Navigating insolvent contractual counterparties under Norwegian law

In Norway, most companies will at some point encounter a contractual counterparty that becomes insolvent or even goes bankrupt. Since such situations can dramatically affect the fulfilment of contracts under Norwegian law, it is crucial to know how to protect your interests effectively.

1. Before bankruptcy occurs
It is primarily before a bankruptcy that you can take measures to minimize the risk of loss from a counterparty's potential insolvency. However, as bankruptcy approaches, both practical and legal options become increasingly limited.

Ensuring the counterparty's ability to deliver
If you rely on deliveries from a contractual counterparty, it's essential to ensure their ability to perform—not just at the contract's inception but throughout its duration. Often, companies become dependent on a single supplier, and switching suppliers can take months. If that supplier faces financial difficulties, your own operations may suffer. In such cases, consider exiting or renegotiating the contract with the financially distressed counterparty.

Reducing credit exposure
Reducing credit exposure to a financially challenged counterparty is prudent. While the counterparty may lack the financial capacity to adjust credit terms—and doing so might present legal challenges—there are often solutions. Adjustments to the contractual relationship, involving stakeholders, or obtaining security interests can help mitigate risks.

Securing legal protection
When expecting delivery of physical items (movable property, real estate, shares, etc.), ensure you have legal protection (rettsvern) through proper transfer of ownership or other means. If you're selling goods on credit, consider stipulating a retention of title (salgspant). Compliance with the relevant legal requirements is vital in both cases.

Supporting a financially distressed counterparty
In some situations, assisting the counterparty to continue operations may be the lesser of two evils. This support can take the form of capital injections or additional orders. Any such arrangement should be structured carefully to minimize your risk exposure.

2. The contractual relationship after bankruptcy
If the counterparty does go bankrupt, the situation is largely governed by Norway's Bankruptcy Act of 1984 and the Norwegian Creditors Recovery Act of 1984. Several key issues commonly arise:

Right of retention and withholding performance
If it becomes evident that the counterparty cannot fulfil their contractual obligations, you may withhold your own performance or prevent its delivery to the counterparty or bankruptcy estate. Should your performance be delivered to the estate after bankruptcy proceedings commence, the estate must return it unless it decides to assume the contract. While the estate can, in theory, demand delivery against security, this is rare in practice. Withholding performance based on anticipatory breach principles is also permissible.

Status of the contract
The bankruptcy estate is not obliged to fulfil the debtor's contracts but has the right to assume them. You can demand that the estate promptly decide whether it will assume the contract. In certain agreements—such as those requiring personal performance—the estate's right to assume is excluded.

If the estate assumes the contract, it becomes bound by its terms and must perform accordingly. For partially fulfilled contracts, the estate may choose to assume only the remaining obligations under certain conditions. For ongoing services, the estate has an extended right to terminate.If the estate does not assume the contract or fails to perform or provide security, you may terminate the agreement. Breaches unrelated to insolvency can also justify termination, following applicable contractual rules. However, for deliveries made prior to bankruptcy, termination rights are generally limited unless a retention of title exists, or the obligation was monetary.

Special considerations for real estate leases
For real estate leases entered into for the debtor's business operations and already in use, the estate automatically assumes the lease unless it declares otherwise within four weeks of bankruptcy commencement and makes the property available to the lessor within that period.

Even without such a declaration, the estate must cover rent from the start of bankruptcy proceedings until the property is returned or the declaration is received by the lessor.

A lessor cannot demand eviction due to unpaid rent prior to bankruptcy unless an eviction order was filed with enforcement authorities before bankruptcy proceedings began.

Set-off rights
If you owe money to the counterparty, the estate can demand payment. However, Norwegian law provides broad rights to set off your claims against the estate's demands. For example, a claim for damages arising from the counterparty's breach can often be set off against payment obligations asserted by the estate.