Enforcement by the principal of a claim for breach of a non-compete obligation by the contractor following termination of the B2B contract
Is a non-compete valid despite the failure to stipulate adequate compensation?
First of all, it should be pointed out that in the Polish legal order, compensation is generally due for compliance with a post-termination non-compete. In the case of persons employed under an employment contract, the stipulation of compensation for the establishment of a non-competition clause after the termination of the employment relationship is mandatory (in an amount not lower than 25% of the salary). In civil law relationships, especially between entrepreneurs, the issue of remuneration for compliance with a non-compete after termination of the contract is not clearly regulated and the court case law on this issue is not consistent. Two opposing positions have formed so far:
- according to the first one, the reservation of a post-contractual non-compete sanctioned by a contractual penalty without compensation for its observance is against equity and therefore invalid,
- according to the opposite view, a non-compete sanctioned by a contractual penalty without compensation for its observance is permissible because it is within the contractual discretion of the parties.
However, a detailed analysis of the jurisprudence should indicate that the prevailing view in the Polish legal order is that the parties may, within the limits of contractual discretion, conclude a non-competition clause in a b2b agreement without simultaneously reserving a financial equivalent. It should be noted that a non-compete clause without compensation for its observance, but with a reservation of a contractual penalty for its breach, is permissible if the parties have so agreed. This is because they may shape the rights and obligations arising from the contract as they see best, exercising their so-called contractual discretion.
Is the terms of the contract relevant when assessing whether a non-compete clause is valid?
It should be pointed out that, in view of the fact that b2b civil law contracts, unlike employment relationships, do not by operation of law guarantee compensation to the obliged party for the duration of the non-competition clause binding on him after the termination of the cooperation, and the court case law on this issue is not uniform, the content of the contract, and in particular whether it takes into account the principles of social co-existence, should be decisive in assessing whether a reserved competition clause without equivalent is valid. Circumstances that are taken into account include:
- whether the non-compete is not excessively long,
- whether the scope of the non-compete is so wide that it limits the earning capacity of the contractor,
- whether the non-compete is justified by the nature of the contract between the parties,
- whether the contractual penalty is adequate in relation to the contractor’s compensation provided for in the contract,
- whether the contractual penalty clause was unilaterally imposed by the principal using its contractual predominance.H2: How do I obtain the cancellation of a loan obligation?
What can the Principal claim from the Contractor in court?
The Principal may, by way of court proceedings, claim from the Contractor the amount of the contractual penalty stipulated in the contract and compensation to the extent exceeding the amount of the contractual penalty, if its damage exceeds that amount. However, it is worth pointing out that claiming a contractual penalty is much easier than claiming damages, as claiming damages (over and above the value of the contractual penalty) on general terms requires the Principal to prove fault, damage and its extent, as well as a causal link between the two.
Is there a risk that the Court will reduce the amount of the contractual penalty?
It should be noted that in cases of this nature there is a certain risk that the Court will award a contractual penalty to the Principal, however at a lower amount than the amount reserved in the contract. In order for this to happen, the Court would have to conclude that the grounds for reducing the contractual penalty existed in the case. The Polish Civil Code provides for the possibility to reduce the contractual penalty in two cases: if the obligation has been substantially performed or if the contractual penalty is grossly excessive.
All information regarding the issues described above can be clarified by our Polish litigation lawyers specialised in non-competition cases.