and available for presentation;
• the construction works performed are within the scope of the CPRB registration of the contractor; and
• natural person(s) with the necessary legally required capacity to implement the technical management of the construction are employed.

The contractor may subcontract certain types of construction and installation work or parts (phases) of the construction. Subcontractors involved in construction should be registered with the CRPB – see 2.2 The Contractor.

The relations between the contractor and the subcontractors are governed by an agreement. Generally, the subcontractor is contractually liable to the contractor and not to the employer, and the contractor is liable to the employer for the actions and omissions of the subcontractor. Nonetheless, the parties may agree that if the subcontractor is approved by the employer, the subcontractor is directly liable to the employer.

Payments to the subcontractors are usually conditional upon approval of the relevant construction works by the employer and, in some instances, conditional upon payment by the employer.

Private projects in Bulgaria are typically financed by banks through loan agreements between the bank and the employer. Such loans are usually secured by special pledge over the employer’s commercial enterprise and/or a contractual mortgage over the plot of land, the future building, or the individual premises therein.

The financier is not a party to the construction contract and does not interfere in the relations between the employer and the contractor. The payments under the financing agreement may be conditional upon reaching certain milestones.

Public projects are often financed by funds of the European Union and co-financed by the Bulgarian state.

The designer is a natural or legal person, having engaged natural persons with the necessary designers’ capacity. All architects and engineers, who prepare the designs for the construction, shall be registered with the Chamber of Architects and the Chamber of Engineers in the Investment Design respectively. In general, architects and engineers from EU member states, EEA states, Switzerland and third countries can exercise their profession in Bulgaria subject to recognition of their professional qualification.

The designer is responsible for:

• notifying the employer in case the provided technical assignment/specifications or other requirements are inappropriate for the preparation of the designs; and
• preparing the designs in accordance with the relevant requirements for construction, the provisions of Ordinance No 4 and the detailed development plan.

The designer performs the author’s supervision and is liable for its actions in this regard.

The instructions of the designer relating to its copyright, for the accurate performance of the investment designs, are registered in the order book and are mandatory for all participants in the construction process. The relations between the employer, the designer and the contractor are outlined in 3.3 Design.

The scope of works depends on the type of contract. Under contracts for construction, the scope of works usually encompasses all construction works necessary for the completion and commissioning of the construction in accordance with the designs and bill of quantities, at the risk of the contractor and with the contractor’s own materials.

Under design-and-build contracts, the employer usually provides its requirements/technical specification, as the scope of works covers the preparation of all design in accordance with the requirements/specifications of the employer, the procurement of the necessary materials, and the performance of all construction works needed for the completion and commissioning of the construction.

In the private sector, the parties are free to agree on the circumstances that lead to a change in the scope and price of the contract, as well as the relevant mechanisms for their determination.

In the case of business frustration – meaning circumstances which arise after the contract is concluded – which the parties could not and would not be obliged to foresee, the continuation of the contract is contrary to justice and good faith, and either party may request the court to modify the contract in whole or in part.

Variations Requested by the Employer

The variations in the scope of works as a result of a change in the employer’s investment intentions, a change to the design or assignment of additional works, result in concluding of an additional agreement on the scope, cost and time for those additional works.

Variations Requested by the Contractor

The contractor has two statutory options under the OCA to request scope and price variations.

• The contractor shall immediately notify the employer if the design or material provided by the employer are inappropriate for the due performance of the construction and request changes to the design or supply of suitable material. Failure to do so renders the contractor liable for damages caused to the employer. If a change to the design results in a change of the scope of the works and assignment of additional works, the contractor shall be entitled to remuneration for the same.

The contractor shall be entitled to an adjustment of the price if, during the term of the contract, the duly determined price for the material or labour is changed, notwithstanding that the price has been agreed in full.

In the event of additional unforeseen works necessary for the performance of the contract and resulting from various technological reasons or from mandatory prescriptions of control bodies, the contract price shall be adjusted.

Variations in the scope and price of contracts under the PPA is permitted in the special provisions of the PPA.

Under contracts for construction, the responsibility for the designs’ preparation vests with the employer. The contractor shall review the designs and immediately notify the employer of any deficiencies therein.

Under design-and-build contracts, the contractor is responsible for the designs’ preparation.

The contractor is responsible for carrying out the construction in accordance with the approved designs.

The Bulgarian legislation prohibits the same person from participating in the construction process both as a designer and as a builder.

The designs are prepared on the basis of a written contract. The technical assignment/specifications or other requirements of the employer usually form part of this contract.

