Franchising in Denmark: Agree Reasonable Limits on Liability

When expanding your existing business into a franchise network, you need to do more than describe what each party will provide. You must also decide who bears the financial loss if an agreed obligation is not met. A limitation of liability can make risk more manageable, but broad, standard wording can create a false sense of security. Here is a practical approach to defining liability before you enter into your first franchise agreement.

1. Map out obligations before considering losses

Start with the specific commitments your business will make to the franchisee. These might include access to a booking system, the supply of equipment or ongoing advice. Any limitation of liability should be assessed alongside these obligations, rather than treated as a standalone section at the end of the agreement.

Create a table with four columns:

• Obligation: What must be provided, by whom and when?
• Potential failure: What specifically could go wrong?
• Potential loss: What costs or lost revenue could result?
• Control: Who is best placed to prevent the failure and limit its consequences?

If, for example, the franchisor selects and provides a mandatory booking system, the agreement should explain exactly what the franchisor is undertaking to provide. Is it simply arranging access, or also ensuring support and certain functions? Uncertainty about the service cannot be resolved simply by stating that the franchisor is not liable for losses.

Distinguish between your own services and those provided by external suppliers. A supplier’s exclusion of liability does not automatically become part of the relationship between franchisor and franchisee. Check whether you are promising more than you can require the supplier to deliver or compensate you for.

2. Apply the Danish legal framework correctly

Denmark has no specific franchise legislation and no dedicated registration scheme for franchise agreements. These agreements are governed primarily by the Danish Contracts Act and general principles of the law of obligations. Other legislation, including the Danish Sale of Goods Act and Product Liability Act, may apply depending on the activities involved and the particular claim.

The starting point is freedom of contract, but this is not unlimited. Under section 36 of the Danish Contracts Act, an agreement may be amended or set aside, in whole or in part, if enforcing it would be unreasonable or contrary to fair dealing. This provision does not guarantee that a business will subsequently be able to escape an onerous clause.

An allocation of liability between the parties does not automatically remove the rights of customers or other third parties either. If, for example, a customer brings a product liability claim, it must be assessed under the relevant rules. The franchise agreement can govern the parties’ relationship with each other within the limits of the law, but it cannot simply exclude the customer’s claim.

Nor does Denmark require a specific statutory franchise disclosure document. General duties of loyalty and disclosure may nevertheless require material information to be disclosed. Known problems with a core service should therefore not be hidden behind a general exclusion of liability.

3. Make the limitation clear and measurable

A liability cap is only useful if both parties understand how it works. Avoid inserting a fixed amount or a reference to fees paid without testing the consequences.

At a minimum, the agreement should clarify:

• Whether the cap applies per event, per contract year or in aggregate over the term of the agreement.
• How multiple claims arising from the same failure are treated.
• Which payments are included if the cap is calculated by reference to fees.
• How the cap is calculated during the start-up period, when few fees have been paid.
• Whether the limitation applies to both parties, and why any differences are necessary.

Also describe the types of loss covered. Terms such as ‘indirect loss’ and ‘consequential loss’ should not stand alone if the parties expect different outcomes. Address explicitly, for example, business interruption losses, loss of profit and reasonable costs of temporary solutions.

Keep damages separate from other claims. If a service is never provided, the question of repayment is not necessarily the same as the question of damages. The agreement should therefore explain how the liability cap interacts with rectification, repayment and other remedies for breach of contract.

Obtain specific legal advice on exceptions, including intentional misconduct, gross negligence and liability that cannot lawfully be limited. Standard wording will not be suitable for every franchise concept.

4. Test the clause against specific scenarios

Before using the agreement, work through realistic scenarios with your adviser and insurance intermediary. Examples might include defective equipment, incorrect advice or a core digital service that is not provided as agreed.

For each scenario, ask: Which obligation has been breached? What loss can be substantiated? Which limitation applies? And is insurance cover actually available? Do not assume that an insurance policy covers every liability you accept under the contract.

Then go through the clause with the franchisee before signing. The aim is not to promise a risk-free working relationship, but to make the consequences clear and establish a sound basis for the franchise network.

Practical takeaway: First map out your commitments, then test the liability cap against specific losses, and finally have the agreement, applicable law and insurance checked to ensure they work together.