Principal Laws Governing the Construction Market in Norway

The fundamental starting point is that the parties to construction contracts are free to agree on whatever terms they desire (principle of contractual freedom). Mandatory legislation is given in respect of (among others):

• consumer protection;
• HSE;
• minimum and mandatory technical requirements for buildings;
• environmental requirements;
• working conditions; and
• tax.

Between professional parties, contracts will generally be interpreted in light of (and, if the contract is silent on a particular issue, will be supplemented by) general principles of Norwegian contract and construction law. The Norwegian Sales of Goods Act, 1988 does, to a large extent, express general principles of Norwegian contract law. This act may be directly applicable as background law for certain design and build contracts, and may in any event be important for the interpretation of unclear terms and for supplementing the contract if there is a disputed matter that has not been completely regulated.

Otherwise, the general principles of Norwegian contract and construction law have been developed over time by the courts (case law) and are discussed in Norwegian legal textbooks.

Standard contracts are used in most construction projects in Norway.

The two most used standard contracts for onshore construction work are:

• NS 8405:2008 – Norwegian building and civil engineering contracts; and
• NS 8407:2011 – general conditions of contract for design and build contracts.

These standards are prepared and unanimously recommended by a committee appointed by Standards Norway, based on a proposal put forward by representatives both from the employer side and the contractor side. These standards may therefore be seen as “agreed documents”.

NS 8405 is intended to be used in contractual relationships where the contractor shall carry out building or civil engineering work (including installations, new buildings, maintenance, repairs and alterations) for the employer, and where most of the drawings, descriptions and calculations are provided by the employer.

NS 8407 is intended to be used in contractual relationships where the contractor shall perform all or a substantial part of the design work in addition to the execution of building or civil engineering work (including installations, new buildings, maintenance, repairs and alterations) for the employer. 

Other Norwegian standard contracts are also often used in connection with onshore construction projects:

• NS 8401:2010 – general conditions of contract for design commissions; and
• NS 8402:2010 – general conditions of contract for consultancy commissions with remuneration based on actual hours spent.

Within the offshore sector, the Norwegian Fabrication Contract NF 15 (fabrication/construction obligations on the contractor) and the Norwegian Total Contract NTK 15 (design and fabrication/construction obligations on the contractor) are commonly used. Certain employers also use these standards as a basis for their contracts for onshore construction projects.

Companies That Act as Employers

The kinds of companies and/or institutions that act as employers in construction projects in Norway vary depending on location and type of project. The employer can be an individual (for example, a landowner) or can include both larger and smaller companies and organisations. Common entities are various public agencies, industrial companies, municipalities and housing companies.

Employer’s Rights and Obligations Under a Construction Contract

The rights and obligations of the employer naturally depend on the specific contract, including type and size of the contract in question. Nevertheless, the employer’s main right is to receive the agreed works within the agreed milestones and final completion date free of defects.

As a starting point, the extent of the employer’s obligations – and thereby also the risk division between the employer and the contractor – depends on whether the employer is to provide the substantial part of the design work (drawings, descriptions and calculations), or on whether the contractor shall perform all or a substantial part of the design work in addition to the construction work.

The general obligations of the employer under a standard construction contract normally include the following:

• to pay the agreed contract price (lump sum(s), unit prices and/or reimbursable items);
• to provide the design/engineering (if and to the extent allocated to the employer);
• to perform other deliverables (employer-provided items);
• to obtain necessary permits (at least those that must be provided by the employer);
• to provide the contractor with access to the site as agreed and/or as required;
• to respond to the inquiries raised by the contractor during the contract period;
• to co-ordinate with the employer’s other contractors involved in the project;
• to issue variation orders and respond to variation order requests; and
• a general duty to act and co-operate loyally with the contractor.

Relations Between the Employer, Contractor, Subcontractor and the Financiers

Depending on the type of contract, the roles and distribution of responsibility between the employer and the contractor vary. The typical relationship between the employer and contractor is mainly transactional, but the parties generally need to co-operate to a certain extent. The standard contracts establish a system consisting of notice and claim obligations, which requires interaction between the parties.

Typically, the subcontractors enter into separate contracts with the contractor, often with corresponding rights and obligations as between the employer and the main contractor (back-to-back).

The financiers typically also enter into separate financing agreements with the relevant party financing the construction project (often the employer). In Norway, mainly wind farm projects have been project-financed, though project financing is also expected to be used in the development of other types of energy projects in the coming years.

Companies That Act as Contractors

The kinds of companies that act as contractors in construction projects in Norway vary depending on the type of project. Contractors are typically privately owned entities operating in Norway as such, or within a specific region.

Contractor’s Rights and Obligations Under a Construction Contract

The rights and obligations of the contractor naturally depend on the specific contract, including type and size of the contract in question. Nevertheless, the contractor’s main right is to receive the agreed contract price within the due date(s). Construction contracts also regularly entitle the contractor to additional time and/or additional payment for variations to the scope of work.

As a starting point, the extent of the contractor’s obligations – and thereby also the risk division between the employer and the contractor – depends on whether the contractor shall perform all or a substantial part of the design work in addition to the construction work.

The general obligations of the contractor under a standard construction contract normally include the following.

• To perform and complete the contract works in accordance with the contractual requirements, official standards and industry norms by the agreed completion date.
• To remedy defective works or parts during the agreed warranty period (usually five years).
• To notify the employer of:
1. errors or defaults in the employer’s requirements;
2. inconsistencies in the design documents;
3. ground conditions; and
4. in general, all parts of the employer’s involvement.
• To provide insurance and security.

General Relations Between the Employer, Contractor, Subcontractor and the Financiers

See 2.1 The Employer.

