Use the Lexology Getting The Deal Through tool to compare the answers in this article with those from other jurisdictions.

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 Norway is open to foreign participation and investment. There are no particular restrictions in Norwegian legislation that prevent or limit foreign participation in the shipbuilding industry, but foreign companies and investors are subject to the same laws and regulations that apply to Norwegian nationals and companies, such as the provisions of the Competition Act of 2004.

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?

There are no shipbuilding facilities in Norway owned or controlled by the government. Most shipbuilding facilities are located on the west coast. The facilities tend to be limited in size and are in general highly specialised, commonly either concentrating on building and repairs of fishing vessels or ferries, or more complex offshore vessels or topsides.

Key contractual considerations

Statutory formalities

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

There are no statutory formalities in Norway that apply when entering into a shipbuilding contract. The contract may in principle be concluded orally, although this is rare in practice owing to the relative complexity of shipbuilding contracts. The person concluding a shipbuilding contract on behalf of a company must have the necessary authority to bind the company in order for the contract to be validly concluded.

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?

Norway is not part of the EU and the justice sector is not covered by the Agreement on the European Economic Area. Consequently, neither Regulation No. 593/2008 on the law applicable to contractual obligations (Rome I), nor its predecessor, the Rome Convention of 1980, applies. The EU regulations on applicable law will, however, be relevant in considering the conflict of law issues under Norwegian private international law. Norway has ratified the convention of 15 June 1955 on the law applicable to international sales of goods and the provisions of the convention have been transformed into Norwegian law.

The parties to the contract are free to choose the applicable law. The choice of law must be expressed or demonstrated by the parties with reasonable certainty in order to be deemed as chosen. The choice of law will be accepted and upheld by the Norwegian courts, subject to narrow exception of public policy and overriding mandatory rules of law, as well as some mandatory Norwegian legal provisions that will apply regardless of the parties’ choice of law, such as certain provisions of the bankruptcy law, which will apply on the basis that the bankruptcy proceedings take place in Norway (lex fori). The procedural law applicable to a dispute will be determined by the court that has jurisdiction over the matter.

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?

Even if the shipbuilding contract contains several elements generally found in construction contracts, the shipbuilding contract has traditionally been perceived as a contract for the sale of goods, and the Sale of Goods Act of 1988 will in principle apply (provided that the buyer does not procure a substantial part of the materials). Notwithstanding the foregoing, the shipbuilding contract is typically more complex than the ordinary sale of goods contract and contains elements that are particular to the shipbuilding industry. The provisions of the Sale of Goods Act will therefore only apply to the extent that they are deemed as relevant.

The provisions of the Sale of Goods Act of 1988 are not mandatory and will only function as background rules of law to the extent that the shipbuilding contract does not regulate the particular issue, or as principles when interpreting the scope and effect of the agreed terms and conditions. Norwegian shipbuilding contracts commonly rely on the background rules of law in respect of several important contractual issues such as liability and damages in the event of default. One example is the arbitration award of 19 August 2011 (Arctic Reefer Corporation Inc v STX Norway Florø AS), in which the sole arbitrator, Hans Jacob Bull, used the provisions of the Sale of Goods Act concerning damages to supplement the warranty provision of the shipbuilding contract.

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 an important part of the identification of the vessel, its equipment and materials, but is not necessarily essential in contractual terms. If the object of the contract can be identified by other means, the hull number may not in itself be decisive, for example, the builder is not free to unilaterally change hull numbers.

The builder is as a starting point obliged to deliver the vessel as identified by its hull number in the contract. Unless clearly set out in the shipbuilding contract, the builder may not substitute the vessel with another even if the substitute vessel complies with the terms of the contract. The issue was raised in the arbitration award of 27 November 2001 (Broström Tankers AB v Factorias Vulcano SA II), where the majority of the tribunal held that any possible right of substitution would have to be clearly reserved by the builder.

The hull number is important in respect of registration of the vessel in the Norwegian Shipbuilding Register (BYGG) and for the purpose of distinguishing and identifying materials, equipment and buyer’s supplies arriving at the yard.

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?

The inclusion of a qualification to the dimensions and descriptions of the vessel will in general allow the builder a certain leeway to deviate from the stated figure. How much leeway the builder has will depend on an overall assessment of the prevailing circumstances in the matter, inter alia, the consequences of the deviation for the buyer.

In a Norwegian arbitration award of 12 June 1980 (Rederiet S Bartz-Johannessen AS v Båtservice Verft AS), a vessel had been delivered with a length of 101.2 metres, whereas the contract specified a length of ‘abt. 100m’. The question raised was whether the builder had a right to additional compensation for work carried out. The sole arbitrator stated that the inclusion of terms such as ‘ca’ or ‘about’ implies that the contract object can comply with the terms of the contract even if it deviates somewhat from the stipulated figure. The arbitrator held that the issue raises two questions: first, which party has the right to deviate; and second, what deviation will be acceptable. As to the first question, the right to deviate rests in general with the party responsible for the design of the vessel. The second question depends on which party has the right to deviate, the intention and purpose of the qualifications, as well as the consequences of the deviation for the other party.

