Contract between entrepreneurs was unreasonable and was set aside under section 36 of the Contracts Act

Six entrepreneurs owned a company together. In 2017, four of them sold a total of 45.5 percent of the shares to the two remaining owners for nearly NOK 41 million. The buyers were unable to finance the purchase price, and the sellers provided credit against a pledge of the shares. To give the buyers time to realise the value of the company, several payment deferrals were also granted. All six had a common goal of reselling the company to get paid for the work that had been put into the business.

In connection with negotiations with a foreign company regarding capital infusion and the sale of shares in the company, the parties entered into a settlement agreement where the agreed price of the shares was reduced by 70 percent, to around NOK 12.2 million. Payment was to be made when the transaction with the foreign company was completed. A few months later, all the shares in the company were sold to the foreign company for NOK 180 million, with a cash consideration to the two remaining owners of NOK 94.5 million. The sale gave them a large profit, and the consideration would have covered the originally agreed purchase price for the shares. The four who had agreed to the reduced price for the shares felt they were subjected to disloyal conduct and withholding of information. The two share buyers, on the other hand, believed that the sellers had deliberately chosen low risk to ensure payment of the originally agreed purchase price.

The Supreme Court, like the Court of Appeal, found that the settlement agreement was unreasonable and had to be set aside in its entirety under section 36 of the Contracts Act. The sellers were therefore entitled to a settlement in accordance with the share purchase agreement from 2017, after deduction for the settlement under the settlement agreement.

The Supreme Court emphasised the manner in which the settlement agreement was concluded and the withholding of information. The sellers and buyers were not equal in terms of knowledge and resources, and they had a loyalty bond between them through their previous agreements.

The decision provides guidance on the application of section 36 of the Contracts Act in commercial contractual relationships.

Read the judgment from the Supreme Court (Norwegian only) (PDF)

Area of law: Contract law. Section 36 of the Contracts Act. 

Key paragraphs: 68–80, 106, 109–110, 113–117

Justices: Matheson, Ringnes, Thyness, Stenvik, Sivertsen