BAHR Dispute Resolution no. 2/2024

Dispute Resolution Insight 02/24

Table of content Opening statement..........................................................................................................................05 statement..........................................................................................................................04 Post-M&A to adapt to a changing landscape? ................................................

07 Rising tide disputes: of climateHow change litigation: Navigating uncharted waters................................06 Introducing BAHR Dispute Avoidanc – aHard new product for establishing a proactive Duty of loyalty in commercial contracts: law or last-ditch argument?.......................14 conflict avoidance and management strategy.............................................................................13 Mediation in commercial disputes – is it worth it?....................................................................19

Opening statement

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Dear friends, In the past few months, we experienced a rapid shift in temperature from one of the coldest Norwegian winters in recent memory to a sunny and warm May, which has permitted us to hope for continued warm and pleasant weather throughout the summer period. The transition from winter to spring and into early summer is a perennial topic of interest, especially for us in the Nordics where sunlight can often be a scarce resource.

The whims of weather have not only formed a topic of discussion for those of us sketching out our summer holidays.

Mirroring the rapid leap from the chill of winter to the warmth of summer we experienced this year, we are also seeing equally brisk developments in the realm of climate change litigation, a central theme on our docket at BAHR this past semester. In early June, I had the opportunity to hold a lecture addressing the topic of Global Trends in Climate Change Litigation at the Oil & Finance Conference in Oslo, where I shared the story behind the rapid increase in the number of climate change cases over the past few decades and an overview of the key decisions handed down in recent years that have shaped this area, as well as casting a gaze towards the horizon of future developments.

Carrying forward the momentum from that lecture, we are excited to delve

deeply into this topic in our first article of this publication, where we look at the genesis of the current trends in climate change litigation, the legal theories that form the basis of many of the types of lawsuits we are seeing, landmark decisions that have paved the way for more zealous and ambitious use of the legal system by climate change activists seeking to compel action on climate change, and our thoughts on what might come next.

Pivoting to a different topic in our second article of this publication, we examine a development in Norwegian litigation that is gaining attention: the courts’ growing consideration of the duty of loyalty in shaping decisions in contract disputes.

The duty of loyalty, being a standalone legal principle in Norwegian law, forms a bedrock of setting the parameters for commercial and business dealings.

However, until recently, the contours of this area of law had not been so clearly examined and defined as to provide definitive guidance to contracting parties. Our review of recent case law aims to resolve some of the outstanding questions surrounding this topic.

We hope, as always, that this publication will capture your interest and provide valuable insights. With that, we take the opportunity to wish everyone a pleasant and warm summer ahead.

Atle Skaldebø-Rød Partner / Head of Dispute Resolution E: atska@bahr.no, M: +47 922 87 727

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The statistics are published by Marsh in Global transactional risk insurance claims report 202

Rising tide of climate change litigation:

Navigating uncharted waters Climate change litigation is gaining momentum with a significant increase in the number of lawsuits in the past five to ten years. In this article we investigate the evolution of legal theories for environmental and climate change-related lawsuits from the initial wave of cases in the 1980s to the landmark decision from the European Court of Human Rights issued in April this year.

A swell in the number and types of climate change lawsuits Climate change is morphing from solely a topic of political and scientific debate into a subject of legal regulation and enforcement by judicial bodies. This is reflected in the fact that the number of lawsuits concerning climate change has more than doubled since the signing of the Paris Agreement on 12 December 2015. A driver of this increase in litigation appears to be frustration that “[c]limate policies are far behind what is needed to keep global temperatures below the 1.5ºC threshold, with extreme weather events and searing heat already baking our planet”, according to Inger Andersen, Executive Director of the UN Environment Programme.1

The concept of climate change litigation is not new, however. The first wave of lawsuits dates from the 1980s and ‘90s, emanating mainly from the US and Australia. The second wave of lawsuits dates from 2007 when climate change litigation expanded to Europe, while the Paris Agreement marked the beginning of the third wave of lawsuits. While there are no hard enforcement mechanisms under the Paris Agreement, we see the treaty being relied upon in conjunction with other instruments to form the basis of legal claims. In this article, we explore our predictions for the future of climate change litigation by conducting a retrospective examination of the legal theories used in the first two waves of climate change litigation and analysing the new theories that have been introduced in the third wave.

