Buying a franchise in Denmark: Know the limits of section 36 of the Contracts Act

When buying into a franchise network, it can be tempting to accept a tough contractual term on the assumption that “surely it cannot be enforced anyway”. That is a risky assumption. Section 36 of the Danish Contracts Act allows unfair agreements to be amended or set aside, but it does not guarantee protection against a bad deal. Here is a practical approach to distinguishing between legal protection and terms you should negotiate before signing.

What does section 36 protect you against?

Denmark has no specific franchise legislation. Nor is there a franchise-specific registration scheme or a statutory obligation to provide a standardised disclosure document before entering into an agreement. General business registration requirements and relevant permits are a separate matter.

Franchise agreements are governed by the Danish Contracts Act and general principles of contract law. Depending on the relationship, other legislation may also apply, including the Danish Competition Act, Marketing Practices Act, Business Lease Act and Interest Act. The absence of specific disclosure legislation does not mean that parties are free to withhold material information: general principles of good faith and fair dealing may give rise to a duty to disclose.

The starting point is freedom of contract. You and the franchisor therefore have considerable scope to agree how rights, obligations and financial risks should be allocated.

Section 36 of the Danish Contracts Act limits that freedom. It allows an agreement to be amended or set aside, in whole or in part, if enforcing it would be unreasonable or contrary to fair dealing. The assessment takes account of factors including the agreement’s terms, the circumstances in which it was entered into and subsequent developments.

It is therefore not enough simply to point out that a term costs you money. The question is whether, on an overall assessment, enforcing it would be unreasonable.

Why is this protection not a financial safety net?

As a franchisee, you will normally enter into the agreement as an independent business operator, not as a consumer. Danish courts are reluctant to apply section 36 to commercial agreements. A clear imbalance in the parties’ bargaining power may be taken into account, but it does not automatically make a term invalid.

The fact that the franchisor uses a standard agreement, or that you are new to running a business, does not in itself entitle you to have the agreement rewritten. Nor does a worse-than-expected financial outcome necessarily mean that the agreement is unfair.

Imagine, for example, a clause under which failing to complete a single administrative task triggers a substantial financial sanction. An adviser should examine the size of the sanction, its relationship to the failure and the rest of the agreement. But you should not sign in the expectation that a court will later reduce the amount.

Even if you have an arguable legal case, resolving the dispute may take time, professional advice and money. When deciding whether to proceed, you should therefore generally assume that the agreed terms will be enforced unless your adviser has assessed otherwise.

Examine potentially one-sided terms systematically

Do not spend the review trying to label the entire agreement as either “fair” or “unfair”. Instead, identify the specific clauses that could have disproportionate consequences for your business.

Create a simple table with four columns:

• Trigger: What has to happen before the clause applies?
• Consequence: What must you pay, do or refrain from doing?
• Justification: What legitimate interest within the franchise network does the term protect?
• Alternative: Could the same interest be protected through a less restrictive approach?

Look, for example, for clauses that give the franchisor broad powers to impose sanctions for minor mistakes, while equivalent failings by the franchisor carry no clear consequences. Also check whether several clauses could apply to the same event at once.

An imbalance is not necessarily unfair. The franchisor may have a legitimate need to protect the consistency of the franchise concept and the network’s shared reputation. Ask for an explanation before demanding that a clause be removed. The key is to understand whether the consequence is proportionate to the interest being protected.

Use the assessment to negotiate before buying

Ask your solicitor to distinguish between three questions: Is the term unclear? Is it commercially onerous but likely to be valid? Or is there a genuine basis for challenging it under section 36 or other rules? These three situations call for different solutions.

An unclear term should be clarified. An onerous term should be negotiated or factored into your decision. A potentially unfair term should be assessed on its own merits, rather than simply accepted with the thought that you might challenge it later.

Propose targeted changes: a precisely defined trigger, a proportionate cap on a sanction, or a restriction preventing overlapping consequences. At the same time, ask your adviser to assess whether the amendment works effectively alongside the rest of the agreement.

Practical takeaway: Use section 36 as a reason to ask searching questions, not as a reason to sign. Resolve significant imbalances before buying, and assess the franchise network on the basis of the agreement you will actually have to live with.