Article IV of the Norwegian Standard Form Shipbuilding Contract 2000 (Ship 2000) states that any qualification of the main dimensions and characteristics in its article II shall be disregarded for the purpose of calculating liquidated damages for deviance from the stipulated figures. Ship 2000 is an agreed document (see question 43) and is commonly used, at least in an amended form, for shipbuilding in Norway.

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 agree that the vessel shall have certain dimensions or characteristics and perform to certain standards. Further, the parties may agree that breach of such standards entitles the buyer to claim price adjustment or liquidated damages or gives the buyer the right to cancel the contract. Provisions to this effect are incorporated in article IV of the standard form Ship 2000 and are commonly used in Norwegian shipbuilding contracts. Pursuant to section 36 of the Contracts Act of 1918, the contract terms and conditions may in principle be set aside or revised if deemed to be unreasonable or contrary to good business practice to apply, but this legal provision is rarely applied to commercial contracts between professional parties. There are applicable trade standards that can be referred to in the contract. The classification societies have standards (eg, for noise and vibration) that are commonly used. In the offshore sector, the comprehensive NORSOK standard is commonly referred to.

Quality standards

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

There are no statutory provisions regulating contract quality standards that apply for shipbuilding in particular. However, the Sale of Goods Act of 1988 section 17, paragraph (2) (a) and (b) states that, except as otherwise provided by the contract, the goods shall be fit for the purposes for which goods of the same description would ordinarily be used, and any particular purpose of which the seller knew or could not be unaware of at the time the contract was concluded, except where the circumstances show that the buyer did not rely on, or that it was unreasonable for him or her to rely on, the seller’s skill and judgment. These principles will apply to the extent that any particular aspect of the vessel or its quality is not regulated in the contract or its appendices. The specifications will commonly contain references to specific sets of standards with which the builder shall comply. A reference to a general standard is often included in the shipbuilding contract, for example, ‘first class shipbuilding practice in Western Europe’. The general standard will be especially important to determine the shipbuilding practice applicable to any particular part of the construction, where the applicable standard is not specified in the contract. However, even when the specifications refer to specific standards, the reference to a general standard of quality may still be of significance when determining the builder’s obligations under the contract (arbitration award of 8 September 1999 (Broström Tankers AB v Factorias Vulcano SA I)).

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?

During construction, the classification society will operate both as a provider of services to the builder, ensuring compliance with class rules, and as an agent for the government, ensuring compliance with public statutory legislation. The classification society may also, from time to time, be engaged directly by a buyer, for example, for the purpose of a due diligence.

Neither in its function as a service provider to the builder, nor as a government agent, will the classification society have any contractual relationship with the buyer and, therefore, in principle will not owe any specific duty of care to the buyer unless otherwise specified or agreed. This is of course different if engaged directly by the buyer.

The classification society may be held liable as a contracting party by the government, buyer or builder under the respective contracts. The contract with the classification society will, however, commonly contain substantial limitations of the classification society’s liability.

The buyer or other affected third parties may in principle hold the classification society liable in tort for negligence. Whether such a right exists depends on the specific circumstances present, inter alia, the type of claim made and the basis on which the classification society has performed its services. Traditionally, Norwegian legal scholars have been reluctant to accept that classification societies can be held liable by third parties, not least in respect of defects. However, in more recent legal theory it has been argued that there is no reason for adopting a sui generis approach to third-party claims against classification societies, and that the question of liability should be resolved in accordance with general contract and tort law. It has been argued that a claim in tort should be available to information recipients that ‘in course of business rely and act upon the certification made by the society’. There is limited Norwegian case law regarding claims against the classification societies, both in respect to contractually based claims and legal action in tort. Notwithstanding that the limited case law available indicates that it is in principle possible for both the builder and the buyer to hold a classification society liable for negligence, it may be difficult in practice to succeed in claims against the classification societies (see for example, Court of Appeal judgment 4 November 1997 (Swire Southern Limited v DNV)).

Recent Supreme Court judgments relating to Information Liability (similar to the English law concept of duty of care), including Rt. 2008 p. 1078 (Information Liability judgment No. I), Rt. 2015 p. 556 (Information Liability judgment No. II), HR-2016-022264-A (Information Liability judgment No. III) and HR-2016-02344-A (Information Liability judgment No. IV), may indicate a development in Norwegian law that will also affect the liability of classification societies. The conditions for Information Liability were summarised in Information Liability judgment No. III. Firstly, there must be misleading information caused by the negligence of the information provider in a professional context. Secondly, the aggrieved party must have had reasonable and justifiable reason to rely on and act according to the information. Thirdly, the information must have been meant for the aggrieved party, or at least for a limited group to which the aggrieved party belongs.

