Can firms attach excessive penalties to the non-compete clause?

By the Editorial Team · Friday, October 30, 2026

Employers can include non-compete clauses with penalties in contracts, but courts have the power to adjust or void excessive penalties to ensure fairness under recent labor and civil laws. Additionally, when selling a factory on leased premises, tenancy rights do not automatically transfer to the buyer unless the lease is in the factory's name and landlords are protected from potential harm.

Employers may include non-compete clauses with penalty provisions in employment contracts, but such clauses are subject to legal scrutiny regarding their reasonableness and enforceability. Under Article 10 of Federal Labor Law No. 33 of 2021, non-compete restrictions are permissible when they are limited in duration, geographic scope, and scope of work to protect the employer’s legitimate business interests. However, penalty clauses attached to these provisions must not be excessive.

The Federal Decree-Law No. 25 of 2025, which promulgates the Civil Transactions Law, addresses the issue of penalty clauses for breaches of non-compete agreements. Article 852 grants courts the authority to review penalty provisions deemed exaggerated or designed to unduly compel employees to remain with the employer beyond the agreed period. In such cases, courts may amend or annul the penalty clause to ensure fairness.

In separate legal guidance concerning the sale of a factory operating on leased premises, owners are generally permitted to sell their factory. However, the sale does not automatically transfer tenancy rights to the buyer. The outcome depends on the nature of the lease agreement.

If the lease was entered into by the owner in a personal capacity, the landlord must be notified as the lease cannot be transferred automatically to the purchaser. The new owner would not acquire rights to occupy the premises under the existing lease without landlord consent.

Alternatively, if the lease agreement was signed in the name of the factory as an entity, the transfer of ownership might not impact the lease itself. Nevertheless, landlords retain the right to seek termination of the lease through legal channels. Courts will evaluate factors such as whether the purchaser provides adequate security and whether the lease transfer would cause any actual harm to the landlord.

This position reflects provisions in Article 728 of the Civil Transactions Law, which allows courts to order the continuation of leases associated with factories or shops upon sale, provided the purchaser offers sufficient security and the landlord is not prejudiced.

These legal frameworks seek to balance the interests of employers, employees, landlords, and purchasers by imposing reasonable limits on contractual clauses and clarifying rights related to leases and business transfers.

This article was reported by synthesizing coverage from multiple independent news outlets to present a balanced, unbiased account. Read about our editorial standards. Spotted an error? Let us know.