Validity & Enforceability Of Non-Compete Clause In Employment Agreement

Author - Navin Kumar Thakur

INTRODUCTION

Undoubtedly, we are living in the era of globalization, where the employers and the employees are complementary and supplementary to each other and the overwhelming development of the two are inter-connected, but at the same time their rights and duties may not be simultaneously flowing together & repel occasionally. It is, however, apparent that the success of body corporates largely depend upon sensitive business oriented designs, technological supremacy, and their own marketing secrets, which is the pivotal reason why the employers concern of all forms of protective measures for the safeguard of their confidential information, business losses from leakage of the business secrets.

Keeping in view the aforesaid concerns, the employers have accepted the "Non-Compete Clause" in common from a long time in various employment agreements and other forms of agreements for restricting the employees and/or former employees from pursuing similar profession or trade or employment with the competitor of the employer after the cessation of his / her employment for a certain time period after cessation of the employment. The employers use such contractual provisions as a mechanism (more often as a condition precedent for employment) in order to impose any one or more of the following restrictions on the employees:

●        Complete prohibition on disclosure of the trade / marketing secrets or confidential information;

●        Restrictions on starting a business having similar nature of goods;

●        Restrictions on working with enterprises operating in the similar area;

●        Restrictions on dealing in the relevant geographic market with the similar goods;

●        Restrictions on soliciting the clients of the employer with similar products / market strategies;

VALIDITY OF NON-COMPETE CLAUSE

Is non compete clause legal in india ? The “Non-Compete” clause India, is governed by the codified provisions of Section 27 of the Indian Contract Act, 1872 ("Contract Act"), whereby every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. However, some intellectuals have raised their disagreement with the law and opined that the non-compete clause in  employment agreement india must be valid if the particular business deals in good will of the concerned business. However, the Hon’ble Supreme Court in Niranjan Shankar Golikari v. The Century Spinning and Mfg. Co. Ltd; have given a liberal interpretation to section 27 of the Contract Act further clarified that all non-compete clauses cannot be held to be non-effective after the termination of the employment agreement and such clause cannot be declared prima facie prohibited and held,

"a negative covenant that the employee would not engage himself in a trade or business or would not get himself employed by any other master for whom he would perform similar or substantially similar duties is not therefore a restraint of trade unless the contract as aforesaid is unconscionable or excessively harsh or unreasonable or one-sided."

Though, the courts, herein India, have more or less adhered to the letter of the law and have given a consistent view treating such clauses more as a concept of equity than a contract.

In short, the non-compete clause in employment agreement india is valid till the employment agreement is in existence i.e. the employee is engaged with the employer in accordance with the particular employment agreement, but the covenant restraining the employees post resignation / termination is not valid if the employer has not made any arrangement for the livelihood of the employee for the entire covenant period.

ENFORCEABILITY OF NON-COMPETE CLAUSE

Enforceability of any clause is directly related to the judicial interventions and the precedents laid down by the Indian Courts with regard to its enforceability, and so as the enforceability of non-compete clause in india. Such restraining covenants may also be termed as negative covenant which is not enforceable due to lack of its completeness, however it is clear that for being enforceable it would have to be fall under the positive covenant and would have to win its short comings first.

The aforesaid discussions can be summed up with the help of the law which has been settled by the Indian Courts. The Hon’ble Delhi High Court in Foods Ltd. and Others v. Bharat Coca-cola Holdings Pvt. Ltd. & others observed,

"It is well settled that such post termination restraint, under Indian Law, is in violation of Section 27 of the Contract Act. Such contracts are unenforceable, void and against the public policy. What is prohibited by law cannot be permitted by Court's injunction."

The Hon’ble Apex Court, while dealing with such a contractual issue in Superintendence Company of India (P) Ltd. v. Sh. KrishanMurgai, raised the question that whether a post-service restrictive covenant would fall within the mischief of section 27 of the Contract Act and the Hon’ble court in reply held that a contract, which had for its object a restraint of trade, was prima facie void.

In view of the aforesaid observations, it can easily be inferred that such clause does not have an effect after the cessation of the employment and have held that such clause would fall within the definition of Section 27 of the Contract Act.

Therefore, in order to qualify for being enforceable by law, it is important to ensure that restriction imposed by the employer is reasonable and not harsh on the employees. It may also be important to specify that the restrictions to the extent of "non-solicitation" and/or "non-disclosure" may be viewed as an exception to this rule. Though the non-solicitation clause may be prima facie viewed as negative in nature, but they are valid and enforceable by law. The Delhi High Court in Wipro Limited v. Beckman Coulter International S.A. held that a non-solicitation clause does not amount to a restraint of trade, business or profession and would not be hit by Section 27 of the Contract Act as being void. Similarly, the Delhi High Court, in Mr. Diljeet Titus, Advocate v. Mr. Alfred A. Adebare and Ors; clarified that confidential information of the employer can be protected even in the post-employment period.

CONCLUSION

Keeping in view the aforesaid facts and circumstances, it is now well settled that the covenant in restraint of trade in India is prima facie void, and may be enforced only if it can be justified as reasonable in the circumstances, by reference both to the public interest and interest of the parties. There are, however, some important differences in the approach of the courts in deciding the question of such reasonableness depending upon whether the covenant has been given in the context of commercial transaction or as a part of an employment contract. However, whether dealing with a non-compete clause in a commercial transaction or any employment contract, there are no defined rules or fixed parameters to decide that what may be the extent of acceptance of such clauses and therefore each case turns on its own facts, but prima facie any negative covenant restraining the trade after the cessation of the employment is void in accordance with the provision of Section 27 of the Indian Contract Act.

The contents of the Article intend only to provide prima facie information to the readers qua the subject matter and the specialist advice should be sought on the basis of your specific circumstances