Non-competition clause in a B2B contract – rules, examples, legal risks

A non-competition clause in a B2B contrac in Poland is a legal instrument used to exclude or restrict competitive activity by a former employee within a specified scope, time frame and territory. In practice, a non-competition clause may take the form of:

–    contractual provisions in a cooperation agreement,

–    an annex to a cooperation agreement, or

–    a separate document signed between the parties, most often referred to as a ‘non-competition agreement’.

Regardless of the form, however, the effectiveness and validity of a non-competition clause is assessed according to the same legal criteria, and the rules for formulating contractual provisions remain the same.

Importantly, the Polish legal system regulates the rules on non-competition clauses in B2B contracts and in employment relationships differently. Neither the Polish Civil Code nor any other act refers directly to non-competition clauses in Polish B2B contracts. Consequently, its content may be shaped on the basis of the so-called principle of freedom of contract, provided for in Article 353¹ of the Polish Civil Code, which is one of the practical manifestations of the constitutional principle of freedom of economic activity. Pursuant to the aforementioned provision, the parties may arrange their legal relationship at their discretion, provided that its content or purpose does not conflict with the nature of the relationship, the law or the principles of social coexistence. The legal relationship referred to in the provision may also include, among others, a non-competition agreement.

Under Polish law, the adoption of such a regulatory model leaves the parties considerable freedom in drafting non-competition clauses, which allows professional economic operators to tailor their mutual obligations to specific market realities and mutual business needs. It is important to note, however, that this freedom is not unlimited, and Article 353¹ of the Polish Civil Code sets limits on the permissible content of contractual provisions. In practice, the extensive case law of the courts and the established position of legal doctrine play an important role in the proper construction of non-competition clauses, providing guidance on how to formulate non-competition clauses so that they remain valid and effective in the context of Article 353¹ of the Polish Civil Code.

The aim of this publication is to provide practical guidelines on how entrepreneurs should formulate non-competition clauses in Poland, based on litigation experience, court case law and legal doctrine. At the same time, our goal is to highlight the significant legal risks involved in drafting non-competition clauses.

When is it worth introducing a non-competition clause in a B2B contract?

Of course, there is no single ‘universal’ answer to this question, primarily because every business relationship has different conditions and objectives, and in the course of cooperation, the contractor gains access to various information that should then be protected by a non-competition agreement. As a rule, the introduction of a non-competition clause is justified when it is necessary to protect the interests of the existing contractor, including in the following areas:

• broadly understood trade secrets (which we discuss in more detail in this publication),
• key technological or organisational know-how,
• customer relations and customer base,
• strategic business and financial information,
• pricing models and discount policies,
• product roadmaps and development plans,
• system architecture, technical documentation,
• operational processes and methods of operation that constitute a competitive advantage,
• information about suppliers, commercial terms and cost structure,
• results of market analyses, research, tests and planned expansions,
• etc.

Non-competition clause and access to customer base

A non-competition clause also applies when the contractor has access to the client base. For example, if the contractor works directly with the entrepreneur’s customers, the introduction of a non-competition clause supplemented by a non-solicitation clause is usually justified. In such a case, the contractor has access to customer data and business relationships that are of significant economic value to the entrepreneur. The free use of this information after the end of the cooperation may realistically expose the entrepreneur to the loss of customers. It is easy to imagine a situation in which, after the end of the cooperation, the contractor establishes direct and unlimited contact with the entrepreneur’s existing customers and offers them similar or competing services, using the knowledge gained during the original cooperation.

Non-competition clause and access to sensitive technological information

Another example would be a situation where a contractor co-creates a project and has access to sensitive information, for example of a technological nature, or has a real influence on the direction of business development. In such a case, if a conflict arises between the contractor and the entrepreneur, regardless of its source and assessment of which party is right, or if the cooperation simply ends, the contractor may attempt to ‘move to the competition with a ready-made project in mind’. In practice, this may mean the transfer of information constituting a competitive advantage to a third party, based on knowledge, concepts and solutions developed in the course of the original cooperation. This type of non-competition clause, appropriately adapted to the nature of the cooperation (as discussed below), may constitute a legitimate instrument for protecting the economic interests of the entrepreneur.