Companies That Act as Subcontractors

Companies that act as subcontractors are typically the same companies that act as main contractors. Subcontractors may also be companies with specialist knowledge in a specific area needed in the relevant project.

Subcontractor’s Rights and Obligations Under a Construction Contract

The rights and obligations of the subcontractor may vary depending on the specific contract, including the contract’s scope and size. Often, the general rights and obligations of the subcontractors are comparable with the rights and obligations of the contractor towards the employer. The subcontract may be entered into on a so-called back-to-back basis, which means that the subcontractor assumes the obligations of the contractor set out in the main contract.

General Relations Between the Employer, Contractor, Subcontractor and the Financiers

See 2.1 The Employer.

Companies That Act as Financiers

Construction projects in Norway are typically financed by private banks, pension funds and public entities.

Financier’s Rights and Obligations Under a Construction Contract

In general, a financier is not a party to the construction contract that they are funding, and consequently they do not have any direct rights or obligations under the contract. Financiers enter into separate contracts with the relevant party to the contract establishing the financiers’ rights and obligations.

General Relations Between the Employer, Contractor, Subcontractor and the Financiers

See 2.1 The Employer.

Companies That Act as Designers

Various types of companies and institutions can act as designers in Norwegian construction projects. These may include:

• architectural firms;
• engineering firms;
• design consultancies; or
• specialised design companies.

Additionally, public institutions, such as municipalities or government agencies, may also act as designers.

Designer’s Rights and Obligations Under a Construction Contract

The rights and obligations of the designer are typically outlined in the independent design contract itself. For independent design contracts, the use of NS 8401 or NS 8402 is common. See also 1.2 Standard Contracts.

In general, the designer is responsible for:

• creating and developing the design concept;
• preparing detailed drawings and specifications; and
• ensuring compliance with applicable regulations and standards.

The designer is generally also responsible for providing technical expertise and assisting in the construction process, as a consultant either to the employer or to the contractor.

General Relations Between the Designer, Employer and the Contractor

The relationship between the designer, employer and the contractor varies depending on the project and the underlying construction contract in use (NS 8405 or NS 8407); see also 1.2 Standard Contracts.

Under NS 8405, the designer typically has a direct contractual relationship with the employer. The designer’s role is to provide design services and to co-ordinate with the employer and the contractor throughout the project.

Under NS 8407, the designer is often engaged by the contractor as a subcontractor. The contractor is responsible for co-ordinating the design process and managing the relationship with the designer. The employer may still have some involvement in the design process, but the primary contractual relationship is between the contractor and the designer.

As a starting point, the freedom of contract enables the parties to agree on the scope of work in each construction contract.

Usually, the employer issues either a public or private invitation to tender to the market/chosen tenderers, which may consist of functional requirements to be achieved or detailed specifications (or a combination). Negotiations may be held before the contract is concluded with a set scope.

After conclusion of the contract and throughout the contract period, the scope may be subject to variations, including additional work, reduction of work (negative changes) and other changes.

As there is no mandatory law regulating professional construction contracts, the starting point will always be the parties’ agreement. In general, the parties tend to adopt a standard contract that contains provisions regarding the employer’s right to vary the works and the contractor’s right to request variations, including both additional compensation and time extension.

Variations Imposed by the Employer

In accordance with NS 8405 and NS 8407, the employer is entitled to order variations to the scope of work. Variations shall, in principle, be notified through formal variation orders.

The employer’s right is commonly limited in that the variation must be sufficiently connected to the contract in question and must not be of a materially different nature to the originally agreed work. Unless otherwise agreed, the employer is typically not entitled to order variations representing an addition to the contract price of more than 15%.

Variations Requested by the Contractor

If variations are imposed on the contractor’s work without the employer’s use of formal variation orders (referred to as an instruction or irregular variation order), the contractor is nevertheless obliged to implement the variations.

If, in the contractor’s opinion, an instruction represents changes to the agreed scope of work, the contractor must notify the employer without undue delay if it wishes to invoke this instruction as a variation to the work. This usually happens in the form of a variation order request, where the employer again must respond to the request by issuing a formal variation order or must reject the request. Similarly, if circumstances for which the employer carries the risk have occurred and affect the contractor’s performance, the contractor must notify the employer without undue delay in order to be entitled to additional compensation and/or time extension.

Both the contractor and the employer should be aware that the Norwegian standard contracts include deadlines that both parties must comply with in respect of variations, typically to notify or respond without undue delay. If any such deadline is not complied with, the contractor may lose its right to claim additional compensation or time extension, and the employer may lose its right to contest that there is a variation to the work or to contest the alleged consequences thereof.

Additional Compensation – Time-Related Costs

For the performance of variation work, the contractor is entitled to additional time and/or payment for the given variations. The price for the variation work can firstly be agreed on a lump sum basis between the parties. In the absence of an agreement, the contract’s unit rates shall apply, if applicable. The variation work will, however, often be performed on a reimbursable basis after the contractor has given a price estimate for the works. The principles for determining the price for the variation work are equal regardless of whether the variations are imposed by the employer or requested by the contractor.

As for time-related costs, also referred to as prolongation costs (increased costs of all kinds due to an extension of the contract period), the basic principle is that the contractor is also entitled to compensation for all such additional costs to the extent that the contractor is able to substantiate that they are caused by circumstances for which the employer carries the risk. This typically concerns so-called preliminary costs (costs for running and managing the project). 

Occasionally, and particularly in larger projects, the parties will agree on a formula for calculating the time-related costs that the contractor is automatically entitled to if the contract period is extended.

The responsibilities regarding the design process between the employer, the designer, the contractor and other parties will vary depending on the parties’ agreement. The responsibility can be clearly divided, but can also be apportioned between the relevant parties.

