BAHR Dispute Resolution Insight - No 1. 2022

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Dispute Resolution Insight

No. 1/2022


CONTENTS Opening statement................................................................................................................................. 5 Recent post-M&A disputes give insight into interpretation of SPAs........................................... 6 Recovering litigation costs................................................................................................................... 10 Securing evidence ................................................................................................................................. 14 Contact us

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OPENING STATEMENT BAHR on dispute resolution Dispute resolution has been key to BAHR’s practice since the early days. Over the decades we have consistently been involved in the highest value and most complex cases in Norway. In the past year alone, BAHR has represented clients in disputes concerning more than USD 7 billion. Going forward, our focus on dispute resolution will only increase. Our dispute resolution team is now formed into one practice group dedicated to protecting our clients’ interests across the full range of contentious issues that they may encounter, be it international issues or local matters. The practice group brings together some of Norway’s most established and experienced Supreme Court counsels, rising stars and promising talents to provide our clients with unyielding representation in court and arbitration, mediation and negotiations. The dispute resolution practice group works closely with our transactional and advisory colleagues in the industry groups to ensure that the expertise of the entire firm is fully utilised. BAHR Dispute Resolution Insight With BAHR Dispute Resolution Insight we aim to shed light on broader dispute resolution issues of interest as a supplement to our regular newsletters on current developments in litigation and arbitration.

Post-M&A disputes form an important part of BAHR’s dispute resolution practice. The body of law on postM&A disputes is limited due to such disputes rarely being heard outside of confidential arbitrations. Recently however, two cases concerning the interpretation of share purchase agreements were heard by the Court of Appeal (Borgarting division). BAHR acted as counsel in both cases and in this Insight, Deputy Head of Dispute Resolution, Daniel Sipos, gives an overview of the key take-aways. Recovering litigation costs is an issue in which we experience an increased focus from clients. Based on a recent article written by Eirik Wigenstad in the Journal for Commercial Law, Eirik gives a condensed overview of litigation costs and losses that may be recovered by a party to a dispute. Securing evidence is not a step that is often needed, but when it is, it is crucial. Andreas Busch gives a practical view of the main considerations and steps in securing evidence. We hope this Dispute Resolution Insight provides an interesting read.

Atle Skaldebø-Rød

Head of Dispute Resolution

In this Dispute Resolution Insight we consider three topics of importance:

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Recent post-M&A disputes give insight into interpretation of SPAs The vast majority of post-M&A disputes in the Norwegian market are settled by arbitration, which is the agreed dispute resolution mechanism in most sale and purchase agreements (SPAs). Arbitral awards are usually not published, which limit their relevance as precedents. As an exemption from this trend, BAHR has recently successfully represented clients in two distinct post-M&A disputes before the state courts. The judgments give insight into how the state courts approach the interpretation of SPAs, including the role of factors such as the duty of loyalty inherent in contractual relationships under Norwegian law.

Case 1: Termination after long-stop date In a rare instance of such case being tried by the state courts, we successfully defended a client in a two-instance court case regarding the termination of a SPA following the expiry of its long-stop date. Our client, a power company, had entered into a SPA with an investment fund in order to sell a single purpose vehicle with six hydro power plants under construction. As a condition precedent in favour of the purchaser for completion of the SPA, all six power plants were required to be complete and operational. The SPA included a customary long-stop date provision, allowing each party to terminate the agreement if the SPA had not yet been completed by the agreed date. As an exception from this termination right, a party would not be able to terminate if the failure to complete the transaction was due to the “fault” of that party. Prior to the long-stop date, an accident occurred in one of the power plants, with the consequence that the power plant was not completed and operational in time. The parties failed to reach agreement on how the situation should be handled before the long-stop date. The seller therefore <<< 4

opted to terminate the agreement, and subsequently succeeded in selling the shares to a third party. The purchaser objected against the termination. The purchaser argued that although no one could be blamed for the accident at the power plant, the failure to complete the transaction should still be deemed to be the seller’s “fault”, as the accident meant that the seller had failed to satisfy the requirement for complete and operational power plants. In the alternative, the purchaser argued that it was contrary to the sellers’ duty of loyalty, a principle enshrined in Norwegian contract law, to exercise the termination right in such a scenario. After failing to obtain an interim injunction in order to block the sellers’ sale of the shares to the third party, the purchaser sued the seller with a claim for damages for the loss of the transaction. The claim failed in the district court and, following an appeal, in the appeal court. Both courts found that the concept of “fault” referred to wilful or negligent misconduct (i.e. culpability). Based on a review of extensive correspondence between the parties and internal correspondence on each side, which had been made available through disclosure requests,