The essential responsibilities of the employer, the contractor, the subcontractor and the designer are outlined respectively in 2.1 The Employer, 2.2 The Contractor, 2.3 The Subcontractors and 2.5 The Designer.

Another participant with essential responsibilities is the consultant, who:

• assesses the compliance of investment projects and/or exercises construction supervision;
• carries out inspection and control of the construction products delivered and put into the construction;
• may perform: pre-investment studies, preparation of the design process and co-ordination of the construction process until the construction is commissioned, including control of the quantities, quality and compliance of the construction and installation works performed for the execution of the contracts.

When the consultant exercises construction supervision, it is responsible for:

• the lawful initiation of the construction;
• exercising control in respect of the completeness and the correct drawing up of the acts and protocols during construction;
• suspending construction that does not meet applicable legal requirements;
• not allowing any damage to third parties and properties as a result of the construction;
• exercising control in respect of the compliance with the applicable occupational health and safety regulations;
• notifying the competent authorities in case of a breach; and
• preparing a final report to the employer upon completion of the construction.

Typically, the employer is responsible for the status of the construction site and for carrying out the relevant pre-design studies of the construction site.

In design-and-build contracts, these responsibilities may be shifted on a contractual basis to the contractor. Thus, any studies done in advance by the employer constitute part of the contract and the contractor is responsible for ensuring the compliance of the designs with such studies. The party responsible for preparing the designs shall ensure that the designs meet the requirements of environment conservation, biological diversity, cultural heritage and other laws.

Prior to the opening of the construction site, the employer is responsible for preparing a construction waste management plan (if required) and a health and safety plan.

The opening of the construction site is ascertained by a relevant protocol under Ordinance No 3.

All construction (except the simplest types of works) requires the issuance of a construction permit, prior to commencement. The issuance of the construction permit usually implies the preliminary approval of the designs for the construction project, and the completion of all of the necessary approval and co-ordination procedures and the obtaining of the necessary conformity assessment reports. Depending on the type of agreement between the parties, these can be either the employer’s or contractor’s responsibilities.

The construction permit is issued to the employer and the employer is responsible for obtaining it.

In some cases, the employer assigns to the contractor the procedure for obtaining the construction permit and/or the parties agree on specific rights, obligations and liability for default provisions with regard to obtaining the construction permit.

Until the handover and acceptance of the construction works, the contractor is responsible for their maintenance.

After completion of the construction but prior to its commissioning, a technical passport must be drawn up, detailing the basic characteristics of the construction, the means for its maintenance, the terms for carrying out relevant repair works and guidelines and instructions for its safe operation. The maintenance means entail the scheduling, implementation and/or documenting of:

• examinations, major renovation, reconstruction, repair and other changes;
• means for maintaining safe operation of the construction and a schedule for implementing emergency means;
• details and characteristics of the executed maintenance, remodelling, and reconstruction of the construction; and
• terms for performing major and current repairs to individual structures and elements of the construction.

The provisions of the technical passport are mandatory to the employer. In some large infrastructure projects, the maintenance of the construction is contractually assigned to a specialised maintenance company or an SPV.

The employer is responsible for maintaining the technical condition of the construction in accordance with the essential construction requirements and shall not allow or perform any changes to the construction which could lead to the deterioration of the designed levels of compliance.

It is not common in Bulgaria (excluding large infrastructure projects) for the employer to assign functions to the contractor other than the performance of the construction works (in contracts for construction) and the preparation of the designs (in design-and-build contracts).

A major exception is the concession for construction contracts, where the concessionaire (contractor) is assigned the performance of the construction works against the right of the contractor to operate the construction subject to assuming the operational risk.

Testing is not mandatory for all types of construction works.

In accordance with the provisions of the relevant agreement, tests are generally required for production facilities and other construction projects with a specific purpose. Where machines and equipment are installed as part of the construction works, they need to be tested individually.

The successful completion of the tests is the responsibility of the contractor.

The tests have to be successfully completed prior to the commissioning of the construction. If parts of the construction can be used independently, the construction contract may provide that the tests for these parts can be completed prior to the full completion of the construction.

The successful completion of the tests is ascertained with the relevant protocols for testing.

Upon completion of the works, the executive documentation shall be prepared (reflecting the non-material deviations from the approved designs) and shall be certified by the relevant participants in the construction process, and shall be handed over to the authorities that have approved the designs.