1 Climate litigation more than doubles in five years, now a key tool in delivering climate justice, 27 July 2023, UNEP, https://www.unep.org/news-and-stories/press-release/climate-litigation-more-doubles-five-years-now-key-tool-delivering.

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Historic view In the first wave of climate change litigation in the ‘80s and ‘90s, cases were primarily brought against national governments with the purpose of raising environmental standards.2 In the second wave of the 2000s, although cases were still being filed against governments, tortious actions were also brought against corporations for their causal contribution to climate change.3 The lawsuits were generally unsuccessful. Several cases were dismissed on procedural grounds, e.g., for lack of legal standing. For instance, in 2008, native Alaskans filed a federal nuisance claim against oil and power companies with a claim of monetary damages for the destruction of the city Kivalina, Alaska by flooding caused by climate change.4 The lawsuit was dismissed for lack of subject matter jurisdiction because regulation of greenhouse gas emissions was a political issue that needed to be resolved by politicians rather than by the courts and because the plaintiff lacked standing. In addition to various procedural barriers, it has historically been difficult to prove that an injury or loss was a direct result of the tortfeasor’s conduct, i.e., a lack of causation and remoteness of damage.

Due to these challenges, parties have attempted, in the third wave of cases we are seeing today, several different new avenues for asserting legal rights and imposing obligations on companies in an effort to compel action on climate change.

New theories and legal bases for bringing climate-related lawsuits A human rights issue or a corporate matter?

Among the most popular new theories tried byparties are shareholder actions against corporate leadership, and the allegations of violations of constitutional and human rights law. We see activist and special interest groups creatively crafting causes of actions under both categories of cases.

Do human rights impose climate changerelated obligations on companies?

Looking first at cases involving allegations of constitutional and human rights violations, in

a 2021 judgment in Vereniging Milieudefensie v Royal Dutch Shell plc, the Hague District Court ordered Shell to reduce its emissions by 45% by 2030 relative to 2019, in line with commitments made under the Paris Agreement.5 The legal basis of the decision was “the unwritten standard of care laid down in Book 6 Section 162 Dutch Civil Code, which means that acting in conflict with whatis generally accepted according to unwritten law is unlawful.”

The court turned to and incorporated the jurisprudence of the European Convention on Human Rights (“ECHR”) Article 2 (the right to life) and Article 8 (the right to respect for private life and home) in interpreting this so-called “unwritten standard of care” under the Dutch Civil Code. The case was appealed to Court of Appeals, with an appeal court judgment expected this summer.

Human rights considerations also played a pivotal role in a climate change lawsuit in Brazil used as a tool to protect the Amazon rainforest. On 5 June 2020, four political parties filed a lawsuit alleging that the Brazilian government failed to implement measures for the Climate Fund (Fundo Clima), an instrument created by law aiming to ensure resources essential for climate change mitigation and adaption. The plaintiffs argued that the Ministry of the Environment neglected its duty to manage the Climate Fund, violating constitutional environmental protections and the precautionary principle.

In a ruling from July 2022,6 the Federal Supreme Court of Brazil ruled that the executive branch could not ignore the legislative branch’s mandate in managing issues in this area and had a duty to allocate resources to the management of the Climate Fund, based both on the principle of the separation of powers and the constitutional right to a healthy environment. The court was also the first in the world to rule that the Paris Agreement is to be considered a human rights treaty with supralegal effect, meaning that any domestic legislation that contradicts the Paris Agreement may be invalidated.7 Most recently in April of this year, the European Court of Human Rights (“ECtHR”) issued its landmark decision in Verein KlimaSeniorinnen Schweiz and Others v.