the courts further took the view that both parties, prior to termination, held the view that the SPA could in fact be terminated by the seller. The courts further held that the seller’s termination right served an important purpose in an uncertain situation such as the one that arose after the accident. For these reasons, it was also not disloyal for the seller to exercise the termination right. The appeal court’s decision is final and binding. The matter is, to our knowledge, the first example of the Norwegian courts trying the termination of an SPA after the lapse of a long-stop date. While the judgment is in part based on the special circumstances in this particular case, it also sheds light on the interpretation of a termination clause which is widely used in the Norwegian market. The judgment is also an interesting example of the interpretation of Norwegian legal concepts expressed in the English language, as the SPA was governed by Norwegian law but drafted in

English. The courts treated the wording “fault” as a reference to the Norwegian law concept of culpability but relied inter alia on the definition of the term in the common law-based Black’s Law Dictionary. It is very common for Norwegian law-governed contracts to be drafted in English, and although the choice of drafting language in principle should not affect the Norwegian law principles applied, the interpretation can be more difficult where the nuances of English legal terms do not correlate exactly with comparable Norwegian legal principles. In this case, however, this did not appear to create any significant obstacles for the courts. Case 2: Indemnity claim Another judgment on the interpretation of SPAs, in which BAHR acted for the successful claimant, was recently handed down by the Borgarting Court of Appeal. The case concerned indemnification of a patent infringement claim which 5 >>>


arose about seven years after closing of the transaction and subsequently was settled by the target company, an offshore services supplier. The risk of a patent infringement claim had been uncovered in the due diligence of the target company prior to entering into the SPA, and a specific indemnity was given by the seller in the agreement. BAHR originally assisted the buyer both in the due diligence of the target and in the drafting of the SPA. The key issue in dispute was whether the specific indemnity covered the settled patent claim. To our knowledge, the case marks the first time a specific indemnity under a SPA has been the subject of a decision by the Norwegian courts. In its interpretation of the specific indemnity, the appeal court attached significant weight to the wording of the provision (which, again, was drafted in English but interpreted to refer to Norwegian law principles). However, the approach taken by the appeal court also shows the importance of good documentation from the time of the transaction, such as due diligence reports and drafts of the SPA exchanged during the negotiations. In simple terms, the judgment implies that a specific indemnity drafted widely will be given a wide interpretation in accordance with its purpose. Further, the appeal court found that the specific indemnity was an agreed allocation of risk; the losses, claims etc. covered by the indemnity should remain with the seller. On that basis, the court also rejected the seller’s argument that the buyer was under a duty to investigate and clarify the finding in the due diligence (which brought about the specific indemnity) <<< 6

after closing. The appeal court also found that the claimant had acted diligently and with the purpose of mitigating its losses in connection with the settlement of the claim that effectively resulted in its loss. The seller’s argument that the amount of the claim should have been reduced was, in turn, not upheld. During the period of discussions with various parties leading up to the settlement, the claimant did, consistently and on several occasions, keep the seller updated on the progress of the matter and offered the seller the possibility to give input to the claim handling or assume control of the claim. The case thus also illustrates the benefits of thorough documentation in connection with the incurrence of a loss leading to a claim for indemnification. The seller’s appeal to the Supreme Court was recently denied leave of appeal. Accordingly, the Court of Appeal judgment is final and binding. Conclusion The outcome of the cases is not surprising. Both judgments confirm that the state courts, when approaching potentially complex commercial agreements, attach significant weight to the wording of the agreement (whether drafted in Norwegian or another language), but also other factors such as the (express or implied) purpose of a given clause, the negotiation, the parties’ common understanding of the clause and the duty of loyalty which is an implied term in all contracts. While the state courts and judges are generalists, and sometimes may lack the commercial and specialist experience which an arbitral tribunal may have, their approach in the cases discussed above does not deviate materially from what we would expect from an arbitral tribunal.


Daniel Sipos

Deputy Head of Dispute Resolution E M +47 928 55 425 Daniel represents our clients in a range of complex commercial disputes, including banking and finance litigation and post-M&A disputes. Recent cases include this article’s case no. 1; an international arbitration concerning a NOK 1.4 billion earn-out claim; and representing the borrower under in a NOK multi-billion lawsuit regarding alleged breaches of a loan agreement.

