Franchising in Denmark—Selected Topics

Jacob Ørskov Rasmussen

Plesner Advokatpartnerselskab, Copenhagen, Denmark

jor@plesner.com

Franchising, as a business model and business expansion concept, has grown significantly in Denmark over the recent decades as a result of foreign franchise systems being established in Denmark as well as Danish companies expanding globally via the use of the franchise model. The franchise model is therefore now a commonly used business model in Denmark.

A major part of the franchise systems in Denmark is found in the fast-moving consumer goods sector, the retail sector, the fast-food sector and hotel sector, but also within the car rental and service sector.

Denmark is an easy market to enter for foreign franchisors, primarily due to the lack of heavy pre-contractual disclosure requirements and the lack of registration requirements.

Specific legislation regarding franchising in Denmark?

There is no legislation in Denmark that makes express provisions regarding the ongoing relationship between franchisor and franchisee, nor any governmental agencies regulating the offer and sale of a franchise. This means that every aspect of franchising is regulated by the general rules of law.

The Danish Contracts Act, as well as general principles of contract law, apply to franchise agreements. The overall principle in Danish contract law is the principle of freedom of contract. However, the drafting of a franchise agreement as well as the execution thereof, may be regulated by various mandatory rules. In particular, certain statutory laws such as the Danish Competition Act, the Sale of Goods Act, the Danish Marketing Practices Act, the Commercial Leasing Act, the Salaried Employees Act, the Interest on Overdue Payments Act and others may restrict the parties’ room for manoeuvre. It should be emphasised that the Danish competition rules in all relevant aspects are identical to the EU competition rules.

Among the rules to be considered in the Contracts Act when drafting (or carrying out) a franchise agreement is the general clause in section 36. Section 36 stipulates: ‘An agreement may be amended or set aside, in whole or in part, if its enforcement would be unreasonable or contrary to principles of fair conduct. The same applies to other legal transactions.’ Danish courts are reluctant to apply section 36 to commercial agreements, but it may be applied where there is an evident discrepancy between the parties’ bargaining positions.

Specific pre-contractual disclosure requirements under Danish law?

Under Danish law, there are no specific pre-contractual disclosure requirements. Consequently, there are no specific legal requirements to disclose certain information relating to the franchise to the prospective franchisee prior to entering into the franchise agreement. However, as a general principle, a duty of disclosure arises when reasonable commercial standards of fair dealing require that particular circumstances should be disclosed when entering into an agreement. A franchisor’s misrepresentation or mis-selling of the franchise concept/system prior to entering into the franchise agreement may therefore give rise to an action for breach of the agreement allowing the franchisee the ordinary remedies for breach. In a commercial relationship, the parties are also obliged to give information voluntarily if they know, or ought to have known, that the information is material to the other party.

The basis of liability for contractual damages on account of breach of an agreement is the concept of fault (culpa). In addition, liability requires that the non-breaching party has suffered a loss and that there is an adequate causal connection between the breach and the loss.

Damages are computed on an expectation basis (ie, the non-breaching party shall be put in the same position as if the agreement had been performed). Danish courts are reluctant to award damages for pre-contractual behaviour when no agreement has been entered into. However, the doctrine of culpa in contrahendo (fault in conclusion of a contract) is recognised as a general principle. As a starting point, precontractual liability requires a clear breach of the law in the form of an unfair behaviour or a clear breach of the rules applicable to the contractual process.

Registration requirements for franchisors and/or franchisees under Danish law?

There are no registration requirements for franchisors and/or franchisees under Danish law.

Application of the rules on commercial agency?

Under Danish law, franchisees are normally treated as independent distributors purchasing and selling goods in their own name and for their own account. The franchisors thus act as suppliers. There are no specific Danish rules on either distribution or franchise agreements. Under Danish law, a commercial agent does not act as an independent distributor for its own account and the main task for a commercial agent is to obtain quotations on behalf of the principal. Consequently, the risk that a franchisee could be deemed a commercial agent of the franchisor is very low.

Minimum term of the franchise agreement and right to renew?

Danish law does not require a minimum term for a commercial agreement, thus the franchisor and franchisee are free to determine the term and duration of the franchise agreement. The franchisor has no duty to renew the franchise agreement upon expiration of an agreed term or any agreed initial term unless such renewal right has been expressly agreed between the parties in the franchise agreement. The franchisee may request a renewal upon expiration of the term or initial term; however, the franchisor is entitled to deny such request from the franchisee.

Regulation of termination and right to compensation?

Danish law does not require a minimum period of notice for the parties to terminate a franchise agreement made for an indefinite term, and the parties are free to agree to the period of notice. If no period of notice has been agreed, a franchise agreement made for an indefinite term may be terminated by a reasonable period of notice taking all circumstances into consideration, including the duration of the franchise relationship. A notice period of six months is normally considered reasonable, including situations in which the parties’ relationship has lasted for several years.

Danish law does not recognise a compensation to the franchisee where the termination of the agreement is lawful, except possibly only in exceptional cases offering very special circumstances, which, according to case law relating to distributors, could be the case if the distributor has not been duly compensated for its efforts due to the (short) duration of the agreement. In a case before the Danish Supreme Court on 25 April 2000, a terminated dealer was, under very special circumstances, awarded compensation in the amount of 200,000 Danish kroner. In the ruling, the Supreme Court clearly stated that under normal circumstances, an independent distributor or dealer would not be entitled to any compensation upon termination of the distributorship or dealership.

However, in this specific case, the Supreme Court awarded the terminated dealer the compensation mentioned above with reference to the fact that the termination of the dealership had taken place with no reasonable explanation and without taking the dealer’s interests into consideration (very disloyal behaviour towards the terminated dealer), and with reference to the fact that the terminating supplier in question had taken over the customer base built up by the dealer, thereby preventing the dealer from being duly compensated for, among other things, its investments in marketing.