The benefit of a non-competition clause in a business sale and purchase agreement

Recently, the district court Oost-Brabant ruled in a preliminary relief case on a matter concerning a former owner of a company (who sold its business) who performed activities which qualified as competing activities with the activities of the sold business.

The facts are as follows. A, owner of B B.V., sold as director of B B.V. in June 2013 the assets of B B.V., including the customers base, the recipes of the products and a trademark to C B.V. for a purchase price of EUR 300,000. Since A continued to carry out activities for the business, a management agreement was entered into between A and C B.V. This management agreement contained a non-competition clause stipulating – in short – that A may not perform any activities which compete with the activities of C B.V. In 2019 it appeared that A carried out competing activities. C B.V. initiated preliminary relief proceedings and demanded compliance with the non-competition clause, requested the court to rule that A should refrain from conducting the competing activities and claimed payment of the penalty and/or (an advance on) the compensation for the damages.

A argued that the parties did not enter into a management agreement but into an agency agreement, as a consequence whereof the non-competition clause should be regarded as void. Furthermore, A also stated that the penalty claimed by C B.V. was far too high. As the proceeding is a preliminary relief procedure, only limited fact-finding was carried out. According to the district court, the question whether the agreement qualified as a management agreement or an agency agreement cannot be answered in a preliminary relief proceeding; this requires further investigation. However, the district court ruled that the claim of C that A should refrain from approaching customers of C and from doing business with them was justified. The district court substantiated the ruling with referring to case law of the Dutch Supreme Court (NJ 1997/685, Kolkman/Cornelisse) and not explicitly referring to the non-competition clause in the management agreement. It follows from that case law that a person who has sold his company is not free to compete with the company or the activities he or she has sold. According to the Dutch Supreme Court, a sale and purchase agreement of a business precludes that the transferor competes with its legal successor by continuing to carry out the same activities in the same area. If competing activities were allowed, this would result in the fact that the profit potential of the transferor was not transferred.

Does this mean that a buyer of a business is sufficiently protected without explicitly including a non-compete clause in the sale and purchase agreement? In our opinion the answer is no. It will remain advisable to clearly define the scope and content of the non-competition clause in the sale and purchase agreement in order to avoid discussion afterwards. Although a buyer will be able to rely on the case law, a buyer will be better protected in the event that the non-competition clause has been explicitly agreed upon and included in the sale and purchase agreement. In addition thereto, it is noted that a non-competition clause will normally be combined with a penalty clause. Such a penalty clause, will already have a sufficient deterrent effect to avoid that a party will act in breach of the non-competition clause.