Validity of Non-Compete Clauses in Indian Law

VALIDITY OF NON-COMPETE CLAUSES IN INDIAN LAW

Author: Muskan Malviya, NLUO

*This article has been written by the author while pursuing a Certificate Course on Research Methodology with us.

Under the Contractual Laws in any relationship between two parties where one side is the employer and the other the employee, the non-competitive provision is well known as the provision. Within the non-competitive clause, The employee undertakes and accepts the employer’s duty that he should not be the employer’s competitor in the nature and life of the employer ‘s employees during the time of employment, or even after employee exits the facilities / jobs of the company. The Non-compete clause finds a place in the globe under the deals and contracts. If we see the Indian legal position about the non-competitive deal it is forbidden under the Contract Rules.

“Section 27 of the Indian Contract Act-1872”

“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”[1].

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 deriving title 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”.

Enforceability of Non-Compete clauses

In India such a condition is regulated by the codified provisions of “section 27 of the Indian Contract Act, 1872” whereby any arrangement that prevents anyone from the practice of some kind of lawful occupation, trade or company is to that degree null and void. The courts in India have followed the text of the law more or less, and issued a firm opinion that treats such clauses more as a definition of freedom than a contract.

With regard to the validity of certain non-competitive clauses, the legal precedent established by the Court of India should be investigated. The Supreme Court of India, in “Superintendence Company of India (P) Ltd. v. Sh, Krishan Murgai[2],”  when grappling with such Krishan Murgai ‘s contractual dilemma raised the issue of whether a strict post-service agreement would be in uncertainty set out in “section 27 of the Contract Act”. The court ruled that an agreement that had an exchange cap for its purposes, was prima facie invalid. Even the “Foods Ltd. and Others v. Bharat Coca-cola Holdings Pvt[3], Delhi High Court. Ltd. and others noted,”

“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.”

Supreme Court decision in Percept D’ Mark (India) Pvt. Khan Ltd. v. Zaheer and Anr. Shed[4] some clarity on the lawfulness of such clauses.

“Under Section 27 of the Contract Act

 (a) a restrictive covenant extending beyond the term of the contract is void and not enforceable.

(b) The doctrine of restraint of trade does not apply during the continuance of the contract for employment and it applied only when the contract comes to an end.

(c) As held by this Court in Gujarat Bottling v. Coca Cola[5], this doctrine is not confined only to contracts of employment, but is also applicable to all other contracts.”

In light of the above findings, it can be assumed that the Indian courts, disputes over such non-competitive provisions in a work deal, considered the pre-completion period as different from the post-employment period. Although the courts were accommodating of enforcing the non-competitive provision, they reached an important role in making sure that this clause would not have an effect after work termination and ruled that such clause would come under the trouble laid out in “section 27 of the Contract Act”.

The Supreme Court in “Niranjan Shankar Golikari v. Century Spinning & Mfg. Co” [6], however. Co., Co. Ltd., while providing a moderate definition of “section 27 of the Contract Act” Go on to clarify that not all non-competitive provisions in place preponderance of the evidence banned and held until the expiry of the work contract,

“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”.

So far to be enforceable by statute It is also necessary to ensure that the conditions enforced by the employer are equitable to and not unfair to the workers. Specification that the limitations to “non-solicitation” or/and “non-disclosure” could be treated is one point to this legislation can not be out of scope. While the non-applications clause can prima facie be called negative in intent, it is constitutionally legitimate and enforceable. In Wipro Limited v. Beckman Coulter International S.A.[7],” Delhi High Court It holds that a non-solicitation provision would not constitute a restraint on commerce, industry or occupation and that “Section 27 of the Contract Act” should not be considered null and void. Similarly, the Delhi High Court has explained in Mr. Diljeet Titus, Advocate v. Mr. Alfred A. Adebare and Ors[8] that sensitive workplace information can be covered even during the post-employment period.

TEST OF RESONABLENESS

While “section 27 of the Indian Contract Act states that all restraining arrangements of any occupation, trade or company are invalid, The existing trend according to various judicial pronouncements leads to the conclusion that equal restraint is permissible to some degree and does not make the contract invalid ab initio”. Fair restriction relies on different considerations, and the restriction must be appropriate in the interests of the parties to guarantee sufficient security of the agreement in order to prohibit exposure of trade secrets or commercial relations. On careful analysis of section 27[9], taking into account the exception given, it can be inferred that the provision means that, in order to be valid a trade restraint arrangement between the parties must be fair and compliant with the public interest. The problem then emerges as to what is a public policy and what is reasonable?

It is to be addressed widely with respect to public policy. It’s illusory, it’s contingent and it’s unreliable. It’s difficult to provide detailed meanings of the word public policy. Public policy definitions can be extended and updated. Exposing the word “Economic policy” is judicial jurisdiction. Several instructions provided by the judiciary to decide what is, and is not public policy. Any of these may be articulated as-any arrangement that seeks to hurt the public interest or health is against public policy. It can also mean – anything that contributes to institutional inequality, freedom restriction, trade, and human or civil freedoms, anything that seems to hinder oppression or infringement of laws, and anything that runs counter to reasonable values can be said to go against public policy. What agreements are, and what is not, in action against public policy is essentially judicial control.

