Introduction
A 2020 decision of the Supreme Court has provided guidance on the importance of a buyer giving notice of defects in due time, as well as the significance of a builder reserving their 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 was too late and so the buyer has lost any claim it might have had in respect of that defect.
According to article X(2)(3) of the Standard Form Shipbuilding Contract 2000, the buyer must notify the builder of defects “as soon as possible” after discovery. Similar provisions are found in:
- clause 35(a)(ii) of Newbuildcon;
- article IX(2) of the Shipbuilding Contract of the Shipbuilders Association of Japan; and
- article 25(1)(2) of the Fabrication Contract 2015, the standard Norwegian offshore construction contract.
The principle of notification follows an internationally accepted legal principle (eg, article 39 of the Convention for the International Sale of Goods), which requires a buyer to give notice of a lack of conformity in goods “within a reasonable time” of discovery, and it 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 their rights.
The two interrelated questions were addressed in a Supreme Court decision in the context of a road construction contract – although, the decision is relevant to shipbuilding – which highlights the importance of a buyer issuing a warranty claim swiftly and of a builder ensuring that their rights are properly reserved.
The Supreme Court decision (HR-2020-2254-A) addressed issues of late notification of a claim and discussions by the parties of the claim’s merits. The case concerned road construction but the judgment is also relevant to other sectors, including the offshore and maritime industry.
A dispute arose between the proprietor, Norwegian Public Roads Administration (NPRA), and its advisor, Rambøll AS, in relation to a road construction tender. The NPRA claimed that there was a defect in some of Rambøll’s calculations that were used to form the basis for the NPRA’s bid. The NPRA notified Rambøll of its claim four weeks after discovery of the defect. Rambøll did not raise a late notification defence until almost three years after receiving the NPRA’s notification of the claim.
As regards the deadline for notification of the defect, the agreement was subject to NS8401, the standard Norwegian construction contract, and a requirement that claims be notified “without undue delay” (item 13(4) thereof). 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 the NPRA’s argument that Rambøll had lost a defence of late notification due to discussions between the parties of the claim’s merits and ordinary principles of passivity.
The Court initially noted that there was no specific provision to this effect in the NS8401 form. The position is the same in the standard form of the commonly used shipbuilding contracts referenced above, which 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 may also be lost as a consequence of passivity or a party doing nothing.
Regarding the aforementioned discussions of the claim’s merits between the parties, the Supreme Court reasoned that in construction contracts, it is of the 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 was 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.
Although the case concerns a dispute in road construction, the principles of the judgment apply generally and therefore are relevant 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 claim’s merits 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 was whether the builder gave the buyer reasonable grounds to believe that late notification would not be raised as a defence. This consideration is relevant in complex construction contracts where continued cooperation is essential, such as shipbuilding and offshore construction contracts, particularly where a project is ongoing. However, having received notice of a defect, a builder should be allowed time to investigate the alleged defect and consider whether it falls within the guarantee before rejecting a claim as being notified too late.
To avoid uncertainty and losing any defence of late notification, builders may wish, before entering into discussions, to reserve all of their rights, including clarifying that a defence of late notification is not waived by virtue of those discussions.
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