2 Climate Change Litigation – Insights into the evolving global landscape, The Geneva Association, April 2021.

3 Op.cit.

4 Kivalina v. ExxonMobil Corp., 663 F.Supp.2d 863 (N.D.Cal. 2009).

5 Milieudefensie et al. v. Royal Dutch Shell plc., C/09/571932 / HA ZA 19-379 (English version) (The Hague District Court, 26 May 2021).

6 PSB et al. v. Brazil (on Climate Fund), ADPF 708 (Federal Supreme Court of Brazil, 4 July 2022).

7 Note that this would not be the case in countries that adopt a “dualist” theory of public international law (such as Norway), 7 which condition the legal effect of international treaties in domestic law on the transposition of the former into the latter through national legislation or the like.

Switzerland. This decision signifies a notable evolution in the realm of climate change litigation. The case concerned a group of senior women from Switzerland who were particularly vulnerable to the health consequences of heatwaves. They argued that their government had failed to protect their rights to life and privacy as guaranteed by Articles 2 and 8 of the ECHR. The ECtHR held that Article 8 includes the right to effective protection from the serious and adverse effects of climate change on individuals’ lives, well-being, and quality of life. Switzerland was found to be in non-compliance with its obligations under Article 8 due to multiple specific failings in its approach to climate change. The decision is the first of its kind, and we expect it to be a watershed moment in climate change litigation. Notably, in coming to its decision, the ECtHR commented that ”the question is no longer whether, but how, human rights courts should address the impacts of environmental harms on the enjoyment of human rights”.

The themes explored in Klima-Seniorinnen Schweiz have also reached Norwegian shores.

The case Greenpeace Nordic v. Norway concerning violation of Articles 2 and 8 of the ECHR is currently pending before the ECtHR.8 The case originates from a judgment from the Norwegian Supreme Court – in plenary session - issued on 22 December 2020. The Norwegian Supreme Court upheld the issuing of new licenses for oil and gas exploration in the Arctic that will allow new fossil fuels to market from 2035 and beyond. 9 The Supreme Court’s reasoning was that, although the Norwegian constitution protects citizens from environmental and climate harms, the future emissions from exported oil are too uncertain to bar the granting of these petroleum exploration licence. On 15 June 2021, two NGOs and six individuals filed an application against Norway before the ECtHR arguing that Norway violated Articles 2 and 8 of the ECHR. The ECtHR has categorized the case as a potential “impact case” and communicated it to Norway. Norway has asked the ECtHR to either dismiss the case or to find that there have not been any violations.

The judgment followed a lawsuit filed by Greenpeace Nordic and Nature and Youth Norway against the Norwegian State, with the court agreeing that Norway's approval of the fields was invalid because they violated the requirements for Environmental Impact Assessments (EIAs) under the Norwegian petroleum regulations. The court agreed that these regulations, when interpreted in light of the Norwegian Constitution and EU Directive 2011/92, required the EIA to include an evaluation of combustion emissions, which the completed EIAs did not. The court did not, however, agree that this constituted a violation of ECHR or the UN Convention on the Rights of the Child. The judgment from the Oslo District Court is controversial and has been appealed. Even if the EIAs conducted were incomplete as they did not include an assessment of combustion emissions, the question of validity depends on whether the (alleged) incomplete EIAs influenced the state's decision. There is reason to assume that this is not the case.12 Do shareholder rights and fiduciary obligations compel action on climate change?

Parties seeking to put pressure on companies to take climate protection more seriously have also added corporate and shareholder actions to their litigation toolkit to supplement human rights-related claims. In recent years, certain climate change activist groups have taken up minority shareholder positions in various companies deemed key in ongoing efforts to stave off the worst consequences of climate change.

