The decision of the Supreme Court of the Czech Republic, Case No. 27 Cdo 1236/2024 of 27 January 2025, represents a significant, but at the same time controversial, intervention in the interpretation of competition clauses negotiated in contracts on the performance of the office between members of governing bodies and business corporations. The key issue that the Supreme Court addressed in its decision was whether and under what circumstances a business corporation may unilaterally withdraw from an already negotiated competition clause for a member of the governing body of a business corporation. What was at issue in this decision, and how is it significant?
The factual situation
In the present case, the plaintiff, the former chairman of the board of directors of the defendant company, as a member of the governing body of a business corporation, entered into a contract on the performance of the office with the company containing a competition clause. The contract prohibited him from engaging in gainful activities of a competitive nature for a period of six months after the termination of his office. In return, the applicant was entitled to financial compensation of CZK 1,470,000.-.
The board member resigned from his function, and his function did not actually end until almost four months after the resignation was announced. At the same time, on the same day that the office ceased to exist, the decision of the governing body of the joint-stock company to withdraw from the competition clause was also adopted. This resignation was delivered to the member of the board of directors on the same day. He subsequently claimed compensation, claiming that the unilateral cancellation of the competition clause had been carried out in breach of good faith and in an expedient manner, i.e. at a time when he already felt effectively ‘bound’ by the clause.
The subject matter of the subsequent dispute and the main issue in dispute was whether the member of the board of directors was entitled to the performance resulting from the competition clause, since in his opinion the withdrawal from it by the joint-stock company was invalid and he invoked in this case the ruling of the Constitutional Court Case No. II ÚS 1889/19, which interpreted that in certain cases the withdrawal from the competition clause may be considered an abuse of law. However, that ruling related to the relationship between an employee and an employer, and the joint-stock company referred to the difference in the position of a member of the board of directors as compared with that of an employee.
Both the court of first instance and the court of appeal agreed with the defendant company and thus granted it the right to unilaterally withdraw from the competition clause even on the date of termination of the position. In the present case, the court of appeal and the court of first instance did not address the applicant’s argument that the defendant joint-stock company exercised its right to withdraw from the competition clause only on the last day of the period in which it could do so, even though it had known of the applicant’s resignation as a member of the board of directors for a longer period of time, as already mentioned, almost four months, and at the same time had not given the applicant any prior notice of its intention to withdraw from the competition clause.
The Supreme Court disagreed with the decision of the lower courts, which on the contrary it strongly criticized, since the courts were satisfied with the simple finding that the appellant and the defendant had agreed on the possibility to withdraw from the competition clause and the defendant had withdrawn within the agreed time limit.
The Supreme Court agreed with the plaintiff that “the withdrawal from the competition clause must be made in accordance with the principles of fairness and legal certainty. If it is not, the exercise of that right is ineffective.” In his argument, he further emphasised that, although a competition clause in a contract of employment is not regulated as strictly as in employment law, it cannot be revoked in a way which would negate the legitimate expectations of the other party.
The Supreme Court further elaborated that the fact that the defendant company could have withdrawn from the competition clause even on the last day of the appellant’s tenure does not indicate whether or not the defendant company abused its right to withdraw. The Supreme Court concluded the case by stating that, insofar as the court of appeal did not consider whether the defendant’s conduct constituted a manifest abuse of the right, the purpose of which was to avoid the obligation to pay the consideration under the competition clause and which, in effect, prejudiced the appellant by substantially reducing his ability to find a new (whether employment or corporate) job in a sector appropriate to his expertise (banking) within a reasonable time, thereby effectively forcing him to comply with the competition clause without providing the agreed consideration (although the applicant alleged those facts), its legal assessment is incomplete and therefore incorrect. The Supreme Court therefore cancelled the decision and referred the case back to the court of first instance for further proceedings.
This interpretation undoubtedly constitutes a significant interference with the contractual freedom of the parties in commercial law relationships, where, unlike employment law competition clauses, the element of protection of the weaker party is usually absent. In our opinion, the Supreme Court’s approach significantly blurs the differences between the regulation of labour law and commercial relations between members of governing bodies and business corporations, while an effort to bring these different legal regimes closer together is evident.
Labour law
In the context of labour law, the competition clause is regulated in Section 310 of Act No. 262/2006 Coll., the Labour Code (hereinafter as the “Labour Code”), with fixed rules. The position of the employee is considered to be that of a weaker party in the case of negotiating a competition clause under the optics of labour law. This approach is based on the reality of employment relations, where the employer usually has greater economic power, organisational superiority and information advantage. Labour law therefore contains a number of protective mechanisms that aim to redress this imbalance and provide the employee with a greater degree of legal protection.