Thereafter, an ascertainment act under Ordinance No 3, certifying that the construction is executed in accordance with the approved investment designs, the certified executive documentation and the material requirements for construction, shall be drawn up. Where tests were carried out, the protocols for testing shall also be attached to this protocol.

By virtue of law, this ascertainment act also serves as a protocol for acceptance of the construction works by the employer. The employer has the right to use the construction only after its commissioning with a use permit or commissioning certificate.

The contractor bears liability for defects and warranty liability. The two types of liability are of different legal natures and they exist and are extinguished independently from one another.

Liability for Defects in Works

Visible defects

At acceptance, the employer shall diligently examine the works within due course and immediately make all objections for inaccurate execution of the works. If no such objections are made, it is deemed that the works are accepted.

Hidden defects

In cases that the defects cannot be discovered within the course of an ordinary examination or defects appear later, the employer shall notify the contractor of the defects immediately upon their discovery. No additional notification shall be necessary if the contractor has known of the defects.

In case of visible or hidden defects, the employer has the right to request:

• remedying of the defects within a term prescribed by the employer, without payment;
• payment of the expenses necessary for the remedying; or
• respective reduction of the remuneration.

In case that the deviations from the assignment or the defects are irremediable and so material that the works are not fit for their agreed or ordinary purpose, the employer has the right to rescind the contract (see 9.6 Termination) and is entitled to compensation under the general rules.

The contractor remains liable to the employer for defects for a period of five years from the date of acceptance, after expiry of which term the above-mentioned rights of the employer are extinguished.

Warranty Liability of the Contractor and Warranty Terms

Warranty liability of the contractor is an obligation to ensure that for a certain period of time the construction and installation works, facilities and construction will retain their properties and qualities. Ordinance No 2 sets out minimum warranty terms, during which the contractor bears warranty liability. The warranty period depends on the type of construction and ranges from two to 13 years. All warranty periods start to run as of the date of commissioning of the construction. In the construction contract the parties can agree to warranty periods longer, but not shorter, than those under Ordinance No 2.

In respect of liability for defects in design, see 3.3 Design, 7.5 Risk Sharing and 9.1 Remedies.

The contract price is an essential element of the construction contract and can be determined using the following methods:

• lump price – the contractor is paid a fixed price or a fixed unit price with the option for cost increase, if agreed;
• cost plus – the contractor is reimbursed the actual costs incurred plus a percentage of those costs or a fixed fee; and
• measurement – in the bill of quantities, unit prices per square metre or for certain types of works are fixed and the total contract price is determined on completion of the works.

The contract price entails the amounts of all the direct costs plus profit.

Milestone payments are often used and are tied to reaching a certain milestone or completing a certain type of work. They are linked to the time periods (according to the programme) for reaching a certain stage or part of the works and form an appendix – an integral part of the contract.

In recent years, indexation clauses have been increasingly used in privately commissioned construction contracts.

Usually, the contractor bears the risk of substantial increase of the price of material or labour used. In addition to indexation (insofar as applicable), as per COA, the contractor is entitled to an adjustment of the price if, during the term of the contract, the duly determined price for the material or labour is changed, notwithstanding that the price has been agreed in full.

In public procurements, the price of a public procurement contract (PPC) for construction can be amended in cases where the prices of essential goods, materials and services, which form the price of the contract, have been substantially increased because of inflation. The amendment is subject to the availability of financial resource and is done in accordance with a methodology, approved by the Council of Ministers.

Any amendment to the price shall be reflected in a relevant additional agreement (annex) to the PPC.

The payment schedule is subject to negotiation between the employer and the contractor and generally the price is divided into instalments, including: advance payment, one or more interim payments and final payment.

Usually, the contract provides for an advance payment, which is used by the contractor for covering the initial expenses necessary for the construction. It is usually made prior to the opening of the construction site and is conditional upon the provision by the contractor of a security in the form of a guarantee deposit, retention money or a performance bank guarantee and the agreed insurances.

The largest portion of the contract price is paid in the form of one or more interim payments. Such payments are often conditional upon the reaching of a certain stage of the construction and acceptance by the employer of the relevant works completed up to that stage.

The final payment is usually made can upon completion of the works and their acceptance by the employer or upon commissioning.

The contractor can seek securitisation of its receivables – most commonly by a bank guarantee and less often by a promissory note.

Typical measures for managing late payment are compensations in the amount of the statutory interest for delay or liquidated damages. The contractor is also entitled to objection for non-performance of counter-obligation (see 9.5 Retention and Suspension Rights), or rescindment of the contract (see 9.6 Termination).

