File Copyright Online - File mutual Divorce in Delhi - Online Legal Advice - Lawyers in India

Legality Of Non-Compete Clauses In The Employment Contracts In India

Nowadays, when industrialization and globalization are at their height, many contracts are a part of day-to-day existence. Employment contracts are the most prevalent type of these agreements. Contracts for employment specify the terms and conditions of employment. The non-compete clause is one of the standard provisions found in the majority of employment contracts these days.

This is carried out in response to worries about the secrets that are connected to every organization. Since employees are an essential component of a company or organization, they have access to information that is deemed to be highly confidential while working for it. As a result, "Non-Compete Clauses" have been introduced into employment agreements to protect this information.

What is non-compete clause?

A non-compete clause, sometimes referred to as a non-compete agreement, is a legal requirement that an employee make a commitment to not work for a rival business or start a similar trade or profession for a set period of time after leaving their current position. This protects critical data and trade secrets for the businesses and stops workers from misusing private information.

This provision is subject to both positive and negative covenants, as was mentioned in the Deshpande v. Arbind Mills Co. decision. In particular, a covenant of service may include a positive requirement that the employee devote all of their attention to serving the employers and a negative covenant that forbids the employee from working for another employer while the agreement is in effect.

Enforceability of non-compete clauses in employment contracts

The enforceability of such non-compete agreements has been a topic of much discussion. The Indian Contract Act's Section 27 is cited by the jurists who oppose the non-compete clause in this regard, while other jurists accept the exception to Section 27 and other precedents. According to Section 27 of the Indian Contract Act,

27. Every agreement by which anyone is restrained from exercising a lawful profession or trade or business of any kind, is to that extent void.

An exception applies when someone sells the goodwill of a business to a buyer, who is then required to refrain from operating a similar business within the specified local limits as long as the buyer, or anyone deriving title to the goodwill from him, operates a similar business there. The court will find these limits reasonable, taking into account the nature of the business.

Employees argue that because Section 27 declares contracts including restrictions on commerce to be void, these non-compete clauses are in restraint of trade and hence unenforceable. Therefore, any restriction of this kind would nullify the non-compete agreement. Nevertheless, the Contract Act's Section 27 interpretation is not res integra. This means that a mere preliminary reading is insufficient to decide whether or not such clauses result in restraint of trade; rather, the interpretation established by courts at different instances and the considerations therein would be crucial in deciding the answer to that question.

Regarding the idea of non-compete while employment as opposed to non-compete after employment, Indian courts have adopted varying stances. In Niranjan Shankar Golikari v. Century Spinning & Manufacturing Co. Ltd., the Hon. Supreme Court interpreted Section 27 of the Indian Contract Act liberally.

According to the Honorable Court, "considerations against restrictive covenants are different in cases where the restriction is to operate during the period of employment contract than those in cases where the restriction is to apply during the period after the termination of the contract." According to the case's facts, it was discovered that the employee was aware of the unique procedure that the plaintiff had developed and implemented, as well as having received training in it.

For the remainder of the time that he had a contract with the plaintiff in that case, the employee who had quit before the agreed-upon timeframe could not work for a competitor. In the Brahmaputra Tea Co., Ltd. v. Scarth case, the court upheld the same principle, holding that "it is difficult to see how that can be unlawful which is essential to its fulfilment and to the due protection of the employer's interests, while the agreement is in force." An agreement to serve someone exclusively for a set term is a lawful agreement.

As a result, the legal rulings lead to the conclusion that reasonable restraint depends on a number of variables, and that reasonable restriction must be taken in the parties' best interests to maintain sufficient protection when preventing the disclosure of trade secrets or business relationships.

Exceptions to restraint of trade

Agreements that restrict trade are void from the outset, as stated in Section 27 of the Indian Contract Act. However, a growing body of legal rulings states that this is not always the case, provided the court determines that the constraint is fair and consistent with public purpose. These kinds of agreements are accepted. The Hon'ble Delhi High Court clarified this in Mr. Diljeet Titus, Advocate v. Mr. Alfred A. Adebare and Ors, ruling that private workplace information can be disclosed even after an employee leaves the company.

The judiciary alone has the authority to decide what is reasonable and is taken into account when defining public policy; no set formula has been established to do so. The reasonableness and whether or not the employment is in line with public policy are determined by the case's facts and circumstances as well as the type of work.

Some of the reasonable restrictions, can include:
  • Distance: Acceptable limitations on workers banning them from practicing the same occupation within a defined period, as the stipulation is fair.
  • Time limit: If the provision allows for a certain duration, it must come under fair limits.
  • Trade secrets: The contractor may reveal trade secrets with reasonable restrictions.
  • Goodwill: An exception to the allocation of goodwill is provided for in Section 27.
Given this, it might be concluded that the Court adopted a stringent stance regarding the enforceability of non-compete agreements and did not use reasonableness as an exception.

Garden leave clause and non-compete clause

A gardening leave clause states that an employee will not be able to work for the employer or anyone else from the time they get a notice of termination until they formally quit their employment with the company. He is, nevertheless, entitled to his pay throughout this time. Since this vacation period is regarded as employment, this clause is enforceable and binds the employee to his non-compete responsibilities that he has during the term of employment.

For instance, in M/s. Kouni Travel (I) Pvt. Ltd. v. Mr. Ashish Kishore, the court determined that the plaintiff was obligated to give the defendant full compensation for the relevant period when the plaintiff was dealing with the validity of the Garden leave clause.

From the foregoing, it can be seen that Indian law has resolved the enforcement of pre-termination provisions quite well; nonetheless, non-compete clauses after termination imply all negative covenants in terms of enforceability.

Law Article in India

Ask A Lawyers

You May Like

Legal Question & Answers

Lawyers in India - Search By City

Copyright Filing
Online Copyright Registration


How To File For Mutual Divorce In Delhi


How To File For Mutual Divorce In Delhi Mutual Consent Divorce is the Simplest Way to Obtain a D...

Increased Age For Girls Marriage


It is hoped that the Prohibition of Child Marriage (Amendment) Bill, 2021, which intends to inc...

Facade of Social Media


One may very easily get absorbed in the lives of others as one scrolls through a Facebook news ...

Section 482 CrPc - Quashing Of FIR: Guid...


The Inherent power under Section 482 in The Code Of Criminal Procedure, 1973 (37th Chapter of t...

The Uniform Civil Code (UCC) in India: A...


The Uniform Civil Code (UCC) is a concept that proposes the unification of personal laws across...

Role Of Artificial Intelligence In Legal...


Artificial intelligence (AI) is revolutionizing various sectors of the economy, and the legal i...

Lawyers Registration
Lawyers Membership - Get Clients Online

File caveat In Supreme Court Instantly