The importance of (drafting) workable non-compete and non-solicitation clauses (Cresco)

Author: Steven Daems (Cresco)

Date of publication: 19/09/2018

SME’s (Small and Medium-sized Enterprises) have always constituted a substantial and even fundamental part of Belgium’s economy, which over the course of many years has gradually evolved from an industrial economy to a service economy. The massive technological evolution that has taken place over the past 25 years only added to Belgium’s economic ecosystem, resulting in a substantial upsurge of technology companies, all of them offering various services to potential customers and recruiting young talents to develop and market their products.

Due to the dynamic (and volatile) character of the market, entrepreneurs and investors soon realized the importance of protecting their investments, products, knowhow and/or human capital through the usage of non-compete and non-solicitation clauses, as these clauses can provide their beneficiaries with the necessary leeway to grow, as well as protection from competitors.

Non-compete 

Nowadays, Belgian company law makes extensive use of non-compete clauses, which have proved to be very relevant in all kinds of agreements inherent to entrepreneurship such as shareholders’ agreements, share purchase agreements, management agreements, service agreements …

From a free market perspective, it initially proved to be difficult to reconcile the usage of non-compete clauses with the freedom of trade as guaranteed in 1791 by the “Décret d’Allarde”. For the same reason, Belgian law only regulates and dictates the form and usage of non-compete clauses in very few (and specific) agreements, for instance employment contracts and agency agreements.

This absence of a regulatory framework and frequent abuse have led to the intervention of Belgian jurisprudence, which since then has continuously shaped and dictated the usage and form of non-compete clauses in Belgium. As such, over the years a consensus has been reached that a non-compete clause can only valid when:

• it is limited in time;
• it is limited in space(territory);
• the activities that are excluded are limited and specified.

When in the past Belgian courts would assess non-compete clauses on the basis of the above criteria and subsequently rule them to be either valid or void, Belgium’s Supreme Court ruling of January 23^rd, 2015 has since then dictated that Belgian courts should restrictively interpret the scope of an invalid non-compete clause and mitigate its consequences to what would legally be permitted, upon the condition that parties have foreseen such possibility of mitigation in the relevant agreement.

Non-solicitation 

Contrary to non-compete clauses, non-solicitation clauses are not subject to specific criteria. Apart from Belgian employment law, there exists no legal framework that dictates the usage and form of non-solicitation clauses in (commercial) agreements. Therefore, parties are free to shape such clauses as they see fit and enforce them upon each other accordingly, taking into consideration that depending on the content and scope of such clause, Belgian courts always have the authority to mitigate or declare void the relevant clause in event of abuse of law. For instance, an obligation to refrain from soliciting or enticing away (key) staff, cannot be interpreted as a restriction to hire candidates that spontaneously apply for a position on the basis of a customary recruitment procedure.

Penalty clauses 

Non-compete and non-solicitation clauses are often accompanied by penalty clauses that state that a breach shall be sanctioned by payment by the infringing party to the injured party of so called ‘liquidated damages’, i.e.damages designated by the parties during the formation of the agreement that are to be collected by the injured party in the event of a specific breach.

When it comes to penalty clauses, the Belgian civil code (articles 1226 through 1233) awards authority to the Belgian courts to, ex officioor upon request of a party, mitigate any penalty clause in the event that the stipulated amount of liquidated damages would be manifestly unreasonable (i.e.when the amount in damages clearly exceeds the potential damages), or even declare it void when they would rule that the specific penalty clause solely has a punitive, and not a compensating character.

Notwithstanding the above, non-compete and non-solicitation clauses, as well as their accompanying penalty clauses, continue to be frequent subject of debate or even litigation between parties when ending their contractual relationship.

In conclusion, it is safe to say that the incorporation of non-compete and non-solicitation clauses in various agreements is vital to protect any company, start-up or otherwise, from suffering substantial disadvantages during and after termination of such agreements. However, it is equally important to tailor these clauses to the specific needs of the company and in line with the various legal and judicial regulations, as lack thereof could have serious repercussions for the company’s functioning and business.

As for the subscriber of non-compete or non-solicitation clauses, one should always carefully negotiate the content of such clauses and consider the consequences of subscribing to them from a future ventures perspective. When effectively parting ways and exploring new ventures, it is vital to assess the scope, operation and impact of non-compete and non-solicitation clauses up front and with a professional, because an incorrect assessment could jeopardize the success any future project.

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