15.06.2022

PROHIBITION OF COMPETITIVE ACTIVITY

Expert comment

A non-compete clause as part of an employment contract or bond agreement is a common way to protect the interests of an economically stronger country, whether it is an employer or a company investor. The possibilities for including such clauses, their validity and manner of implementation depend on the nature of the contractual relationship between the parties. Most often, these clauses are guaranteed by penalties agreed in the contracts, the validity of which is also the subject of further investigation, but very often their very presence deters the other party from engaging in competitive activities.

The prohibition of competitive activity can be considered in general in the following areas:

Prohibition to perform competitive activity under employment contract:

Until 1998, the Law on Protection of Competition stipulated a hypothesis according to which a person who is in an employment relationship may not engage in competitive economic activity for a period of three years after the termination of the employment contract. With the repeal of this provision, this legal restriction for employees has also been lifted. The fact that there has been no such legal restriction option for many years does not deter employers from including such clauses in their employees' employment contracts.

According to the constant practice of the courts, the right to work and the exercise of a profession is imperatively guaranteed by Art. 48, para. 3 of the Constitution and such a restriction of this constitutionally regulated right could not be the subject of a bond transaction. Therefore, the stipulation, which restricts the performance of competitive activity by employees for a period after the termination of their employment contract, in the first place violates the constitutionally recognized right to work. Next, the employer has no right to prohibit its employees who specialize in a field from practicing their profession after the termination of their employment, as this would mean restricting their right to stay in employment. future, which is why such a clause is inherently void.

It should be noted that in Art. 111 of the Labor Code provides for the possibility of performing work outside the working hours established in the employment contract under the main employment contract, but only if this possibility is not limited by the employer within the employment contract. It is in the analysis of this provision that it is necessary to conclude that in the employment contract it is possible to provide for a ban on the performance of competitive activity by the employee, but within the term of the employment relationship.

Prohibition of competitive activity by managers of commercial companies and by partners in a limited liability company (Ltd.):

The Commercial Law explicitly regulates in Art. 41, para. 2, art. 142, para. 1, item 1 and in Art. 237, para. 4 prohibition to carry out competitive activity by a certain category of persons in order to preserve the interests of the traders, which these entities represent, manage or control by virtue of a contract or law. The scope of the ban includes: sales representatives, managers of limited liability companies, as well as members of the board of directors and the management board of companies. It should be noted that this legal prohibition is temporary only while the persons are performing the respective position, and not after the termination of the contractual relationship.

Contrary to the above hypotheses, the Commercial Law does not provide for a ban on the performance of competitive activities by partners in limited liability companies by the managing companies. In practice, however, such restrictions are negotiated in additional agreements between investors and partners, insofar as there is no overriding prohibition in this regard. The fulfillment of the obligations under such agreements may be secured by penalties for non-fulfillment of the obligation for non-performance of competitive activity by the manager and partner, both while holding this position and for a period after termination of participation in the company.

In challenging the validity of such clauses for penalties in court, the courts until recently took a rather conservative approach, assuming that the right under Art. 48, para 3 of the Constitution of the Republic of Bulgaria that every citizen can freely choose his profession and place of work, cannot be subject to actual refusal or restriction, expressed in a private law agreement, incl. as an employment contract clause, resp. an agreement on the basis of which they have declared the nullity of the penalty for non-compliance with a restriction on competition.

The new practice of the Supreme Court of Cassation from 2020 broke this understanding by accepting that the constitutionally enshrined right of a person to freely choose his profession and place of work is not violated by an agreement between the parties banning competition for a period of one year.

The Court held that the obligation not to compete for a period of one year did not restrict a person's right to work in an undertaking with similar activities, nor to be a manager of companies operating other than those of the company in which was a manager or partner. The position of the manager or partner in a company is not analogous to that of an employee holding a certain position and performing work in fulfillment of an employment contract concluded with the employer.

The new case law opens new opportunities to protect the interests of investors in companies. In this way, they can protect their investment and limit the unscrupulous actions of managers and partners. The assumption of a contractual obligation for non-performance of competitive activity by the manager or the partner is in itself an obligation for inaction for a specific period. The purpose of the commitment is to ensure the preservation of customers and developed markets, as well as the preservation of production and trade secrets of the company managed so far by the manager/partner. In these cases, the penalty agreed in the contracts has an enhanced security function, i.e. it aims to prevent the former partner and/or manager from competing to ensure that the company he has managed retains customers, as well as commercial and production secrets.

The scarce legal framework related to the restriction on the performance of competitive activity presupposes the settlement of the disputable issues through their interpretation by the court. We advise you to consult legal experts in each case, both the possibility of including such clauses in contracts and agreements, and their content, so that they can be maximized and ensure their effective implementation, regardless of voluntary or compulsory order.