Application of Section 36 of the contract act(s) between commercial parties in the Nordics

Section 36 of the Norwegian Contracts Act (the "NCA"), the Danish Contracts Act (the "DCA"), and the Swedish Contracts Act (the "SCA") authorises courts to modify or set aside unfair contractual terms if their enforcement would be unreasonable or unconscionable. In all three jurisdictions, the primary objective of this provision is to promote fairness, particularly to safeguard consumers. For completeness, the Norwegian version explicitly emphasises good business practices as a key consideration, distinguishing it from the Danish and Swedish counterparts.

The application of Section 36 of the Contract Acts of Norway, Denmark and Sweden in commercial contracts has been a subject of debate, especially regarding how restrictive the courts should be in applying it to business-to-business relationships. This article explores whether there may be a recent pan-Nordic development, challenging the highly restrictive application that has historically been seen in the Nordic countries.   

Despite the Swedish courts' mandate to modify or disregard contractual terms, the preparatory works emphasise that this possibility should be exercised with restraint, particularly in commercial contracts between business entities. Historically, this restrictive approach has been upheld by Swedish courts with support from legal scholars and practitioners.

Recent Swedish case law has challenged the traditionally strict application of Section 36 of the SCA in commercial agreements, as outlined in the preparatory works, particularly regarding the adjustment of liability limitations in contracts between commercial parties. This may suggest a shift away from the previously rigid restrictive approach toward a more flexible approach in commercial contexts.

In the newsletter "Section 36 of the Contracts Act – Nowadays Relevant in Commercial Contexts," published on January 26, 2024, by Carl Rother-Schirren and Hilda Melander of Schjødt's Stockholm office (available here), the authors explain that in recent years, Swedish Supreme Court rulings and arbitral awards have increasingly recognised the relevance of Section 36 in business-to-business contracts. The newsletter concludes by noting that it remains to be seen how much the Swedish trend will influence courts and practitioners in Norway and Denmark, where a more restrictive approach continues to prevail.

Notably, on 12 February 2025, Section 36 was applied by the Norwegian Supreme Court in the case HR-2025-251-A, to set aside an agreement in whole between commercial parties.

Historically, the application of Section 36 of the NCA in Norway has been limited in the context of commercial contracts between professional parties. Its primary focus has been on provisions that excessively limits a party's liability. In cases where a contractual provision significantly restricts liability, both ordinary courts and arbitral tribunals have used Section 36 to either interpret the provision narrowly or revise it to eliminate any unreasonable outcomes

In the aforementioned judgment of 12 February 2025, the Norwegian Supreme Court applied Section 36 to set aside an agreement in whole. The case involved six company founders, four of whom had agreed to sell their shares to the other two, with the intention that the two founders would later sell the entire company. However, the process was delayed, and at one point, it was believed that the company's value had significantly decreased. In response, the four founders accepted a settlement of 30% of the original amount they were promised. Unbeknownst to them, the two remaining founders were aware of a potential investor who valued the company at nearly ten times the amount they had communicated to the others. Shortly after the four founders agreed to the 30% settlement, the two founders sold the entire company for more than double the value of the original agreement.

The Supreme Court set the settlement agreement aside and granted the four founders payment in accordance with the original agreement. The Supreme Court found that there was a special level of trust and loyalty between the parties, both due to the cooperation in the founding of the company as well as a high level of cooperation in the sale proceedings. With a heightened level of loyalty, the Supreme Court concluded that the two founders unlawfully prioritised their own interests over the others by withholding vital information.

A more in-depth analysis of the judgement is available in our newsletter (available here)

Although this marks the first time the Supreme Court has set aside a commercial agreement using Section 36, it is likely that the same result would have been reached by Section 33 of the NCA, which is more commonly used when there is a question of withheld information. As such, the judgment does not necessarily indicate any new trend in Norwegian law but rather shows that the same result may be reached through different rules.

In Denmark, the traditional application of Section 36 of the DCA appears to remain largely unchanged.

While Section 36 of the DCA is primarily designed to protect consumers, it also extends to business-to-business contracts. However, caution must be exercised when disregarding or adjusting business agreements under this provision, as professional parties are generally assumed to have the ability to understand and manage the legal and economic consequences of their decisions. The Supreme Court articulated this perspective in the judgment U.2012.3007H of 28 June 2012.

The case involved the jewellery company P, which had entered into an agreement with the company L for the design of glass beads. The agreement stipulated that L's compensation would be calculated as a royalty based on P's total sales of glass beads, irrespective of the designer. P sought to have this clause invalidated pursuant to Section 36 of the DCA.

The Supreme Court considered that "[t]he royalty agreement is concluded between business owners and is a result of the parties' considerations regarding business risks and economic conditions. Consequently, and as there are no subsequent circumstances that make the royalty provision unreasonable, the Supreme Court finds no basis under Section 36 of the DCA to set aside clause 3.1 of the agreement, either wholly or partially".

As such, the Supreme Court upheld the restrictive approach concerning the application of Section 36 of the DCA to commercial contracts. 

The current question is whether this approach has changed the relevance of the 2012 judgment. In reviewing the most recent practices concerning business-to-business agreement, the Supreme Court ruling U.2022.2949 of 11 May 2022 offers a noteworthy conclusion. The case concerned a publishing agreement including rights to use compositions in musicals etc. which were not set aside under Section 36 of the DCA. 

The High Court justified its decision by stating that the agreements must be assumed to rest on a comprehensive balancing, which is the result of the parties' considerations regarding business risks and economic conditions. The Supreme Court upheld this decision.

The judgment not only upholds the restrictive approach in case law but uses essentially the same reasoning as the Supreme Court did in the 2012 case U.2012.3007H (mentioned above). In summary, recent case law from the Supreme Court of Denmark establishes that Section 36 of the DCA is still applied restrictively in contractual relationships between businesses.

While there has been no significant development in legal precedent, an emerging question in Denmark is whether such a shift may be on the horizon. In legal literature, there is a degree of "cautious optimism" regarding the application of Section 36 in professional relations. Professors Ole Hansen and Vibe Ulfbeck suggest that there may be a growing trend toward a broader use of Section 36 in commercial matters. They attribute this to structural and market changes that have led to increasing negotiation and resource imbalances in business agreements (see Lærebog i aftaleret, 2023, p. 126). It remains to be seen whether the traditionally restrictive approach will give way to a more flexible application in the near future. 

Contracting parties are naturally expected to fulfil the obligations they have agreed upon, this could be said to form a corner stone of contract law in most (if not all) jurisdictions. However, situations may arise where it would be unreasonable/unconscionable to enforce an agreement or a contractual term, even in a business-to-business contract. In such cases, Section 36 of the respective Contracts Act may provide an avenue. 

In all three jurisdictions, the primary objective of this provision still remains to promote fairness, particularly for consumers. The Supreme Court in Denmark has currently upheld the restrictive approach concerning the application of Section 36 of the DCA to commercial business-to-business contracts, whereas the Swedish and Norwegian courts have arguably adopter a somewhat more flexible approach. 

It remains to be seen whether a future will emerge in which the number of disputes rises, with parties seeking to persuade courts to revise or set aside their contractual obligations on the grounds of reasonableness.