Formation Defects in Norwegian Contract Law: An Overview

Introduction

Formation defects are a central category of invalidating factors in Norwegian contract law. When a contract is afflicted with formation defects, it means there is something wrong with the manner in which the contract was formed. This article provides an overview of the most significant formation defects in Norwegian law, their characteristics, and their legal effects.

What are Formation Defects?

Formation defects encompass a wide range of situations where there is a failure in the formation of the contract. Unlike content defects, which target the contract's content itself, formation defects focus on the process leading to the agreement.

The classic formation defects in Norwegian contract law include:

1. Falsification and Forgery

2. Misrepresentation

3. Unauthorized Completion

4. Declaration Error

5. Coercion

6. Fraud

7. Simulation

8. Invalidity under Contract Law § 33

9. Disloyalty

Falsification and Forgery

Falsification

Falsification occurs when the person appearing as the promisor has not made any declaration. This is a situation where the document is issued by someone other than the one appearing as the promisor.

Forgery

Forgery involves a promise being altered by someone other than the promisor after being issued. For example, a check amount may be changed from 1,000 to 10,000 NOK, or "NOK" can be erased and replaced with "USD."

Both falsification and forgery are considered strong invalidation reasons. This means the issuer is not bound, even if the promise receiver is in good faith. In the case of forgery, the issuer is not bound beyond what the document expressed before the forgery.

Negligence of the pseudoissuer may, however, lead to liability for damages for the good faith promise receiver's negative contractual interest.

Misrepresentation

Misrepresentation implies that the content of the statement has changed on its way from promisor to promisee. This differs from forgery as no change occurs in the original document, and misrepresentation is usually the result of a misunderstanding, not a deliberate intervention.

Contract Law § 32 paragraphs two to five regulate misrepresentation and establish it as a strong invalidation reason. The promisor can be bound if he fails to complain upon discovering the misrepresentation, or he may be liable for damages if he contributed to the misrepresentation, for example, by filling out a telegram form unclearly.

In today's digital world, these rules have limited practical significance and cannot be directly applied to modern means of communication such as email, internet, or SMS.

Unauthorized Completion

Unauthorized completion arises when an intermediary exceeds the principal's expectations by completing a document in a different manner than instructed.

If the principal has authorized the intermediary, the dispute must be resolved under general authorization rules. Even if the principal has not granted authorization, he will still be bound to a good-faith co-contractor if the intermediary has been provided the legitimacy to carry out the completion.

Declaration Error

Contract Law § 32 paragraph one addresses declaration errors, which include typos or slips of the tongue ("typing errors or similar mistakes"). The provision states directly that the promisor is not bound by typos or slips of the tongue if the promise receiver realized or should have realized a mistake existed.

Conversely, this means the promisor is bound by his typo or slip of the tongue to a promise receiver who acted in good faith. This applies even if the promisor cannot be blamed.

Coercion

The Contract Law has §§ 28 and 29 rules on coercion as an invalidation reason. Both rules apply to compulsive (psychic) coercion, not mechanical (physical) coercion.

Gross Coercion (§ 28)

Gross coercion is defined as coercion using violence against a person or when a promise is induced by threats that imply grounded fear for life or health. Gross coercion is a strong invalidation reason that can be claimed even against a good-faith promise receiver. The promisor must, however, complain without undue delay as soon as the coercion has ceased.

Ordinary Coercion (§ 29)

All other coercion than that mentioned in § 28 is considered ordinary coercion. This might include threats of scandalizing. Ordinary coercion cannot be claimed against a good-faith promise receiver.

For coercion to be unlawful, it must be improper. This is the case when the means of coercion are used to obtain something not entitled or more than entitled, or when using an unlawful means of coercion or there is no factual correlation between the means of coercion and what is desired.

Fraud

Fraud exists when a promise is made because the promisor is deceived, usually by the promise receiver. Contract Law § 30 prescribes that a contract induced by fraud is invalid.

Fraud is a weak invalidation reason, meaning it cannot be claimed against a promise receiver acting in good faith.

Fraud has limited practical significance in modern contract law, partly because it is challenging to prove a deliberate fraudulent situation and partly because courts are reluctant to stamp a fraudulent label on a contract when the issue can be resolved using Contract Law §§ 33 or 36.

Simulation

Simulation (sham) occurs when the parties, in consensus, outwardly express something other than the legal act they have actually performed. Simulation is often used in illegal arrangements, but it can also have legitimate purposes, such as protecting confidential business strategies.

Among the parties, the rule is simple: The simulated act is invalid, and the real act is considered. However, to protect innocent third parties, Contract Law § 34 contains a rule that they can assert rights based on the simulated act.

Contract Law § 33

Contract Law § 33 is a general clause targeting situations where it would contravene honesty and good faith to enforce a contract based on circumstances that existed when the promisee was informed of the declaration.

Scope

The provision is a "catch-all provision" that supplements and partly supersedes other weak invalidation reasons. "Circumstances" can be nearly anything, but there is a requirement that they have motivated the promisor's promise.

The central criterion is that it would be "against honesty and good faith" to enforce rights under the promise. This is a legal standard allowing for specific discretion and development over time.

Duty of Disclosure

In practice, the application of § 33 often concerns the duty of disclosure for the promisee. The question is how far the obligation to provide information extends.

The limits of the duty of disclosure depend on several factors:

• The nature of the agreement

• The parties' expertise and insight

• The parties' positions in the contractual relationship

• The promisor's typical and reasonable expectations

The trend in legal development points towards stricter requirements for the promisee's duty to disclose information, particularly in consumer relations.

Disloyalty as an Invalidation Reason

In addition to the statutory invalidation reasons, case law has established that disloyalty itself can constitute a basis for invalidity. This presupposes that the disloyalty has influenced the other party's commitment to the contractual relationship.

The Supreme Court has confirmed this principle in both Rt 1984 p. 28 and more significantly in Rt 1995 p. 1460 (the Haughom case), demonstrating that disloyalty can lead to invalidity even in commercial contracts.

To determine whether there is disloyalty as an invalidation reason, it must:

1. Be established what level applies to loyal conduct in the relevant contractual relationship

2. Be assessed whether lack of information has been motivating for the contract formation

3. Be assessed whether the promisee should have understood that the information would be of significant importance

Conclusion

Formation defects constitute a central part of the invalidation reasons in Norwegian contract law. They are characterized by focusing on the formation of the agreement, not its content.

The rules on formation defects balance the need to protect the promisor with the concern for commercial security and the promise receiver's legitimate expectations. This balance is expressed through the distinction between strong and weak invalidity reasons, where the former can be invoked even against good-faith promise receivers, while the latter can only be claimed against promise receivers who are in bad faith or negligent.

In modern contract law, the general clause in Contract Law § 33 and the non-statutory principle of disloyalty as an invalidation reason have gained increased significance, especially in scenarios where classical invalidation reasons do not suffice.