The choice between the two most common Norwegian standard contracts (NS 8405 and NS 8407) is made based on which party is responsible for providing the majority of the design work. For independent design contracts, the use of NS 8401 or NS 8402 is common.

See also 1.2 Standard Contracts.

The responsibilities regarding the construction process may be agreed on according to the wishes of the parties. In general, the contractor performs the construction work (often using subcontractors) while the employer provides information, permits, approvals and typically holds more controlling functions.

See 2.1 The Employer and 2.2 The Contractor.

The tender documents issued by the employer will often include information about the construction site, including pollution, underground obstacles, geotechnical conditions, archaeological finds, etc.

In the absence of other agreements, the starting point is that the employer carries the risk for ground conditions if they deviate from what the contractor had reason to expect when preparing its tender. In this regard, it is provided that the contractor shall undertake a careful inspection of the construction area and its surroundings, and shall obtain available information about the ground conditions, including information about cables, pipes, etc. The employer is, however, obliged to provide all known information about the conditions which it would assume would be of interest to the contractor. In general, all provided and incorrect information is at the employer’s risk.

Permits and Licences

Construction work of a certain magnitude requires specific permissions from the relevant building authorities before the work can be started. In addition, those performing construction work need general permits for their respective activities and for the specific work to be undertaken. A construction project can also trigger the need for obtaining other permits, including permits concerning pollution and construction waste. 

The Norwegian Planning and Building Act 2008, and all subordinate legislation pursuant thereto, contains building regulations that apply to construction work in Norway.

The party responsible for obtaining the permits is typically the architect, another designer or the project manager. The parties can otherwise agree on which party will be responsible. In the absence of any agreements, site-related permits would typically be at the employer’s risk.

The Norwegian standard contracts do not include maintenance after completion (takeover) of the project. Accordingly, as this is not generally included as part of the contractor’s scope of work, the employer is typically responsible for the maintenance of the works. However, up until completion of the project (takeover), it is a part of the contractor’s scope of work to ensure that the contract works are “maintained” in the sense that they meet the contractual requirements.

Within certain areas, such as wind farm projects, it is rather common for the employer and the contractor to enter into an operation and maintenance agreement. Such agreement normally includes an availability guarantee, and the contractor is responsible both for scheduled and for unscheduled maintenance.

Also, in certain infrastructure projects such as road construction projects, the contract may include maintenance obligations on the contractor for an agreed duration after takeover.

Other functions in the construction process, such as operation, finance and transfer, are generally not instructed by the employer to the contractor or third parties. Exceptions do occur in certain types of projects.

A construction contract is often based on takeover taking place in several stages where technical facilities form part of the contract work. The contractor shall carry out inspections, testing and adjustments, etc, of the work, after which the takeover process itself can be carried out.

The contractor is responsible for the necessary testing being carried out, but the employer shall contribute to the extent necessary to ensure accomplishment. Tests must be carried out until the system functions satisfactorily. The contractor must document the implementation and results of the tests.

In larger projects, it is common for the parties to agree in further detail on how and when all required tests and commissioning activities shall be carried out, before takeover can take place.

The Process of Completion, Takeover and Delivery

The Norwegian standard contracts stipulate provisions regarding the completion, takeover and delivery of works.

The contractor (or subcontractor) shall, in a reasonable time before the contract work is completed (usually two weeks), summon the employer (or main contractor) in writing to proceedings for taking over the works. In this regard, the contractor shall deliver all necessary documentation regarding the works in advance.

A record must be kept of the proceedings, stating:

• who is present;
• deficiencies that are identified;
• the deadline for rectification of proven deficiencies and time needed for any post-inspection;
• whether the contract work is taken over or was refused to be taken over; and
• the employer’s reasons for refusing to take over, and the contractor’s reasons if the contractor does not accept this.

The record must be signed by both parties.

Legal Consequences of Takeover

The legal consequences of takeover are well regulated in the standard contracts and can also be agreed by the parties. Common legal consequences are as follows:

• the employer becomes entitled to start using the contract work;
• the risk of loss of or damage to the contract work passes from the contractor to the employer;
• any delay liquidated damages cease to accrue;
• the contractor’s obligation to keep the contract work insured ceases;
• security that the contractor has provided in respect of liability during the execution period is reduced in accordance with agreed provisions;
• the contractor must issue a final account proposal and the final invoice to the employer; and
• the defect notification period (warranty period) commences.

In accordance with NS 8405 and NS 8407, the defects liability period for defects (warranty period) is five years after taking over. In order to invoke any remedies for defects, the employer also needs to notify within a reasonable time period after it has or ought to have discovered the defect.

Usually, for the parts of the contract work that have been remedied, a new five-year period shall run from completion of the remediation work for the part in question. The new period must not exceed the original deadline by more than one year. Irrespective of the five-year period for notification, the employer shall be entitled to invoke defects that the contractor has caused intentionally or through gross negligence.

The authors note that, due to short statutory limitation periods under Norwegian law (usually three years), claims may become time-barred even before the expiry of the warranty period. Therefore, the employer may have to ensure that statutory limitation periods are complied with in parallel, which may require commencing legal proceedings or obtaining an extension of time-bars.

Remedies

In the case of defects, the remedies available to the employer are (usually) set out in the contract. As per NS 8405 and NS 8407, the contractor shall be obliged to remedy a defect and be liable for costs of remedying damage caused by the defect, unless the costs of remediation will be disproportionate to the result achieved. Secondary legal remedies include price reduction and compensation for damages, and the last resort is termination of the contract.

The contract price can be a fixed price (lump sum), unit prices, reimbursable items or (as is often the case) a combination of these. The parties may also agree on a target price that is a jointly determined final cost, including incentives for achievement for both parties.

