Is an unpaid ban on competition after termination of a service agreement binding?
There is no legal regulation guaranteeing even minimal compensation for refraining from competitive activity after working under a non-employment contract, but such a ban may be found to be contrary to public policy.
Statutory guarantee of compensation only for employees
Persons hired on an employment contract in Poland who have assumed a contractual obligation to refrain from competing with the employer after the end of the employment relationship are entitled to compensation for this undertaking. Under the Labour Code, such compensation cannot be less than 25% of the salary received by the employee before the end of the employment, for a period corresponding to the non-competition period. This is an example of the protective function of employment law. However, these guarantees do not cover persons working under non-employment civil-law contracts.
An undertaking not to compete after termination of a civil-law contract is generally governed by the Civil Code, supplemented by the Unfair Competition Act. But the Civil Code is silent on the topic of non-competition agreements, apart from regulations concerning agency contracts (Civil Code Art. 7646–7648). These provide for the possibility of imposing a ban on competing activity, but on condition that the agent must be paid for the non-competition, and that the ban is limited in time and scope.
Consequently, agreements not to compete after the end of cooperation under a civil-law contract (other than an agency contract) will be governed by the principle of freedom of contract set forth in Civil Code Art. 3531. The parties may thus frame their legal relationship according to their discretion, so long as its substance and purpose do not conflict with the properties (nature) of the relationship, statute, or public policy (literally, “principles of social coexistence”). This speaks in favour of upholding the parties’ ability to enter into a contract including an undertaking by the service provider not to perform competitive activity either during the period of cooperation or after it ends, even if the contract does not provide for compensation for this covenant.
Unpaid non-compete as an expression of the free will of the parties
The position upholding the permissibility of an unpaid non-competition agreement after termination of a service agreement under the principle of freedom of contract was adopted by the Supreme Court of Poland in its judgment of 5 December 2013 (Case V CSK 30/13). There the court reasoned that the absence of specific regulations governing service contracts demonstrates a legislative intent to permit a broad scope of contractual freedom in this area. This permits the contractor to undertake not to compete after the cooperation ends, even without receiving compensating consideration. Under the facts of that case, the contractor was a sole trader who promised not to take up activity competitive with the customer for a period of one year following termination of the service contract. The court held that this undertaking was consistent with the nature of the legal relationship and did not violate public policy. Similar holdings had been issued previously by other courts (e.g. Białystok Court of Appeal judgment of 4 December 2001, I ACa 439/01, and Gdańsk Court of Appeal judgment of 14 May 2003, I Ca 174/13).
Unpaid non-compete and principles of equity
Nonetheless, there is a visible tendency in the case law of the Supreme Court to limit the freedom of contract when it comes to unpaid non-competition agreements following completion of cooperation under a service contract.
Thus, in the judgment of 11 September 2003 (Case III CKN 579/01), the Supreme Court held that an undertaking to refrain from competitive activity for three years following the end of a service contract was invalid as it violated public policy. Although that case involved hiring of a contractor operating as a business (sole trader), the court cited Art. 1012 of the Labour Code, governing compensation for non-competition by employees, and found that the guarantee of compensation for non-competition by former employees demonstrates that the failure to award any compensation to an individual for refraining from competitive activity violates public policy and renders the non-competition agreement void.
The determination of whether an unpaid non-competition agreement violates public policy depends on the assessment of the factual circumstances of the specific case. Relevant factors include the degree of the contractor’s autonomy in performing the service contract, any advantage one party had over the other at the time the non-competition agreement was reached (including whether the non-competition agreement was reached when entering into the service contract or at the time of termination of the service contract), and the duration of the non-competition undertaking as compared to the length of time the services were performed.
A consequence of a finding that an unpaid non-competition agreement is invalid because it violates public policy is that the former contractor can freely take up activity competitive with the former customer regardless of the existence of the non-competition agreement.
However, there is no express legal basis which the contractor could rely on to assert a claim for compensation for refraining from taking up competitive activity. A former employee complying with a non-competition agreement after the end of his employment can rely on Labour Code Art. 1011 §§ 1 and 3 and demand payment of the statutory minimum compensation, but application of this provision to persons working under civil-law contracts must be viewed sceptically.
Based on the Polish case law, it should be recognised that unpaid undertakings not to compete following the end of the cooperation between parties to a service contract are generally binding. However, under the circumstances of the specific case such an undertaking may be found to violate public policy, rendering it invalid.
It thus appears that in doubtful instances, particularly where the dealings between the parties resemble an employment relationship, it would be sensible to consider securing the effectiveness of such a non-competition undertaking by using appropriate clauses providing for compensation for refraining from competing activity.
Dr Marta Derlacz-Wawrowska, Employment practice, Wardyński & Partners