Wednesday, January 3, 2024

Access the Danish market via Agency-, Distribution- and Franchising agreements

The foreign company will have to be well aware of the risks and benefits of the various alternatives. Agency- and distributorship agreements, allows the company to access the Danish market through an appointed commercial agent or distributor, who is familiar with the market. A franchising agreement however, makes the foreign company’s establishment and presence more direct in the Danish market.

Click here to read more about commercial contracts in Denmark

Lastly and in addition to the above, there is also an option for the foreign company to simply establish a Danish subsidiary. All this is covered more in detail in our article “How to start a business in Denmark“.

Agency- and distribution agreements are usually more widespread as the foreign company – who acts as the exporter – has minimal knowledge of the Danish market. The expertise from the local partner or intermediary (i.e. the commercial agent or distributor) will help limit financial risks. Franchising on the other hand is more suitable to an experienced exporter with a well-established product and who is looking for (i) a more permanent presence in the market, (ii) development and/or (iii) continuing increasing revenue streams.

Which option or route an exporter decides on when entering the market is usually based on the exporter’s experience and the desired degree of control. Nevertheless, agency-, distribution- and franchising agreements all have different characteristics and each entail individual risks and benefits.
In this article, we would like to support you as an exporter intending to access the Danish market by providing you with guidelines and some basic information about these three types of commercial agreements.

What you should know:

• In Denmark, the Danish Agent Act regulates agencies. However, Denmark has no specific laws regulating distributorship and franchising
• An agent’s ability to act with binding effect for the exporter requires authorization from the principal. Only when the principal authorizes the agent as a “commission agent”, can the agent  make transactions in its principal’s name
• Commercial agents in Denmark must be registered in the Central Business Register (CVR). However, VAT-registration is typically not necessary for commercial agents. The principal will generally collect and settle for VAT.
• Non-competition clauses are relevant to consider when retaining an agent.
• The prudent thing to do concerning distribution agreements is to draft as much as possible.
• Similar to commercial agents, distributors operating in Denmark must be registered in the Central Business Register (CVR). However, unlike commercial agents, distributors must also be registered for VAT in Denmark, as they will enter in to the agreement with the customer / third party buyer.
• The franchisor’s degree of control of the franchisee is normally limited by the franchising agreement.
• The franchisee should advertise itself as an independent businessperson, yet protecting, developing and marketing the brand as well as ensuring the adequate supply of the franchised products.
• There are no specific registration requirements for domestic franchises or for foreign franchisors doing business in Denmark. The same registration requirements as apply to all companies conducting business in Denmark.

The agency contract

Agencies are by default regulated by the laws of the country of the agent, and contain mandatory rules on requirements and restrictions applicable to the agent, as well as provisions on termination and remuneration. In Denmark, agencies are regulated by the Danish Agency Act, which is based on an EU-Directive applicable to all member states.

In an agency contract, the agent can either act as a “commercial agent”, which is defined as an independent, self-employed intermediary whose role is merely to negotiate the sale or purchase of goods or services on behalf of the principal (supplier) without being able to conclude the actual agreement on behalf of the supplier. Alternatively, the agent can act as a “commission agent”, whose authority includes both the negotiation phase as well as the actual conclusion of the transactions on behalf and in the name of the principal. Such fiduciary authority of the agent requires authorisation from the principal.

Irrespective of the type of agent, basic terms such as the scope of authority, conditions for amendment of the original provisions, remuneration, termination and non-competition should be regulated in the agency contract. This contract is highly encouraged to be in written form, however in the absence of a written agency agreement, the Danish Agency Act holds provisions providing a certain minimum of protection for the agent.  The agent’s scope of authority is fundamental when determining which party might ay be held liable in the commercial triangular relationship between the agent, the principal and the end-customer. We distinguish between “commercial agents” and “commission agents”. In the majority of cases, the principal will choose a “commercial agent” to negotiate contracts on his behalf. Only on certain special occasions will the principal choose a “commission agent” to negotiate and conclude transactions in the supplier’s name.

Contracts that have been validly concluded by the agent acting within his scope of authority, or that have been negotiated by the agent and ratified by the principal, will obligate the principal. On the contrary, contracts concluded by an agent who is exceeding his scope of authority are voidable and will not affect the principal – as long as the principal never ratified that contract. In such cases, the agent might even be liable to pay damages to the end-customer who in good faith entered into such agreement with the agent.

Commercial agents in Denmark must be registered in the Central Business Register (CVR). However, VAT-registration is typically not necessary for commercial agents, as it will be the principal who concludes the transactions with (and receives the payment from) the end customer, i.e. the principal will generally collect and settle VAT.

