The Supreme Court: The duty of loyalty in commercial contracts

The case concerned a long-standing commercial relationship between the Norwegian manufacturer Isola AS and the German distributor Dural GmbH, involving the sale of so-called decoupling mats used as underlays for tiled floors. Under a supply agreement entered into in 2015, Isola was obliged to produce and sell the mats exclusively to Dural, while Dural in turn undertook a volume commitment rather than an exclusivity obligation.

In early 2019, Dural secretly initiated contact with an Italian manufacturer, TeMa, requesting a near-identical copy of Isola's mat. From May 2020, Dural began purchasing mats from TeMa and resold them to customers under the same trademark as Isola's mats, without informing customers of the change in manufacturer. Dural first disclosed its new "multi-sourcing approach" to Isola in October 2020. Isola terminated the agreement with immediate effect in July 2022.

The Supreme Court considered two main grounds on which Isola sought to justify the termination: 

1. Whether the supply agreement, properly construed, imposed an implied exclusivity obligation on Dural.
2. Whether Dural was in breach of its duty of loyalty.
    

The Supreme Court found that the 2015 agreement contained no exclusivity obligation for Dural. The agreement between the parties imposed exclusivity on Isola, while Dural was bound only by a volume commitment, a structure the Supreme Court regarded as reflecting a deliberate and balanced allocation of risk.

The Supreme Court's most significant contribution lies in its treatment of the duty of loyalty. At its core, the duty requires each party to take the other party's interests into account to some extent, even to some degree at its own cost. The purpose of the duty of loyalty is to promote predictability, prevent abuse of rights, limit conflicts and damage, and foster trust in the contractual relationship.

The Supreme Court acknowledged that the long-standing nature of the relationship (dating back to 2002) and the degree to which the parties had pursued a shared commercial objective warranted a somewhat heightened duty of loyalty. However, the Supreme Court emphasized that in professional, commercial relationships, parties must be expected to identify and agree upon their key rights and obligations. Where they have agreed on a particular allocation of risk and burden, the duty of loyalty cannot serve as a basis to alter that allocation.

The Supreme Court also held that Dural's act of submitting Isola's mat to TeMa for copying did not constitute a breach, as the mat was freely available on the open market and was not protected by any intellectual property rights.

On the question of timing, the Supreme Court found that in a commercial relationship of this nature, the parties must be afforded space to make their own strategic assessments and take steps without an immediate obligation to inform the counterparty, and that Dural had acted within this marginal space.

The judgment provides authoritative guidance on the limits of the duty of loyalty in Norwegian contract law. While a long-term relationship and shared commercial purpose may elevate the standard of loyalty expected, the duty of loyalty primarily serves to supplement a contract where it is silent. The duty of loyalty cannot override or revise an agreed risk allocation, and its precise content must always be assessed concretely in light of the specific contractual relationship. Professional businesses engaged in long-term supply or distribution arrangements should take note, as strategic decisions such as adding alternative suppliers may be entirely permissible, even without prior notice, if the contract does not expressly prohibit it.