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Ruling on non-compete clause in an employment contract

18.12.2003

According to the Estonian Act of Employment Contract, it is required that if the parties agree on imposing confidentiality obligation and/or competition prohibition for certain period after the expiry of the contract, the payment of a compensation for performing such an obligation is required. Imposing of confidentiality obligation and/or competition prohibition for the validity period of the employment contract does not require the payment of any special compensation.

Recently there was the first case concerning the employee's competition prohibition heard in the highest court of Estonia (Riigikohus). In this case the employer claimed back the compensation that it had paid to the employee for the 2-years competition prohibition after the termination of the employment contract. The compensation was paid to the employee during his employment. Shortly after the termination of the employment contract the employee started to work for the company that was a competitor of the former employer, so breaching the 2-years competition prohibition. Since it is very complicated to prove any specific damages caused by such breach, the employer claimed the repayment of the compensation that had been paid to the employee for that obligation, arguing that due to the breach the employee is not entitled to that compensation and the paid compensation could be considered as the damage caused to the employer.

In its decision, the highest court of Estonia (Riigikohus) ruled that in case of the breach of competition prohibition, the employer may not claim back the paid compensation, unless such right (remedy) is expressly provided for in the employment contract. The court also ruled that the paid compensation cannot be automatically considered as damage caused by the breach to the employer. The damages should be caused by the breach itself, and there must be causation between the breach and the claimed damages.

One judge of the panel, however, presented a dissenting opinion in this case, saying that the employer should have the right to claim back the compensation based on the principle of good faith. Also, after the employee's breach, the paid compensation could also become the damage caused to the employer.

In the light of the above-mentioned court decision, in order to avoid problems in case of the employee's breach, the clause of the competition prohibition in the employment contract should expressly include the remedies which are available for the employer in case of the breach by the employee.

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