25. Sep 18

Post-contractual prohibition on competition and compensation for interim period

A post-contractual prohibition on competition is a reciprocal agreement. If one party fails to perform the work or service as agreed, then the other side is entitled to rescind the agreement.

It is common for employment contracts as well as commercial agency agreements to include a post-contractual prohibition on competition. This entails the employee or commercial agent undertaking not to compete with his or her former employer or business for a certain period of time after their contract has been terminated. In return, he or she receives compensation for the interim period. A post-contractual prohibition on competition is thus a reciprocal quid pro quo agreement. We at the commercial law firm GRP Rainer Rechtsanwälte note that if one party fails to adhere to the arrangement, this entitles the other side to rescind the agreement. However, rescission would only have ex nunc effect, i.e. its effects would be limited to the period starting from when rescission takes effect onwards. This was clarified by the Bundesarbeitsgericht (BAG), Germany’s Federal Labour Court, in a judgment from January 31, 2018 (Az.: 10 AZR 392/17).

The decision to rescind a post-contractual prohibition on competition ought to be carefully considered and not made in haste, as demonstrated by the case that came before the BAG. Here, the employee terminated the employment relationship with effect from January 31. The employment contract included a three-month post-contractual prohibition on competition. In return, the employee was supposed to receive compensation for the interim period. Yet even after several weeks had passed following termination of the employment relationship and despite being requested to pay the compensation, the employer failed to do so. The ex-employee subsequently informed his former employer by email of March 8 that he no longer considered himself bound by the prohibition on competition. In addition, he sued for payment of the compensation for the agreed interim period of three months, stating that he had only rescinded the prohibition on competition out of spite.

The BAG nonetheless held that this did not render the rescission invalid. It went on to say that the plaintiff had been entitled to withdraw from the agreement because of the other party’s failure to pay the compensation agreed for the interim period and that the rescission had ex nunc effect. This meant that the plaintiff was entitled to pro rata compensation for the period from February 1 to March 8, but not for the remaining weeks.

Lawyers who are experienced in the field of employment law can offer advice when drafting agreements and post-contractual prohibitions on competition.

For more informations: https://www.grprainer.com/en/legal-advice/employment-law.html

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