Invoicing conditions typically follow the agreed payment conditions, taking into account the provisions of the Value Added Tax Act. The invoicing of the interim payments usually follows the drawing-up of relevant ascertainment acts and protocols under Ordinance No 3 or the issuance of a relevant payment certificate, as the invoices need to be prepared in line with these documents.

The time for completion, as well as any interim deadlines, are essential in the construction contract. Strict administrative regulation and the principles of documentation and supervision of the construction process imply the need for planning and preparation of a programme (or schedule).

The programme can be prepared by the employer or by the contractor on the basis of the design, the employer’s requirements or the financing conditions. Once agreed between the parties it shall be an appendix to the contract.

Observing the time for completion and the programme are usually secured by liquidated damages for delayed performance, by linking the contractor’s payments to the milestone under the programme, by objection of the employer for a breach of contract.

Adherence to the programme is controlled by the employer and is ascertained by the relevant acts and protocols in accordance with Ordinance No 3 and by bilaterally signed protocols.

The construction process entails the completion of multiple procedures, works and activities within multiple periods, all of which may be delayed.

Delay of the Contractor

Generally, the contractor is in delay if it fails (by reason for which the contractor is responsible), within the agreed time, to perform the works or to hand over the works, executed in accordance with the contract.

The remedies available to the employer in case of delay of the contractor are outlined in 5.3 Remedies in the Event of Delays.

Delay of the Employer

The most common cases of delay of the employer are cases where, within the agreed time, the employer fails to:

• pay the due remuneration;
• accept the performed works, executed in accordance with the contract;
• provide the necessary designs, documents or materials;
• grant access to the construction site;
• provide the persons whose participation in the construction process is mandatory; and
• assist in drawing up the acts and protocols establishing the completion of certain works or stage.

The remedies available to the contractor in case of delay of the employer are, most commonly:

• right to seek payment of the agreed remuneration plus compensation for delay in the amount of the accrued statutory interest;
• right to liquidated damages; and
• right to rescind the contract (see 9.6 Termination).

In case of delay by one of the parties, the other party shall serve a written notice, providing an appropriate time for performance. Many contracts provide for timely notifications to the other party of circumstances which could lead to delay. To avoid delays, periodic progress meetings and/or the submission of progress reports may be provided.

Delay by Reasons for Which the Party is Not Responsible

Generally, a party is not liable for delays by reason not attributable to the party’s default: see 5.5 Force Majeure, 5.6 Unforeseen Circumstances and 9.6 Termination.

Delays by reasons for which the contractor is not responsible have, as a consequence, an extension of time.

By virtue of law, in cases of the contractor’s delay, the employer is entitled to:

• effective performance of the agreed obligation plus compensation for delay;
• compensation for the non-performance of the obligation;
• authorisation by the court to carry out the agreed works at the expense of the contractor;
• rescind the contract if it becomes apparent that the contractor will not perform on time, in the agreed or due manner (see 9.6 Termination); or
• rescind the contract under the general rules (see 9.6 Termination).

Special contractual provisions relating to contract terminations are also commonly used.

Liquidated damages are another commonly used contractual remedy.

In cases where both parties are in delay and the counter obligations are not conditional upon one another, each of them is entitled to rescind the contract and no compensation is due.

The contractor shall notify the employer of the reasons for an extension of time and the consequences thereof. In case of some of the grounds for extension of time which are due to the delay of the employer, the contractor also has the option of raising an objection for non-performance of counter obligation (see 9.5 Retention and Suspension Rights).

Generally, the grounds for extension of time are:

• change of the investment intentions of the employer and award of new or additional works;
• delay of the employer (see 5.2 Delays);
• reasons for which other participants in the construction are liable – the consultant, the supplier of machinery and equipment, the designer;
• force majeure (see 5.5 Force Majeure);
• adverse geological conditions; or
• archaeological finds which could not have been foreseen.

Some of the above-mentioned grounds are also grounds for suspension of construction. In such instances, for the suspension of the construction, a relevant act under Ordinance No 3 shall be drawn up and signed, which proves both the existence of a circumstance which leads to extension of time and its duration. The existence of a force majeure event can be proven through a certificate of force majeure, which is issued by the Bulgarian Chamber of Commerce and Industry.

Under Bulgarian law, force majeure is defined as an unforeseen or unavoidable event of extraordinary nature, which has occurred after the conclusion of the contract, is of a temporary nature and results in the impossibility of performance.