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 Norwegian Maritime Authority (NMA) is in charge of controls of Norwegian ships and has appointed several classification societies as recognised organisations (RO), to which it has delegated tasks such as inspections and surveys with the purpose of ensuring compliance with statutory law and international regulations on behalf of the Norwegian government. The authority delegated is set out in individual agreements with the respective RO. The societies appointed as ROs are:

  • the American Bureau of Shipping;
  • Bureau Veritas;
  • DNV GL;
  • Lloyd’s Register of Shipping;
  • RINA SpA; and
  • Nippon Kaiji Kyokai.

Norway has two ship registries: the Norwegian International Ship Register and the domestic register, Norwegian Ordinary Ship Register. The Norwegian Ships Register is a separate department of the NMA located in Bergen. Pursuant to an agreement entered into with the NMA, ROs are authorised to carry out certain surveys, verification and certification functions on behalf of the NMA in accordance with the international conventions adopted by Norway and Norwegian statutory legislation.

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?

Vessels under construction in Norway may be registered upon the application of the owner in the BYGG, which is a separate chapter of the Norwegian Ordinary Ship Register, provided that it is made probable that the vessel will have an overall length of 10 metres or more. Shipbuilding contracts with a Norwegian builder may also be registered in the BYGG upon the application of the buyer. Registration is open to buyers of all nationalities.

Registration can be made in the name of either the builder or the buyer depending on which party holds title to the vessel during the construction period. The party registered as owner may register mortgages over the vessel under construction.

Registration of title in the construction period will usually be in the builder’s name and the builder may in such event mortgage the vessel and its materials, excluding any buyer’s supplies, typically as security for construction financing, including costs for obtaining refund guarantees. A mortgage may also in some cases be provided to the buyer of the vessel as security for the repayment obligation of the builder in the event of cancellation as a substitute for refund guarantees.

If the buyer is registered as owner in the construction period, a mortgage may be registered, for example, as security for the financing of the buyer’s pre-delivery instalments or other payments before delivery.

The registration of title to the vessel gives security with regard to the other party’s creditors and legal successors.

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?

The parties are free to agree that title to the vessel shall pass to the buyer during construction and are furthermore free to agree whether such transfer shall take place progressively or in stages. Transfer of title is not common in traditional shipbuilding contracts and Ship 2000, article XI provides for a system whereby title is transferred upon delivery and acceptance of the vessel.

Transfer of title under construction is, however, common in offshore construction and the Norwegian offshore construction standard contract forms, including Norwegian Total Contract 2015 (NTK15) and Norwegian Fabrication Contract 2015 (NF15) (see question 43), provide for a system of progressive transfer of ownership to the work performed, implying that the buyer can secure title to materials before the start of construction.

Passing of risk

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

The parties are free to agree on the transfer of risk, but risk will commonly pass to the buyer simultaneously with the transfer of title, something that is also reflected in Ship 2000, article XI. Particular agreements on insurance under construction may affect the division of risk under construction.

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?

The builder is responsible for delivering a vessel to the buyer in accordance with the shipbuilding contract. In the absence of any agreement to the contrary, the shipbuilder has in general the right to subcontract the contract work, but will remain liable towards the buyer for all work performed by its subcontractors. Notwithstanding the foregoing, there may be limitations to the builder’s right to subcontract also when the agreement does not regulate the use of subcontractors, if such limitations arise out of the specific circumstances prevailing in the contractual relationship. Examples of this could be where the contract negotiations or other correspondence between the parties shows that there existed a mutual intention regarding limitations in the use of subcontractors.

The parties are free to regulate the builder’s right to subcontract all or parts of the contract works and limitations in the builder’s liability towards the buyer for work performed by subcontractors. The builder will commonly have the right to subcontract all works except for the hull and major sections thereof, the subcontracting of which is subject to buyer’s consent (not to be unreasonably withheld), but will for all circumstances remain fully liable as if the work was done by the builder at the builder’s yard, see Ship 2000, article II, clause 4.

Notwithstanding the general principle that the builder shall remain fully liable, subcontracting may affect the builder’s liability in other ways, such as for late delivery if the definition of permissible delay (force majeure) covers delays from subcontractors. Furthermore, the builder’s liability under the shipbuilding contract is usually limited and the buyer will, therefore, have an interest in ensuring that the quality of work is not significantly affected by subcontracting parts of it. Amendments to the Ship 2000 standard may be necessary to protect the buyer’s interest in this respect.

A maker’s list is usually included as an appendix to the contract, from which the builder is free to choose suppliers and subcontractors.

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?

Whether or not the builder has an obligation to inform the buyer of his or her intention to construct main items in another country will depend on the particular circumstances prevailing in the contractual relationship.

