A Non-Compete Clause That Paid Nothing Cost an Insurance Agency 120,000 Euros, Until the Guimaraes Court of Appeal Struck It Down

An insurance agency in Viana do Castelo that left the DS Seguros network was ordered by a first-instance court to pay the group 120,000 euros for breaching a clause barring it from competing for two years. The Tribunal da Relação de Guimarães (Guimarães Court of Appeal) has now thrown that award out, ruling that demanding the money in these circumstances was an abuse of right that "manifestly exceeded the limits of good faith".

The decision, dated 28 May and reported by the business title ECO, dismissed the action outright against both the former agency and the person who ran it. Grupo DS had originally claimed at least 151,000 euros plus interest. With the appeal ruling, nothing is owed.

A clause that ran one way

The contested term was a non-compete pact preventing the agency from carrying on competing business for two years after it left the network. What it did not do was pay anything for that silence. No compensation was provided for the period during which the agency was barred from trading, while the same contract fixed a substantial penalty if the bar was broken.

That asymmetry is what the appeal judges fixed on. They noted that the contract had been drafted by Grupo DS and that those terms were, in the court's phrase, "removed from the parties' negotiation". Nor was it proved that the group had ever offered the agency any compensation for the two years it would spend unable to work in its own trade. Enforcing the penalty on those facts, the court held, was "an offence against the values of justice and good faith".

The legal hook is article 334 of the Código Civil (Civil Code), which is short enough to quote in full: the exercise of a right is illegitimate when its holder manifestly exceeds the limits imposed by good faith, by good custom, or by the social or economic purpose of that right. It is a general-purpose corrective, applied where a term is formally valid but its enforcement is not defensible.

Why an employee would have been paid

The comparison that makes the ruling legible is with employment. Portugal's Código do Trabalho (Labour Code) treats non-compete clauses with some suspicion. Article 136 opens by declaring void any clause that restricts a worker's freedom to work after a contract ends, then carves out a narrow exception: a limitation is lawful for up to two years, and only if it is in writing, only if the activity in question could genuinely harm the employer, and only if the worker is given compensation for the whole period of the restriction. For roles involving special trust or access to commercially sensitive information, the ceiling rises to three years. Where a dismissal is later declared unlawful, the compensation must rise to the level of the worker's base pay, or the restriction cannot be invoked at all.

None of that applied directly here, because a network agency is a commercial counterparty rather than an employee, and the statutory compensation rule does not reach it. The appeal court arrived at a comparable outcome by a different route. Where Parliament has legislated, it has decided that keeping someone out of their trade has a price; where it has not, article 334 gave the judges room to reach the same conclusion on the facts.

Not an isolated case

ECO reports that the ruling sits within a wider set of proceedings involving former agents of the network, following an investigation by SIC that identified at least 59 separate actions. The appeal court's reasoning is fact-specific, turning on a standard-form contract, terms not open to negotiation, and the absence of any compensation. Those features are the kind that repeat across a franchise network, which is why a single acórdão can matter well beyond the parties named in it.

Non-compete terms are not a fringe issue in the Portuguese labour market. The OECD estimated this year that up to a third of private-sector workers here are tied to one, a figure that placed Portugal high among the economies it examined. Most of those clauses sit inside employment contracts and carry the article 136 compensation entitlement, whether or not the worker knows it exists.

What this means for you

• Check whether your clause pays: if you are an employee with a non-compete term and no compensation is specified for the restricted period, the clause does not meet the conditions article 136 sets. The compensation requirement is not optional.
• Two years is the normal ceiling: for employees, the limit is two years, extended to three only for roles involving special trust or sensitive commercial information. A longer term is outside what the Labour Code permits.
• Self-employed and agency contracts are different: if you operate through a company, a franchise or an agency agreement rather than an employment contract, the statutory compensation rule does not apply to you. Challenging a penalty means arguing abuse of right on the facts, which is harder and slower.
• Who drafted it matters: the court weighed the fact that the contract was written by the stronger party and its terms were not open to negotiation. Keep evidence of how a contract was presented to you, not only of what it says.
• A first-instance judgment is not the end: the agency here lost at first instance and won on appeal, two years or more after the dispute began. Portuguese civil litigation rewards persistence more often than speed.

The practical effect of the ruling is confined to one former agency in Viana do Castelo. Its wider significance is what it signals to anyone holding a standard-form contract that bars them from working and offers nothing in return: the clause may be in the document, and still not be enforceable.