Milewska Legal

Non-competition clause in civil law agreements

28 March 2022

The non-competition clause is widely applied to employment agreements (both during their term and, above all, after termination of employment). The non-competition clause after the termination of the employment agreement is strictly linked with the obligation of paying the employee a compensation for refraining from competitive activity in the amount of at least 25% of his salary. This minimum level of employee protection is guaranteed by the Labour Code.

Nevertheless, it is also possible to conclude an agreement prohibiting the conduct of competitive activity in other types of legal relations than an employment agreement. However, in the case of a non-competition clause in civil law agreements, is it necessary to pay compensation for refraining from competitive activity? Will the contractor bear the same liability as the employee for breaking the non-competition clause?

 

Boundaries of the contractual freedom with non-competition clause in civil law agreements

The advantage of an employee employed under an employment agreement is the fact that the labour code precisely indicates what the non-competition clause may apply to (inability to work for an entity running a competitive business and to run own business in such a scope). In addition, it makes the possibility of introducing a non-competition clause after the end of cooperation conditional on access to particularly important information and receipt of compensation from the employer (failure to pay compensation by the employer releases the former employee from the obligation to refrain from competitive activities).

There are no such clear rules for the contract of mandate and management contract. This does not mean, however, that there are no limits to contractual freedom. When defining the framework of the competition clause, one should be guided primarily by the principles of social coexistence, in other words, the principles of rightness and justice. Therefore, when introducing a non-competition clause, the interests of the principal (enterprise owner) and the contractor (manager) must be balanced and analysed. For example, prohibiting the undertaking of competitive activities after the termination of the agreement between the parties without an appropriate equivalent – e.g. in the form of compensation – was recognized by the Supreme Court as a decision inconsistent with the principles of social coexistence (number of the verdict: III CKN 579/01). Therefore, it should be remembered that although no provision introduces an obligation to pay compensation for refraining from competitive activity by the former contractor or manager (who was not an employee), the lack of such an equivalent with the simultaneous application of the non-competition clause may be considered contrary to the principles of social coexistence, in other words, it is simply unfair and leads to an imbalance of the parties. Going further – if the non-competition clause without adequate compensation is found to be contrary to the principles of social coexistence, it will simply be invalid and not binding for the former contractor or manager. Of course, it is possible to introduce a different kind of compensation for refraining from competing activities than paying a certain amount. It may be, for example, the transfer of valuable ownership of movable property, or enabling further use of the company’s benefits, despite the termination of cooperation. It is important that both parties recognize a given form of compensation as actually equivalent to the non-competition clause introduced.

 

Consequences of breaching the non-competition clause by the contractor or manager

As far as the consequences of breaking the non-competition ban are concerned, the general principles should be followed, unlike the labour code, which includes its own regulations in this regard. This means that the parties can agree on various consequences of breaking the agreement. They may introduce, for example, a contractual penalty of a specific amount and such rigor is most often stipulated in agreements. The contractor or the owner of the enterprise may also apply for compensation if, as a result of breaking the non-competition clause, he suffered material damage (e.g. lost a customer), and in some cases even for compensation for non-pecuniary damage (if as a result of the former contractor or manager breaking the non-competition clause, for example, he has suffered a significant image loss).

 

And when it is the principal who does not fulfill his obligations?

By reversing the situation, where it is the principal or the owner of the enterprise who does not pay the due compensation for refraining from competing, this prohibition simply ceases to apply.

 

Summary

The contract of mandate and the management contract, like other civil law agreements, are outside the regulations of the labour code, which, in short, means that the contractor is not protected to the same extent as an employee. On the other hand, these agreements are characterized by much greater freedom and flexibility, which is usually a great advantage for entrepreneurs, especially those who want to introduce further restrictions on the other party under the cooperation agreement. Nevertheless, it should be remembered that the contractual freedom  does not override the general principles of social coexistence and no agreement may lead to gross detriment to one of the parties.

Didn't you find the answer to your question?

contact me

Scope of services

milewska.legal© 2022