Commercial agents in Denmark must be registered in the Central Business Register (CVR). However, VAT-registration is not necessary for commercial agents, as it is the principal who concludes the transactions (and receives the payment from) with the end-customer, i.e. the principal will generally collect and settle VAT.

The agent will be entitled to a commission or agreed percentage, based on the value of the original transaction, the number of executed transactions and the general circumstances of the market. The agent is also entitled to remuneration for every successful transaction during the period of the agency contract, and often even after its termination.

Non-competition clauses is yet another relevant factor to consider when retaining an agent. This may be particularly relevant when retaining a “commission agent”, where the principal may want to consider prohibiting the agent from representing competing businesses in the Danish market.

The distributorship contract

Distributorship contracts, like agencies, are by default regulated by the domestic law of the distributor, unless otherwise expressly agreed to by the parties. Although there are no Danish acts specifically governing distributorships, the parties (and Danish courts) will to some extent refer to the local rules on agencies and apply them by analogy to the distribution contract.

An exporter of high-end goods may not want to see its exclusive products for sale in the cheapest Danish supermarkets.

Distributorship contracts entails a purchase of goods from the supplier (exporter) to the distributor for the resale of the goods to a third party (end-customer). The distributor will buy the goods from the supplier and resell them to the end-customer. Therefore, the supplier will not be able to reverse the sales concluded as it has transferred the title of the goods to the distributor and hence, the latter transaction of sales between the distributor and the end-customer remains valid.

Consequently, the exporter may want to exert some degree of control over the distributor to ensure the brand status. An exporter of for example high-end goods may not want to see their exclusive products for sale in the cheapest Danish supermarkets. Therefore, we see a natural tendency in distributorship agreements to draft rather extensive agreements. For example, the supplier may want to include certain obligations for the distributor, e.g., the promotion or distribution in the targeted territory, the guarantee of a privileged position in the territory, prohibition of parallel imports, etc.

Finally, like with commercial agents, distributors operating in Denmark must be registered in the Central Business Register (CVR). Additionally, distributors must also be registered for VAT in Denmark, as they will conclude the agreement with the customer (unlike commercial agents).

The franchising contract

Denmark does not have specific franchise laws, therefore franchising agreements are based on general contract law rules. However, the Danish Franchise Association has adopted the European Code of Ethics for Franchising, including general ethical principles, which are observed by all the members of the Association.

The franchising contract regulates a licensing relationship between the franchisor (owner, person or company that grants the license) and the franchisee (person or company to whom the license is granted), for the business operation under the franchisor’s trademark and trade name in Denmark. The franchisor will also provide the franchisee with an operating system, brand and support. However, the franchisor’s degree of control over the franchisee is in general limited to control over operation and supply, in accordance with the agreed terms under the franchising agreement.

Information and transparency is especially important within franchising. In the pre-contractual phase, best practice standards encourages the franchisor to provide the franchisee with a wide range of information, e.g. business method, success rate of other franchisees, etc. Please note, that the franchisor’s failure to disclose all relevant information can be considered a violation of the franchisor’s obligations under the Danish Market and the Contracts Act (culpa in contrahendo). Failure to loyally disclose relevant information to the franchisee may in severe cases result in the franchising contract being declared void with a consequent claim for compensation for damages to the franchisee.

Denmark does not have any specific franchise laws, thus franchising agreements are based on general contract law rules.

The franchisee is responsible for clearly advertising that it is in an independent businessperson, protecting, developing and marketing the brand as well as ensuring adequate supply of the franchised goods or services. In case of non-compliance with the franchisee’s obligations, the franchisor may be entitled to a compensation for damages from the franchisee.

The franchising contract should always include a license to use the franchisor’s IPR (Intellectual Property Rights), as well as provisions on the franchisee’s obligation to use these rights in compliance with the franchisor’s commercial practice or franchisor’s “Operations Manual”. In order to ensure compliance with the franchisor’s operational standards, the franchise contract will provide access for the franchisor to carry out (unannounced) audits and inspections.

In principle, the parties are free to agree on the terms of the franchise contract. However, considering the EU regulations on restrictions for “product-tying”, franchise agreements are normally limited to a period of 5 years with the option of renewal.

Finally, there are no specific registration requirements for domestic franchises or for foreign franchisors doing business in Denmark.

Do you want to know more about the possibilities of accessing the Danish market? Contact our specialists Nicholas Ørum Keller