Those groups have then used their status as minority share-holder to explore legal avenues in various juris-dictions, and to put companies under pressure through the use of corporate and shareholder actions.

The most prominent example of this involves Shell. The Milieudefensie case discussed above was against shell, and at the same time as that case was making its way through the Dutch court system, Shell faced another

8 Greenpeace Nordic & Others v. Norway (application no. 34068/21).

9 Greenpeace Nordic & Others v. Norway (Ministry of Petroleum and Energy), HR-2020-2472-P (Supreme Court of Norway, 22 December 2020).

10 Greenpeace Nordic, Young Friends of the Earth Norway v. Norway (Ministry of Energy), TOSL-2023-99330 (Oslo District Court, 18 January 2024).

11 PDO stands for “Plan for Development and Operation”, which is a comprehensive document describing various aspects of a planned field development, which is submitted to authorities for approval.

12 Norway (Ministry of Energy) v. Greenpeace Nordic, Young Friends of the Earth Norway, LB-2024-36810-1 (Borgarting Court of Appeal, 20 March 2024).

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“

The question is no longer whether, but how, human rights courts should address the impacts of environmental harms on the enjoyment of human rights.

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lawsuit in England in ClientEarth v Shell plc,13 in which ClientEarth sought permission to bring a derivate action against Shell’s board of directors in connection with Shell’s climate change risk management strategy, arguing that the strategy was insufficient and incompatible with commitments made under the Paris Agreement.

ClientEarth is an environmental law non-profit based in the UK. At the time it initiated the derivate action, ClientEarth held only 27 shares in Shell, although it did receive support of shareholders holding 12.2 million shares, with holders of a further 12.5 million shares issuing letters confirming their alignment with ClientEarth’s position.

However, all in all, even this total number of shares only represented about 0.3% of total Shell shares.

On 12 May 2023, the English High Court dismissed ClientEarth’s derivate action on the grounds that there was no prima facie case for the grant of permission to continue the derivate action: • The court was not convinced that there was any universally accepted methodology as to how a company might be able to achieve targeted emissions reductions, in this case commitments under the Paris Agreement.

• The court did not accept that Shell had a

singular obligation to consider climate risk alone, but had to weigh this against other competing factors including fiduciary responsibilities.

• The court was also not convinced that the relief sought by ClientEarth (mandatory injunctive relief) was appropriate, in that it would require constant judicial monitoring to ensure its efficacy.

• The court suggested the possibility that ClientEarth had brought the action in bad faith, given its relatively small shareholding.

13 [2023] EWHC 1897 (Ch) 14 [2024] NZSC 5

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A whole new world of climate-related tortious actions?

While certain actors have explored creative ways of repackaging existing legal tools to compel corporate action on climate change, other actors have attempted to introduce novel interpretations of existing torts and the invention of completely new torts that more directly address specific damages caused by climate harms.

In Smith v Fonterra,14 the New Zealand Supreme Court permitted the plaintiff, a climate change activist, to pursue causes of action based on: (a) public nuisance; (b) negligence; and (c) an entirely novel tort based on an alleged duty to cease damaging the climate system. The plaintiff had sued seven corporations allegedly responsible for one third of New Zealand’s greenhouse gas emissions. After concluding that, in theory, New Zealand legislation did not preclude the pursuit of such tortious causes of action, the court focused on the question of whether public nuisance was a feasible cause of action in the context of climate harm.

The public nuisance tort in common law might be conventionally ill-suited when it comes to climate change litigation given the “special damages rule”, which requires a plaintiff to be damaged in a way that is different to other members of the public. The Supreme Court indicated that the rule might be outdated and ill-advised in a modern context when grappling with the “all-embracing” threat of climate change. The decision suggests that the Supreme Court might be willing to fundamentally depart from the traditional public nuisance test and to adapt it to address climate harms. The Supreme Court also did not expressly disallow the plaintiff from pursuing its cause of action premised on the duty of care and the novel duty to cease damaging the climate system.