In recent years, there have been significant interpretative changes in the courts’ decision-making practice regarding the withdrawal of competition clauses in employment relationships. A fundamental one was the ruling of the Constitutional Court of the Czech Republic of 21 May 2021, Case No. II ÚS 1889/19 (hereinafter as the “Ruling”), which significantly challenged the previously prevailing judicial interpretation regarding competition clauses, specifically the employer’s ability to withdraw from them without stating a reason. In the Ruling, the Constitutional Court stated that the general courts (including the Supreme Court) went beyond the scope of statutory interpretation by universally considering as invalid a contractual arrangement that allowed the employer to unilaterally withdraw without a reason, even though the Labour Code did not expressly prohibit such an arrangement.
The Supreme Court followed up on the finding in its decision of 13 December 2023, Case No. 31 Cdo 2955/2023, which is considered groundbreaking with regard to the interpretation of the employer’s withdrawal from the competition clause. The Supreme Court directly referred to the aforementioned Ruling in the reasoning of the decision and, contrary to its earlier decisions, came up with a clear legal conclusion that an employer may withdraw from a competition clause even without stating a reason if this possibility was expressly agreed upon by the parties.
An analogous interpretation of the competition clause agreed for the contract on the performance of the office in the Supreme Court decision Case No. 27 Cdo 1236/2024
The Supreme Court held that there can be no doubt that a business corporation may also abuse its right to withdraw from a competition clause against a member of its elected body; the fact that the member of the body does not have the status of a weaker party (employee) vis-à-vis the business corporation is not legally relevant in this case. Among other things, an act which is not aimed at fulfilling the purpose pursued by a legal norm, but which is motivated by the intention to cause harm to the other party and is contrary to good morals, must be considered a manifest abuse of law.
In this context, the Supreme Court recalled the interpretive guidelines, based on the above-quoted Ruling, which may indicate that an abuse of rights actually occurred. In this case, in particular:
- timing of withdrawal from the competition clause;
- whether the resignation took place just before the end of the employee’s employment (analogous to the termination of the governing body);
- withdrawal from the competition clause without giving any reason;
- if the circumstances indicate that the employer acted arbitrarily or capriciously in withdrawing from the competition clause.
Although the above criteria were formulated (and adopted by the Supreme Court in the judgment of the Grand Chamber of the Civil and Commercial Chamber of 13 December 2023, Case No. 1 Cdo 2955/2023) for the purposes of assessing competition clauses in employment relations, the Supreme Court holds that they can also be reasonably taken into account when assessing the withdrawal from a competition clause agreed in a contract on the performance of the office of a member of an elected body of a business corporation.
Why is the decision controversial?
The decision of the Supreme Court in Case No. 27 Cdo 1236/2024 extends the importance of the principles of fairness and legal certainty to the area where contractual freedom has prevailed so far. Although the Supreme Court’s decision helps to protect the expectations of former officers of business corporations, it also complicates the predictability and flexibility of commercial relations. The interpretation of competition clauses thus enters a whole new level – approaching the nature of an employment regime, even though it is not an employment relationship.
If the parties to a commercial relationship expressly agree on the possibility of unilateral withdrawal under certain conditions and within a certain period of time, it is reasonable to expect that these agreements will be respected. However, an interpretation which makes the effectiveness of withdrawal subject to the principles of good faith and fair dealing reduces legal certainty and undermines the predictability of commercial relations.
Moreover, in our view, the judgment in question does not indicate at what point in time withdrawal from the competition clause is still permissible. Is it still possible to resign on the date of the termination of office? Is it necessary to do so a week or even a month in advance? This ambiguity may lead to significant uncertainty for the parties in practice and cause application difficulties.
As a result of this decision, companies entering into competing clauses with members of governing bodies should be extremely cautious when negotiating the terms and conditions of competing clauses.
Conclusion
In our view, the judgment therefore interferes with key legal principles such as freedom of contract, legal certainty and the protection of the legitimate expectations of the parties. At the same time, the interpretation chosen by the Supreme Court blurs the boundary between labour law and commercial relations, thereby calling into question the traditional distinctions between these legal regimes.
If you have any questions about this topic or any other issue relating to competition clauses, labour law or corporate law, please do not hesitate to contact us.
Mgr. Martin Heinzel, senior attorney-at-law – heinzel@plegal.cz
JUDr. Tereza Pechová, junior lawyer – pechova@plegal.cz
5. 6. 2025