Chairman acquitted of damages claim

A limited liability company had provided a demand guarantee securing its obligations as employer in a construction contract. The demand guarantee entitled the contractor to payment upon demand, without the employer being able to raise objections arising from the underlying contractual relationship.

A dispute arose in the construction contract. Following a judgment of the District Court, the contractor—who had been awarded damages and legal costs amounting to approximately NOK 45 million—demanded payment of the guarantee sum of NOK 13 million. The judgment was appealed, and the appeal succeeded. The Court of Appeal awarded the employer approximately NOK 61 million in damages. After the judgment became final, the contractor entered bankruptcy. The estate had no funds to cover outstanding claims, including the final settlement under the guarantee agreement.

The employer brought a damages claim against the chairman of the contractor company, who was also the company’s chief executive officer, alleging that he had acted in a manner giving rise to liability by failing to ensure that the guarantee funds remained available for settlement under the guarantee agreement.

The Supreme Court held that the chairman could not be held personally liable for the loss. Whether members of a company’s management can be held liable for individual transactions in a situation of financial distress must be assessed concretely in light of the circumstances at the time of the act, the Court stated. Liability in damages requires unlawful conduct, and the key question, according to the Supreme Court, 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.

In its specific assessment, the Supreme Court found that the chairman had not breached his duty of loyalty in connection with the guarantee agreement between the companies, nor had he acted in violation of his other duties under the Companies Act.

The judgment clarifies the scope of directors’ and officers’ liability in relation to individual transactions prior to bankruptcy.

Source: Supreme Court