The price generally includes all contract work, including materials necessary for the contractor’s completion. The establishment of the contract price is usually based on the employer’s invitation to tender and the contractor’s tender under which the contractor will offer a price.

Milestone payments are commonly agreed on, together with several other types of payment methods such as monthly payments, advanced payments, etc. See also 4.3 Payment.

Indexation of prices is commonly used in construction contracts in Norway to address the risk of price fluctuations. The specific allocation of risk for large price fluctuations between parties can vary depending on the specific contract regulation. The risk may be allocated to one party (for example, through fixed price contracts) or shared through an agreed price adjustment clause.

Both NS 8405 and NS 8407 contain price adjustment clauses, stating that all price elements shall be index-linked unless otherwise agreed. Such index-linking takes place in accordance with an agreed total index method.

Late or No Payment

In the events of late payment, the contractor is entitled to interest on overdue payments according to the Norwegian Act 1976 Relating to Interest on Overdue Payments. The interest rate is determined every six months and will usually be somewhere between 8% and 11% per annum.

In accordance with NS 8405 and NS 8407, the contractor may, in addition to claiming interest, suspend the execution of the works in the event of a material breach of the employer’s payment obligation, or where it is clear that such breach will occur. In such case, the contractor must issue a written notice in advance, giving the employer 24 hours to pay. In the event of (a legitimate) suspension, the contractor is entitled to claim additional time and additional payment.

Advanced Payments, Interim Payments and Delayed Payments

The parties are free to agree on a payment period as well as on the method of payment.

Advance payments are common in construction projects. In such cases, the employer would usually require security by way of a bank guarantee, either by a general guarantee covering the contractor’s performance of its obligations under the contract or by a specific advance payment guarantee. As a starting point, unless otherwise agreed, the Norwegian standard contracts provide that the contractor shall provide security amounting to 10% of the contract price.

In addition, the employer is entitled to deduct from the contractor’s invoices a certain percentage of the invoiced amount in retention monies. The contractor cannot invoice this amount before the final invoice is issued.

The contract also holds other security mechanisms, such as the employer’s right to withhold payment in order to secure its claims following the contractor’s breach of contract. See also 7.2 Guarantees.

Interim payments, in the sense that a contractor receives the contract price in stages, are very common. These are usually regulated by making payments of defined parts of the purchase price upon achieving predefined payment milestones. Also, ordinary progress payments as the project goes forward are common if the contract work is (mainly) compensated on a reimbursable basis or is based on unit prices/rates.

In accordance with NS 8405 and NS 8407, invoices must be paid by the employer within 28 days after receiving the invoice. The parties may otherwise agree on the length of the payment term.

In all cases, the invoices must be submitted as agreed in the contract, which may be through a digital platform, and the receiving party must be able to verify the works and the amount invoiced.

The parties usually agree on a main contract schedule that forms part of the contract. The contract schedule may include milestones for the fulfilment of both parties’ obligations.

In general, the contractor must document that the milestones have been achieved.

As per NS 8405 and NS 8407, unless otherwise agreed, the contractor must submit a contract schedule within four to six weeks after the contract is entered into. This schedule must, as a minimum, include the main activities to be carried out by the contractor and other activities which the contractor may be dependent on, including works to be performed by the employer’s other contractors. Further, the contractor is, on a running basis, obliged to inform the employer of the actual progress of the works, and to notify the employer of any (significant) deviations from the schedule. In the case of significant deviations, the contractor must present a revised schedule.

In larger construction projects, the parties often agree on rather detailed administrative requirements, which will include the contractor’s planning and reporting. Often, a set of different schedules on different levels (contract baseline schedules, etc) may be agreed on.

The parties are free to agree on milestone dates, including milestone dates subject to liquidated damages, in the case of delay. Provisions regarding liquidated damages in the case of delay are set out in all standard contracts. In general, the contract completion date is sanctioned by delay liquidated damages. In other cases, the parties must agree that a milestone shall be subject to liquidated damages. An actual loss is not required to claim payment of such liquidated damages.

Both parties have an obligation to notify the other party of a delay.

A delay may entitle the contractor to an extension of time and, in some cases, to additional payment, if the progress is impacted due to circumstances for which the employer carries the risk. Correspondingly, the employer may also be entitled to an extension of time if the employer is hindered in its contribution by circumstances for which the contractor carries the risk.

If a party wishes to demand extension of time due to delay, such party shall notify the other party without undue delay, and must do so in order to safeguard its claim for extension of time.

In the case of concurrent delay, the contractor would, as a general rule, only be entitled to an extension of time for the parts of the delay that can be attributed to events for which the employer carries the risk, provided that such events have an impact on the contract’s “critical path”. If the contractor’s delay results from two parallel delays, under which the contractor itself is equally liable, the contractor would, as a general rule, not be entitled to an extension of time.

As for the costs incurred by the contractor, the employer would only be liable for increased costs attributable to the parts of the delay for which the employer carries the risk. If the costs would have occurred regardless of the events for which the employer carries the risk, the contractor would, as a general rule, not be entitled to the costs occasioned by that concurrent delay.

In the case of delays, the contractor’s claim for additional payment may generally include increased time-related costs (prolongation costs), as further explained in 3.2 Variations.

If there is no basis for an extension of time nor other defences available for the contractor, the delay represents a breach of contract, where the employer normally has several remedies available, including:

• liquidated damages for delay;
• claim for damages; and
• termination.

