The Line Between Being Right and Being Proven Right: HR-2025-1171-A

Background

In 2016, Fredrikstad Seafoods AS (later Nordic Kingfish Fredrikstad AS) entered into a turnkey contract with the contractor Gråkjær AS for the construction of a land-based fish farm. The agreement included a security requirement, and Nordic Kingfish provided a demand guarantee by depositing NOK 13 million in a blocked account at Pareto Bank. During the project, cracks appeared in the structure, and a dispute arose between the parties as to who bore the risk for this. In 2018, Nordic Kingfish brought legal proceedings against Gråkjær AS, halted the work and terminated the contract. The district court acquitted Gråkjær AS and awarded the company additional compensation of NOK 30 million. Gråkjær AS claimed the guarantee amount from the bank and transferred the amount to Gråkjær Holding A/S for the purpose of reducing the group’s debt. The transfer took place before the district court’s judgment became final.

The district court’s ruling was overturned in the court of appeal. The court of appeal ordered Gråkjær AS to pay Nordic Kingfish MNOK 61 in compensation. The ruling became final in June 2022. The following day, the board of Gråkjær AS decided to file for bankruptcy, and the company was declared bankrupt. In March 2023, Nordic Kingfish sued A, who was both chairman of the board and managing director of Gråkjær AS. They demanded repayment of the amount previously paid out under the guarantee.

The chair of the board was acquitted in the district court, which found that disposing of the guarantee amount did not constitute negligence giving rise to liability for damages. Nordic Kingfish appealed, and in September 2024, the Agder Court of Appeal reached the opposite conclusion. The chairman was ordered to repay the entire guarantee amount of just over NOK 13 million with interest, as well as cover the legal costs for both the district court and the court of appeal. The chairman then appealed the case to the Supreme Court.

The Supreme Court's assessment of board responsibility

The parties agreed that Gråkjær AS had an unconditional right to demand payment under the demand guarantee, and that it was not in itself unlawful to receive the amount.  The key question was whether it was negligent and contrary to the obligations under company law and the duty of loyalty under the guarantee agreement to dispose of the guarantee funds before the liability had been legally determined.

The Supreme Court based its ruling on Section 17-1 of the Norwegian Public Limited Liability Companies Act, which stipulates that the managing director and board members may be held personally liable for damage they have caused intentionally or through negligence to the company’s creditors. The Supreme Court emphasised that board liability requires special justification – the management of a company has considerable leeway in its business assessments. This is particularly true in situations of financial difficulty, where company management must make difficult trade-offs between protecting the interests of shareholders on the one hand and the interests of creditors on the other.

The Supreme Court further finds that the question of whether management can be held liable for individual decisions in a difficult financial situation must be assessed specifically on the basis of the circumstances at the time of the action. Liability for damages presupposes unlawful conduct, and the key issue is therefore whether the person has acted in breach of the duties applicable to their role in the company and can be blamed for this. It is also important whether the person exposes creditors or co-contractors to an “extraordinary” or “unpredictable” risk of loss.

In its specific assessment of the chair’s actions, the Supreme Court stated that Nordic Kingfish could not have had a legitimate expectation that the guarantee funds would be “held back” pending a final judgment. This was justified in particular by Gråkjær’s liquidity needs and the fact that, according to the guarantee agreement, the company had a legitimate right to draw on the guarantee. The Supreme Court acknowledged that A’s disposition entailed the possibility of a subsequent settlement and that, in certain situations, a creditor with a claim may be obliged to reserve funds for such a settlement. In the present case, however, there was no such obligation, and A’s actions were therefore not considered unlawful.

Nor did the Supreme Court consider the disposal to be a breach of the Companies Act’s requirement of prudence with regard to the company’s equity capital.

The Supreme Court therefore concluded that A had not acted negligently or breached his duties under the Companies Act, and he was acquitted of liability for damages.

The significance of the judgement

There are two aspects of the ruling in particular that players in the construction industry should take note of.

Firstly, the ruling highlights the inherent risk involved in the use of demand guarantees. Unlike absolute guarantees, where the guarantor can refuse payment by pointing to deficiencies in the underlying circumstances, a demand guarantee means that the guarantor must pay when the claim falls due – without being able to raise objections to the underlying circumstances. If this is not a desirable situation, a guarantee in the form of a directly enforceable guarantee should be used. Alternatively, the demand guarantee can be regulated so that guarantee funds cannot be paid out in a situation where there is an ongoing legal dispute about the claim.

Secondly, the ruling illustrates that in practice it may be difficult for a creditor to succeed with claims against the board or managing director if the principal debtor goes bankrupt. In our view, the ruling clarifies and consolidates current law on board liability. The Supreme Court has ruled that it takes a lot before the board or managing director can be held personally liable for transactions made in the company, even if the company is in a weak financial position and there is a risk that the creditor will not be compensated. The case before the Supreme Court concerned the company management’s handling of a disputed claim before the courts, including personal liability for legal costs that the company was unable to pay. Although the Supreme Court did not consider the case to be directly comparable, it pointed out that HR-2022-1148-A also shows that it takes a lot to impose liability on company management for promoting and defending the company’s interests in court cases. The decision illustrates that there is a high threshold for negligence giving rise to liability for damages, provided that the board’s decisions are made on a sound basis.

The construction industry has a high level of disputes, and recent years have also been particularly marked by economic challenges and high bankruptcy figures. Because it takes a lot to obtain coverage from parties other than the bankruptcy estate and guarantors in the event of bankruptcy, the financial situation of the contracting party should be an important and decisive factor in strategic considerations both when entering into a contract and in the event of a dispute. This is particularly true when choosing between bringing legal action or entering into a settlement.

There is little point in spending a lot of time and resources on proving that you are right if you still cannot get justice due to the other party’s financial situation.