Member Article

On 23 January 2015, the Supreme Court delivered a judgment concerning the moderation of an invalid non-competition clause in a business transfer agreement. This judgment arose after the Ghent Court of Appeal had refused to moderate a non-competition obligation lasting for period of 17 years. In line with previous case law, the clause was declared absolutely null and void and the Ghent Court of Appeal ruled that the clause could not be mitigated in any way. In its judgment of 23 January 2015, the Supreme Court overturned the lower court’s judgment.

The Supreme Court’s judgment confirmed that a non-competition clause limits the freedom of entrepreneurship (as set out in Article II.2 Code of Economic law) and that this freedom of entrepreneurship is fundamental to the Belgian legal system and affects the public order. If a non-competition clause is too broad in terms of its duration or territorial and material scope, then the clause as a whole would be null and void. In a business transfer agreement, a non-competition clause is generally considered to be valid provided that: it is necessary for the transfer of the acquired business; and both its duration and territorial and material scope are limited to what is required to meet that goal.

Since older case law held that non-competition clauses that are null and void cannot be moderated, most contracts contain severability clauses that are intended to limit the effects of the non-competition clause. Such severability clauses provide that if any agreement provision is found to be invalid, illegal or unenforceable, in whole or in part, then the remainder of that clause and the rest of the agreement will not be affected by that provision’s annulment; the agreement itself will continue to have full force and effect as if it had never contained that invalid, illegal or unenforceable provision. In addition, a severability clause in an agreement usually states that the parties will make all reasonable efforts and take all necessary action to replace any illegal, invalid or unenforceable agreement provision with a valid, legal and enforceable provision that has the same economic effect for the parties and reflects, to the fullest extent permitted by law, the replaced provision.

In the case at hand, the Supreme Court’s judgment explicitly confirmed the right to apply partial annulment to agreements or clauses that are initially deemed null and void provided the following three conditions are met: (i) the partial annulment must in practice still be possible, (ii) such partial annulment cannot be forbidden by law and (iii) the parties must have the intention to continue the agreement or clause that has been partially declared null and void. One particularly noteworthy aspect in the Supreme Court judgment is its recognition that part of a clause can be declared null and void while the remainder of the clause will remain valid. The Supreme Court decided that the contracting parties’ intentions must prevail and that the nullity of the clause should be limited as far as was legally permitted. By inserting a severability clause, the parties had explicitly confirmed that it was their intention to continue the agreement or the clause, even when part of the agreement had been declared null and void. As a result, the Supreme Court ruled that the non-competition clause must be limited to the duration for which it was legally permitted.

When drafting a non-compete obligation in a business transfer agreement that may be questionable in terms of its duration or territorial or material scope, it is crucial that a solid severability clause is included so that the non-compete obligation can, if required, be reduced to what is legally permitted and the remainder of the clause and the agreement can continue in full force.