Non-competition clause and training, courses, certifications

Another example is when an entrepreneur invests in the development of their business partner, for example by financing their training, courses, providing certifications, or devoting significant financial resources to onboarding them into the company’s know-how. In practice, in companies based on human capital and specialist competences, such investments are quite common, and often the financial outlay associated with undertaking these activities is considerable. The introduction of a non-competition clause in this type of business relationship is justified by the need to secure a return on investment. Of course, a non-competition clause cannot be ‘retaliatory’ in nature towards the contractor and should be drafted in accordance with the principles discussed later in this publication.

When should a non-competition clause not be introduced?

On the other hand, our practice shows that contractors are often subject to non-competition clauses on the grounds that ‘this is how it is done in our industry’, ‘this is the market standard’, ‘this will protect our company’. However, it seems that this approach is not correct and may increase the risk of formulating a non-competition clause in an imprecise, overly broad manner, identical in every cooperation agreement, regardless of the scope of the parties’ obligations, or containing other irregularities described later in this text.

In business practice, such provisions may do more harm than good, primarily because they do not protect the real interests of the entrepreneur, damage business relationships, may be legally unenforceable in practice, thereby increasing the risk of disputes and generating unnecessary legal costs. It seems that every contractual provision, including non-competition clauses, should have its economic and legal justification. In Poland contracts should not be formulated in a formulaic manner, repeated for all contractors, especially given that ‘in our industry (regardless of the industry), a non-competition agreement must be signed’.

It seems that each time before deciding to include a non-competition clause in a contract, an entrepreneur should answer two questions:

• what interest am I protecting?
• what real damage will I suffer without a non-competition agreement?

If the answers to these questions do not come automatically, the introduction of a non-competition clause is likely to be unnecessary and could potentially lead to unnecessary legal complications.

Can a non-competition clause in a B2B contract be free of charge?

As indicated above, the prohibition of competition between entrepreneurs is based on Article 353¹ of the Polish Civil Code, which gives the parties considerable freedom in determining their mutual obligations and thus allows for potential ‘inequality’ in the shaping of the legal relationship. Therefore, there is no legal provision that would impose an obligation to pay remuneration for the non-competition clause after the end of cooperation between entrepreneurs – unlike in the case of a non-competition clause concerning a former employee hired on the basis of an employment contract, which is regulated by Article 101² § 3 of the Polish Labour Code.

In practice, this will be reflected in a situation where the party subject to a non-competition clause may consider, for example, that the remuneration received during the term of the cooperation agreement is so favourable that it compensates for the free non-competition clause for a certain period of time after the end of the cooperation agreement. Of course, such a finding must be a conscious and voluntary expression of the party’s will, and not, for example, an unfair exploitation of the counterparty’s contractual advantage.

A practical example from Polish case law:

“It should be noted that both parties were entrepreneurs and, within the limits of their individual competences, they shaped the distribution of rights and obligations, adjusting and modifying it during the performance of the contract. A non-compete clause without equivalent compensation, subject to a contractual penalty for its breach, despite its lack of symmetry, does not lose its economic sense and falls within the limits of contractual loyalty. The contractor was not the weaker party, and the knowledge he acquired threatened the claimant’s economic interests if used in the interests of another entrepreneur. It cannot be accepted that such a formulation of rights and obligations in a non-competition clause is incompatible with the axiology underlying civil law relations in business transactions” (judgment of the Polish Supreme Court of 5 December 2013, ref. no. V CSK 30/13).