Atle Skaldebø-Rød

Head of Dispute Resolution E M +47 922 87 727 Atle is admitted to the Supreme Court and has extensive experience across a broad range of complex commercial disputes. His practice includes post-M&A, directors’ liability, shareholder disputes, company law, financial reporting and marine insurance as well as special forms of judicial proceedings, such as preliminary injunctions and securing of evidence.

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Recovering litigation costs Introduction Costs of litigation is a frequently returning topic, and rightly so. As cases grow in complexity and size, so do costs. In large commercial cases this does not only affect legal fees, but also the costs the party itself incurs in dedicating time and resources to follow-up on the case. In our experience, it is not uncommon for clients to allocate resources to follow-up on a case, part- or even fulltime. The internal costs associated with following up on the case might prove to be significant. Additionally, a party to a commercial dispute may also incur other costs that are directly linked to the dispute, which cannot be classified as either legal costs or internal costs. The totality of these costs may best be classified as litigation costs. The legal basis and possibility to recover these costs does however differ significantly, which in turn could lead to only parts of the total litigation costs being recoverable. It is against this backdrop we pose this article’s question: What is the legal basis for recovering litigation costs? The general starting point The starting point under the Norwegian Dispute Act is that necessary costs incurred in relation to the case are recoverable in full. The extent to which a party prevails may also be reflected when the state courts award costs. Cost awards pursuant to the Norwegian Arbitration Act in practice reflect the same principles. The term “costs” are not in itself limited to legal fees. On the contrary, it follows expressly from the Dispute Act section 20-5(1) that the costs recoverable are all necessary costs in relation to the case not expressly excluded by law. <<< 8

Legal fees The costs most typically incurred for parties in legal disputes are fees to the legal counsel and disbursements including inter alia expert costs, travel expenses and court fees. As may be recalled, for costs to be recoverable they must have been incurred in relation to the action. This limits the scope of the liability in two separate directions: First, the legal fees must be incurred in relation to the legal proceedings leading up to the dispute. Costs incurred prior to this may generally not be recovered as legal costs pursuant to Dispute Act or Arbitration Act. Parties to civil disputes are however obliged to fulfil a series of actions under the Dispute Act before submitting the Statement of Claim, including the submission of a legal notice of the dispute and make efforts to resolve the dispute amicably. Therefore, to incentivize the parties to comply, it is generally assumed that the parties must be able to claim costs incurred from this stage of the proceedings. Second, the term in relation to the action limits the scope of the liability in terms of factual proximity to the dispute. In other words, the costs must derive from work relevant and not insignificant to the legal proceedings. There needs to be a sufficient degree of closeness between the incurred costs and the dispute. In summary, the legal fees that are recoverable pursuant to the Dispute Act and the Arbitration Act are characterised by their immediate and unavoidable connection to the proceedings. These costs will almost always be incurred in legal proceedings and can therefore be


taken into account before deciding to the engage in a dispute before the courts. Internal costs As noted above, a party may incur significant costs related to the internal follow-up of the case (for instance by in-house counsel). Such costs may also be recoverable. However, the conditions for recovering such costs are narrower than for legal fees. Pursuant to the Dispute Act section 20-5 a party may claim reasonable compensation for costs of its own internal work if the work has been particularly extensive or would otherwise have had

to be undertaken by counsel or another qualified assistant. Whilst this rule applies generally, the preparatory works to the Dispute Act nevertheless state that the main rule is that the Party may not claim compensation for internal costs. The rule is based on the notion that the parties to commercial disputes must generally accept that their involvement in business activities could result in legal disputes, and that internal costs associated with these disputes may not necessarily be charged to others. This general idea only applies, however, to disputes where the scope and complexity of the dispute is reasonably limited. Thus, a party may claim compensation if the internal work with the case has been particularly extensive. 9 >>>