The Bulgarian legislation does not contain a list of events classified as force majeure. These generally include: natural disasters, state of war, labour strike, etc. The parties are entitled to specify events that they consider being or not being force majeure events.

The consequences of force majeure include:

• for the duration of the force majeure the performance of the obligations affected by the force majeure and their respective counter-obligations are suspended;
• the party who owes performance is exempt from liability for non-performance as a result of the force majeure and is not liable for damages. It shall not be exempt from performance if it has been in default before the occurrence of the force majeure event; and
• the debtor invoking the force majeure shall notify in writing the other party of the presence of the force majeure event. Otherwise, it owes compensation for damages to the other party.

If the force majeure lasts long enough so that one of the parties no longer has interest in the contract, this party is entitled to unilaterally terminate the contract (see 9.6 Termination).

The PPA provides that “unforeseen circumstances” are circumstances that have occurred after the conclusion of the contract, could not have been foreseen taking due care, are not a result of an action or omission of the parties, but render impossible the performance of the obligations under the agreed conditions. The presence of unforeseen circumstances is one of the grounds for amendment of the PPC, which is otherwise generally inadmissible.

The legally defined term “unforeseen circumstances” is applicable to PPC, but not to all construction contracts. However, based on the freedom of contract principle, the parties may contractually define what they would consider “unforeseen circumstances”.

Bulgarian legislation does not acknowledge disruption in the meaning of disturbance, or change in the originally planned execution, which leads to lower efficiency in the execution, respective to costs associated with it. There are no established methods for disruption evaluation.

The principles of accurate performance and good faith, of co-operation between the parties, of sequency and conditionality of the counter obligations are applicable to the construction contracts which usually contain clauses for compliance with these principles and that neither party will prevent the other from accurate performance of its obligations.

Pursuant to the ОСА, any provisions which limit or exclude in advance the debtor’s liability for gross negligence or wilful misconduct are considered invalid. Further, any exclusion of the liability of the parties for non-compliance with the statutory requirements would also be deemed invalid. Any exclusion or time limitation of the warranty liability of the contractor is invalid.

Both the concept of wilful misconduct and gross negligence exist in the Bulgarian legal system and are governed by mandatory provision of law as follows.

• In Bulgarian civil law, wilful misconduct is a form of fault, where the debtor has deliberately failed to perform its obligation.
• The term “negligence” is closely associated with the term “due care”. When performing its obligations under the contract, the party is under the obligation to exercise due care, acting with the necessary knowledge, skill, diligence, conscientiousness and professionalism. The party has acted with negligence if it has failed to exercise due care. “Gross negligence” is different from regular negligence in terms of its intensity: the debtor has acted with gross negligence if it has not exercised even the basic care to perform its obligation; has not exercised the care that even the most negligent person would have exercised in similar circumstances.

In general, the Bulgarian law allows for certain limitations of liability, subject to the restrictions outlined in 6.1 Exclusion of Liability.

Most commonly, the parties agree on capping the liquidated damages potentially due under the contract. However (if not agreed otherwise), if one of the parties suffers damages greater than the amount of the agreed liquidated damages, the injured party is entitled to seek compensation for the damages exceeding the amount of the liquidated damages, even if this is not expressly agreed in the contract.

In addition to the insurances of the contractor (see 7.3 Insurance) and the remedies available in case of default, which include compensation in case of contract non-performance (see 9.1 Remedies) and based on the freedom of contract, the parties may provide for certain risks associated with the performance of the construction contract, in the occurrence of which one of the parties owes indemnity to the other. Such indemnity clauses most commonly refer to the risk of claims of third parties for protection of intellectual property rights or tort claims of third parties that have suffered personal injury or property damage in connection with the construction works.

With the exceptions mentioned below, in Bulgaria the parties have the freedom of contract to negotiate the type of guarantees which each of them should provide and the manner of the guarantees’ provision.

Guarantees of the Contractor

In private projects, at the tender stage, the participants may be required to provide a deposit or a bank guarantee. These serve as a collateral to the employer in the event that the participant in the tender procedure is chosen as contractor, but refuses to conclude the construction contract.

The provision of the advance payment is sometimes subject to the granting of a bank guarantee or a guarantee deposit by the contractor in order to ensure that the employer would be able to recover the amount paid in advance, should the contractor fail to fulfil its obligations.

Performance guarantees, corporate guarantee, guarantee deposits, and retention money are other commonly used forms of guarantee in Bulgaria.

Guarantees of the Employer

The payment obligations of the employer are most often secured by means of bank guarantees, and less often by promissory notes. 

