The Constitution of India, in accordance with Article 19 (1) (g), confers on each and every citizen with the fundamental right to practice any profession, or to carry on any occupation, trade or business. This right, however, is not absolute in nature and is subject to reasonable restrictions. One such restriction is the non-compete clause in an employment agreement.
Importance of non-compete clause:
A company endeavors to protect its business, safeguard its confidential information and the sensitive business knowledge bestowed upon its employees. If an employee quits and starts a competing business in the same area as the company then it possibly translates to the employee using the knowledge gained from the company to hamper the company’s business. Therefore, it is a common practice by companies to include a non-compete clause in the employment agreement with their employees in order to ensure the protection of their business.
Validity and reasonability of restriction:
Section 27 of the Indian Contract Act, 1872, provides for an agreement in restraint of trade. It states that every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. The Supreme Court of India in the landmark case of Percept D’ Mark (India) Pvt. Ltd v. Zaheer Khan, discussed Section 27 of the Indian Contract Act, 1872, and laid down that if a restrictive covenant in the agreement is framed in such a way that it extends even after the term of the contract has expired then such a covenant in the contract will not be enforceable. Further, the Apex Court had also noted that this principle also applies to all contracts and not just employment contracts with respect to obligations continuing after termination of contract.
However, the Apex Court has also stated in the case of Niranjan Shankar Golikari vs The Century Spinning And Mfg. Co., that if a restraint of trade against the employee is restricting the employee from competing against the employer during the term of employment then such a covenant is valid and is enforceable in respect of the employee’s actions during the employment.
This view taken by the Supreme Court has also been reiterated by the Competition Commission of India in the case of Mr. Larry Lee McAllister v. M/s. Pangea3 Legal Database Systems Pvt. Ltd. & Ors. under the relevant Competition laws. It was observed in this case that a non-compete clause in an employment contract is not in violation of Sections 3 and 4 of the Competition Act, 2002.
A company intends to protect its confidential information, sensitive business information, and/or trade secret and to restrain its employees from using the same against it in order to maintain its competitive advantage in the marketplace. Hence, an employee agreeing to not compete with the employer during the term of employment is very reasonable in nature. However, if an employee is refrained from continuing to work in the same profession after the term of employment then such a restraint is unfair to an ex-employee skilled in only that particular profession. Non-compete clauses which extend to post employment are held to be invalid and in violation of Article 19 (1) (g) of the Constitution.