The parties are free to agree on milestone dates, including milestones subject to liquidated damages in the case of delay. Provisions regarding liquidated damages in the case of delay are set out in all standard contracts. In both NS 8405 and NS 8407, the rate is set at 0.1% of the total contract price per day, and the total sum of attainable liquidated damages is capped at 10% of the total contract price, unless the delay is caused by the contractor’s gross negligence or wilful misconduct.

Liquidated damages will correspond to a pre-agreed standard sum payable to the employer. Liquidated damages will therefore be claimable regardless of any negligence on the part of the contractor and regardless of whether the employer has suffered any loss due to the delay.

As an alternative to liquidated damages, in cases where the delay is caused by gross negligence or wilful misconduct of the contractor or someone for whom contractor is responsible, the employer may instead claim compensation for the losses suffered due to the delay.

The employer may also terminate the contract in the case of a substantial breach of contract on the part of the contractor, including for significant delays or if it is evident that such significant delays will occur.

In accordance with NS 8405 and NS 8407, the contractor is entitled to an extension of time if the execution of the works is delayed due to the following circumstances:

• variations;
• delays or defects in the employer’s performance of its contractual obligations; and
• other circumstances for which the employer carries the risk under the contract.

Claims for extension of time are made in a written notice to the employer (often by a pre-agreed and standardised form), stating the reason and required extension.

The extension of time should, in principle, correspond to the effect of the impediment. Both NS 8405 and NS 8407 contain a separate clause specifying how the extension should be calculated and which factors should be considered, such as necessary stoppages and any postponement of execution to a time of year that is more or less favourable to the party concerned. Ultimately, the calculation of the extension often depends on an assessment of evidence. The starting point is that the party requesting extension of time must prove, on the balance of probabilities, both the basis for the extension and the extent of the extension.

Norwegian law recognises force majeure both as a statutory provision and as a contract term concerning relief from contractual obligations. A rule of force majeure also exists as a general principle of Norwegian contract law, and this is regulated in the Norwegian Sale of Goods Act, 1988. This means that a force majeure clause would usually not be needed for either party to claim an event as force majeure.

However, it is still common for the parties to expressly regulate force majeure. The individual contract provisions would nevertheless usually be interpreted in light of the general principles.

The parties are, as part of the freedom of contract, free to limit or exclude certain circumstances from being qualified as force majeure. It is not unusual for the contract to define force majeure as specific occurrences, to prevent subsequent interpretation disputes. According to NS 8405 and NS 8407, circumstances generally constituting force majeure include:

• extraordinary weather conditions;
• public orders and prohibitions; and
• strikes and lockouts.

The conditions for an event to be constituted as force majeure are assumed to be the same in accordance with the general principles of Norwegian contract law and the standard contracts. The following four conditions must generally be fulfilled:

• an event that prevents the fulfilment of a contractual obligation has occurred;
• such event is considered to be beyond the control of the affected party;
• the affected party could not reasonably have foreseen the event when entering into the contract; and
• the affected party could not reasonably have avoided or overcome the event or its consequences.

In the case of force majeure, neither party shall be considered in breach of the contract, and each party will cover its own cost. This makes force majeure regulation reciprocal.

The affected party may be entitled to an extension of time, meaning that, if the affected party is prevented from performing its obligations in full, the contract is suspended until the party is (or should have been) able to resume the fulfilment. Fulfilment is suspended without financial responsibility for the party affected.

In any case, the parties must give notice to the other party if a force majeure event occurs.

Unforeseen circumstances are not governed by mandatory or regulatory law, but may be contractually agreed upon by the parties. Unforeseen circumstances may, however, qualify as a force majeure event if the conditions stated in 5.5 Force Majeure are met.

In exceptional cases that make it “highly unreasonable” for a party to perform as per the contract, unforeseen circumstances may also entitle such party to claim revision of contractual terms.

Disruption or Inefficiency

Disruption or inefficiency is a known concept under Norwegian law, and briefly means that the contractor is faced with (significant) changes or disturbances that prevent them from performing the contract works as expected or as planned, and which thereby reduce productivity.

The required standard of proof – including what kinds of evidence the contractor generally must submit to be entitled to additional compensation due to inefficiency – has been discussed and clarified in recent Norwegian case law. The fundamental precedent is a Supreme Court judgment from 2019 (HR-2019-1225-A), which is often referred to as the “HAB judgment”.

The starting point is that disruption or inefficiency caused by circumstances for which the employer carries the risk may entitle the contractor to additional compensation. Thus, it is acknowledged that the contractor may incur additional costs as a result of inefficiency due to (significant) changes and/or (significant) disruptions during the execution phase. It follows directly from NS 8405 and NS 8407 that “reduced productivity” may entitle the contractor to additional compensation.

As per the Supreme Court’s guidelines, the contractor must prove, on the balance of probabilities, that all conditions for such disruption claims are fulfilled. A “global cover-all claim” is in principle not accepted. The individual events that form the underlying basis for such claims must be particularised. General experience and calculations may be a factor to consider, but such generic evidence only is not sufficient to prove inefficiency in respect of a specific project. Accordingly, project-specific evidence which stems from the execution phase will be required to document such claims.

According to the Supreme Court’s guidelines, the contractor must substantiate the alleged circumstances for which the employer carries the risk. This includes substantiating what work operations the relevant circumstances have affected and during which periods of time, and the consequences these circumstances have had for the contractor’s productivity. In addition, the contractor must also substantiate, on the balance of probabilities, that these consequences actually resulted in the alleged disruption-related costs.

It would not be correct to say that disruption as such may entitle the contractor to an extension of time. However, when determining the schedule impact of an alleged variation or event, it follows from NS 8405 and NS 8407 that the overall effect of previous variations/events which have been notified by the contractor, and which could have entitled the contractor to an extension of time, shall be taken into account. As such, it is recognised that a significant number of variations may eventually have a schedule impact that the contractor should be able to invoke.