However, some rulings indicate that a non-competition clause which is gratuitous and at the same time long-term and restrictive, or even precluding the possibility of conducting business activity, may be considered contrary to Article 353¹ of the Polish Civil Code. Therefore, it seems that before deciding whether a non-competition clause should be subject to compensation (and if so, in what amount), it is worth analysing not only the issue of remuneration itself, but also looking more broadly at the facts of the case. Factors that should definitely be considered include:

• the industry in which the contractor operates,
• the scale and scope of the non-competition clause (in terms of subject matter and territory),
• the duration of the non-competition clause,
• the degree of interference with the contractor’s ability to continue conducting business activity / the degree of restriction on the ability to conduct business activity.

In many cases, attempts to ‘circumvent’ the non-competition clause by including a symbolic remuneration that does not reflect the real burden of the restriction imposed on the contractor may also be ineffective.

How to determine the scope of a non-competition clause in a B2B contract?

One of the most common mistakes made by entrepreneurs is to formulate a non-competition clause in an imprecise manner, stating that the contractor is obliged to refrain from undertaking ‘any form of activity that may be considered competitive to the entrepreneur’. Due to its generality and arbitrariness of interpretation, this type of contractual provision is unlikely to fulfil its purpose and protect the entrepreneur’s interests, even in light of the liberal principles of freedom of contract under Article 353¹ of the Polish Civil Code.

For a non-competition clause to be effective, it must therefore be formulated in such a way as to allow for unambiguous interpretation and enforcement. Otherwise, it may leave so much room for interpretation that the court may conclude that the parties do not fully understand what specific activities they wanted to cover by the prohibition.

How to define what is meant by ‘competitive activities’?

The parties should first define what is meant by ‘competitive activities’. In this regard, it is recommended to refer to specific services, products or activities which, as a rule, directly overlap with the nature and profile of the entrepreneur’s business or actually compete with it. For example:

‘Competitive activity is the provision of programming services involving the creation and implementation of web applications in Python and JavaScript for clients operating in the financial industry (fintech)’.

With such a narrow definition of ‘competitive activities’, it seems that the analysis of which specific services are covered by the non-competition clause leaves no room for doubt. On the other hand, the entrepreneur remains fully capable of conducting other business activities not related to the services specified in the prohibition, which reduces the risk of the clause being considered overly restrictive.

To which entities should the non-competition clause apply?

Another mistake that regularly appears in the non-competition agreements we analyse is the inclusion of ‘all entities operating on the market’ in the prohibition. However, this approach is also incorrect and may also result in the non-competition clause being deemed unlawful.

It seems that in practice, the non-competition clause should not cover ‘all companies on the market’, but rather the following groups of entities:

1. direct competitors of the entrepreneur – the prohibition may cover entities that offer identical or similar products or services in the same market segment, i.e. ‘competitive’ products or services – in the literal sense of the word. In practice, it may also be good practice to attach a list of these specific entrepreneurs to the non-competition agreement, which will clearly identify them,

• the entrepreneur’s customers – in this respect, the contractor may refrain from providing services or selling products to customers who used the entrepreneur’s services or products during the term of the B2B agreement,

• entities operating in a specific market segment – in the case of specialist or niche industries, the non-competition clause may be narrowed down to a specific market segment, e.g. ‘SaaS project management software for the IT industry’, so that the clause is proportionate.

For example, the provision may read as follows:

‘The contractor undertakes to refrain from providing services to entities operating in the field of production and distribution of ready-made health snacks for retail consumers.’

How long should a non-competition clause in a B2B agreement remain in force?

Again, neither in case law nor in business practice is there a single ‘optimal’ and ‘indisputable’ period in court during which a non-competition clause may or should remain in force. However, setting the duration of a non-competition clause ‘automatically’ for each cooperation agreement (e.g. always 12 or 24 months) without analysing the specific facts increases the risk of the clause being considered overly restrictive and contrary to the principle of freedom of contract.

This is because each non-competition clause protects business interests of varying economic importance, as the value of technological information, know-how or customer relationships differs. The business context of the cooperation, the scale of the contractor’s involvement and the rate at which the protected information becomes obsolete also vary. A list of customers may become obsolete much faster than, for example, a contractor’s technological knowledge or know-how.