Special Provisions

As per the special provisions of the PPA, a guarantee shall be provided in the form of a cash deposit, bank guarantee or insurance securing performance by covering the liability of the contractor. An insurance can be provided only in a case where the amount of the advance payment or performance security is up to BGN500,000. The amount of any performance guarantee shall not exceed 10% of the contract value. A guarantee securing the advance payment shall be in an amount of the advance payments.

By virtue of law, the contractor, the designer, the person performing technical supervision on “Structural”, the person exercising construction supervision, and the consultant are required to obtain a professional liability insurance.

This insurance generally covers the damages caused to other participants in the construction and/or third parties as a result of unlawful acts or omissions of the insured person during or in connection with the performance of its obligations.

The following risks are not covered by the professional liability insurance:

• war or terrorism;
• direct or indirect effect of ionising radiation or radiation pollution;
• improper use of flammable or exploding materials;
• penalties, sanctions and liquidated damages due; and
• damages caused to own workers and/or employees.

The parties are free to negotiate other types of insurances such as: insurance of the contractor covering the liability with regard to the specific construction site, additional insurance covering the material damages on the construction, the materials, the on-site construction machinery and equipment during the term of construction (if these are paid by the employer or are its property).

The contractor shall also furnish а work accident insurance.

Construction All Risk (CAR) insurances are also commonly accepted.

In construction contracts it is generally agreed that if insolvency proceedings are opened against one of the parties, or one of the parties is declared insolvent, the other party has the right to rescind the contract.

In the event that the contractor is declared insolvent, it shall be de-registered form the Central Professional Register of the Builder.

The following (without limitation) provisions may also have a reflection on the relations between the parties in case of insolvency.

• As of the date of the court decision for the opening of insolvency proceedings, all non-monetary obligations are converted to monetary ones on their market values. As of entry of the decision in the commercial register, all payments to the debtor must be accepted by the insolvency practitioner.
• If the contract is not performed (in full or in part), the insolvency practitioner is entitled to terminate the contract with 15 days’ notice. The counterparty is also entitled to ask the insolvency practitioner to state whether they terminate the contract or not. If the insolvency practitioner does not respond within а 15-day term, it is deemed that the contract is terminated. 
• On the date of the court decision declaring the debtor insolvent, all obligations of the debtor become due.

Aside from the contracts under FIDIC forms of contract, the risk-sharing model is not a common practice in Bulgaria. However, the Bulgarian laws contain multiple provisions relating to risk allocation, such as:

• the risk for adverse geological conditions, archaeological finds which could not have been foreseen, lies with the employer as owner of the land (or person having the right to construct on the land);
• the contractor bears the risk of subsequent objective impossibility for performance of the contract. If part of the works has been performed and can be useful to the employer, the contractor is entitled to a relevant portion of the agreed remuneration;
• the risk of impossibility of performance due to inappropriateness of the designs or materials provided by the employer lies with the employer, if the contractor has timely notified the employer.
• the risk of accidental loss or damage of the construction works is borne by the contractor until the acceptance of the construction works;
• the risk of accidental loss or damage of the materials to be used in the construction lies with the party that has provided the materials, unless the other party is in delay; and
• generally, in case of delay by one of the parties, the risk is transferred to that party. A similar rule also applies to cases of force majeure.

A risk, which by virtue of law is borne by one of the parties, can be shifted to the other party based on the principle of freedom of contract. In cases where the risk is transferred from the employer to the contractor, this is generally associated with an increase of the contract price (particularly in cases where a lump-sum price model is used). The inclusion of provisions, regulating the payment of contingencies (up to a certain amount) or reimbursement of certain costs, outside of the contract price is another commonly used method of pricing the risks shared between the parties.

Generally, it is agreed that the contractor shall ensure the necessary personnel are available, and that all employees engaged in the construction have the required professional qualification, knowledge and experience. In design-and-build contracts, the contractor shall ensure that the engineers and/or architects charged with the preparation of the designs have the required designer’s capacity.

It is usually agreed that the contractor is under the obligation to comply with the relevant occupational health and safety, traffic safety, fire protection, sanitary and hygiene requirements, including to provide the relevant protective clothing, equipment and specific instructions, where the nature of the works so requires.

In large construction projects the tender documentation often requires that the participant designates key experts with specific areas of expertise.

Unless agreed otherwise, the contractor has the right to subcontract certain types of construction works or parts (stages) of the construction.

