A non-compete clause is well known under the Contractual Laws as the clause being made out into any agreement between two parties where one party is the employer and the other party is the employee. By virtue of this non compete clause, the employee undertakes and gives his acceptance to the condition of the employer that during the course of the employment or even after the employee leaves the services/job of the employer, he will not be the competitor of the employer in the form and nature of the employment of the employer. The Non-compete clause finds place under the agreements and contracts throughout the globe. When we see the Indian legal scenario about the non compete clause, it is prohibited under the Law of Contracts.
Section 27 of the Indian Contract Act-1872 provides that ”Every agreement by which anyone is restrained from exercising a lawful profession or trade or business of any kind, is to that extent void”.
Exception : One who sells goodwill of a business with a buyer to refrain from carrying on a similar business within specified local limits so long as the buyer, or any person derivingtitle to the goodwill from him, carries on a like business therein provided that such limits appear to the court reasonable, regard being had to the nature of business.
Indian law is therefore very clear and strict on this point, any such non compete agreement shall not be binding on the parties and the same shall be null and void. By using the term void ab initio, for such type of agreements it has shown that it has kept such non compete clause in the agreements beyond consideration. Indian courts have also consistently refused to enforce post termination non compete clauses in employment contracts as “restraint of trade” is impermissible under section 27 of the Indian Contract Act-1872, and have held them as void and against the public policy because of their potential to deprive an individual of his or her fundamental right to earn a living.
However considering the developed social, legal, and corporate circumstances, and the required confidentiality and the integrity of the employments, the judiciary has inclined its view towards giving some regard to the non compete agreements. In the case of ‘Niranjan Shankar Golikari Vs the Century Spinning and Manufacturing Company Ltd.’ , the Hon’ble Supreme Court observed that-“restraints or negative covenants in the appointment or contracts may be valid if they are reasonable”. Further in one case - V.F.S. global services Pvt. Ltd Vs Mr. Suprit Roy, 2008(2) Bom CR 446, the Bombay High court established the principle that a restraint on the use of trade secrets during or after the cessation of employment does not tantamount to a “restraint on trade” under section 27 of the Act and therefore can be enforceable under certain circumstances. In the case of Mr. Diljeet Titus, Adv Vs Mr. Alfred A Adebare & Ors 2006(32)PTC 609 (Del), Delhi High court held that “The real test was the degree of employment control to determine whether it was a contract of service…” .
Like these there are several other judgements of various High courts which have laid down certain tests or guidelines to check the validity and legality of imposition of restrictions on such non competing agreements. It shows that Indian courts may in certain circumstances enforce confidentiality agreements intended to protect an employer’s proprietary rights.
In foreign judiciary subject to certain limitations and reasonable boundness, the non compete agreements are declared to be enforceable to the reasonable extent. For example: In ‘HRX Holdings Pty Ltd Vs Pearson(2012) FCA 161’, the Federal Court of Australia upheld a post employment restraint preventing a senior employee from competing with his former employer for two years. The court upheld the two years non compete clause with consideration. The court held the restraint reasonable because
- The employee was the “humanface” of the company and had intimate knowledge of the former employer’s client relationships, pricing arrangements and strategies, and
- The employee had received compensation for the restraint in the form of the remuneration and shares for all but three months of the restraint period.
Keeping in view, the increase in cross border trade and an enhanced competitive climate in India, confidentiality, non compete and non solicitation agreements are becoming increasingly popular, especially in the IT and technology sectors. A huge number of out sourcing and IT companies are including confidentiality, non compete and non solicitation covenants in agreements with their employees, with terms ranging from a few months to several years after the employment relationship is terminated. The companies claim that such restrictions are necessary to protect their proprietary rights and their confidential information. In the same way, foreign companies doing business in India often seek to include confidentiality, non compete and non solicitation covenants in their agreements with senior management and employees, as is customarily done in certain abroad countries.
Although section 27 of the Indian Contract Act states that all agreements in restraint of any profession, trade or business are void, the current trend as per various judicial pronouncements leads to the conclusion that reasonable restraint can be permitted to some extent and does not render the contract void ab initio. Reasonable of restraint depends upon various factors, and the restraint in order to prevent divulgence of trade secrets or business connections has to be reasonable in the interest of the parties to ensure adequate protection to the covenantee. On careful analysis of section 27 keeping in view the exception provided with it, it can be safely concluded that the section implies that, to be valid an agreement in restraint of trade must be reasonable between the parties and consistent with the interest of the public. So the question arises as to
- What is public policy and
- what is reasonable
It is to be widely discussed regarding the public policy. It is illusive, varying and uncertain. It is difficult to give precise definition of the term public policy. Concept of public policy is capable of expansion and modification. It is the province of the judiciary to expound the term “Public policy”. There are several guidelines given by the judiciary to determine as to what is public policy and what is not. Some of these can be expressed as – any agreement tending to injure the public interest or public welfare is against the public policy. Further it can include as to – whatever tends to injustice of operation, restraint of liberty, commerce and natural or legal rights, whatever tends to the obstruction of injustice or violation of statutes and whatever is against good morals can be said to be against Public Policy. What agreements are actually against the public policy and what are not, is totally the discretion of the courts.
So far as the term “Reasonable” is concerned, simply in general understanding it means- “according to reason”. Whatever a reasonable man would do using common sense and knowledge, under the given circumstances, will account as reasonable. Therefore the test of reasonability depends on the facts and circumstances of each case. Whether an agreement containing non compete clause is valid and suitable to restrain, or not, is also a total discretion of the courts and which is varying based on the facts of the case.
To validate such non compete clauses certain reasonable restrictions may be imposed like:
- Distance: Suitable restrictions on employee prohibiting them to practice same profession within a stipulated distance, the stipulation being reasonable.
- Time limit: If there is a reasonable time provided in the clause then it will fall under reasonable restrictions.
- Trade secrets: the employer can put reasonable restrictions on the letting out of trade secrets.
- Goodwill: Article 27 of the Indian contract Act provides an exception on the distribution of goodwill.
In addition to this the Judiciary uses the tool of ‘Injunction’ to prevent a third party from releasing confidential information, using trade secrets etc. & ‘compensation’.
Certain efforts have also been made by the Legislators to substantiate the confidentiality etc. such as – Section 72 of I.T. Act-2000, deals with breach of confidentiality & privacy and any breach will attract imprisonment up to two years, or fine of Rs. One Lac.
Although such Non compete clauses are valid in foreign countries, but in regard to the Sphere of the Indian judiciary, it does not find such wider and effective scenario like that in foreign countries. Article 21 of the Constitution of India guarantees the right to livelihood and since it is a fundamental right it is held to be inviolable. This makes the enforcing of non compete clauses in India even more difficult. At the same time it is also very pertinent to be considered that, the time and the circumstances-socio, legal, economical & corporate, have changed and developed in India and Abroad to a greater extent and in order to fill the lacunas of law and the developed circumstances, social engineering (Social engineering is a beautiful concept propounded by Roscoe Pound – social engineering is a means of trying to control human behaviours with the emphasis of laws. This principle is based upon the thought that laws are a deterrent to future crimes. As written by the Roscoe Pound in the ‘Jural Postulates’, he lays the foundations for assumptions in which a civilized society should be able to live…) is required to be done. The recent trends of the Indian Judiciary tending to validate the non compete clauses to the reasonable and justful extent in the various agreements as discussed above is an attempt to that effect and are commendable.