Buying a Franchise: Understanding a Contract Governed by Foreign Law

Joining an international franchise network can give you access to an established business concept, but the agreement will not necessarily be governed by Danish law simply because your business is based in Denmark. A short choice-of-law clause can affect how your obligations are interpreted and what rights you have if the relationship breaks down. That is why you should examine the governing law before signing, rather than waiting until problems arise.

What does the agreement’s choice of law mean?

Choice of law is the parties’ agreement on which country’s law will govern the contract. If, for example, the franchise agreement states that it is governed by the law of the franchisor’s home country, the starting point is that the rules of that country will be used to interpret the agreement and assess the parties’ contractual rights.

This is not the same as jurisdiction or arbitration. Choice of law concerns the rules that apply; jurisdiction and arbitration concern where and how a dispute is resolved. An agreement can therefore combine foreign governing law with dispute resolution in Denmark. These provisions need to be read separately, even though they should be assessed together.

Find the clause in the agreement and write down the answers to three questions:

• Which country’s law has been chosen, and is the country or legal system clearly identified?
• Does that choice apply to the whole agreement or only to certain parts?
• Do the schedules and related agreements have their own choice-of-law clauses?

Do not assume that a contract written in Danish is governed by Danish law. The language of the contract and its governing law are separate matters.

Denmark does not require franchise agreements to be governed by Danish law

Denmark has no specific franchise legislation and no special requirement to register franchise agreements or franchise networks. General business registration requirements are a separate matter. Nor is there any franchise-specific disclosure legislation requiring a mandatory document to be provided before signing.

Where Danish law applies, the agreement is governed by, among other things, the Danish Contracts Act and general principles of contract law. Depending on the circumstances, the Danish Competition Act, Marketing Practices Act, Sale of Goods Act, Commercial Leases Act and Interest Act may also be relevant. General duties of good faith and disclosure may also require material information to be disclosed during negotiations, even though there is no prescribed franchise disclosure document.

As a general rule, the parties are free to choose foreign law. There is no Danish requirement for a franchise agreement covering a business in Denmark to be governed by Danish law.

However, this does not mean that all Danish or EU rules can be excluded. Certain mandatory rules may still apply, such as competition rules. Which rules apply despite the choice of law requires a case-by-case assessment. So do not simply ask your adviser to confirm that the choice is permitted; ask them to explain its practical consequences.

Have your rights assessed under the chosen law

The most important question is not whether foreign law is generally better or worse than Danish law. What matters is how your particular agreement operates under the chosen legal system.

Ask an adviser with the relevant expertise to review specific scenarios:

• Failure to deliver: What options do you have if the franchisor fails to provide agreed training or access to essential systems?
• Unclear provisions: How are conflicts between the main agreement and its schedules interpreted?
• Unfair terms: What scope is there to set aside or limit an unfair contract term?
• Claims and deadlines: When must you notify the other party of a problem or bring a claim to avoid losing your rights?

Under Danish law, section 36 of the Contracts Act may allow unfair agreements to be amended or set aside. However, it is applied cautiously in commercial relationships. You should neither rely on it as a guaranteed safety net nor assume that foreign law offers equivalent protection.

Ask for a short written assessment with specific recommendations for amendments. A general comment that the contract is standard for international franchise networks does not answer your questions.

Negotiate the governing law before the rest is finalised

You can propose Danish law, particularly if your operations, customers and investment are all based in Denmark. The franchisor, on the other hand, may want a single legal system to apply across its network. This is a point for negotiation, not a guarantee that your preference will be accepted.

If the franchisor insists on foreign law, obtain a quote for the necessary legal review before committing. Establish whether your Danish adviser can carry out the assessment or needs to work with a lawyer in the relevant country. Allow for any document translation costs as well.

Then check that the choice-of-law provisions are consistent across the franchise agreement and any separate agreements covering, for example, licensing or system access. Different choices of law are not necessarily inappropriate, but they can make an overall assessment more complicated.

Practical takeaway: Identify the governing law early, have its consequences explained through specific scenarios, and establish the cost of qualified advice. Sign only once you understand the agreement under the rules that will actually apply.