Liquidated damages in non-competition agreements 13 November 2018

Labour law

According to the Hungarian labor law rules the employer and the employee may conclude a non-competition agreement in which the employee agrees not to infringe or endanger the legitimate business interest of the employer for a maximum of two years after the termination of the employment, whilst on the other hand the employer agrees to pay a fee for its former employee for the fulfilment of this obligation. If the employee breaches the non-competition agreement, he or she may be obliged to pay liquidated damages by their agreement. (Article 228 of the Labor Code)

In one of its recent decisions the Hungarian supreme court (Curia of Hungary, hereinafter referred to as Curia) examined whether former employees could be required to pay liquidated damages set out in the non-competition agreement if they do not comply with their contractual obligation to provide information on their new job to their former employers while entering into that new - non-competing - job does not violate the non-competition agreement. (Curia, Mfv II.10.541 / 2017.)

In its decision, the Curia stated that the non-competition agreements essentially relate to non-facere (not to do) obligations.  Basically, it comes from the essence of the non-competition agreement that employees may be obliged to pay liquidated damages if they compete and thus violate or threaten the business interest of their former employer. However, if they do not comply only with the post-clearance obligation of the non-competition agreement they do not endanger the business interest of the employer and hence no liquidated damages can be imposed.

It follows from the decision of the Curia that liquidated damages stipulated in general for breach of a non-competition agreement can only be claimed in the case of infringement of the substantive contractual obligation (prohibition of competing service) and, if the agreement contains additional obligations too, the related sanction must be expressly provided for. Secondly, if the parties specifically agree to impose the same amount of liquidated damages in case of a breach of a supplementary obligation (e.g. providing information on new jobs) as in the case of breach of the principal obligation, the amount of that liquidated damages is likely to be excessive and the employee may be in the position to request the court to reduce its amount (Article 6:188 of the Hungarian Civil Code).

Consequently, liquidated damages stipulated for supplementary obligation in a non-competition agreement are not invalid automatically, but it needs to be ensured that this sanction is expressly identified in the contract and not excessive. Therefore the decision makes it particularly important to have a good and proper drafting of non-competition agreements.

Labour Code, Non-compete clause

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