Notwithstanding the absence of express obligations in the contract wording, an obligation to inform the buyer will easily be deemed to exist as an implied term or in accordance with general Norwegian contract law. An important factor will be whether the buyer had a well-founded expectation that the main items were to be constructed at the builder’s yard, for example, on the basis of the contract negotiations or builder’s previous practices. It is common for Norwegian builders to have the hull built in a low-cost country.

Norwegian shipbuilding contracts will usually regulate this by specifying the yard in which the vessel is to be built and limiting the builder’s right to subcontract main parts of the works, including how to deal with the hull.

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?

There is no specific statutory contract law regulating fixed-price contracts as opposed to labour-and-cost-plus contracts, but as the two methods of calculating the contract price are different in nature, specific legal provisions may of course apply to one method, which may not be relevant to the other.

The parties are free to agree on the method of calculating the contract price. Shipbuilding contracts in Norway are traditionally fixed-price contracts, with an original contract price agreed for a defined scope of work payable in instalments and any possible adjustments to the contract price being payable in the last instalment on delivery. This method of payment is incorporated in article III of Ship 2000.

As opposed to the standard format shipbuilding contract, offshore construction contracts such as NF15 and NTK15 will commonly adopt ‘labour-and-cost-plus’ as the method of calculating the contract price.

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?

The general principle is that any price increases must be based on the provisions of the contract, and if no such provisions exist, any actual price increases in labour and materials will be at the builder’s risk. If the contract is subject to Norwegian law, the contract price may in theory be adjusted pursuant to section 36 of the Contract Act of 1918 if the application of the terms is deemed to be unreasonable or contrary to good business practice. As mentioned above, this legal provision is rarely applied to commercial contracts between professional parties.

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?

In general, consent without condition to a particular price increase will be deemed as an agreed amendment to the contract. Such agreement may, however, in principle be set aside and considered void pursuant to the provisions of the Contract Act of 1918 if, for instance, the contract was entered into under circumstances that would render its application unreasonable or contrary to good business practice.

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?

The parties may agree on limitations to, or the exclusion of, the buyer’s right to set-off, deduction of amounts and suspension of payment.

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?

There is no statutory legislation in Norway regulating the format and wording of refund guarantees, but to be accepted as a guarantee and enforceable as such, the guarantee wording must be clear both in respect of the guarantee obligation and under what conditions it becomes due. The wording of the guarantee is also critical as to ascertaining the type of refund guarantee issued, including whether the refund guarantee is an on-demand guarantee (demand bond) or an ancillary guarantee. See, for example, the Supreme Court case of 22 August 2012 (Norsk Tillitsmann ASA v Silvercoin Industries AS) and Court of Appeal case of 6 June 2016 (Bergen Group ASA v Eastern European Investment Management Sp. Z.o.o). The format and wording of refund guarantees are usually in line with international banking practice, albeit the wording of the guarantee tends to be more compromised if subject to Norwegian law. The refund guarantees will commonly be issued by way of a Society for Worldwide Interbank Financial Telecommunication (SWIFT) message. There are no requirements for any permission or approval from authorities for issuing a refund guarantee.

Advance payment and parent company guarantees

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

Insofar as the guarantee is issued to the benefit of a third party not associated with the company, there exists no specific statutory regulation in respect of the issuance of advance payment guarantees and parent company guarantees.

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?

Depending on which party holds title to the vessel under construction, either the builder or buyer can create and register a mortgage over the vessel under construction provided that the vessel is registered in its name in BYGG.

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?

The risk and liability for defective design depends on the definition of the builder’s scope of work and warranty in the shipbuilding contract. In Ship 2000 the builder is responsible for the design of the vessel (see article II), and the warranty explicitly covers faulty design (article X, clause 2). This reflects the traditional division of risk with respect to design in Norwegian shipbuilding contracts, but has over the last decade been subject to criticism by Norwegian builders, in particular in respect of contracts where the design is provided by the buyer but contractually remains part of the builder’s scope of work and risk. Builders may avert this risk by removing design from its scope of work and warranty, and require that the design should be delivered as buyer’s supplies under the shipbuilding contract. Another approach used from time to time is to divide the risk and liability for the design so that the buyer assumes the risk for certain defined fundamental aspects of the design (basic design) and the builder assumes the risk for the rest of the design (detailed design).

 

Remedies for defectiveness (after delivery)

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

The rights of the buyer’s legal successors are commonly regulated in the shipbuilding agreement. In the event that the buyer sells or transfers title to the vessel to another legal entity during the warranty period, Ship 2000, article X provides that assignment of the buyer’s rights under the warranty is subject to the builder’s consent (which shall not be unreasonably withheld or delayed). This contract term is often amended (eg, to secure assignment to associated companies). In the event that the builder does not consent to the assignment, the original buyer will have to make and handle any warranty claims against the builder on behalf of its legal successor.

