15 September 2021

The non-compete agreement may provide protection of the legitimate economic interests of the employer even after the termination of employment relationship. However, the Hungarian Labour Code lays down strict requirements for the agreement. In our article we analyse a recent decision of the Supreme Court about the importance of the precise determination of the compensation, so you as an employer can conclude a valid non-compete agreement.

1. Facts of the case

As of March 2015, the defendant (,,Employee”) has worked as a team leader for the plaintiff (,,Employer”).

In March 2017, the parties concluded an employment contract supplement about a non-compete agreement. In connection with the calculation of the compensation, the parties referred to the conditions defined in the Employer's Internal Regulations, without specifying a precise amount.

In the agreement they also stipulated that in the event of a breach of the non-compete obligation, the Employee has to pay penalty. The Employer paid the compensation in advance during the employment relationship.

In August 2017, the employment relationship was terminated by the Employer’s notice and the Employee soon afterwards started to work at the Employer's competitor.

2. Dispute between the Parties

After the above history, the Employer filed a lawsuit against the Employee. In his claim he requested the repayment of the already paid non-compete compensation and the payment of the penalty stipulated in the contract. He stated that he had fully complied with the agreement, nevertheless after the termination of the employment relationship the Employee had started an employment relationship with his competitor.

In his defence, the Employee asked for the action to be dismissed. On the one hand he referred to the non-existence of the non-compensation clause, on the basis that the agreement did not contain a compensation. On the other hand, he claimed that the amount paid as a compensation did not reach the mandatory minimum laid down in the Labour Code.[1]

3. The first and the second instance decision

The first instance court dismissed the Employer’s claim. After establishing that the non-competition agreement was concluded between the parties and based on that the Employer paid compensation to the Employee, it examined if the compensation complied with the legal requirements.

The first instance court found that, on the basis of the calculation specified in the Internal Regulations, the compensation received by the Employee did not reach the legal minimum[2].  With regard to the incorrect compensation, this part of the contract is invalid (partial invalidity), so no right can be exercised based on that.[3]

The second instance court upheld the decision of the first instance court on its merits. However, contrary to the first instance court, it concluded that the non-competition agreement was not partially but completely invalid. The Employer was unable to prove the content of the Internal Regulations, so one of the most important elements of the contract, the determination of the compensation was missing.

The second instance court stressed that the exact amount of the compensation must clearly appear from the contract itself, so it is not sufficient if the employee is able to infer it from other circumstances (e.g. payroll or the amount of the salary received).

4. The decision of the Supreme Court

Although the Supreme Court did not change the decision of the lower courts on its merits, it made it clear that the courts mistakenly declared that the contract as invalid.

It referred to an earlier Supreme Court opinion[4], which states that, in the absence of an agreement on an essential issue, a non-compete agreement cannot come into existence. The compensation is such an essential issue, so if the non-compete agreement does not contain the restriction imposed and the compensation, the non-competition agreement is not invalid, but it is non-existent.

The Supreme Court also found that the non-compete agreement between the parties did not contain an exact amount. Thus, in the present case, there was not an invalid, but a non-existent contract, so no right could be exercised based on that, meaning that it created neither a right nor an obligation.

5. Assessment of the decision

It can be seen that, by its present decision, the Supreme Court confirmed its previously occupied position, as expressed in the opinion cited above, namely that the non-competition agreement should contain both the stipulated restriction and the compensation, without this a non-compete agreement does not come into existence between the parties.

In the present case, the Employer did not clearly declare the compensation, only referred to an internal policy, which, however, did not contain the exact amount numerically. For this reason, even though the Employer made payments to the Employee, it could not enforce the non-competition obligation, due to a detail that may seem insignificant at first.

To sum up the precise determination of the non-competition obligation and the compensation protects not only the employee, but also the employer, so it is advisable to involve a lawyer with experience in labour law before concluding a non-competition agreement.

[1] Act I of 2012 Labour Code

[2] See Section 228 (2) of the Labour Code The amount of compensation for the term of the agreement may not be less than one-third of the base wage due for the same period

[3] See Section 6:114. (1) of the Civil Code

[4] 1/2019. (V.20.) KMK opinion about the question arises from labour proceedings connected to the non-compete agreement and study contract