We note that the Supreme Court did not finally determine whether the plaintiff in Smith had succeeded in his claims, and only held that the plaintiff was entitled to pursue certain causes of action as a preliminary matter. As such, this remains a space to watch.

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The future of climate change litigation While the current legal framework is possibly not fit-for-purpose to address climate change litigation, and actors are sometimes forced to conjure up arguably artificial ways of repurposing the current system to advance climate-related agendas, plaintiffs are experiencing success to varying degrees through human rights lawsuits and tortious causes of action. Especially in the human rights arena, we expect the decision in KlimaSeniorinnen Schweiz against Switzerland to have potentially significant ramifications in this area.

The developments we have seen might indicate that corporate and shareholder actions might not be the most effective for compelling specific corporate behaviour. That said, the ClientEarth judgment does not mean the death of corporate actions as a means of compelling companies to take actions to protect the environment.

ClientEarth does not tell us that companies can ignore climate risk in their plans and activities in light of the Paris Agreement, just that minority shareholders and courts have little say in detailed formulation and execution of thoseplans. Situations where company boards have unreasonably neglected to implement a viable

plan to mitigate climate risk may still prove fertile breeding ground for climate change litigation. As such, corporate and shareholder actions will likely remain an important weapon in climate activist groups’ litigation arsenal.

Moreover, given the increasing focus on the green transition and climate-focused politics, we may see countries introduce specific legislation regulating climate change litigation that might include new causes of action for parties to pursue, adding further complexity.

While it is difficult to make any precise predictions, what is clear is that climate change litigation is here to stay and will only become increasingly prevalent over the next decades, as suggested by the dramatic increase of lawsuits in just the past five to ten years. Coupled with findings from a working paper that simply being on the receiving end of a climate change lawsuit negatively impacts a company’s share price, 15 boards now have a fiduciary duty to prepare for the eventuality of defending such a lawsuit and keeping themselves apprised of developments in this area.

15 Sato, Gostlow, Higham, Setzer, Venmans, Impacts of climate litigation on firm value, Grantham Research Institute on Climate Change and the Environment & Centre for Climate Change Economics and Policy, May 2023 (available for download at Impacts of climate litigation on firm value - Grantham Research Institute on climate change and the environment (lse.ac.uk).

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About the authors

Atle Skaldebø-Rød

Partner

E: atska@bahr.no M: +47 92 28 77 27 Atle is admitted to the Supreme Court and has extensive experience across a broad range of complex commercial disputes. His practice includes; A, directors’ liability, shareholder disputes, company law, financial reporting and marine insurance as well as special forms of judicial proceedings, such as enforcement proceedings, preliminary injunctions and securing of evidence.

Daniel Steel

Managing Associate E: daste@bahr.no M: +47 930 487 34 Daniel is part of BAHR’s Dispute Resolution team. His practice focuses on international arbitration, cross-border litigation, and investigations; compliance. Daniel has over ten years of experience advising clients in arbitration matters under the ICC, LCIA, AAA/ICDR, SIAC, HKIAC, CIETAC, and UNCITRAL rules. His experience in contentious matters comprises a wide range of industries and areas, including; gas, renewable energy, pharmaceuticals, telecommunications, intellectual property, real estate, arbitration-related litigation, and shareholder disputes. He has handled matters covering a broad geographical scope, including Africa, Asia, Europe, South America and the United States.

Lene Fjellstad Johnsen

Senior Associate

E: lefjo@bahr.no M: +47 +47 932 032 30 Lene is part of BAHR’s dispute resolution team. She works with general dispute resolution and litigation. Lene litigates cases before ordinary courts and arbitral tribunals. She has built up her expertise in dispute resolution and mediation through litigation of numerous cases a judge and judicial mediator, as well as an attorney.

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Duty of loyalty in commercial contracts:

Hard law or last-ditch argument?