The legal successor holding title to the vessel may under certain conditions make claims against the builder directly for defectiveness on the basis of the Norwegian contract law principle of direct action. Other third parties may also, depending on the specific circumstances prevailing, hold the builder liable in tort for negligence if, for example, the defectiveness has caused personal injury.

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?

Liquidated damages do not have to reflect the actual damages suffered, and the parties are in principle free to agree on the level even to the extent that it contains an element of penalty. In principle, liquidated damages can be adjusted in accordance with the Contracts Act, section 36, if deemed to be unreasonable or contrary to good business practice to enforce; however, there would have to be extraordinary circumstances present to apply section 36 to liquidated damages agreed in a commercial contract between professional parties. Older case law provides examples of liquidated damages being reduced on the basis of section 36 of the Contracts Act (such as Court of Appeal judgment ND 1973, p. 196).

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?

An agreement to apply liquidated damages will in general preclude the buyer from claiming damages for its actual economic loss unless the contract itself provides otherwise. The limitation in the builder’s liability that liquidated damages implies may, however, be set aside and the buyer may be allowed to claim damages, in broad terms, if the builder has acted with gross negligence or wilful misconduct.

Force majeure

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

The parties are free to define which events shall constitute permissible delay under the shipbuilding contract, namely, a delay that under the terms of the contract will permit extension of the delivery date. A force majeure delay will ordinarily constitute a permissible delay.

Whether the parties under Norwegian law are free to define force majeure as a term, is, however, more uncertain. Force majeure is a term that has been defined in Norwegian case law and that is applied as a general contractual principle. Notwithstanding that force majeure has a more or less clear definition in Norwegian law, the definition of force majeure in shipbuilding contracts tends to reflect international shipbuilding standards by defining the term and providing a list of examples of events that constitute force majeure. In recent years, it has been more usual to find shipbuilding contracts that contain examples of force majeure events that would not be considered a force majeure event under Norwegian contract law (eg, delays in deliveries from subcontractors). It remains to be seen whether the courts will accept that the parties, by way of providing examples of events, extend the scope of force majeure. For all circumstances, Norwegian courts will interpret the force majeure clause restrictively in the sense that any extension of the term force majeure beyond its normal meaning would have to be set out very clearly.

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?

Building insurance on all-risk terms is readily available in the Norwegian insurance market and will commonly be concluded on the basis of the terms of chapter 19 of the Nordic Marine Insurance Plan of 2013, version 2016 (previously the Norwegian Marine Insurance Plan of 1996, version 2010). It must be specifically agreed for the insurance to cover manufacture and transport outside the builder’s areas (cf clause 19-5). The all-risk insurance is usually taken out by the builder, but may also be taken out by the buyer or owner. Supplementary covers are available for risks such as additional costs of rebuilding, liquidated damages and loss of interest in the event of late delivery as well as towage and removal of the vessel.

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?

Norwegian courts and arbitration tribunals will in general not function as umpires setting terms if the parties are unable to reach an agreement as to the consequences of a modification. However, a dispute in respect of whether there exists a modification and the consequences of the same may be considered by the courts and tribunals as partly a legal dispute concerning fulfilment of the contract or a claim for damages. The parties are free to agree that any dispute concerning modifications shall be decided by an umpire or expert either with binding effect or as a recommendation.

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?

A signature on the protocol of delivery and acceptance will not in itself preclude subsequent warranty claims, including for latent defects, even if the protocol states that the buyer’s acceptance shall be final and binding as to the conformity of the vessel. Such a statement in the protocol may, however, affect the right to make claims relating to defects known to the buyer on delivery if the buyer fails to reserve his or her rights in other ways.

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?

Under Norwegian law, the builder’s suppliers and subcontractors cannot exercise any lien over the vessel or work or equipment for unpaid invoices relating to goods and services delivered to the builder. The supplier may, however, based on an agreement with the builder, retain a security interest in, or title to, materials and equipment delivered (see question 33).

The vast majority of Norwegian shipbuilding contracts will explicitly specify that the vessel shall be delivered free from encumbrances (eg, article VIII, clause 1 of Ship 2000). Moreover, the existence of any such liens, claims or encumbrances will in practice have to appear in the bill of sale. Notwithstanding the above, if the contract does not explicitly state that the vessel shall be free from encumbrances, it would probably be considered as an implied term unless there are specific circumstances indicating otherwise.

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?

Under Norwegian law, a supplier of materials and equipment may as a general rule retain title in the materials or equipment sold as security for payment of the purchase price. The reservation of title is deemed to be a sales lien, (see section 3-22 of the Liens Act 1980). The sales lien or right to reserve title, as well as the validity and enforcement of the same, is, however, subject to a number of conditions.

