Chairman not liable for compensation claim after use of funds from a demand guarantee

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

A dispute subsequently arose under the construction contract. Following a judgment in the District Court, the contractor, who had been awarded damages and costs totalling approximately NOK 45 million, demanded payment of NOK 13 million under the guarantee. The judgment was successfully appealed, and the Court of Appeal awarded the employer nearly NOK 61 million in damages. Once the judgment became final, the contractor company entered into bankruptcy proceedings. The estate lacked sufficient funds to cover outstanding claims, including the settlement envisaged under the guarantee agreement.

The employer brought a claim for damages against the chairman of the board of the contractor company, who also served as its general manager, on the grounds that he had acted negligently by failing to ensure that the guarantee funds remained available for the 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 may be held liable for individual decisions made during periods of financial distress must be assessed based on the circumstances at the time of the decision. Liability presupposes unlawful conduct, and the key question is, therefore, whether the individual acted in breach of the duties associated with his role in the company and can be blamed for doing so.

In its individual assessment, the Supreme Court found that the chairman had not breached the duty of loyalty arising from the guarantee agreement between the companies, nor had he acted in contravention of his other obligations under the Companies Act.

The judgment clarifies the scope of directors' liability in relation to individual decisions made prior to insolvency.

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

Areas of law: Tort law. Company law. Section 17-1 of the Companies Act. 

Key paragraphs: 53-55

Justices: Bull, Østensen Berglund, Steinsvik, Sivertsen, Poulsen