The wording of the provision suggests a relativity high threshold for when a party may recover internal costs. The preparatory works to the Dispute Act notes that the decisive factor is whether the scope of the work was qualitatively extensive, and the work must also be found to have been useful. Assuming that the internal work associated with the case is deemed as particularly extensive or if the work otherwise had to be undertaken by counsel or other qualified assistant, the party may claim a reasonable compensation. It is assumed that a reasonable compensation is limited to documented costs the party has incurred. If the costs cannot be adequately documented, the Courts will generally award the compensation discretionary and restrictively. Other losses Commercial disputes may also cause significant losses beyond legal fees and internal costs. For instance, the mere fact that the party is involved in a dispute may result in loss in sales and/ or loss of goodwill. A dispute may also deter otherwise willing investors from investing in the company, forcing the company to borrow money rather than financing the company through equity subscription, or borrow at a higher cost. Such losses may be caused by the litigation but are not considered costs under the Dispute Act. As such, there is no written law under Norwegian law that governs access to recover such costs. The admissibility of such claims was however addressed in a Supreme Court ruling from 2015; Roxar (HR-2015-787-A). In Roxar, a company involved in oiltechnology had filed an action against one of its competitors. The action regarded claims for discontinuation of marketing of a particular technology applied in petroleum related activities <<< 10

and a claim for damages. The defendant rejected the claim and filed a counterclaim for losses in relation to the litigation beyond legal costs. The claim was specifically related to loss of sales, loss of goodwill and increased financingcosts. The claimant withdrew the principal claim during the proceedings before the Court of Appeal, but the defendant maintained, the counterclaim. On appeal of the claim for losses caused by the litigation, the Supreme Court held that liability for damages beyond legal costs must be reserved for instances of abuse. The Supreme Court also provided a test for establishing abuse in this relation (our translation): “Abuse will normally be established if the action is without any prospect of succeeding and the party to the disputes realises that this is case. The action will then be motivated by other purposes than succeeding in the action and this will generally represent an abuse of the right to file actions”. Accordingly, to claim losses beyond legal costs it must be shown that: i) the action is without any prospect of succeeding; and ii) and the party to the dispute realises that this is case. i. Without any prospect of success The first limb of the test – “without any prospect of success” – is based on the merits of the filed action and determined on a case-by-case basis. The threshold is high due to even “weak” actions having a protected right of access to court under the ECHR Article 6. Accordingly, it must be evident, by a clear margin, that the action could succeed


either in whole or in part to satisfy the first limb of the abuse test. ii. The party’s realisation that the action is without any prospect of success The second limb of the test is that the party filing the action understood that the action was without any prospect of succeeding. It is not sufficient that the party should have known and it is generally difficult to establish the evidentiary basis for the assessment, which will often be contingent on there being for instance e-mails or other correspondence demonstrating that the party understood that the action was without merits.

Supreme Court in Roxar provides for discretion on part of the court. The test may “normally” establish abuse, but even so, an action which the filing party knew was without any prospect of succeeding, might still not be regarded as abuse of the judicial system. Typical instances where bringing an action may be perceived as rightful regardless of merit, may be actions filed to highlight societal issues or deficiencies in specific legislation. However, the “normally”-discretion has limited practical application and to our knowledge, it has yet to be applied by the courts.

Lastly, we note that the statement of the

Eirik Wigenstad

Senior Associate | Dispute Resolution E M +47 917 93 486 Eirik acts as counsel in a wide range of commercial disputes with an emphasis on professional and shareholder liability matters. The above article is based on a larger article written by Eirik and published in the Journal for Commercial Law (2020).

Simen Skjold Søgaard

Partner | Dispute Resolution E M +47 900 21 287 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.

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Securing evidence Access to evidence can be a key to success in a dispute before the courts. Usually, the parties will submit evidence they deem relevant, and comply with the opposing party’s requests for document production in good faith. However, there are cases where there is a real concern that evidence may be “lost” or manipulated before an action is filed. In such instances the Dispute Act provides a special judicial proceeding allowing for such evidence to be secured by the court in advance of the plaintiff filing his action. Introduction The duty to disclose evidence in an action before Norwegian courts is quite comprehensive, and in most commercial disputes the regular provisions on disclosure are sufficient to meet the parties’ need for access to relevant evidence. In some cases, there could however be a need to get access to the relevant evidence even before an action is filed with the courts, or at least secure the evidence to allow for later access. Especially if there is reason to fear that evidence may be lost, destroyed or manipulated while following the regular procedure of disclosure after an action has been filed. Manipulation or destruction of evidence is a special concern for digital evidence, such as e-mails and documents. These concerns could typically be relevant in cases regarding fraudulent behaviour, suspected theft of trade/business secrets or breach of non-compete and non-solicitation clauses following an acquisition. The Norwegian Dispute Act contains a special procedure that allows for one party to a potential dispute to have the court secure evidence from the opposing party or any third party that may have relevant evidence in their possession, prior to filing an action. This is called a securing of evidence proceeding. BAHR’s dispute resolution team has extensive experience with such proceedings. The following gives <<< 12