Typically agreed contractual limitations to subcontracting are:

• obligation of the contractor to notify the employer in advance about the subcontractor and the scope of works which are to be subcontracted. Subcontracting may be subject to the preliminary written approval of the employer; and
• prohibition of the contractor to subcontract the entire scope of activities assigned to it under the construction contract to third parties.

In public procurements the employer may specify that a portion of the procurement (up to 30% of the value) shall be done by subcontractors. The contractors may offer involvement of subcontractors for a larger portion. The contractors are required to indicate in advance the subcontractors that will be used. Specific conditions for the use of subcontractors in concession construction contracts are contained in the Concessions Act.

All approved architectural designs, approved urban development designs, maps, schematics, plans and others relating to architecture and spatial development are considered objects of copyright.

The natural person who has created the designs is their author and has the title of all authorship rights.

The following contractual provisions are often included in the contracts.

• In contracts for construction – guarantees by the employer that it has the necessary rights and/or that it will procure the necessary authorisations for the use of the designs by the contractor for the execution of the construction works and the employer will indemnify and hold the contractor harmless against any claims of third parties (in particular the author of the designs) relating to the use of the designs.
• In design-and-build contracts – that the copyright over all designs in any form shall pass to the employer without further payment by the employer.

In the event of breach of the construction contract, the affected party can resort to the following remedies.

Remedies available to both parties:

• right to seek effective performance of the agreed obligation with compensation for delay;
• compensation for the non-performance of the obligation;
• objection non-performance of counter-obligation (see 9.5 Retention and Suspension Rights);
• liquidated damages;
• right to rescind the contract under the general rules and to seek compensation for the damages caused as a result of the contract rescindment (see 9.6 Termination); and
• right to satisfy its payment claim through the guarantees provided.

Remedies available to the employer:

• authorisation by the court to carry out the agreed works at the expense of the debtor;
• right to rescind the contract if it becomes apparent that the contractor will not perform on time, in the agreed or due manner (See 9.6 Termination); and
• in case of defects the employer has the rights under the first heading in 3.11 Defects and Defects Liability Period, including the right to rescind the contract (See 9.6 Termination).

Remedies available to the contractor:

• claim for payment of the due contract price or part of it; and
• compensation for delayed payment in the amount of the accrued statutory interest.

The compensations under the first two bullet points above cover incurred loss and the loss of profit to the extent the same are a direct and immediate consequence of the contract non-performance and could have been foreseen upon the obligation arising. Where a party seeks compensation for loss of profit as a result of delay in the construction, the obtaining of such profit needs to be certain, and such certainty is not presumed.

Although the parties may agree on restricting the remedies available, they cannot agree to waiving, limiting or excluding:

• the parties’ liability for wilful misconduct or gross negligence (see 6.1 Exclusion of Liability); and
• the right to contract rescindment in the event of contract non-performance.

The parties cannot agree on waiving in advance or excluding the right to lodge a claim in the event of breach of contract.

The parties may agree on:

• capping the liquidated damages potentially due under the contract;
• a sole remedy clause (see 9.3 Sole Remedy Clauses);
• setting out procedures for the due exercise of certain rights under the contract; and
• provision limiting the due compensation for breach of contract only to those damages that are not covered by the relevant insurance.

With the exception of the exclusive liquidated damages clause, the parties may not limit the applicability of types of remedies available by virtue of law.

The use of sole remedy clauses in construction contracts is not a common practice in Bulgaria. The parties can agree on an exclusive liquidated damages clause, which provides that in the event of breach of contract the defaulting party’s liability will be covered by the exclusive liquidated damages and that it will not owe any other compensation (unless the damages have been caused as a result of wilful misconduct or gross negligence, in which case the defaulting party shall owe compensation).

The liability of the parties is limited to the incurred loss and the loss of profit to the extent the same are a direct and immediate consequence of the contract non-performance and could have been foreseen upon the arising of the obligation. If the defaulting party has acted in bad faith, it is liable for all direct and immediate damages (regardless of whether they could have been foreseen or not).

The parties are not liable for indirect, non-consequential damages (ie, in cases where the cause-and-effect link between the contract breach and the damages has been interrupted).

Excluding certain forms of damages on a contractual basis is not a common practice in Bulgaria.

Retention rights (on real estate and commercial liens) are not applicable to the construction contract.

