China: Non-compete Clause that Fails to Specify Scope, Term and Damages is Unenforceable

The employee had signed three employment contracts successively with the company, which all included a non-compete clause. The non-compete clause mentioned that the company was entitled to request the employee to honor the post-employment non-compete obligation. However, the non-compete clause failed to specify the scope, term and liquidated damages for breach of the non-compete obligation.

The two parties also did not sign a separate agreement on the non-compete. After the employee resigned, he joined a competitor of the company. The company filed a claim against the employee, seeking payment of damages and performance of non-compete obligation. The employee rebutted the allegation, arguing that the non-compete clause should not be binding upon him.

The court eventually dismissed the case and ruled in favor of the employee, based on the reasoning that 1) the non-compete clause in the employment contract should be deemed as a standard clause and interpreted as unfavorable to the company that provided it; 2) since the non-compete scope, the non-compete term and the liquidated damages were not explicitly specified, the clause should be read in light of the fact that the parties did not reach an agreement on the non-compete; and 3) the employee should bear no liability for joining a competitor of the company.

For more information on these articles or any other issues involving labour and employment matters in China, please contact Carol Zhu (Partner) of Zhong Lun Law Firm at carol.zhu@zhonglun.com or visit www.zhonglun.com.