The duty of loyalty is hailed as a deeply rooted principle in Norwegian contract law, even in commercial contracts. The general nature of the principle inspires parties to invoke the duty of loyalty in support of a wide range of claims and arguments, including claims for damages, which are not necessarily supported by the wording of the contract.

Does the duty of loyalty make the interpretation of contracts less predictable, and how should parties in commercial contracts adapt to it at various stages of a contract’s life?

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Loyalty in commercial relationships Imagine a scenario where a software development firm enters into a joint venture with a hardware manufacturer to create an integrated tech solution. As the project progresses, the software firm discovers a lucrative opportunity to develop a similar, potentially more profitable product with another hardware producer. This opportunity promises significant financial gain but would require reallocating resources critical to the success of the original joint venture. The software company now faces a dilemma: stay with its initial partner or seize the opportunity for potential expansion and profit. Can the duty of loyalty limit the software company’s leeway, or even expose it to liability if it seizes the opportunity?

No matter how friendly or profitable, most commercial relationships involve crossing interests and are based on differing business cases. As the relationship evolves, circumstances may change, and the parties could find it necessary to protect their own interest at the expense of their partners’.

In the realm of contractual engagements, the clear starting point is that parties transact at their own risk, with their protections circumscribed by the provisions in the executed agreement. Although some boundaries follow from the scope of contract or statutory regulations, and breaches are sanctioned by way of compensation or other remedies, an additional and separate requirement for loyalty towards partners has long been accepted in Norwegian law. From a commercial point of view, a separate duty of loyalty contributes to ensuring that the purpose of the relationship will be fulfilled, be it long term contracts, joint ventures, employment, law partners or shareholders.

In most relationships, acting loyally towards a partner or contracting party is a given and requires no extra effort. However, as market conditions or economic and financial landscapes evolve, this dynamic may shift: Fluctuations in prices or the cost of goods could render the partnership unprofitable.

There is no doubt that, although there is (and should be) a legal duty of loyalty in various commercial relationships, there is also a need

for flexibility and for parties to protect their business or financial interests. So, how far can one go in doing so at the expense of a partner?

Characteristics of the duty of loyalty Although there are many manifestations of the principle of the duty of loyalty in Norwegian legislation, the general contractual duty of loyalty is a non-legislative rule, with the courts playing a central part in the development.

Although it is fundamental in all the Nordic countries, it is believed to have been more frequently applied in Norwegian law in recent years than in the other Nordic countries.

The principle can in general be specified as an obligation to consider and to some extent safeguard the interests of the counterparty.

Consequently, the assessment depends on the balancing of interests. The duty of loyalty serves as an “implied obligation” within the contractual relationship. Traditionally loyalty obligations have not been articulated in the contract itself.

However, today it is not uncommon to include loyalty provisions in some forms of contracts.

While the incorporation of explicit loyalty provisions in contracts may, under certain circumstances, heighten the parties’ obligations to act loyally, it is our view that the legal effect of such provisions remains relatively limited, given that the duty already arises from the underlying background law. Consequently, the norm functions independently regardless of whether it is explicitly stipulated in the contractual provisions, guiding the conduct of contracting parties by default.

The duty of loyalty is directed specifically at the parties’ conduct in the contractual relationship, as opposed to rules that are based on the result of an action or development. Instead of asking whether the result is unreasonable, or whether it is unreasonable to enforce the agreement, the courts assess whether the parties have acted disloyally towards each other. An analysis of the courts’ use of considerations of loyalty in their reasoning can therefore provide a basis for establishing specific obligations for the parties, at different stages in the contractual process.

Although breach of loyalty obligations may be subject to various remedies, damages often emerge as the most relevant sanction.

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Duty of Loyalty in the Pre-Contractual Phase While there exists considerable leeway during the negotiation phase, Norwegian contract law presumes that obligations arise for the involved parties before a final agreement is concluded.

