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8 Nov 2022 Annulment of a settlement agreement on grounds of duress/deception and a claim based on unlawful competition

Litigation between employer and employee regarding partial annulment of a settlement agreement on grounds of mistake and deceit. Employer argues that the prospective ex-employee deliberately concealed the fact that during his employment with employer he was already engaged in (helping) to set up a similar business in Germany. In addition, employer alleges unlawful competition and claims damages. What is the court's verdict?

Employer is a company that offers medical examinations and preventive medical examinations, for the business market. In addition, employer offers flu and travel vaccinations for the private market. Employer's company operates in the Dutch market. The company was founded in October 2009, and on 8 February 2016, employee was appointed in charge of operational management due to the fact that there were serious conflicts between the directors.

As the conflicts between the directors worsened, the shareholders, together with an external advisor, started discussions in mid-2020 about selling the company from employer. A German GmbH was also established on 23 July 2020, which also focuses on offering flu and travel vaccinations for individuals. The GmbH in question operates in the German market.

On 6 January 2021, employee called in sick.

The company doctor ruled on 11 January 2021 that the cause of employee's illness was entirely work-related. There was employee's lack of confidence about the course of events within employer's company. According to the company doctor, no exploitable opportunities existed for employee at that time, but future opportunities would exist. The advice was therefore to start a mediation process.

After a mediation process, employer and employee concluded a settlement agreement on 8 March 2021.

Part of the content of that settlement agreement was that all of employer's company property, including a laptop computer, would be returned to employer in good condition no later than the end date of the employment contract.

On 2 June 2021, employer requested employee to surrender his work laptop, after which, on 31 July 2021, employee informed employer that he had destroyed the hard disk of that laptop and took the remains to the landfill.

Employer then engaged Hoffmann Bedrijfsrecherche to investigate whether employee had taken confidential and strategic information and provided it to the German GmbH. In a report dated 9 December 2021, Hoffmann concluded that: "Although there is no evidence of 'taken' or 'provided' information to 'the competitor in Germany', it has been established that Mr [plaintiff] , during his employment with employer, carried out activities for, and was involved in, activities for the German GmbH.

Subsequently, on 28 December 2021, employer extrajudicially set aside the settlement agreement in part on the grounds of mistake and fraud, insofar as it relates to the continued payment of wages, the compensation for legal assistance, the termination payment (not paid) and the final settlement (not paid).

In court, employee claims payment of all these matters, as employee believes that employer wrongfully breached the settlement agreement.

The employer disputes the claim, primarily arguing that it is not obliged to comply with the relevant matters in the settlement agreement, because there is a legally valid partial annulment on the grounds of mistake and/or fraud. After all, during his employment with the employer, the employee was allegedly secretly helping to set up the competing company in Germany, secretly and illegally using data and software belonging to the employer. During negotiations with employer on the terms of the termination of the employment contract by mutual consent, employee deliberately concealed that information, according to employer. Thereafter, too, employee failed to disclose and deliberately destroyed evidence.

In the further alternative, employer relies on the limiting effect of reasonableness and fairness.

In the proceedings, the employer also claimed a considerable amount of unduly paid salary and legal costs, plus statutory interest.

In support of this claim, the employer argued that the employee had acted contrary to the principles of reasonableness and fairness and had breached the employment contract, and had also imputably failed to comply with the contract.

The Subdistrict Court was of the opinion that it had been sufficiently established that, at the time of the negotiations on the settlement agreement, the employee was involved in setting up a business similar to the employer's business in Germany. In the opinion of the Subdistrict Court, employee knew, or at least should have known, that this information was of great importance to employer and that employer would not have entered into a settlement agreement under the conditions that ended up in the settlement agreement, had it been aware of employee's ins and outs. Employee should have disclosed the intended establishment of the German company when entering into the settlement agreement. The Cantonal Court ignored employee's position that all this arose from the mutual distrust between employee and employer and the unjustified accusations involved. Employee did not substantiate this and, moreover, the Subdistrict Court is of the opinion that employee could and should have been candid. By his conduct, employee caused employer to err in concluding the settlement agreement and employee was guilty of fraud. The Subdistrict Court therefore held that the employer had validly annulled Articles 3 and 4 of the settlement agreement in part, so that the employer was not obliged to fulfil the agreements whose fulfilment the employee claimed. The employee's claim is therefore dismissed.

Finally, the employer also claimed a declaratory judgment that the employee had acted unlawfully towards the employer and was liable to pay damages. The employee disputed that he had acted unlawfully vis-à-vis the employer. The Subdistrict Court agreed with the employee and held that there was no question of unlawful competition, considering as follows.

Without the existence of a non-competition clause, freedom of trade and business applies in principle. Under circumstances, however, there may be unlawful competition. According to the employer, this is the case in this instance because the employee, by virtue of his position, has acquired specific, confidential knowledge of the employer's business, competes with the employer by offering the same services in a niche market with the same software module, and the employee had already been busy (helping to) set up a competing company in Germany for about 1.5 years prior to the termination of the employment contract. It follows from established case law that unlawful competition (only) exists in the case of systematic and substantial destruction of sustainable business flow. In the case of involvement of a former employer or contractor, this may include taking away customers using knowledge and data obtained in the previous partnership. Whether this is the case must be assessed on the basis of the concrete circumstances of the case. In the opinion of the Subdistrict Court, however, the employer has not put forward any concrete circumstances that could support the conclusion that there has been a systematic and substantial breakdown of the employer's sustainable business flow.

It follows from established case law that unlawful competition (only) exists in the case of systematic and substantial destruction of sustainable business flow. In the case of involvement of a former employer or contractor, this may include taking away customers using knowledge and data obtained in the previous partnership. Whether this is the case must be assessed on the basis of the concrete circumstances of the case.

In the opinion of the Subdistrict Court, however, the employer has not put forward any concrete circumstances that could support the conclusion that there has been a systematic and substantial breakdown of the employer's sustainable business flow.

The claimed declaratory judgment was therefore dismissed.

You can read the relevant ruling here.

Would you like to know more about this ruling, or about when there is unlawful competition and/or when a settlement agreement can be annulled? If so, please feel free to contact one of the employment lawyers at SPEE lawyers & mediation.

SPEE advocaten & mediation Maastricht

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