Norwegian Supreme Court sets aside unreasonable agreement between professional parties

The case concerned the holding companies of six entrepreneurs who together founded the company Red Rock, offering marine services. After six years of cooperation, the founders discussed a possible sale of Red Rock, and it was agreed that as a first step, four of the six founders would sell their shares (the "Sellers") to the two remaining founders (the "Buyers"). The agreement, entered into in June 2017, valued the company at 90 million NOK, and the Sellers were to be paid 41 million NOK. The plan was that the two Buyers later would sell the entire company.

However, the Buyers had difficulties with the financing of the purchase, and after several delays, the parties agreed to execute the sale through seller's credit with a lien on the shares. It was agreed that the Sellers would receive payment in 6 months, and in any event when the Buyers sold at least 50% of the shares in the company. This deadline was also pushed back several times.

In the spring of 2021, a possible investor signaled an interest to invest 70 million NOK for 40% of the shares in the company, giving the company a valuation of 175 million NOK. The investor required that the Buyers find a way to get the Sellers' lien on the shares removed. Based on this, the Buyers contacted the Sellers and informed them of the possible investment of 50 million NOK in Red Rock and possible sale of some shares. The Buyers did not inform the Sellers of the valuation of Red Rock at 175 million NOK; instead, the Sellers were led to believe that Red Rock was worth significantly less than the 90 million NOK valuation of 2017.

The Sellers were given two options by the Buyers: either get 25% of the 90 million NOK now as a full and final settlement, or get 10% now and the remaining 90% when the Buyers sell more than 75% of Red Rock. After some negotiations, the Sellers agreed to take 30% of the 90 million NOK as a full and final settlement.

Shortly after the settlement agreement, the possible investor indicated an interest in purchasing 100% of the shares in Red Rock. After negotiations, the Buyers sold all the shares in Red Rock for 180 million NOK.

The Supreme Court stated that the case concerns whether the Buyers withheld important information during the negotiations and signing of the settlement agreement, which led the Sellers to accept a reduction of 70% in their compensation.

The Buyers argued that the Sellers took a calculated risk in accepting 30% now rather than the possibility of 100% later. This argument was rejected by the Supreme Court, which states that a broader approach must be taken, considering the context, the relationship between the parties, the information available to them, and the imbalance of the settlement agreement.

The Supreme Court highlighted the close relationship between the six founders in building the company, and later between them as Sellers and Buyers, where the Sellers multiple times gave the Buyers postponements and adjustments on the agreements to allow them to realize the full value of the company. The Supreme Court argued that this created a heightened duty of loyalty between them, and that the Sellers trusted the Buyers to consider their interests during negotiations with potential investors.

Building on this duty of loyalty and trust, the Supreme Court considered what they described as a significant discrepancy in the information available to the parties. The Buyers controlled all relevant information and chose to share this to a limited extent with the Sellers. Based on the shared information, the Sellers had a misleading view of the investor's proposal and believed Red Rock was worth much less than the 2017 valuation. Conversely, the Buyers knew that Red Rock was valued at almost twice the 2017 valuation in the potential transaction. The Buyers used this discrepancy to their advantage, disregarding the Sellers' interests.

The Supreme Court concluded that the withheld information rendered the settlement agreement unreasonable and set the entire agreement aside. Consequently, the Sellers were entitled to the full sum agreed in the original 2017 share purchase agreement.

As the Supreme Court's assessment shows, a heightened duty of loyalty and a justifiable degree of trust increases the obligation to disclose relevant information and limits the extent to which a party can prioritize its own interests at the expense of its contracting parties. The concrete assessment by the court also provides guidance on the factors involved and how they heighten the duty of loyalty, including the history between the parties and their efforts toward common goals.

In Norwegian commercial negotiations and transactions, the parties typically have a higher degree of trust than might be the case in other jurisdictions. The Supreme Court demonstrates that this trust can be upheld by law when breached.

The facts of the case are specific, but the Supreme Court made several general statements. In Norwegian law, article 36 has rarely been used between professional parties. The Supreme Court stipulates that whether a party is professional is not simply a binary question but should be assessed by the degree of professionalism, with the threshold for setting aside an agreement increasing with this degree. This was previously stated in an arbitral award of 1990, which the Supreme Court now endorses.

Additionally, the Supreme Court emphasizes that an agreement cannot be set aside as unreasonable if a party has taken a calculated risk or merely made a poor business deal. Therefore, the judgment does not introduce a new era in Norwegian contract law but highlights a specific set of circumstances constituting a breach of the duty of loyalty.

Read the judgement here (Norwegian).