This is explicitly held by the Supreme Court, stating that the duty of loyalty that exists between parties in a contractual relationship also can arise before a final agreement is concluded.

to disclose, the counterparty’s responsibilities to investigate must be emphasized in the assessment. An illustrating case is the Supreme Court’s decision in Rt-2002-1110, concerning the sale of shares to a buyer who did not conduct a due diligence investigation. The Supreme Court held that the sellers were nevertheless found liable since their representative withheld material information about the company’s financial position.

As the result of the negotiations become apparent, each party, based on the general assumption of mutual loyalty, may have grounds to assume that the parties are bound even if a final agreement has not been reached. This pre-contractual duty of loyalty implies that if there is a risk that the counterparty is misled into acting as if an agreement has been established, the party who does not want to commit has a duty to make his or her position known.

Disloyalty will normally imply that there is a basis for liability based on negligence. If the disloyal conduct leads to the agreement being invalid, the starting point is that the other party can have their transaction costs, and other loss from relying on the contract, covered. In the case LB-2023-55808, the Borgarting Court of Appeal found a contractor liable for compensation due to disloyal conduct, as the company failed to timely disclose information about its finances, which they ought to have realized would impact the completion of the contract. The developer was awarded damages corresponding to the transaction costs.

Consequently, they were financially positioned as though the agreement had never been entered into, and were compensated for their

It may also be considered a breach of loyalty if a party withholds information during the negotiation phase. In this context as well, a balancing of the parties’ interests is essential to determine adherence. Regarding the obligation

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negotiation and conclusion expenses, performance costs, and increased financing expenses.

When the disloyal conduct involves a party withdrawing from negotiations before they have advanced to the point of a legally binding contract, such as when there is no consensus on all fundamental terms, it is typically not deemed justifiable to impose liability for damages on the party that withdraws.

Nonetheless, the possibility of such liability cannot be entirely dismissed. This is illustrated in Rt-2014-100, where the purchaser had maintained the option to withdraw prior to the signing of the contract. The Supreme Court held that while one cannot preclude the possibility under certain circumstances of a party being held liable for damages for failing to conclude the negotiations, the prevailing principle is that liability for damages does not arise from the mere refusal to enter into an agreement.

On the other hand, a party who is only testing the market with no intention of concluding an

agreement, could more easily be found liable for the transaction costs of his counterparty.

Duty of Loyalty in the Performance Phase Contracts include many provisions that are based on or reflect the duty of loyalty. The duty of disclosure of relevant information and notification obligations are typical examples.

Additionally, the duty of loyalty imposes implied obligations, such as contributing to fulfilling the purpose of the contract or relationship.

The duty of loyalty is particularly important in long term commercial relationships, as they are exposed to market fluctuations or changes in financial circumstances that could affect the profitability of the contract for one of the parties. For instance, should the cost of goods in retail contracts rise above the pre-agreed prices with the local retailer, does this allow the vendor to initiate a more advantageous partnership with the retailer’s competitor?

Could a lender leverage the borrower to repay the loan before the maturity date to reduce his 17

exposure? Or where the landlords financing costs increase, making the lease unprofitable, can the lease be terminated and offered to the market at higher prevailing rates?

The parties’ discretion in such cases will vary depending on the circumstances. Moreover, case law shows that the courts may approach such questions differently, either by asserting firm loyalty obligations or through interpretation of the applicable instrument.

An example of the latter is the Supreme Court case Rt-2005-268, concerning a long-term contract for the supply of fish to a slaughtering facility. The supply agreement—which did not include minimum volume requirements—was, but for a short period, not adhered to by the supplier. In finding the seller in breach of the supply agreement and liable towards the slaughtering facility, the Supreme Court argued that the interpretation of the agreement, i.e., rests on the general duty of loyalty in contractual relationships.

Another interesting example is the judgement from the Supreme Court in HR-2021-954. The case concerned a retailer’s claim for damages towards a bankruptcy estate for disloyal acts.