In Norway, certain liabilities cannot be limited, as follows:

• criminal liability;
• liabilities based on certain international conventions that cannot be derogated from; and
• liabilities that go beyond the purpose and intended scope of the contract.

Further, any limitation or waiver of liability will generally not be upheld in the event of wilful misconduct or gross negligence by a company’s senior managerial personnel. See also 6.2 Wilful Misconduct and Gross Negligence.

Wilful misconduct and gross negligence are known legal terms in Norway in several areas of law, including construction law. The concepts are often used to increase liability, and form common exceptions to agreed limitations of liability in construction contracts.

In Norway, the “freedom of contract” principle entails a right for the parties to limit or exclude liability under the contract to some extent. This may include:

• capped amounts;
• liability for indirect or consequential losses; and
• the total liability for breach of contract and third-party losses.

Such limitations will generally be upheld by Norwegian courts and tribunals, unless the loss has been caused by wilful misconduct or gross negligence by a party’s senior managerial personnel.

Contractual indemnification provisions are quite common within certain industries. However, the standard construction contracts (NS 8405 and NS 8407) do not include any express indemnifications. As these standards, via other provisions, place and regulate responsibilities and risks between the parties, specific indemnity clauses would not always be considered necessary.

However, the parties are free to agree on indemnification clauses. As an example, knock-for-knock terms and other reciprocal indemnity regimes are very common within the offshore industry.

General

Bank guarantees are the standard security in most Norwegian construction contracts.

Guarantees Provided by the Contractor

It is common for the contractor to be required to provide the employer with a performance security, to guarantee contractual performance. In general, there are no restrictions on the nature of such guarantee, given that the contract is entered into between professional parties. 

According to the Norwegian standard contracts (NS 8405 and NS 8407), unless otherwise agreed, the contractor must provide security to the employer for the performance of its contractual obligations. This includes all potential liabilities that may arise during the execution phase and the contractor’s liability for defects during the defect liability period (warranty period).

The security must be provided in the form of an ordinary guarantee from a bank (most common), insurance company or other financial institution. In larger construction projects, the requirement for on-demand guarantees has become quite common – ie, the guarantor cannot invoke any defences and/or counterclaims which otherwise would have been available to the contractor.

Also, in accordance with NS 8405 and NS 8407, the security shall amount to 10% of the contract price. Upon takeover of the work, the security shall be reduced to 3% of the contract price with reference to any guarantee claims for a period of three years.

It is also worth mentioning that employers may, on occasion, require a parent company guarantee if the contractor is a subsidiary of another company. There are no restrictions on the nature of a parent company guarantee, provided that the contract is entered into between professional parties.

Guarantees Provided by the Employer

In accordance with NS 8405 and NS 8407, unless otherwise agreed, the employer must also provide security for its performance under the contract amounting to 15% or 17.5% of the contract price. It is rather common to agree that (financially strong) employers need not provide such security, and the standard contracts expressly state that publicly owned employers are not obliged to provide such security.

As a starting point, the parties are free to agree on an insurance regime, although some insurances are compulsory by law. The Norwegian standard contracts, however, set out an insurance regime typically used in construction contracts.

Contractor’s Insurance

In accordance with NS 8405 and NS 8407, the contractor must keep materials and other parts of the work to be performed by the contractor insured until takeover of the contract object/the contract works. The employer should be co-insured. The contractor must also maintain a liability insurance, covering any damage and economic loss caused by the contractor to personnel or property of the employer or any third party.

Employer’s Insurance

In connection with larger construction projects, the employer often provides and maintains a “Construction All Risk” (CAR) or “Builder’s All Risk” (BAR) insurance where the contractor will be co-insured.

In other projects where the contractor provides the insurance, the employer must still, according to mandatory labour legislation, provide and maintain workmen’s injury insurance for its personnel. Moreover, employers will always require the contractor to provide and maintain liability insurance; and, in the case of design work, the employer may typically require that professional liability insurance be provided and maintained by the engineer.

As a starting point, the parties may agree on contractual provisions regarding the consequences of insolvency of a party to the contract.

According to most Norwegian standard contracts, including NS 8405 and NS 8407, both parties are given a right to terminate the contract if the other party goes bankrupt or becomes insolvent. The employer shall, however, not be entitled to terminate the contract if it is proven without undue delay that the contract works will be completed in accordance with the contract, or if satisfactory security is provided without undue delay for timely performance.

That said, the parties to construction contracts that include such clauses should take into account the bankruptcy estate’s right to enter into the debtor’s agreements in accordance with the Norwegian Creditors Security Act, 1984, which will prevail over agreed terms to the contrary. The bankruptcy estate will, however, usually be reluctant to step into a construction agreement and be obliged to fulfil the debtor’s obligations.

The sharing of responsibility for certain risks is not common practice in Norway. Usually, the party to whom a risk shall be attributed is regulated in the contract, and would, if not directly regulated, be considered in light of whether the risk is connected to functions carried out by the employer or by the contractor – ie, the risk division follows the division of the parties’ functions. 

However, occasionally, certain mechanisms which are based on a “risk-sharing philosophy” are agreed. One such mechanism is referred to as partnering or partnering agreements. There are currently no general standards for partnering agreements in Norway. The purpose would be to ensure early interaction and co-operation with regard to developing the design (phase I), and to then agree on a target price mechanism for the remaining works (phase II). The parties may, as an example, share the “bonus” if the final cost is less than the target price (ie, a part of this “bonus” is paid to the contractor). Conversely, they will also share the risk of cost overruns, as the part of the total cost which exceeds the target price will not be compensated in full by the employer.

