Brazil: Non Compete Clause In Services Agreements Under Brazilian Law

Last Updated: 24 August 2012
Article by Cláudio Mattos

The restriction of the service provider's performance of activities to others  including also competitors, after the end of the agreement is quite controversial and may be questioned given the principles laid down in the Federal Constitution, among them, for the sake of exemplification, the principle of free enterprise and the principle of freedom to perform any job or exercise any occupation.

Further, that provision may be questioned on the ground of lack of economic justification explaining/basing the need to prohibit the service provider from developing a similar activity for a third party, after the end of the agreement. In this regard, the other party may further argue: (i) disproportion between what it received in consideration of the services provision to contracting party and the burden generated by the restriction; and/or (ii) the restriction (after the end of the agreement) will have a financial impact on the company that may contribute to its bankruptcy. 

On the other hand, regardless the risks indicated above, there are arguments favorable to the clause maintenance and enforceability.

In thesis, there is not an explicit prohibition in the law.

In view of the fact that such obligation was undertook under the agreement, it would be credible to suppose that the service provider would hardly be successful in arguing that it did not know the reach of the obligations it undertook in order to be excused from complying with the non-compete obligation.

In such context, the valid existence of the non-compete clause would be based on the general principles of agreements ─ "Pacta Sunt Servanda", under which the parties' rights and obligations are materialized through the execution of an agreement. There are some arguments that support the non-compete (or "exclusivity") clause validity under civil sphere, which are grounded on article 122 of the Civil Code that prescribes that "in general all conditions not expressly prohibited under the law are lawful." 

Although the matter is subject to discussion, decisions made in other legal spheres (Labor Courts and Economic Defense) considered the non-compete (or "exclusivity") clause valid, in particular where such clauses reasonably stipulate limits of time, space and purpose as well as financial compensation for non-competition or non-assisting others.

In this way, there are labor court's decisions point to a trend of considering the non-compete clause valid provided that it includes reasonable restrictions, as follows:

  1. the restriction has to be time-limited;
  2. the restriction has to be space-limited (i.e., territory in which the individual cannot work);
  3. the restriction has to be circumscribed to the company's line of business; and
  4. the individual has to be financially compensated for the non-competition.

However, it should be emphasized that the lack of such elements/limitations increases the risks of such provisions being questioned and ultimately being considered ineffective.  Further, even with the presence of such elements, this does not mean that we may discard the risk of the affected party alleging that such provision and/or such elements generate excessive burden to it (how time, space etc. were agreed upon in the concrete case).

There is no widely accepted understanding of this matter under civil contract such as services agreement, especially in regard to its application after the end of the agreement, but the unenforceability risk tends to be considerable.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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