DENMARK: An Introduction to Dispute Resolution
Dispute Resolution in Denmark
The Kingdom of Denmark comprises Denmark, Greenland and the Faroe Islands, which generally share a common legal system and culture. The Danish court system consists of 24 district courts; the Courts of Greenland and the Court of the Faroe Islands; the Maritime and Commercial High Court; the Eastern and Western High Courts; and the Supreme Court.
Institutional and ad hoc arbitration are the predominant dispute resolution forums for resolving larger commercial disputes in Denmark. Arbitral proceedings are governed by the Danish Arbitration Act, which is based on the UNCITRAL Model Law of 1985. Denmark is also a contracting state to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The two major domestic arbitration institutions are the Danish Institute of Arbitration and the Danish Building and Construction Arbitration Board.
2023 in review
For the eighth consecutive year, Denmark was ranked first on the World Justice Project’s Rule of Law Index in 2023. In recent years, however, the court system has been challenged by increased case processing time, which is a pressing matter to be dealt with if the ranking is to be maintained. In response to the challenges, a committee set up by the Ministry of Justice presented several recommendations on the reform of the court system in 2023, and a political agreement has been reached providing an additional DKK2.3 billion of funding to the courts in the coming years.
Six landmark cases from 2023 are highlighted below, within the areas of management liability, energy trading, due process, liability in M&A transactions, and professional liability.
Hesalight
In March 2023, the Eastern High Court found that the former CEO and certain members of the board of directors of the LED company Hesalight had acted negligently in the organisation and management of the company and were liable for a loss of DKK200 million following the company’s collapse. Contrary to the district court, the High Court dismissed the claim against the auditor based on a lack of causation between the negligence and the loss. Hesalight has been one of the most spectacular busts in recent Danish corporate history, leading to one of the most notable management and auditor liability cases.
Energy trading scandals
Energy prices have fluctuated dramatically in Europe in recent years, and the turmoil in the energy market has created both difficulties and opportunities for many businesses. In 2023, two energy trading scandals came to light, based on the challenging market conditions.
In April 2023, several senior individuals of a power trading company were charged with manipulating prices on the power exchange between March 2021 and March 2023. The individuals are believed to have earned illegal profits in the triple-digit million range and potentially face sentences of up to six years in prison.
Also in April 2023, a leading power trading company terminated the employment of three traders who had each earned a bonus of up to DKK300 million based on trading activities in 2022, which generated a windfall profit for the company. The company claims that the bonus agreements were invalid and were entered without the board of directors’ knowledge. One of the former employees has subsequently initiated a court case against the company claiming wrongful termination and payment of the bonus.
Cable Collaboration
In October 2023, the Supreme Court rendered several significant procedural rulings on due process in the criminal cases against the former Minister of Defence and the former head of the Defence Intelligence Service (FE), concerning alleged breaches of secrecy and disclosure of state secrets regarding a cable collaboration between Denmark and the USA. The cable collaboration was reported in the media in 2021, where it was revealed that the US intelligence agency NSA had used a collaboration with FE to intercept Danish internet cables and spy on politicians in Europe. The prosecution had limited both the accused’s and the public’s access to detailed information about the criminal cases with refence to national security concerns.
In its rulings, the Supreme Court overturned decisions from the lower instances and determined that:
- the former head of FE had the right to receive the indictment
- the cases should be conducted partly in public; and
- the case against the former minister should be tried by a jury, given the political nature of the case.
Following the rulings, the prosecution withdrew the cases as the prosecution allegedly did not consider it secure to present classified information in the proceedings. The prosecution has subsequently received massive criticism of its conduct of the cases.
Gram Equipment
In November 2023, the Maritime and Commercial High Court dismissed in a split vote a damage claim of approximately EUR87 million against Swedish private equity fund Procuritas and its former managing partner, among others, in relation to the sale of Danish company Gram Equipment in 2017 to Norwegian private equity fund FSN Capital. Prior to the court case, an arbitral tribunal had found in 2020 that the seller entity controlled by Procuritas was liable to the buyer entity controlled by FSN Capital for willful misconduct in relation to financial manipulation of Gram Equipment in the sales process. Subsequently, the seller entity went bankrupt and the question for the court was whether Procuritas and other key parties could be held liable for FSN Capital’s loss on a non-contractual basis. In the split vote, the majority and minority opinion disagreed on several key points, such as the standard of liability, calculation of loss and whether a report on valuation submitted by an expert panel was substantially flawed. The decision has been appealed, and the final judgment is likely to develop the standard for non-contractual damage claims in M&A transactions.
Cum-Ex scandal
In November 2023, the Supreme Court found that a law firm was liable for the Tax Agency’s loss of DKK400 million as part of the Cum-Ex scandal. The Tax Agency had claimed approximately DKK700 million on the basis that the law firm – through a legal opinion issued to a German bank – had contributed to the bank’s fraud against the Tax Agency. The Supreme Court found that the transactions described in the bank's model were without commercial basis, and the lawyer who issued the legal opinion must have known that there was an obvious risk that the bank was developing a model of unjustified refunds of dividend tax. On that basis, the lawyer had negligently disregarded the interests of the Tax Agency. The amount of damages was reduced to DKK400 million as it was not foreseeable for the law firm that the bank’s refunds of dividend tax were based on fictitious transactions and not actual shares and dividends. The judgment is likely to develop the standard of liability for law firms vis-à-vis third parties in relation to legal opinions.
Outlook for 2024 and beyond
Looking into 2024, certain trends seem to be emerging throughout the legal landscape.
AML sanctions
Following changes in legislation in 2019 and 2020 regarding calculation principles for fines and administrative powers to issue fines, one of the major challenges is how the Financial Services Authority (FSA) and the Special Crime Unit (SCU) seek to impose significantly increased fines for AML violations. Several cases are pending, but except for two minor cases no fines have been settled or issued under the new regime. The cases raise many legal issues, and the financial institutions seem to take a more aggressive stance against what is perceived as disproportionate and unfounded application of the new legislation.
Corporate liability
In recent years, focus on tightening corporate liability has increased, which in part has been prompted by the largely unsuccessful and extremely costly suite of litigation by Finansiel Stabilitet, the Danish state’s financial unwinding vehicle, in its attempt to make directors liable for bank failures in the aftermath of the financial crisis in 2008. In July 2023, an act on the tightening of management liability in financial undertakings came into force, which criminalised severe or frequent management failures that result in loss or risk of loss or that significantly increase the risk of the financial undertaking being exposed to or used as part of a crime. In addition, the act tightened the civil liability of management by imposing a reversed burden of proof and strict liability in certain circumstances.
Indemnification
Indemnification of management has been a focus area for many companies in recent years because of increasing prices on and/or limited coverage under D&O insurance, as well as increased risk exposure for management. It has been debated whether companies could adopt a general indemnification of management as an alternative or supplement to D&O insurance. In April 2023, the Business Authority published new guidelines setting out the process and criteria for adopting a general indemnification. The new guidelines will prompt many companies to revisit previously adopted indemnification resolutions prior to the next annual general meeting, in order to ensure compliance with the guidelines.