Germany - Court decision on a withdrawal of a post-contractual non-competition obligation

03 July 2018

Dr Catharina Klumpp

The Federal Labour Court (Bundesarbeitsgericht (BAG)) has confirmed that the general civil right to rescission trumps the specific rules on post-contractual non-competes in sec. 74 et seq. of the German Commercial Code.

Under German law, post-contractual non-competition agreements in an employment relationship are subject to the statutory provisions in sec. 74 et seq. of the German Commercial Code. These provide very specific and formal requirements for such agreement to be enforceable and any deviations can only be agreed if beneficial for the employee. Notably, they  may not exceed a duration of two years and in order to be binding,  the employer must pay compensation for the duration of the agreed term of at least 50% of the employee’s latest contractual remuneration (including any variables).

Once effectively agreed, parties can at any time agree on a mutual waiver of the non-compete, but a unilateral waiver by the employer is only possible before the termination of the employment relationship. Such waiver will mean that the employee will immediately be free to perform any competing activity but the employer’s obligation to pay the non-compete compensation will only cease 12 months following declaration of the waiver. In practice this means that unless such waiver is declared well in advance of the termination of employment (i.e. 12 months), the employer is still under obligation to pay the non-compete compensation even though they will not benefit from the non-compete. Such restrictions on non-compete waivers make non-competition obligations very financially valuable to employees.

The case in question involved a former employee who worked as a technical director. The employment agreement contained a post-contractual non-compete for a period of three months. The employee terminated the employment relationship, but did not receive any compensation for the non-compete, despite sending a formal request for payment via e-mail. The former employee sent a second e-mail to the employer, showcasing his annoyance at not receiving payment. In the email he informed the employer that he no longer considered himself to be bound by the non-compete, something he later asserted in court to have been said “in defiance of the fact that the employer has not paid the compensation”. The employee subsequently filed a claim for payment of the compensation for the entire duration of the non-competition obligation (three months).

Whilst the Labour Court initially found in favor of the employee the Second Instance Labour Court overturned the decision and dismissed the case for the period following the employee's second email on the basis that he had rescinded the agreement.

According to settled case law, a non-competition obligation is a mutual contract and therefore subject to the general rules on mutual agreements, where payment of the compensation is related to the employee’s duty not to compete for the agreed period. In its decision, the Federal Labour Court has now determined that neither the specific rules on post-contractual non-competes in sec. 74 et seq. of the German Commercial Code (specifically the provisions on waivers of non-competes (see below)), nor other specific civil law provisions, inhibit the application of the general civil right to rescission pursuant to sec. 323 et seq. of the German Civil Code (Bürgerliches Gesetzbuch BGB). Although rescission of contractual relationships normally require additional prerequisites (laid out in sec. 346 et seq. BGB), it has to be taken into account that post-contractual non-competition obligations cannot be rescinded, therefore rescission only takes effect from the date the opposing party receives the notice of rescission (ex nunc).

Based on this, the court interpreted that the claimant’ second e-mail was an effective rescission from the non-compete with immediate effect, the consequence of which was that he was no longer entitled to any compensation (from the date of receipt of his e-mail). Contrary to the claimant's statement the notice of rescission only resulted out of an act of defiance, the court held that the e-mail was a binding declaration. The claimant was unable to rely on the fact that he did not know about the legal consequences.

This case confirms the opportunity to rescind from a subsequent non-compete obligation. However, it has to be taken into account that there is no way to receive compensation for actions that took place before the counter party received the notice of termination. Employees should be aware of the fact that imprudent remarks could lead to a loss of the contractually agreed remuneration for omission of competition. Employers should ensure that payment is made in full and on time so as to make sure that employees are actually bound under an agreed non-compete.