Articles

How to legally negotiate a non-compete clause in a commercial agreement?

by Lenka Katríková

An increasingly current topic that we face in practice is to negotiate non-compete clauses in various types of commercial agreements. Legal regulation of non-compete clauses in an employment agreement is significantly wide. On the other hand, legal regulation of a non-compete clause under the framework of commercial agreements are fundamentally absent. 

What is a non-compete clause?

To put it simply, the non-compete clause is a contractual arrangement whereby one contracting party undertakes for a certain period of time, not to engage in an activity which is competitive with the activities of the other contracting party.

A non-compete clause is regulated under the Slovak Commercial Code but is restricted to one type of contract, that being the Contract on Commercial Representation. In Section 672a of the Commercial Code concerning this clause, it states that: „A contract may contain a written agreement that the business representative must not conduct the activity which was the subject of commercial representation or a different activity which would be competitive in nature with respect to the principal’s entrepreneurial activity, for at most two years after the expiry of the contract within a designated territory or towards a designated range of customers in such territory, either on their own account or on another party’s account.”

The provision cited above is the only legal definition of a non-compete clause in commercial law, and its application requires the prior written agreement of both parties.

In which contracts is it possible to settle a non-compete clause? 

It seems obvious that in practice, a non-compete clause is agreed in other types of contracts, for example a work contract, contract for the provision of services, partnership agreement etc. Since the party who proposes to include a non-compete clause in a contract is more interested in restricting the other party in their respective competitive activities as much as possible, it is general practice to negotiate restrictions that are very broad, often without territorial or time specification. In light of the foregoing, legal proceedings have begun to raise questions as to whether, and under what conditions, such prohibition of competition may be validly negotiated in commercial contracts.

As an example, we can mention the decision of the Supreme Court of the Slovak Republic[1], which is often cited by the courts of lower instance in their decision-making activities. In that decision, the Supreme Court of the Slovak Republic confirmed that the court concludes that even the Slovak Commercial Code does not contain a legal regulation of the non-compete clause for other types of contracts than the Contract on Commercial Representation, it does not mean that the non-compete clause may not be validly negotiate therein. The Court thus confirmed the contractual freedom of entrepreneurs in negotiating this legal element.

Is it possible to prohibit competitive activities of entrepreneur unlimitedly? 

At the same time, the Court stated in the respective decision that the prohibition of competition cannot be unrestricted. Therefore, if a non-compete clause is negotiated in any commercial contract, its scope should always be governed by the conditions set out in the above-mentioned Section 672a of the Commercial Code. This is because the non-compete clause interferes with fundamental freedoms, in particular the right to freely entrepreneurial activity, and it is therefore necessary to regulate it.

The part of professional public does not agree with the above-mentioned conclusion, as they are of the opinion that the automatic application of Section 672a of the Commercial Code to other types of commercial contracts other than the Contract on Commercial Representation, incorrectly restricts contractual freedom in business relations. At the same time, the following could also be argued: if the legislator considered that the non-compete clause had to be regulated in other contractual relationships in this manner, he would clearly do so.

In this context, it should be noted that similar legislation which currently exists in the Slovak Republic was in the Czech Republic until 2012, but the Czech legislator in the new wording of the Czech Civil Code expressly lays down the limits of the non-compete clause in Section 2975, which may be negotiated in any contract.[2] These limits are the conditions that the non-compete clause must always include the territorial scope, area of ​​activity or circle of persons affected by the non-compete clause, and the non-compete clause may be negotiated for a maximum of 5 years.

In view of the above, it can be concluded that the regulation of the non-compete clause as chosen by the Czech legislator is appropriate and clearly removes any legal uncertainty about the limits in which may or may not be restricted the competitive activities of entrepreneur in types of contracts other than the Contract on Commercial Representation.

However, as long as the conditions of the non-compete clause for types of contracts other than the Contract on Commercial Representation are not expressly stipulated in legal regulation, it can be assumed that courts will continue to analogically apply the limits set out in Section 672a of the Commercial Code.

So what should a non-compete clause look like in a commercial contract?

A non-compete clause in a commercial contract should comply with the following:

  • written form of its arrangement;
  • a specification of a competitive activity that is prohibited;
  • determining a territorial scope of the prohibition of competitive activity;
  • set forth a circle of persons affected by the competition ban;
  • determination of the duration of the non-compete clause, which should not exceed 2 years after termination of the contract;
  • compensation for the prohibition on performing the competitive activity by a certain consideration[3].

In instances of non-compliance with the above limits on the restriction of competition, courts also analogically apply Section 672a (2) of the Commercial Code and they limit the non-compete clauses to the legally prescribed scope or declare invalidity of the whole clause.



[1]  Decision of the Supreme Court of the Slovak Republic of 30.09.2016, File No. 4Obdo 17/2016.

[2]  A special regulation in Section 2518 of the Czech Civil Code shall apply to the Contract on Commercial Representation.

[3]  This resulting from Section 669 (1) (b) of the Commercial Code.

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