The Danish Act on Contracts contains a number of invalidity rules. A distinction is traditionally made between shortcomings of original (circumstances related to the conclusion of the contracts) and deficiencies in content (matters relating to the content of the contract).
20.1. Shortcomings
The Danish Act on Contracts contains the following rules relating to the circumstances related to the conditions at the time of the conclusion of the contract.
- Sections 28-29 about coercion
- Section 30 about fraud
- Section 31 about exploitation of another party’s situation (usury)
- Section 32 about miswriting/distortion
Common to these provisions is that they regulate situations where there already is a lack of will at the time of the submission. In “Basic Contract Law”, 4th edition, page 375, professor Mads Bryde Andersen, Doctor of Laws, summarises it is follows: “The fact that a declaration of intent suffers from a lack of will means that it does not express the issuer’s real wish to be obligated. It can either be that the issuer has misunderstood certain circumstances about the matters covered by the declaration of intent or that the issuer was under a certain pressure (e.g. coercion or exploitation).”
Such a lack of will usually imply that the entire agreement lapses as invalid. In order for this far-reaching legal effect to take effect, the Danish Act on Contracts requires, in all provisions mentioned, that the declaration of intent is “induced” by the circumstances that qualify the cause for invalidity. Se e.g. section 30:”A declaration of intent is not binding for the issuer if the person to whom the declaration has been made has caused it by fraud or has realised or should have realised that it was caused by fraud from a third party.”
20.2. Content deficiencies
The Danish Act on Contracts contains the following rules relating to content deficiencies in sections 33 and 36.
Section 33 reads:
”Even if a declaration of intention shall otherwise be regarded as valid, the person to whom the declaration was made may not, however, rely on the declaration if, as a result of circumstances existing at the time when he had notice of the declaration, and of which he must be deemed to have known, it would be against the principles of good faith to endorse the declaration.”
Section 36 reads:
(1) ”A contract may be modified or set aside, in whole or in part, if it would be unreasonable or at variance with the principles of good faith to enforce it. The same applies to other juristic acts.
(2) ”In making a decision under subsection 1 hereof, regard shall be had to the circumstances existing at the time, where the contract was concluded, the terms of the contract and subsequent circumstances.”
20.2.1. Section 33 of the Danish Act on Contracts
Section 36 is a relatively new rule (introduced in 1975), and the introduction of it implied that section 33 is now without substantial meaning, see Textbook in Contract Law, page 133. This is due to the more limited use due to the requirement that it must not only be unreasonable but outright contrary to ordinary honesty to enforce the agreement and due to the more limited access to take subsequent circumstances into account. The section is, however, still used from time to time in connection with cases of “undeclared work”, i.e. agreements where VAT and tax payment is avoided.
20.2.2. Section 36 of the Danish Act on Contracts
Section 36 of the Danish Act on Contracts – the so-called general clause – is today the most frequently used provision when an agreement is to be overridden or declared invalid.
The provision was last time amended in 1994 where section1 was changed from “A contract can be set aside in whole or in part” to its current wording: “A contract can be modified or set aside in whole or in part”. It appears from the report submitted in connection with the provision (the Legal Affairs Committee’s report on Bill no. L 27 of 8 December 1994) that a minority of the parliament was concerned that the amendment provided direct authority for the courts to change or amend agreed contractual terms between parties. The minority found that it was contrary to basic principles in Danish contract law that agreements are made between parties and that “it can have unintended effects if the courts can formulate contract terms positively without one of the parties having the opportunity to withdraw from the contract”. Thus, the minority wished to limit the access to amend contract terms to special situations. As it can be seen, the wishes of the minority were not followed as the majority emphasised that the Ministry of Justice had pointed out specific cases for which it could be appropriate for the courts to have the opportunity to amend or change a contract.
Thus, with the change of the law, a positive position was taken that it is not only in special cases that a contract can be changed. This means that there is now (since 1994) a more general access to correcting contracts that are or have become unreasonable in relation to one party.
20.2.3. Section 36 of the Danish Act on Contracts in business relations
Section 36 of the Danish Act on Contracts is often mentioned as a consumer protection rule, but as stated in the provision itself, it is not limited to consumer relationships but can be used on professional relationships as well. The Danish Acton Contracts previously contained a provision about conventional fines which has now been abolished, but this is, however, not an indication that conventional fines in business relationships are covered by section 36; on the contrary, the intention of the amendment was to extend the scope of the use for infringement in business relationships. See “Agreements and Intermediaries”, page 202, and “Basic Contract Law”, chapter 6.5.d, where both conventional fines and disclaimers of liability are mentioned as specific areas where section 36 of the Danish Act on Contracts can apply to business relationships.
A review of case law shows that VBA tends to lay down more concrete justifications and often seeks support from AB92/ABT93 and the specific agreements between the parties when justifying the conclusion, see section 5.6. The rulings made by VBA rarely relate to such comprehensive, extensive and complex contract law issues as those discussed here. Therefore, it is relevant to highlight a number of recent Supreme Court cases illustrating the parameters that are crucial when assessing whether a contract can be overridden or set aside in Danish law.
20.2.4. Case law refusing overriding agreements under section 36
It is important to keep in mind that section 36 in the Danish Act on Contracts does not intend to exempt businesses or commercial parties from identifying and relating to possible changes of the risk they assume. See e.g. a recent Supreme Court judgment printed in UfR 2002.3997H where the Supreme Court rejected overriding an agreement under which a designer was entitled to a 12% royalty of the total turnover/revenue of jewellery for the jewellery company Pandora, whether created by the designer or by others. The agreement had a special justification which Pandora would have benefitted from if the turnover had been less, and the Supreme Court found that it was an agreement between two equal partners.
