Nullity of non-compete clause

What are the current issues of the nullity of a non-compete clause?

 

Related to the change of legal regulation it is always necessary to consider whether the so-far formulated jurisdiction findings shall be applied on the legal cases governed by the recent legal regulation. E.g. in the Judgement File No. 21 Cdo 2/2012 of 28 November 2012 the Supreme Court explained the non-compete clause may not be lawfully negotiated when the content of the agreement contains an agreement on the financial settlement below the statutory minimum level and therefore when the non-compete agreement does not contain financial settlement at least at that amount, the whole non-compete agreement is contrary to law (Section 18 of the Labour Code, Section 39 of the Civil Code) and thus null, and the nullity is relative (Section 20 of the Labour Code). Will these findings be sufficient at the new legal regulation? We do not think so, based on the facts stated below.   

 

Under Section 310 (1) of the Labour Code it is applied that: “If the non-compete clause, binding the employee to refrain from gainful occupation which would be in accordance with the subject of the employer´s activity or which would have a competitive character against the employer for a definite period after the end of the employment but for a maximum of 1 year,  was negotiated and an obligation of the employer to provide the employee with adequate financial settlement, at least in the amount of one half of average monthly earnings, for each month of the fulfilment of the obligation, is a part of the non-compete clause. The financial settlement is due backwards for a month period, unless agreed otherwise by the contracting parties.”  

 

The Labour Code does not contain any own full regulation of the legal transaction in labour relations (cp. i.a. Title V “Some provisions on legal transaction”), the legal form in the alternative stated in the Civil Code (Section 4 of the Labour Code) shall be used in this case.

If the amount of financial settlement in the non-compete clause is negotiated contrary to Section 310 (1) of the Labour Code, that means in a lesser amount than the adequate amount, the non-compete clause in the part related to this arrangement (Section 576 of the Civil Code) is partly null for being contrary to law (Section 4 of the Labour Code in connection with Section 580(1) of the Civil Code), as the purpose and objective of the law (i.e. special legal protection of employee´s status as a weaker contracting party) requires that [Section 1a(1)a) of the Labour Code] and at the same time it violates public policy (Section 1a(2) of the Labour Code, cp. Section 1(2) of the Civil Code). We believe that in such case it is an absolute nullity, as such arrangement evidently violates public policy as required (Section 588 of the Civil Code).

Such finding is i.a. based on the text of the explanatory report to the Act No.
303/2013 Coll., which changes some acts in connection with the adoption of the private law recodification: “Provision Section 580 of the New Civil Code will be important for labour relations. As it implies that a legal transaction which goes against good manners is null as well as legal transaction which contravenes a law, if required by the purpose and objective of the law. Such explanatory rule corresponds with basic principles of labour relations (Section 1a of the Labour Code). The current adaptation of Section 18 of the Labour Code, which expresses priority of relative nullity of legal acts in term of their content before their absolute nullity in labour relations, may not succeed in the Labour Code in the future.”

For the sake of procedural caution we recommend employees to better appeal the nullity in the limitation period of three years (Section 629(1) of the Civil Code) starting from the day following the day of termination of the labour relation (see the Judgement of the Supreme Court File No. 21 Cdo 2569/2015 of 04 May 2016) in case that the courts would reach an opposite conclusion, and when it applies to relative nullity.

 

As suggested above, the defect in question does not cause the nullity of the whole non-compete clause. Such finding results from Section 577 of the Civil Code which states: “If the reason for nullity is only in unlawful determining of quantitative, temporal, spatial or other scope, a court shall change the scope so that it is consistent with an equitable arrangement of rights and duties of the parties; in doing so, the court is not bound by the parties’ motions, but shall consider whether a party would have made the juridical act had the party ascertained its nullity in time.”

An employee should at first claim a change of determination of the illegal scope of the financial settlement with an application at the Court, he may also require the settlement higher than one half of average monthly earnings, for each month of the fulfilment of the obligation, the court is not bound by his bill. “The period for the right to suggest a change of the content of the legal transaction is not established by the law, it is concluded that such right is subject to the lapse in general limitation periods under Section 619 and 629(2).” The prayer for relief may read e.g.: “The financial settlement negotiated in the non-compete clause concluded on xxx between the Plaintiff and the Defendant amounting at ABC for each month of the fulfilment of the obligation shall change to XYZ on the day of legal force of this judgement for each month of the fulfilment of the obligation.”

 

 


It will not be either an action for performance or declaratory action, but the so-called legislative action (the Court´s decision will have a constitutive character with the ex nunc effects). “Such decision is not order for the enforcement of decision (Enforcement Order), unless the commitments changed by the decision were duly met, only at that time the authorised person may claim his right by filing an action for performance [Section 80(b) of the Civil Procedure Code].“

Regarding the fact that in labour relations the principle is applied that: “The nullity of legal act may not be prejudicial to the employee, if he did not cause the nullity exclusively.” (Section 19(3) of the Labour Code, the Court should result from that rule when deciding whether the employer would accede to conclude the non-compete clause, if he identified the nullity on time, because the abatement of action (without the employee exclusively causing the nullity of arrangement on the amount of financial settlement) would be detrimental to the employee.

In accordance with the jurisdiction it must be emphasized that: “When judging the question if any participant of the contract (agreement) negotiated in labour relations caused its nullity, it is impossible to result (automatically) without other matter from the finding that at a bilateral legal act its nullity was not caused (at all) by only one participant, when the declaration of both parties’ will is necessary for the conclusion of a contract (agreement), because in such case the institute of relative nullity of contracts (agreements) may not be applied already on the basis of an argument that without the affirmative will of the participants the contract (agreement) should not be concluded and that the nullity of the contract (agreement) was caused by both parties by concluding the contract (agreement) (cp. the legal opinion expressed in the Judgement of the Supreme Court of 24 February 2000 File No. 20 Cdo 934/98) although the legal regulation included in the provision Section 20 of the Labour Code undoubtedly relates to (and especially to) the bilateral legal acts. The nullity of the bilateral legal act may not be caused by mere participation during the conclusion of a contract. When the contract (agreement) is affected by the reason of nullity, it is always necessary – taking account of circumstances of the case – to focus on the fact how the participants specifically (really) participated in the formation of the content requirements, especially who and how “caused” the contract (agreement) was marred by an error which causes its nullity. The one whose participation in the contract (agreement) lied in a mere adoption of proposal (offer) from the second participant, could not have caused (co-caused) the nullity of the concluded contract (agreement).” (see the above mentioned Judgement of the Supreme Court File No. 21 Cdo 2569/2015 of 04 May 2016).

 

 

 

 

The article was published at EPRAVO.CZ on 07 February 2018.