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08 January 2019

Cancellation of non-compete agreements – evolving court practice

Post-termination non-compete clauses are a common feature of employment contracts in Hungary. As the obligations prescribed by such clauses become effective only upon termination of employment, the parties' interests linked to the enforceability of the clauses may be completely different.

Can either party unilaterally terminate a non-compete clause if it does not wish to maintain it after the termination of employment? If so, which party may terminate and when such termination can take place must also be assessed.
The legal practice surrounding these questions is constantly evolving. Taking a rather conservative approach, such agreements may only be unilaterally cancelled if stipulated therein and only by the party that is entitled to do so.

Which party may have cancellation rights?
Non-compete clauses are designed to protect the employer's interests after the termination of the relationship. The former employee needs to refrain from any kind of business activity that competes against the employer in exchange for financial compensation. In practice, it is rare for employees to have the option of cancelling the non-compete clause. Cancellation rights are usually stipulated in favour of the employer. Court practice does not recognise employees' cancellation rights in the absence of a specific contractual provision in this regard.

When can a non-compete agreement be cancelled?
Court practice clearly shows that even if the right of unilateral cancellation is stipulated (which is typically exercised by the employer), the cancellation must take place before the termination of the employment.

Recently there have been some rather employee-friendly decisions stating that in the case of a termination with notice, the employer should communicate his or her intention to cancel the non-compete clause upon giving notice. This position is derived from the parties' general duty of cooperation and the protection of the employees' interests. If the cancellation is communicated upon giving notice, the employee can start to look for a similar job already during the notice period. In a recent highly debated court decision, the employment tribunal declared that the employer may be entitled to unilaterally cancel non-compete clauses before the termination of the employment even in the absence of a contractual clause allowing it to do so.
A unilateral termination (cancellation) by the employer may be acceptable, particularly if a long period of time occurred between the conclusion of the agreement and the termination of the employment. The court derived this rule from the principle of contractual freedom. This employer-friendly decision of the tribunal case has yet to be heard by higher level courts, but it will be interesting to see the direction in which the court practice will evolve.
A taskforce of the Hungarian Supreme Court (Curia) is currently working to synthesise the court practice regarding non-compete agreements.

Though the further evolution of court practice will certainly be interesting for legal practitioners, for companies it is generally always better to avoid legal disputes. This can be achieved by thinking ahead and setting out clear rules of cancellation in the agreement itself. These clauses should be reviewed by legal counsel before entering into non-compete agreements.


This article was up to date as at the date of going to publishing on 10 December 2018.


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