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However, the principle that business partners have an extensive duty to assess the risks is an expression of reluctance to apply section 36 of the Danish Act on Contracts to override a contract in its entirety unless it is a question of e.g. abuse of a position of power, see “Basic Contract Law”, page 422.
The fact that one party is suffering from liquidity problems is not in itself sufficient to override or disregard an unfavourable agreement, entered into under financial distress, as unreasonable. See e.g. U2001.1474H which dealt with an agreement between a shipping company and a master on the rental and purchase of vessels. Due to the master’s liquidity problems, the shipping company entered into a favourable agreement about repurchasing one vessel and leasing another. By votes 4-1, the Supreme Court rejected to override the agreement as unreasonable on the grounds that the agreement was a result of negotiation by professional parties.
In U2014.558 H, a position is taken on a situation where, in the Supreme Court’s view, unfair action has been taken by one party. This was a situation where a company (M) had collaborated with S, and the consulting company of S (I) had carried out an extensive product development on the basis of an oral agreement which ceased. After a written agreement had been entered into according to which M were to pay an amount of DKK 1,000,000 to S, S terminated the collaboration after a few months and entered into an agreement with M’s former employees instead. M required to receive the amount already paid back, but as M had demonstrated that the agreement could be terminated with short notice, there was no basis for overriding the agreement on payment despite the established, unfair conduct of S. The judgment shows that the fact that there has been unfair action from a party does not in itself necessarily lead to a breach of an agreement. It has probably been of importance that in the first instance, operation was established based on an oral agreement and that the company had completely neglected to uncover the risk that the seller legally took advantage of the opportunity to terminate the cooperation after receiving payment.
A number of rulings, including among others U1999.1161 H and U2006.632 H, emphasise what is customary in an industry when they reject overriding contract terms as unreasonable.
The conclusion of a review of rulings refusing to apply section 36 of the Danish Act on Contracts is that the possibility of anticipating or hedging the risk, the parties’ equal balance of power and possibly compliance with industry standards block the application of section 36.
20.2.5. Case law overriding agreement pursuant to section 36 of the Danish Act on Contracts
In U2004.2400 H, the Supreme Court overrode an agreement about conventional fines on the grounds that the amount of the conventional fines was significantly higher than what the contractual amounts could justify. The Supreme Court further emphasised that no loss of this magnitude was probable. The conventional fine was reduced to approximately 15% of the agreed amount. It is worth noting that the Danish Maritime and Commercial High Court, which decided the case in the first instance, emphasised that the size of the fine was determined following negotiation. Also, in U2015.2434 H, the Supreme Court reduced an agreed conventional fine as unreasonable because it was disproportionate to the breach. In other words, the Supreme Court applies a principle of proportionality.
It is stated in ”Basic Contract Law”, page 429, that: “A factor that plays a significant role in the application of section 36 is the content of background rights, see section 1.1.d. As stated in NJA 2011.67, it cannot be ruled out that a condition that has become a part of the contractual basis as a result of a dispositive legal rule can be contract-censored, cf. also Torgny Håstad’s contribution in NJA 2010.467. This option can e.g. be relevant in assessing the validity of a disclaimer, cf. p. 437f.” On page 437, it is explained that it is seen that the courts allow agreed limitations of liability to lapse based on preconditions.
Of particular interest is an older Supreme Court ruling, U1973.544 H where a disclaimer in a construction agreement according to its wording probably also included investment losses etc. which were due to the construction delay as the delay was a result of “demonstrable and significant negligence from the Employer”. As it appears, the ruling is from before the introduction of section 36, and the ruling is thus decided on the basis of a restrictive interpretation of the contract, but it illustrates that the courts are more likely to override a disclaimer when the party benefitting from it has shown negligence after the conclusion of the contract and thereby inflicted a loss on the other party. The fact that the ruling has been handed down based on case law only makes it more interesting – it illustrates that the courts, even without support from the legislation, find it reasonable that demonstrable and significant negligence regarding time conditions from the employer is sanctioned with lapse of the disclaimers.
Recent rulings that emphasise that subsequent circumstances can be particularly attributed to one party are e.g. U2000.632 H, see below.
In ”Agreements and Intermediaries”, page 214, it is stated: “Information that a given contract term is not usual within the industry may, conversely, point in the direction of a breach pursuant to section 36 of the Danish Act on Contracts.” The authors review a number of judgments, including U2012.533 H, which deals with a situation where a contracting party deviated from his own contractual practice in a direction which was unfavourable to the co-contractor. There was an ongoing business relationship regarding the delivery of pigs. According to the overridden condition, the pig trader was to receive payment for delivered pigs according to the list price for pigs with the highest SPF health status. Sinc e the price paid by the pig trader when he purchased pigs was determined based on the actual health status of the pig, this condition would imply that his profit was increased if the quality of the pigs that he delivered was lower which was contrary to his normal practice.
20.2.6. Summary, section 36 of the Danish Act on Contracts
There are no examples in case law where section 36 of the Danish Act on Contracts has been used to completely reject an agreement of a business relationship, nor are there any examples that it has been used to override a settlement agreement.
On the other hand, there are – especially after the change in the law in 1994 – examples of the provision being used to override individual provisions. As stated above, it is not in itself sufficient for a breach that a contract term is inappropriate or inadequate or that a party has acted unfairly. There must be something that qualifies overriding a clause. That “something” can e.g. be that an amount limitation of a limitation of liability was disproportionate and therefore unreasonable. That would be in line with the way conventional fines are treated. Although the fact that there is a limitation is not in itself unreasonable, it may be that the limitation of the amount is unreasonable.
However, it is worth bearing in mind that it is a very basic condition for the application of section 36 that one can convince the courts that the breach of loyalty and disclosure is of such a nature that the agreed limitation of liability can be overridden as being unfair.