an outline of the process, and some comments as to when it should be considered. How it works A securing of evidence proceeding is initiated by a petition to the court by the party seeking to secure evidence that may be relevant to a potential action. The prerequisites for granting such a petition are that it concerns evidence that may be relevant in a subsequent action and that there is either imminent danger of the evidence being lost or impaired, or if it is especially important to get access to the evidence before filing an action. Based on the sensitivity and nature of the possible dispute, there is also a possibility to have the court decide on the petition without hearing the defendant (so called “ex parte”). If the court grants the petition for securing of evidence, an assistant will normally be appointed to assist the bailiff in executing the court’s decision. If the case concerns digital evidence, this will typically be forensic technology experts. For ex parte cases, the execution of the court’s decision is similar to a dawn raid, and the defendant will have to comply. After the evidence is secured, the next step is to set a mandate for an expert to review the secured evidence with a view to separate out irrelevant evidence and, inter alia, evidence subject to privilege. The mandate is set by a decision of the court after reviewing submissions from the parties regarding the scope of the


mandate and may be appealed. If the securing of evidence has been executed as an ex parte proceeding, the defendant may also request an oral hearing on the ex parte decision before the court moves forward with setting the expert mandate. This subsequent review of the ex parte decision results in a new decision from the court which can be appealed, and thus delays the process somewhat. The expert review of the secured evidence shall result in a report summarizing the findings based on the mandate. Thereafter the plaintiff may request access to the expert’s findings in accordance with the regular provisions on disclosure of evidence. However, there is also at this stage a possibility for the defendant to oppose disclosure and thereby forcing the court to decide on this question. As for most other court decisions, the disclosure decision may be appealed.

It follows from the above that securing of evidence could end up being a lengthy and costly process. Cost/benefit? In addition to potentially being quite lengthy, the general rule is that the plaintiff has to carry the cost of both (all) parties relating to the securing of evidence proceeding. This applies in particular for the execution of the decision on securing the evidence and the expert’s review of the evidence. Moreover, it is common to also require the plaintiff to cover the defendant(s’) legal costs throughout the process. These costs may however be included as a claim for damages in the action concerning the future, underlying dispute. Thus, securing of evidence could end up being a time consuming and expensive process. And, since it is ‘designed’ for a very early stage of litigation, there is 13 >>>


also the added uncertainty of whether the secured material actually contains any relevant evidence supporting a claim. These circumstances call for careful considerations before initiating a securing of evidence proceeding. On the other hand, if the potential dispute warrants this kind of proceeding the upside can be significant. Getting access to supporting evidence before filing an action can reduce the risks associated with litigation and increase the chances of a satisfactory out of court settlement. Thus, such proceedings could spare the parties from being caught in long lasting litigation. When should securing of evidence proceedings be considered? Given both the time and cost aspects of securing of evidence proceedings, it is

a procedure that should be reserved for extraordinary cases such as e.g., high value disputes, possible theft of trade and business secrets with significant economic impact or trademark infringement disputes, where there is a real concern that relevant evidence may be lost or destroyed. In cases where the possible evidence is easy to identify or the scope of the review can be limited, the costs could be mitigated to some extent. If the case warrants a securing of evidence proceeding, it could serve as an important tool in resolving the dispute either before filing an action or through litigation.

Andreas Busch

Senior Associate | Dispute Resolution E M +47 469 10 858 Andreas joined BAHR from Schjødt’s dispute resolution practice in March 2022. Andreas represents clients in a broad range of commercial disputes and has extensive experience with actions for the securing of evidence and other forms of preliminary injunctions.

Jan B. Jansen

Partner | Dispute Resolution E M +47 934 94 306 Jan is admitted to the Supreme Court with a practice focused on tax litigation (in particular matters under the Petroleum Tax Act), oil and gas disputes, insurance and professional liability matters.

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Contact us

Atle Skaldebø-Rød

Jan B. Jansen

E M +47 922 87 727

E M +47 934 94 306

Head of Dispute Resolution


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