In general, however, it seems that it would be contrary to the principles of social coexistence to oblige a contractor not to engage in competitive activity for a period of several years after the expiry of the contract without an obligation to pay monetary compensation for that period.  At the same time, if the contractor’s obligation to comply with the non-competition clause is remunerated, the period may be longer than in a situation where no compensation is paid for compliance with the obligation.

Polish case law also emphasises that imposing a non-competition clause after the termination of a cooperation agreement may in some cases lead to the temporary exclusion of the contractor from the labour market in the field of their professional qualifications. If a person has highly specialised skills (e.g. is a clinical dietitian), imposing a ban on them to conduct business in this area effectively forces them to retrain for another profession. This process inevitably takes time, during which the person is unable to effectively pursue gainful employment. Moreover, it is often associated with significant costs.

Consequently, courts point out that the assessment of the admissibility of a non-competition clause after the end of cooperation should take into account the real impact of such a restriction on the ability to conduct business activity consistent with the contractor’s education, skills and experience. If the non-competition clause effectively deprives the contractor of the opportunity to earn a living in their current profession, it may be considered overly restrictive and contrary to the principle of freedom of contract.

A practical example from Polish case law:

‘It cannot be considered consistent with the principles of social coexistence to oblige the contractor not to engage in competitive activity for three years after the termination of the contract, without any equivalent’ (the Polish Supreme Court judgment of 11 September 2003, file ref. III CKN 579/01).

How to define the territorial scope of a non-competition clause in a B2B contract?

A non-competition clause in a B2B contract in Poland should always specify the territorial scope of the restriction, i.e. the geographical area in which the contractor may not engage in competitive activity after the termination of the cooperation. This scope may be defined narrowly, for example by specifying a particular city or province, or more broadly, covering the entire territory of a country, and in some business models even a selected region of the world (for example, Central and Eastern Europe, although in this case it seems that the specific countries covered by this term should be specified).

However, the broader the territorial scope is formulated, the more the contractor will be eliminated from the market. Consequently, a non-competition agreement covering the whole of Poland may be relatively easy to challenge on the grounds that, in practice, it may lead to a situation where the entity is unable to conduct business. This will be particularly relevant where the obligation to refrain from competitive activities is not compensated by damages.

A practical issue that often arises in connection with the scope of a non-competition clause is whether the territory covered by the non-competition clause can be defined more broadly than the area in which the entrepreneur currently conducts its business operations. It seems that, in principle, this may be the case, but (again) such an extension of the prohibition should have a real and objectively verifiable economic justification. In practice, the justification for a wider territorial scope may include, in particular, circumstances such as:

• the actual area of activity of the capital group to which the entrepreneur belongs,
• foreign expansion that has begun or is at an advanced stage of implementation (e.g. in the form of agreements concluded or negotiated with partners in other countries),
• the nature of the relevant market (e.g. cross-border, regional, rather than Polish),
• a business model based on the provision of services or sale of products on international markets.

At the same time, even in such cases, the territorial scope of the non-competition clause in Poland should remain proportionate to the actual risk of infringement of the entrepreneur’s interests. The mere fact that one of the above conditions is met will not automatically justify extending the non-competition clause to the entire area of the group’s operations if the contractor did not actually have access to information, customers or projects carried out in those markets. For example, if a capital group operates throughout Europe and a sales representative was responsible for the British market, it would be unreasonable to impose a non-competition clause covering the whole of Europe on that representative. In such a case, a reasonable and proportionate solution would be to limit the territorial scope solely to the market in which the contractor actually operated and to which he had operational access.

Summary

A non-competition clause in a B2B contract in Poland can be an effective instrument for protecting the interests of an entrepreneur, but only if it is well thought out, proportionate and precisely constructed. Although it may seem that a non-competition clause should be included in every B2B contract, this position is flawed. Mechanically duplicating clauses ‘because that’s how it’s done in the industry’ increases the risk of invalidity or unenforceability of provisions and escalation of disputes with contractors.