First, the sales lien cannot be agreed in objects that can be entered in a real property register, including a ship register (see section 3-15(2) of the Liens Act 1980). This means that the sales lien in materials and equipment will be lost if the materials or equipment are incorporated into the vessel under construction. The sales lien will, however, remain in existence if imposed on accessories of the vessel. Secondly, sales lien cannot be agreed in materials and equipment that the buyer has the right to resell before they have been paid. If title to the vessel remains vested with the builder in the construction period, as is the case under the traditional shipbuilding contract, the builder’s right to resell will prevent a subcontractor or supplier of the builder from imposing a sales lien in materials and equipment. The situation is different for suppliers of buyer’s supplies, because the buyer’s supplies are not meant for resale. A sales lien in material and equipment delivered as buyer’s supplies will be lost if the materials or equipment are incorporated into the vessel in such a manner that to separate it would be disproportionately costly or would involve an unreasonable loss of value (see sections 3 to 19 of the Liens Act of 1980).

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?

The remedy under Norwegian law for obtaining provisional security for a monetary claim is arrest (the Dispute Act section 32-1(2)). An arrest will give temporary security for the claim in the form of an attachment over the debtor’s assets, allowing the creditor time to obtain an enforceable judgment or award for claim. The petition for arrest can be filed before the district court where the asset belonging to the defendant is situated and must specify the claim, the reason for the arrest and provide an outline of the petitioner’s contentions. An arrest is only granted on certain conditions. First, an arrest can only be granted in respect of the debtor’s assets, which means that considerations concerning title will have to be made before obtaining arrest over the vessel, equipment or materials at the yard. Piercing of the corporate veil may, in theory, be possible under Norwegian law, but the courts will usually accept the integrity of each legal entity. Second, an arrest is conditioned upon the petitioner substantiating, on the balance of probability, that he or she has a claim against the debtor, for example, by submitting unpaid invoices. Third, the petitioner must substantiate, on the balance of probability, that he or she has sufficient reasons for obtaining security for his or her claim through an arrest, more precisely that the debtor’s conduct gives grounds to fear that the enforcement of the claim would be evaded or considerably impeded if arrest is not granted.

In the event that the third-party creditor has obtained a basis for enforcement of the claim, such as an enforceable judgment or arbitration award, the creditor can obtain an enforcement lien in assets belonging to the debtor and thereafter institute proceedings to forcibly sell the assets.

The builder’s right of retention will in principle not be affected by a security attachment or execution lien and the builder will have the right to retain the vessel until payment is received even if the vessel or equipment is sold to a third party. The buyer may protect his or her right to have the vessel delivered according to the terms of the shipbuilding contract by registering the shipbuilding contract in BYGG (see question 12), in which case the buyer will be protected as regards the builder’s 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?

The builder can assign to the buyer its rights under a subcontractor’s or manufacturer’s warranty, provided that such assignment is allowed in the subcontract or the subcontractor gives its consent to the assignment.

In article X, clause 4 of Ship 2000 the builder has, upon the buyer’s request, an obligation to assign to the buyer any rights the builder may have against any subcontractors, including the right to pursue any claim under the subcontracts, and shall endeavour to include provisions in the subcontracts to the effect that the buyer can make claims against the respective subcontractor directly.

Notwithstanding any assignment of rights, the buyer may under certain conditions make a direct claim against the subcontractor or manufacturer under the respective warranty or contract with the builder. Under certain conditions the buyer may also make a direct claim in tort against the subcontractor or manufacturer.

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?

The remedies available to the buyer in the event of the builder’s default will in general follow from the shipbuilding contract. If not regulated by the contract, the buyer can rely on the remedies available under Norwegian contract law including the provisions of the Sale of Goods Act of 1988.

The buyer has an obligation to give due notice of the default in order to protect their claim against the builder. The shipbuilding contract will in some cases make the buyer’s remedies contingent on the issuing of a notice of default. This is usually the case for cancellation of the shipbuilding contract (see, for example, article XII of Ship 2000). If nothing is stated in the shipbuilding contract, the notice of default is in general not a condition for the remedies to begin to accrue but merely a step to protect the buyer’s contractual rights.

Norwegian shipbuilding contracts, in accordance with standard international shipbuilding contracts, will usually provide for different remedies for different types of default. Delays in delivery of the vessel will in general give the buyer the right to claim liquidated damages, and in the event of excessive delays, the right to cancel the contract, (see, for example, article IV, clause 1 of Ship 2000). Failure to deliver a vessel in compliance with the contract including the specifications, will in general give the buyer the right to refuse to accept the vessel, and to the extent specifically agreed in the contract, the right to claim reduction in the contract price. As to defects discovered after delivery of the vessel, the buyer will in general have to rely on the warranty as set out in the shipbuilding contract (see, for example, article X of Ship 2000) including the builder’s right to rectify and repair the fault. The builder’s liability for damage to other part of the vessel than the defective part is limited in scope. To the extent that the shipbuilding contract does not regulate remedies or calculation of the same, the Sale of Goods Act of 1988 and general Norwegian contract law will apply.