In reality, a more standard and simple target price mechanism that is intended to incentivise the contractor to reduce the project costs, without detailed partnering terms, is often more common.

Except for a target price mechanism, there are no typical concepts for “pricing shared risks” in construction projects that are subject to Norwegian standard contracts. As mentioned, risks would generally not be “shared”, but allocated to one of the parties. Target price mechanisms and bonus schemes may, however, be agreed on.

In all construction projects, and as provided for in NS 8405 and NS 8407, the employer and the contractor must appoint one representative with authority to act on each party’s behalf in all matters concerning the contract. The parties’ representative will therefore, as a starting point, be entitled to represent and decide on all matters with binding effect for the respective party.

In larger construction projects, it is common to include more detailed terms regarding the parties’ representatives and other individuals considered as “key personnel”. Typically, the contractor will not be entitled to appoint or replace its representative and key personnel without the employer’s prior consent, which may not be unreasonably withheld or delayed.

Both NS 8405 and NS 8407 enable the contractor to use subcontractors.

When the contractor has chosen a subcontractor, it must notify the employer thereof and regarding which parts of the work will be carried out by the relevant subcontractor.

Certain conditions must be met by the subcontractors, and the employer may reject a chosen subcontractor on a justifiable basis. In such case, the employer must notify the contractor of the rejection without undue delay and no later than 14 days after having received the requested information about the relevant subcontractor (eg, financial strength and technical competence).

In tender proceedings, the employer will often demand that the bidders name all their key subcontractors in the tender. The employer may also limit the number of subcontractors to be used. This typically results in a list of pre-agreed subcontractors to be used in the project.

Contractual provisions regarding intellectual property rights are only found to a limited extent in the Norwegian standard construction contracts (NS 8405 and NS 8407). Unless otherwise agreed, the employer shall only be entitled to use the design work for:

• the completion of the project;
• subsequent operations;
• maintenance;
• alterations; or
• extensions.

All other rights to the design work shall continue to be held by the party that has prepared the design work.

Contractual provisions regarding intellectual property are also found in NS 8401 and NS 8402, which are used between commissioning parties, architects, consultant engineers and other professionals regarding design commissions; see 1.2 Standard Contracts. The main rule is that the commissioning party shall be entitled to use materials prepared by the consultant for the completion of the project to which the commission is linked. If the commissioning party has made payment for models and demonstration objects, these shall then become the property of the commissioning party. However, the consultant shall retain all other rights to its ideas and the materials it has prepared.

The authors note that, in standard contracts used within the offshore sector, there would typically be more detailed and somewhat different intellectual property terms. Typically, more rights are transferred to the employer than would otherwise follow from background law, such as in respect of inventions developed on the basis of information mainly provided by the employer.

General

A prerequisite for both parties to invoke legal remedies is often the fulfilment of the duty to notify either without undue delay or within fixed deadlines in connection with the final account. A failure to notify in time will usually imply that the party loses the right to pursue its claim.

The remedies available in the event of a breach of contract depend largely on the severity of the breach. Typical breaches of contract are related to delay and defects; and in the case of delay and defects, as well as late payment, the standard contracts typically provide the available remedies.

The consequences of any other breaches are to a lesser degree (directly) regulated in the standard contracts. As a starting point, unless otherwise stated, a party may hold the other party liable for damages for any losses suffered due to the other party’s (negligent) breach of contract.

Employer’s Remedies

In the case of delay, the main remedy available to the employer is liquidated damages; see 5.3 Remedies in the Event of Delays. In the case of defects, the main remedy available to the employer is rectification work; see 3.11 Defects and Defects Liability Period.

In the case of breaches unrelated to delays and defects, the employer may (as a starting point) hold the contractor liable for damages, and, if the breach is substantial, may terminate the contract.

Contractor’s Remedies

If the employer is late in making payments, the contractor is entitled to claim interest on overdue payment (default interest). If the breach is material, the contractor may also be entitled to suspend the works; see 4.3 Payment.

If the employer’s breach of contract during the execution phase affects the contractor’s work, the contractor may then be entitled to additional compensation and extension of time.

In the case of any other breaches by the employer, the contractor may (as a starting point) hold the employer liable for damages, and, if the breach is substantial, may terminate the contract.

Limitations of Liability

It is common practice to contractually limit the remedies available to a party. In accordance with NS 8405 and NS 8407, the remedies available to the employer in the case of delays and defects are limited, as the standard contracts enumerate the remedies the employer may invoke and state that the right to claim damages (for losses that extend beyond the defined remedies) would only be available to the employer in the case of wilful misconduct or gross negligence.

In line with the principle of freedom of contract, Norwegian courts and tribunals will generally uphold any limitations of liability that the parties have agreed on. Limitations may generally only be set aside in the case of wilful misconduct or gross negligence, as also stated in the standard contracts.

Contractual sole remedy clauses are known in construction contracts in Norway, particularly in standard contracts used within the offshore sector. As for NS 8405 and NS 8407, the “sole remedy effect” has been ensured in respect of the contractor’s delays and defects, by providing the remedies that are available to the employer and by stating that the employer may only claim compensation for any (other) losses in the case of wilful conduct or gross negligence.

As a clear general rule, sole remedy clauses will be upheld by Norwegian courts and tribunals. The general view is that they may only be set aside if a party suffers a loss which is caused by wilful misconduct or gross negligence on the part of the other party’s senior managerial personnel.

Losses that in most jurisdictions would be characterised as indirect or consequential are typically excluded from liability in construction contracts. The standards used within the offshore sector typically include reciprocal indemnities in respect of each party’s consequential losses.

