Shipbuilding Notice of defects – possible traps for the buyer and the builder

A Norwegian Supreme Court decision from last year provides guidance on the importance of a buyer giving notice of defects in due time, as well as the importance of a builder reserving its rights before entering into discussions on the merits of those defects.

In cases where time has lapsed between a defect occurring and the builder being notified by the buyer of the defect, a builder may rightfully argue that the buyer’s notification is too late and so the buyer has lost any claim it might have had in respect of that defect.

According to the Norwegian Standard Form Shipbuilding Contract 2000 (“SHIP2000”) Article X No. 2 third paragraph, the buyer must notify the builder of defects “as soon as possible” after discovery. Similar provisions are found in the NEWBUILDCON clause 35 (a) (ii), the Shipbuilding Contract of the Shipbuilders Association of Japan (“SAJ Form”) Article IX No. 2, as well as in the standard Norwegian offshore construction contract, NF 2015, Article 25.1 second paragraph. This principle of notification follows an internationally accepted legal principle of notification, see for example Article 39 of the Convention for the International Sale of Goods (the Geneva Convention) which requires a buyer to give notice of a lack of conformity in goods “within a reasonable time” of discovery, and can be found in various types of contracts and sectors.

However, the principle, founded on providing parties with certainty, can also affect a builder’s rights. Just as a buyer may be prevented from claiming rectification of a defect where a claim has not been duly notified, a builder may also be ­prevented from objecting to the allegedly late notification on the grounds that the builder entered into discussions on the merits of the claim and did not raise a timely objection to the claim without reserving his rights. These two interrelated questions were addressed recently in a Norwegian Supreme Court decision – in the context of a different type of contract although relevant to shipbuilding – which highlights the importance of a buyer issuing a warranty claim swiftly and of a builder ensuring his rights are properly reserved.

The facts of the case

In the decision by the Norwegian Supreme Court (published as HR-2020-2254-A) issues of late notification of a claim and discussions by the parties of the merits of the claim were addressed. The case concerned road construction but the judgment is also relevant to other sectors including the offshore and maritime industry.

The dispute arose between the Norwegian Public Roads Administration (“NPRA”) as proprietor and their advisor, Rambøll AS, in relation to a road construction competition. NPRA claimed that there was a defect in Rambøll’s delivery of certain calculations which were used to form the basis for NPRA’s tender. NPRA notified Rambøll of its claim four weeks after discovery of the defect. Rambøll did not raise any late notification defence until almost three years after receiving NPRA’s notification of the claim.

Rationale and holding

Regarding the deadline for notification of the defect, the agreement was subject to the Norwegian Standard Construction Contract NS8401 and a requirement that claims be notified “without undue delay” (item 13.4). This obligation was assessed in relation to the complexity of the claim and the scope of the construction project. The Supreme Court held, without further reasoning, that two weeks should have been a sufficient period to consider the defect and a claim. The notification presented by the NPRA after four weeks was therefore made too late and any consequent entitlement was lost.

The Supreme Court went on to address NPRA’s argument that Rambøll had lost a defence of late notification due to discussions between the parties of the merits and ordinary principles of passivity.

The Supreme Court initially noted that there was no specific provision to this effect in the relevant contract, the NS8401 form. The position is the same in the commonly used standard form shipbuilding contracts referenced above and which also do not include any such provision. However, based on considerations of “symmetry”, the Court reasoned that where a claim for a defect may be lost due to late notification of the defect, the same rules of expediency should apply to objections to those claims – the right to object also being capable of being lost as a consequence of passivity. Or a party doing nothing.

Regarding the aforementioned discussions between the ­parties of the merits, the Supreme Court reasoned that in ­construction contracts, it is of utmost importance that the parties maintain good cooperation and continuous dialogue throughout the project. A rule that leads to the loss of contractual rights because one party has been eager to find practical and amicable solutions in order to drive the project forward, could easily give rise to a “trap” for that party.

The Supreme Court stated that the relevant criteria here is whether the defaulting party gave the other party “reasonable grounds to believe” that late notification would not be invoked as a defence. Based on the facts of the case – that three years had passed between the late notification and the defence being raised, the Supreme Court held that the defence of late notification had been lost.

Key takeaways

Although the case concerns a dispute in road construction, the principles of the judgment apply generally and are of relevance to shipbuilding projects. With respect to a buyer’s deadline for notification of defects, this will depend on the scope and complexity of the relevant project and, of course, the contractual terms.

Further, the parties’ discussion of the merits of a claim is only one of several relevant elements to be considered when evaluating whether a builder’s claim for late notification is lost. The relevant test is whether the builder gave the buyer reasonable grounds to believe that late notification would not be raised as a defence. This consideration will be relevant in complex construction contracts where continued cooperation is essential, such as shipbuilding and offshore construction contracts and particularly where a project is ongoing. A builder should though, having received notice of a defect, be allowed time to investigate the alleged defect, and consider whether or not it falls within the guarantee, before rejecting a claim as being notified too late.

To avoid uncertainty and to avoid losing any defence of late notification, builders are well advised, before entering into discussions, to reserve all of their rights including making clear that a defence of late notification is not waived by virtue of those discussions.

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