As far as the word “fair” is concerned, it clearly means-” according to the principle “in general understanding. Under the given circumstances, Every rational man should use common sense and experience would understand why. So the reasonableness test relies on the truth of every case and the circumstances. That a non-compete clause arrangement is legitimate and appropriate for restraining, or not, is also a true court decision which differs depending on the circumstances of the case.

Such non-compete clauses may be subject to some reasonable restrictions, such as:

1) Distance: Acceptable limitations on workers banning them from practicing the same occupation within a defined period, as the stipulation is fair.

2) Time limit: If the provision allows for a certain duration, it must come under fair limits.

3) Trade secrets: The contractor may reveal trade secrets with reasonable restrictions.

4) Goodwill: An exception to the allocation of goodwill is provided for in Section 27[10]. The court also uses the “injunction” procedure to restrict the exchange of confidential information with a third party, using trade secrets, etc. & “compensation.”

GARDEN LEAVE CLAUSE

In a “Garden Leave” provision, an employee allows the employer to receive advance notice of his absence from work and the employer in exchange shall bring him full remuneration at such time when he is not required to work. According to this provision, the notice given by an employee can be stretched to one year to terminate his job with the employer keeping the right not to attend the job at some time after the notice has been completed. Thus, the organization could essentially put him on garden leave after three months. Although that term is a growing strategy used by employers to replace the non-competitive provisions in other parts of the globe, the United Kingdom in particular also lacks the procedural clarity of Indian courts. Currently, “VFS Global Services Private Limited v. Mr. Suprit Roy Bombay High Court”[11] stated that “obstructing an employee who has left service from gaining a job elsewhere is not fair or appropriate.” The Court has acknowledged that the provision is prima facie trade-restrictive and is protected by “Section 27 of the Contract Act”.

CONCLUSION

The scope of non-compete agreements varies across countries. Indian rule departed from British law in this field of contract law. British law is fluid, regulated by judicial precedents as opposed to the strict Indian law regulated by “Section 27 of the Indian Contract Act, 1872” in this respect. After much evolution in British law today, according to the British courts, general restraint is absolutely void, and partial restraint is permissible as long as appropriate [12]. “Reasonability” would be the appropriate matter in the current context for creating better terms of understanding between employer and employee for their interests. The Indian Judiciary’s recent propensity to uphold the non-compete provisions to a rational and equitable degree in deals is a sign of improvement[13]. The Indian Judiciary’s recent propensity to uphold the non-compete provisions to a rational and equitable degree in deals is a sign of improvement.

International investors in India need to be aware of Section 27[14] existing and increasing implications, as they prepare their job connections and management opportunities.

In this case, Indian courts struggle to consider a wider and more effective scenario, as seen abroad. “Article 21[15] and 19(1)(g)[16] of the Indian Constitution guarantees the right to life and poses problems with the compliance of non-competitive provisions in India”. While it is difficult to work effectively, it is important to accept that the socio-legal, economic and corporate circumstances in India and abroad have modified and grown.


[1] Indian Contract Act 1872, s 27

[2] Superintendence Company of India (P) Ltd. v. Sh. Krishan Murgai,  (1980) SCR (3)1278.

[3] Foods Ltd. and Others v. Bharat Coca-cola Holdings Pvt, (1999) VAD Delhi 93.

[4] D’ Mark (India) Pvt. Khan Ltd. v. Zaheer and Anr. Shed, (2004) (2) BomCR 47.

[5] Gujarat Bottling v.  Coca Cola, (1995) SCC (5) 545.

[6] Niranjan Shankar Golikari v. Century Spinning & Mfg. Co, (1967) SCR (2) 378.

[7] Wipro Limited v. Beckman Coulter International S.A, 2006 (3) ARBLR 118 Delhi.

[8] Mr. Diljeet Titus, Advocate v. Mr. Alfred A. Adebare and Ors, (2006) (32) PTC 609 Del.

[9] Indian Contract Act 1872

[10] Indian Contract Act 1872

[11] VFS Global Services Private Limited v. Mr. Suprit Roy  Bombay High Court, (2008) (2) BomCR 446

[12] Satyavrata Ghosh  v. Kurmee Ram Bangor, (1954) SCR 310,.

[13] Singh, Shivan, and Singh, ‘LexQuest, Extent of validity of Non-Compete Clause in IndiaLexQuest’ (2015) <http://lexquest.in/extent-validity-non-compete-clause-india/>accerssed on 5 May, 2020.

[14] Indian Contract Act 1872.

[15] Indian Constitution Act 1950, art 21.

[16] Indian Constitution Act 1950, art 19 (1) (g).

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