NS 8405 and NS 8407 do not include a general or reciprocal indemnity or limitation of liability in respect of the parties’ indirect or consequential losses. Further, the NS standards do not include a total liability cap limiting the contractor’s total liability. However, by providing an (exhaustive) list of the remedies that are available to the employer in the case of the contractor’s delays and defects, mainly covering necessary and direct costs and losses, the employer would in such cases not be entitled to hold the contractor liable for the employer’s indirect or consequential losses (except for cases of wilful misconduct and gross negligence).

Retention and suspension rights are generally not contractually excluded. Retention is usually regulated in the contract, whereas suspension is not necessarily regulated in the contract.

Retention

The right to retain part of the contract price is regulated in both NS 8405 and NS 8407. As an example, NS 8407 provides that a deduction of 7.5% of the progress payment shall be made by way of retention. The retention will be invoiced and payable as part of the final account. Further, the employer may withhold payments if the employer has a legitimate claim against the contractor.

Suspension

NS 8405 and NS 8407 do not include any provisions that entitle the employer to suspend the contractor’s performance of the work. Suspension would also not be available to the employer in accordance with general principles of Norwegian construction law, if this has not been expressly agreed on. Therefore, employers should consider the need for including a suspension clause.

Depending on the terms, the employer may in some cases use the variation order regime to adjust the contract schedule, and this may potentially allow for deferring certain contract works. The standard variation order regime in NS 8405 and NS 8407 does not necessarily allow for this.

The authors note that the Norwegian offshore standards include a suspension clause that entitles the employer to suspend the contractor’s performance of the work (or a part of the work), following which the contractor is entitled to additional payment and extension of time. If the work has not been resumed within 120 days, the contractor may cancel the contract for the affected part of the work and may claim compensation as per the termination for convenience (cancellation) terms.

The Right to Terminate a Construction Contract

As a general principle of Norwegian contract law, a party is entitled to terminate the contract (for cause) if the other party has substantially breached its contractual obligations. The same applies if it is evident that such substantial breach will occur. NS 8405 and NS 8407 are in line with this. What constitutes a substantial breach depends on a concrete assessment of the circumstances.

Another ground for termination is if a party goes bankrupt or becomes insolvent. See 7.4 Insolvency.

In accordance with NS 8405 and NS 8407, the employer is generally entitled to terminate the contract at its convenience. However, upon such termination, the contractor will be entitled to compensation for the loss the contractor has suffered as a consequence of the termination.

Contractual Consequences of Termination

In accordance with background law (and NS 8405 and NS 8407), the termination (for cause) of the contract results in the release of both parties from future obligations under the contract. Additionally, the aggrieved party is entitled to compensation equal to the financial losses incurred as a result of the other party’s breach and the subsequent termination.

As per NS 8405 and NS 8407, the contractor shall be entitled to compensation for the work that has been completed at the time of termination. If the employer has (rightfully) terminated the contract, the employer shall be entitled to compensation for necessary additional costs incurred and for any foreseeable losses suffered due to the termination.

If the contractor has (rightfully) terminated the contract, the contractor shall be entitled to compensation for necessary additional costs incurred (including rigging-down and winding-up costs) due to the contract being terminated, as well as to compensation for lost profits in respect of such part of the work as will not be performed by the contractor due to the termination. The contractor may also claim compensation for foreseeable losses suffered due to the termination.

In general, any dispute between the parties concerning the contractual relationship shall be settled by ordinary court proceedings unless it has been agreed that the dispute is to be settled by arbitration. Unless otherwise agreed, the judicial district of the building or civil engineering works shall be the legal venue for all legal proceedings that may arise from the contract.

Negotiations and Project-Integrated Mediation

Disputes concerning the contractual relationship should be attempted to be resolved amicably between the parties. This has also been expressed directly in NS 8405 and NS 8407.

If the parties agree, the standards also suggest that a meditation panel may be appointed (preferably at an early stage) to assist the parties in resolving any disputes that arise during the contract period. This is referred to as “project-integrated meditation” (PRIME). The panel will typically consist of three members that have been appointed jointly by the parties. The panel’s decisions will not be binding unless the parties have agreed that the decisions shall be binding.

Temporary Dispute Resolution by an Umpire

Both NS 8405 and NS 8407 stipulate that each of the parties can demand an umpire decision (oppmannsavgjørelse) on disputes, unless the dispute has already been brought before ordinary courts or arbitration. When the umpire has reached its decision, the parties must, within one month, notify each other in writing regarding whether or not they intend to accept the decision as binding.

Mediation

Norwegian courts offer a voluntary court-administered mediation, which may be held after the writ of summons and the defence reply have been submitted. The purpose of such mediation is for the parties to try to solve the dispute amicably, with the collaboration of a judge (mediator). A lot of cases, including commercial disputes, are finally resolved by such court mediation.

The authors note that parties to construction disputes also frequently attempt out-of-court mediation. The parties may then appoint mediators with the desired background and expertise. Such mediation will be governed by a mediation agreement. Standard mediation rules are available.

Arbitration

A common alternative means of dispute resolution is arbitration, regulated by the Norwegian Arbitration Act, 2004. The Arbitration Act is based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration. The parties are, to a large extent, free to agree on the arbitral process.

Arbitral awards cannot be appealed. A (disappointed) party may only bring an invalidity action before the ordinary courts. The threshold for setting aside an arbitral award is very high.

The authors note that the Nordic Offshore and Maritime Arbitration Association (NOMA) has established rules and best practice guidelines. There is a tendency for NOMA to also be used in other areas, including construction disputes. As an alternative, the Arbitration and Dispute Resolution Institute of the Oslo Chamber of Commerce (OCC) offers institutional arbitration. Both NOMA and the OCC have standard rules available for arbitration (including fast-track arbitration) and mediation.