Default, liability and remedies in shipbuilding in Norway

Default, liability and remedies

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?

The contract would normally state explicitly that the shipbuilder is liable for the design and liable for defective design under the warranty clause of the contract. Thus, the question of whether defective design falls within the scope of poor workmanship would not be relevant. If the contract does not explicitly mention liability for design, one would likely interpret the contract to imply that the shipbuilder would still be liable for the design, as this is in line with the traditional division of risk in Norwegian shipbuilding contracts. The consequences of being liable for the design could be a heavy burden on the shipbuilder if the vessel does not perform properly due to an error in the design. Remedying design defects after completion of the vessel may be costly. The scope of the shipbuilder’s liability for the design may be regulated and differentiated in the contract.

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

The shipbuilder could be liable to third parties for personal injury or death based on the Norwegian Product Liability Act. According to this Act, the shipbuilder would be liable for damage caused by the vessel (product) that is due to the vessel (product) not offering the security that a user or the public in general could reasonably expect (a security defect).

If the third party is the legal successor to the buyer, his or her legal rights against the shipbuilder are normally regulated in the ship­building contract. In the absence of explicit regulation, the legal successor to the buyer may, under certain conditions, make claims directly against the shipbuilder based on the Norwegian contract law principle of direct action.

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?

It is generally not a requirement that the agreed level of compensation represents a genuine link with the actual damage suffered. However, a court could set aside a liquidated damages provision, wholly or partly, if it is deemed to be unreasonable or against good business practice to enforce such provision. The threshold to set aside an agreed provision on this basis is fairly high, in particular when the contract has been entered into between professional parties.

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

The answer to this question would depend on an interpretation of the contract. Normally, a claim for higher damages will be explicitly excluded in the contract. Even without such an explicit disclaimer, an interpretation of the contract could lead to the result that a claim for further damages is precluded.

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

Yes, the parties are free to design the force majeure clause of the contract.

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

A shipbuilding project in Norway would normally be insured by the shipyard according to the Nordic Marine Insurance Plan 2013 (the Nordic Plan). The latest version of the Nordic Plan is version 2019. This would be an insurance policy (construction all risks) covering the builder’s yard or other premises in the port where the yard is situated, and transport between these areas. The insurance would not cover subcontractors prior to delivery to the yard or transport of parts from subcontractors to the yard.

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?

A court or arbitration tribunal in Norway would be prepared and obliged to set the terms and decide if the parties were unable to reach agreement on the alteration to key terms of the contract or a modification to the specification.

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?

At the outset, 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, would preclude a subsequent claim for breach of performance warranties. However, the shipyard would normally be liable for latent defects based on the warranty provisions of the contract. If the parties do not agree on possible outstanding issues, both parties have the right to make reservations or notes in the protocol, or in a separate document signed by the parties, ‘for acknowledgement of receipt only’, which would reserve the party’s right to make a claim following delivery.

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 of the shipbuilder would not be entitled to exercise a lien over the vessel after incorporation of the work or equipment into the vessel. Before such incorporation, the suppliers or subcontractors would be entitled to exercise a lien on the equipment if such a lien has been agreed between the shipbuilder and the respective supplier or subcontractor. It follows from section 41 of the Norwegian Sale of Goods Act that a lien, charge or encumbrance on the vessel at the time of delivery shall be considered a defect giving rise to a claim on the part of the buyer, unless it is agreed that the buyer shall assume such lien, charge or encumbrance.

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

No, a reservation of title by a subcontractor or supplier of materials and equipment would not survive the affixing to or incorporation in the vessel under construction.

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?

If title to the vessel under construction vests with the builder, and provided such a third-party creditor has an enforceable basis for its claim, a third-party creditor of the builder could 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. Such security attachment or enforcement lien would have priority after a prior registered mortgage, but only to the extent that the loan secured by the mortgage had been drawn by the shipbuilder before the taking out of the security attachment or enforcement lien. If the buyer has registered his or her right under the contract in the Norwegian Shipbuilding Register, the buyer will maintain his or her right to have the vessel delivered to the detriment of the security attachment or enforcement lien of such third-party creditors against payment of the purchase price.

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?

Generally, a subcontractor’s or manufacturer’s warranty could be assigned to the buyer and the buyer would be entitled to make a direct claim under the subcontractor’s or manufacturer’s warranty. However, if the subcontractor or manufacturer has not been fully paid by the shipbuilder, the subcontractor or manufacturer would be entitled to withhold his warranty work until being fully paid, and the buyer may have to settle such outstanding payment to benefit from the sub­contractor’s or manufacturer’s warranty.

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?

There is no general legal requirement to put the builder in default by sending an official notice before the buyer’s remedies begin to accrue if the builder defaults in the performance of the contract. Specific performance will always be open to the buyer. Whether and to what extent the buyer will have a claim for damages will in practice always be regulated and limited in the contract and will normally be limited to:

• liquidated damages for breach of technical warranties;
• liquidated damages for delay; and
• in case of cancellation by the buyer, refund of instalments paid.

If there is no explicit regulation of limitation on the buyer’s right to claim damages, the buyer will in principle be entitled to claim damages equal to his or her economic loss.

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?

At the outset and apart from the agreed contractual provisions, there are no remedies available to the buyer in the event of protracted failure to construct or continue construction by the shipbuilder. However, if the shipbuilder is grossly negligent or wilfully failing to construct the vessel, the buyer may have a claim for damages and possibly a right of cancellation.

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

The bankruptcy estate of the shipbuilder would have a right to step into the contract in lieu of the shipbuilder, in which case the estate would have to perform under the contract. If the estate elects to exercise such step-in right, then the buyer is prevented from terminating due to the builder’s insolvency. In practice, a bankruptcy estate would be reluctant to use such step-in rights in the case of a shipbuilding contract, and the outcome of such a situation would depend on negotiations between the buyer and the builder’s bank and other creditors.

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

The parties would most commonly agree to ad hoc arbitration proceedings in Norway to be carried out pursuant to the Norwegian Arbitration Act. Following the launch of the Nordic Offshore and Maritime Arbitra­tion Association (NOMA) in 2017, it has been more common to agree that the arbitration proceedings shall be carried out pursuant to the NOMA rules. Such rules are similar to those of the London Maritime Arbitration Association. If ordinary courts are agreed, there would be no specialised judges or courts dealing with shipbuilding disputes.

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?

A buyer’s contractual right to take possession of the vessel under construction and continue construction would not survive the bankruptcy or moratorium of creditors of the builder. A buyer could seek to obtain such a right by having registered title to the vessel or possibly a mortgage on the vessel under construction.

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

Typical alternative dispute resolution clauses would allow the class to decide on class issues and to appoint a technical expert for other technical matters. General mediation clauses would be possible to agree, but are less common.

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?

The remedies available to the builder in the event of the buyer’s default and the consequences of the builder’s cancellation would normally be agreed in the contract. Typically, in the case of non-payment by the buyer, the builder would be entitled to:

• agreed default interest;
• stop work and postpone delivery; and
• cancel the contract after a certain number of days of delay.

In the case of cancellation, the builder would normally be entitled to:

• complete or not to complete the building of the vessel;
• sell the vessel in a finished or unfinished state; and
• claim damages from the buyer equal to the builder’s economic loss.