Buying a Franchise: Set Clear Limits on Your Liability

A franchise network relies on shared standards, but losses and compensation claims are not necessarily shared. Before buying a franchise in Denmark, you should establish which mistakes you are liable for and whether you must also pay for matters controlled by the franchisor. The agreement’s liability provisions can be just as important to your finances as the initial franchise fee.

Understand the legal framework and the role of the agreement

Denmark has no dedicated franchise legislation, no franchise-specific registration scheme and no statutory standard disclosure package that franchisors must provide before signing. General principles of good faith and duties of disclosure may nevertheless require material information to be disclosed.

Franchise agreements are governed by the Danish Contracts Act and general principles of contract law and the law of obligations. Depending on the business’s activities, other legislation may also apply, including the Danish Competition Act, Marketing Practices Act, Sale of Goods Act and Product Liability Act. Freedom of contract is therefore broad, but not unlimited.

For a typical damages claim arising from a breach of contract, key questions include the legal basis for liability, evidence of loss and the causal link between the breach and the loss. However, the agreement can alter how risk is allocated, for example through warranties, limitations of liability or specific payment obligations. So do not simply ask who made the mistake; also check who the contract requires to foot the bill.

Section 36 of the Danish Contracts Act allows unreasonable contract terms to be amended or set aside. However, the courts are reluctant to apply this provision in commercial relationships. Do not treat it as a reliable safety net for an excessively broad liability clause.

Map liability against control over each task

Start by drawing up a simple overview of who makes decisions, delivers services and controls the main aspects of the operation. For example, you may be responsible for local operations and customer service, while the franchisor supplies shared marketing materials, operating manuals or central systems.

Then work through some specific scenarios:

• An employee of your business damages a customer’s property.
• A mandatory central system fails, leaving you unable to accept orders.
• A network-wide campaign contains an error that triggers customer claims.
• A product you sell turns out to be defective or dangerous.

For each scenario, establish who the customer can claim against, who must handle the claim and whether you can subsequently recover the amount from someone else. These are separate questions. An internal agreement between you and the franchisor does not automatically limit a customer’s rights under mandatory legal rules.

Use this overview as a basis for negotiation: as far as possible, liability should reflect the ability to prevent the mistake. If you must follow a mandatory instruction, the agreement should also address liability if the instruction itself is wrong.

Read liability caps and indemnities together

A liability cap limits how much a party must pay under the agreement. But a cap is only useful if it is clear which claims it covers. Check whether the limit applies per incident, per year or across the entire term of the agreement, and whether related incidents count as a single claim.

Also look at how the cap is calculated. If the franchisor’s liability is limited to fees paid over the preceding few months, the protection may be modest during the start-up period. Compare the cap with realistic potential losses, rather than just the ongoing payments under the contract.

An indemnity clause may require you to cover certain claims or costs incurred by the franchisor. Ask your adviser to clarify:

• Whether the clause covers only matters for which you are responsible.
• Whether the franchisor’s own mistakes are excluded.
• Whether legal fees and settlement payments are included.
• Whether the indemnity is subject to the liability cap or sits outside it.

Also check exclusions for indirect losses and business interruption losses. These terms should be clearly defined; otherwise, the parties may disagree about which losses are actually excluded. Ask for a practical explanation of how the provisions would work in a situation such as a prolonged system outage.

Align the contract with insurance and claims handling

Send the liability clauses to an insurance adviser before signing. Business liability insurance will not necessarily cover every obligation you voluntarily accept in a franchise agreement. Clarify the scope of cover, exclusions, excess and policy limit, and ask for the assessment in writing.

The contract should also explain how claims are handled. Who must be notified, how quickly, and who may admit liability or agree a settlement? If the franchisor can settle a claim at your expense, negotiate a reasonable say in the decision and access to the supporting documents.

Complete your review with a consolidated overview of your maximum contractual liability, any exceptions and the insurance cover actually available. Ask a solicitor to assess any unclear or unlimited obligations.

Practical takeaway: Only sign once you can explain which claims you must pay, where your liability ends and how much your insurance can actually cover.