The shipbuilding contract will usually to a certain extent preclude other remedies that would otherwise be available under Norwegian contract law, typically in relation to agreed liquidated damages for delays or the warranty for defects after delivery. Whether other remedies under Norwegian contract law in fact are precluded will depend on an interpretation of the contract.

The regulation of default and remedies will normally imply limitations in the builder’s liability, which would otherwise have existed in accordance with general Norwegian contract law. Such limitations of liability may be set aside under certain conditions. The conditions for setting aside agreed limitations are subject to discussion and may vary depending on the contract and specific circumstances of the contractual relationship. In broad terms, limitations in liability may be set aside when the builder has acted with gross negligence or wilful misconduct, but can also be set aside in the event of protracted non-­performance (see question 37).

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?

The parties are in general free to agree on the terms and conditions for the construction and delivery of the vessel, including the remedies available to the buyer in the event of failure to make due progress in the construction. As a starting point the buyer will have to rely on the rights conferred in the contract. However, depending on the specific circumstances, there may be certain remedies available either in addition to the contractual provisions, or setting the contractual provisions aside.

In the absence of any contractual provisions regulating the same, the buyer may be able to rely on anticipated breach of contract if the buyer can substantiate that the vessel will be delayed for a period exceeding the date upon which the buyer is entitled to cancel the contract. This may be practical in a situation of protracted non-­performance and where the contractual provisions provide no specific remedies.

Other situations of protracted non-performance may constitute a default without being one in the strict sense of the word, including setting aside any limitations of liability in the contract (see the arbitration award in the 1979 Wingull case in which the builder’s failure to rectify a defect within a reasonable period of time gave the buyer a right to cancel the contract and claim damages, setting aside the liability limitation in the contract).

Builder’s insolvency

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

As stated in question 3, Norwegian bankruptcy law will in general apply as lex fori regardless of the agreed choice of law in the contract. Pursuant to Norwegian bankruptcy law, the bankruptcy estate of a Norwegian entity has the right to accede the debtor’s contracts on the same terms and conditions as the debtor. A contractual provision that entitles the buyer to terminate in the event of the builder’s insolvency is as a starting point not enforceable in Norway, unless the subject matter of the contract dictates otherwise. It is unclear how this principle will be applied to shipbuilding contracts, and whether there are grounds for differentiating the various shipbuilding contracts. There is no decisive case law and both conclusions have been argued by legal scholars. It may well be that it is not possible to exclude the possibility of the estate’s accession as such, but that the right of accession will depend on a specific overall evaluation of the contract subject matter and whether the shipbuilding contract specifically stipulates anything with respect to performance of the construction works.

Judicial proceedings or arbitration

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

Shipbuilding contracts in Norway will usually contain provisions referring disputes either to a specific Norwegian legal venue (court of first instance) or to arbitration. In article XIX, clause 2 of Ship 2000, arbitration is the agreed dispute resolution mechanism. There is limited tradition in Norway for using arbitral institutions and the alternatives are few. Consequently, arbitrations tend to be agreed on an ad hoc basis. As the market is small, an informal ‘pool’ of well-known and experienced arbitrators has been formed, ensuring the quality of the proceedings. Arbitration proceedings, including their formation, are regulated by the Arbitration Act of 2004.

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?

As stated in question 3, Norwegian bankruptcy law will in general apply as lex fori regardless of the agreed choice of law in the contract.

The buyer’s legal position with regard to the estate and creditors depends on the contract and specific circumstances present. If the parties have agreed that transfer of ownership shall take place progressively, and the buyer has taken necessary steps to protect its title, then the buyer will be able to take possession of the vessel. However, under a traditional shipbuilding contract with transfer of title on delivery, a contractual right to take possession of the vessel will not survive the bankruptcy of the builder, and the buyer will have to enter into an agreement with the estate on commercial terms in order to take possession.

ADR/mediation

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

It is not common to incorporate an ADR clause in shipbuilding contracts. More frequently, shipbuilding contracts will contain comfort provisions to the effect that the parties shall attempt to solve the disputed issues through negotiation before bringing the dispute before a court of law or arbitration tribunal. If a dispute is solved in the ordinary courts, the court has a statutory right and duty to suggest, and seek to carry out, court-sponsored mediation with the objective of trying to solve the matter amicably, provided that such solution seems realistic.

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?