The company that went bankrupt supplied children’s clothing to several retailers at an agreed price level (to ensure equal and competitive terms). After bankruptcy was declared, the estate “dumped” a major party of clothing on a competitor at a significant discount on the agreed price. One of the retailers argued that this entailed a breach of the duty of loyalty and the supply agreement. The Supreme Court did not find the estate liable due to Norwegian bankruptcy rules, and unfortunately refrained from commenting on the loyalty argument.

From the appeals courts, it is also worth mentioning the Frostating Court of Appeal’s judgement in LF-2018-170684, where a municipality was found in breach of its contractual loyalty obligations in a real estate transaction which also required a public law permission from the municipality. Although the transaction agreement did not include obligations to process applications for the relevant permission in due time, the appeals court found that such obligations followed from the general contractual duty of loyalty.

The municipality was found to have used too long time to process the application, resulting 18

in economic losses for the private party, for which liability was imposed.

Damages as sanction to disloyal acts To this date, there are no examples from the Supreme Court where isolated breaches of the duty of loyalty has resulted in damages, where the act itself is not in breach of specific provisions in the contract. Cases where damages have been awarded also include breach of other specific obligations, either explicit or implied.

However, it seems clear from relevant case law from the appeals court, that disloyal acts, even where they do not violate specific provisions, can lead to liability. Thus, there are limits to what one party is permitted to do to protect its interests. And even more so when it happens at the expense of a partner.

In conclusion, the essence of the duty of loyalty in contract law is to foster an environment where the parties can rely on a baseline of good faith and fair dealing from their counterparts.

The boundary between loyalty and disloyalty is not a fixed line but a dynamic norm defined by the expectations set forth in the contract, the nature of the relationship, and overarching legal principles. Although such a vague norm might contribute to uncertainty in its application, the wide-ranging nature of the situations in which it could be applied warrants a flexible norm.

For instance, arguments could be made to allow a party facing bankruptcy or shut down due to unforeseen market changes or financial difficulties resulting from a partnership, a broad range of discretion. On the other hand, a supplier seeking to exploit the situation should not be able to forsake his duties to one retailer in favor of pursuing increased profitability with a competitor.

In cases where acts of disloyalty results in economic damage to the other party, there are substantial grounds for imposing liability, as a main rule.

While parties are entitled to act in their own commercial interests, they must not do so in a manner that inflicts undue harm on the other party or undermine the contractual purpose.

In essence, loyalty requires a party to refrain from opportunistic actions that would be considered fundamentally unfair by an objective standard.

About the authors

Simen Skjold Søgaard

Partner

E: sss@bahr.no M: +47 47 90 02 12 87 Simen is admitted to the Supreme Court and rejoined BAHR as partner after six years at the Office of the Attorney General (Civil Affairs) in April 2022. Simen represents clients in all forms of commercial disputes with a particular focus on tax and VAT litigation and matters involving public authorities.

Martin Aspaas

Managing Associate E: maasp@bahr.no M: +47 41 52 58 94 Martin joined BAHR in 2014 and has since then gained considerable courtroom experience from his work as a lawyer and deputy judge.

This includes extensive litigation and arbitration experience in various legal areas, particularly within contract law and real estate, as well as shareholder disputes and disputes arising out of M&A activity.

Andreas Busch

Managing Associate E: anbus@bahr.no M: +47 46 91 08 58 Andreas is a commercial litigator with significant experience from both public court proceedings and arbitration. His practice includes corporate litigation and complex contractual disputes e.g. within the energy sector, IT and telecom, as well as directors’ and professional liability cases. Andreas also has extensive experience with special forms of judicial proceedings such as securing of evidence and injunction proceedings.

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Contact us

Jan B. Jansen Partner

Atle Skaldebø-Rød Partner / Head of Dispute Resolution

E: jbj@bahr.no M: +47 934 94 306

E: atska@bahr.no M: +47 922 87 727

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