Suspension rights are usually used in construction contracts. The general applicable rule is the objection for non-performance of counter-obligation set out in the OCA. By exercising such objection, either party to the contract may refuse to perform its enforceable obligation until the other party has performed its counter-obligation. The contractor may suspend the works until due payment is performed or until the necessary assistance or provision of construction machinery or materials (if provided by the employer) is received. Accordingly, the employer may suspend the due payments in the event of non-performance of the works due.

The SDA contains a special rule enabling the employer to suspend all payments due in the event of failure by the contractor to maintain professional liability insurance.

Termination herein means any termination of the contractual relationship.

In Respect of a Construction Contract in the Private Sector

General grounds:

• by accurate performance of the obligations of the parties;
• by mutual written consent;
• in case of complete subsequent objective impossibility not due to the fault of the debtor – termination of the contract by virtue of law. In such cases the contractor is not entitled to remuneration. However, the contractor is entitled to remuneration for the part of the work that has been executed and may be useful to the employer;
• in the event of partial subsequent objective impossibility of performance of the contractor’s obligation, the employer shall be entitled to demand a proportionate reduction of the price or to ask the court to rescind the contract if the employer no longer has interest in partial performance;
• in the event of force majeure – termination henceforth by a unilateral written statement of the party having lost interest in performance;
• in the case of business frustration (as defined in 3.2 Variations) – by the court, on the basis of a claim of one of the parties; and
• rescindment due to a substantial default of one of the parties, by written notice by the non-breaching party to the other party, granting an additional appropriate term for performance, with a warning that the contract will be deemed rescinded upon expiry of the term. Granting of additional term is not required if the performance has become impossible in whole or in part, if by reason of delay of the debtor it has become useless. According to the case law, the rescindment of a construction contract may also be done by a court claim for damages, liquidated damages or repayment of the remuneration under the rescinded contract. Rescindment of construction contracts where real property rights are transferred or established shall be made by court decision. The right to rescind the contract shall be time-barred for five years.

Special grounds for termination of construction contract:

• termination by the contractor by written statement to the employer if the employer has provided a design or material inappropriate for the execution of the work, the contractor has promptly notified and requested the employer to make changes or supply suitable material, and the employer has failed to make the requested changes or supply suitable material. The contractor is entitled to remuneration if it has notified the employer thereof in a timely manner;
• termination by the employer in the presence of reasonable cause. Termination of the contract on this ground is permissible where performance has begun but not has been completed and accepted;
• right of the employer to rescind the contract by unilateral written statement if it becomes apparent that the contractor will not perform on time, in the agreed or due manner. This assessment is made on a case-by-case basis depending on the type and specifics of the construction. The employer is entitled to compensation under the general rules; and
• right of the employer to rescind the contract by unilateral written statement in the presence of material and irremediable defects which render the work unfit for the ordinary or agreed purpose. The right shall be exercised within a limitation period of five years from acceptance – for visible defects and from their discovery – or for hidden defects. The employer shall be entitled to compensation under the general rules. 

Special grounds for termination are provided for in the PPA and the Concessions Act in respect of PPC and concession contracts, respectively.

Special grounds for termination are provided for in respect of works awarded by way of a works concession.

Unless the parties have agreed otherwise, construction disputes are resolved under claim proceedings before a court under the general rules of the CCP.

The courts of first instance are:

• the regional courts on disputes with a value of the claim up to BGN25,000; and
• the district courts – for claims over BGN25 000.

Unless agreed otherwise, the local jurisdiction of the courts is determined by the seat and/or permanent address of the defendant.

The first instance judgment is subject to appeal before the relevant district court or the relevant court of appeal, and in the presence of the grounds for cassation appeal – before the Supreme Court of Cassation of the Republic of Bulgaria.

Arbitration is the most preferred alternative means of resolving construction disputes in the private sector.

Disputes relating to contracts awarded under the PPA are also subject to arbitration.

Arbitration is governed by the ICAA, which establishes mandatory prerequisites for arbitration.

The parties usually specify in the contract a standing institutional arbitration which shall solve all disputes that may arise between the parties. The arbitration agreement shall be in a written form. The arbitral award is final, has the force of res judicata and is enforceable. It is subject to annulment by bringing a claim for annulment on the grounds exhaustively set out in the ICAA before the Supreme Court of Cassation, which cannot consider the merits of the dispute. Foreign arbitral awards and agreements are subject to recognition and admission for enforcement in the Republic of Bulgaria, following a three-instances judicial proceeding.

Mediation is another method for dispute resolution in construction expressly regulated by the MA.

The settlement reached on a legal dispute in the mediation proceedings has the force of a court settlement and is subject to the approval of the regional courts in the country.