In broad terms, the buyer’s defaults under the shipbuilding contract can be divided into two categories, default of payment obligations and default of other obligations. Failure to pay any part of the contract price will first of all entitle the builder to charge interest, usually at a rate agreed in the shipbuilding contract, see article III, clause 3, last paragraph of Ship 2000, or in accordance with the Interest on Delayed Payments Act of 1979. Second, pursuant to article XII, clause 2 of Ship 2000, if the amount remains outstanding seven days after the buyer received the shipbuilder’s notice of default, the shipbuilder is entitled to suspend work and enforce the claim. If the amount remains outstanding 21 days after the buyer received notice of default, and the buyer has failed to provide acceptable security, the shipbuilder is entitled to cancel the contract. The buyer’s failure to pay the instalment on delivery will entitle the shipbuilder to withhold delivery of the vessel as security for the outstanding payment. See the Maritime Code section 54.

Whether the payment default leads to suspension of work or cancellation, the shipbuilder is entitled to claim compensation for any loss caused thereby. The compensation payable as a result of cancellation of the contract is calculated on the basis of the positive contractual interest and therefore covers the shipbuilder’s loss of profits. The shipbuilder has, however, a duty to mitigate the loss. In the event of cancellation, the shipbuilder has an obligation to refund all pre-delivery instalments made by the buyer with the addition of interest at a fixed rate. The shipbuilder must also return any buyer’s supplies provided, or pay an amount equal to the buyer’s costs for such equipment, for example, if the buyer’s supplies have been incorporated into the vessel. However, in practice the shipbuilder will retain the instalments, or such part of it which is necessary, to cover the claim for compensation by way of setoff. The standard form contract Ship 2000 does not regulate the sale of the vessel following cancellation. In principle, the buyer can retain the vessel for its own purposes, but will usually choose to sell the vessel in order to establish the loss incurred as a result of the cancellation. The shipbuilder will have to comply with a general duty of care when selling the vessel, but there are no formal requirements such as a tender process.

The consequence of the buyer’s failure to comply with other obligations under the contract, such as comments to and approval of plans and drawings, participation in tests and trials and delivery of buyer’s supplies, will generally be regulated in the specific provisions of the shipbuilding contract regulating the obligation. To the extent that the buyer’s breach of obligation causes delay, such delay will be considered permissible delay and entitle the shipbuilder to extend the delivery date by the net delay caused thereby (see article IX, clause 3 of Ship 2000).

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?

The Norwegian standard form shipbuilding contract Ship 2000 is commonly used for shipbuilding in Norway, either in its original form or with certain amendments. Ship 2000 is an agreed document, negotiated by the Norwegian Shipowners’ Association on one side and Norwegian Shipbuilders’ Sales and Marketing Organisation and the Norwegian Shipbuilders’ Association on the other. As representatives of both builders and buyers have been involved in the drafting, the standard is generally considered to be fairly balanced. Norwegian law is stated as the choice of law; however, the standard is drafted so as to also be operative under English law.

Offshore construction contracts are generally based on the recently revised standard format Norwegian Fabrication Contract 2015 (NF15), Norwegian Total Contract 2015 (NTK15) or Norwegian Total Contract Module and Modification 2015 (NTK15 MOD), all of which are agreed documents developed in cooperation between the major Norwegian oil companies and representatives of the offshore industry.

Subcontractors’ supplies to builders can be subject to standard contract forms such as the Nordic conditions for the supply of machinery and other mechanical, electrical and electronic equipment (NL 09 and NML 10), as well as the new Norwegian Purchase Conditions 2015 (NIB16) that are intended to be used for work subcontracted under NF1,5 NTK 15 and NTK15 MOD.

Assignment of the contract

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

There are no statutory requirements pertaining to the assignment of rights and obligations of the shipbuilding contract to a third party. If nothing is agreed in the shipbuilding contract, the general rule under Norwegian law is that a contract can be assigned unless it is clear from the circumstances of the contract that the parties had intended for the contract to be fulfilled by the original contractual party, or that there is such a close connection between the contractual obligation and the contractual party that it cannot be assigned.

A monetary claim under the shipbuilding contract can be assigned separately, for example, as security (see section 4-9 of the Liens Act of 1980). However, all contractual claims that are not monetary, for example, the buyer’s right to delivery of the vessel, cannot be validly assigned separately as security under Norwegian law.

The parties will commonly wish to limit the right of assignment in the shipbuilding contract. Such limitation exists in the Norwegian standard form shipbuilding contract Ship 2000, article XIII, which states that neither party can assign the contract unless prior consent of the other party is given in writing, such consent not to be unreasonably withheld. This article is, however, often amended to allow the buyer to make inter-group assignments, or security assignments for the purpose of financing the vessel.

The assignment is perfected by notification of the debtor and does not need to take the form of a tripartite agreement. Verbal notification is in principle sufficient, although a written notification and acknowledgment is usually issued and obtained in order to secure evidence of notification.

Provided that the shipbuilding contract is subject to Norwegian law, the assignment does not constitute a novation of the contract, as the concept is known under English law. The shipbuilding contract will not be discharged by the assignment and the assignee will assume all rights and obligations of the original contracting party. This principle is also set out in the Norwegian standard form shipbuilding contract Ship 2000, article XIII, second paragraph.