What is a non-compete clause?
A non-compete clause under the Contractual Laws is the clause in an employment
agreement whereby the employee undertakes and gives his acceptance to the
condition of the employer that during the employment or even after the employee
leaves the services of the employer, he will not be the competitor of the
employer in the form and nature of the employment of the employer.
Section 27 of the Indian Contract Act, 1872
From an Indian legal perspective, the Non-compete clause 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. 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.
For any restrictive covenant to fall within the ambit of Section 27 of the
Contract Act, the agreement has to be in restraint of trade. Unlike the law in
the United Kingdom, the Contract Act does not distinguish between partial and
total restraint of trade, if the clause amounts to restraint post-termination of
the agreement, then the same is void. Section 27 does not offer insight as to
what kinds of restraints are valid; the qualification of reasonable restraints
being valid and enforceable has been read into Section 27 by the courts.
What does Article 19(g) of the Constitution of India say?
Article 19(g) of the Constitution of India provides every citizen the right to
practice any profession, trade, or business. This is not an absolute right and
reasonable restrictions can be placed on this right in the interest of the
public, the courts have always been wary of upholding such restrictions and have
kept the interpretation of this provision flexible to ensure that principle of
justice, morality, and fairness are aptly applied, depending upon facts and
circumstances of each case. Considering 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
Further in case:
V.F.S. global services Pvt. Ltd Vs Mr. Suprit
y, 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.
Like these, there are several other judgments of various High courts that 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.
The Supreme Court of India, while dealing with such a contractual issue
in Superintendence Company of India (P) Ltd. v. Sh. Krishan Murgai
question that whether a post-service restrictive covenant would fall within the
mischief of section 27 of the Contract Act. The court held that a contract,
which had for its object a restraint of trade, was prima facie void.
Delhi High Court in Foods Ltd. and Others v. Bharat Coca-cola Holdings Pvt. Ltd.
"It is well settled that such post-termination restraint, under Indian Law,
violates Section 27 of the Contract Act. Such contracts are unenforceable, void,
and against public policy. What is prohibited by law cannot be permitted by
The judgment of the Supreme Court in Percept D'Mark (India) Pvt. Ltd. v. Zaheer
Khan and Anr.
sheds some light on the legality of such clauses. The Apex Court
"Under Section 27 of the Contract Act:
- A restrictive covenant extending beyond the term of the contract is void
and not enforceable.
- The doctrine of restraint of trade does not apply during the continuance
of the employment contract and is applied only when the contract comes to an
- As held by this Court in Gujarat Bottling v. Coca Cola (supra), this
doctrine is not confined only to contracts of employment, but is also
applicable to all other contracts.
Given the aforesaid observations, it can be inferred that while dealing with
disputes relating to such non-compete clause under an employment agreement, the
Indian courts have considered the pre-termination period of the employment
distinct from the post-termination period of the employment. Whilst the courts
have been tolerant about the application of the non-compete clause, they have
walked an extra mile to ensure that such clause does not have an effect after
the cessation of employment and have held that such clause would fall within the
mischief of section 27 of the Contract Act.
However, the Supreme Court in Niranjan Shankar Golikari v. The Century Spinning
and Mfg. Co. Ltd
., thereby giving a liberal interpretation to section 27 of
the Contract Act further clarified that not all non-compete clauses effective
after the termination of the employment agreement are prima facie prohibited and
"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".
Therefore, to qualify for being enforceable by law, it is important to ensure
that the restriction imposed by the employer is reasonable and not harsh on the
employees. It may not be out of place 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, they are valid and enforceable by law.
The Delhi High Court
in Wipro Limited v. Beckman Coulter International S.A
. held that bar under
Section 27 of the Act will not be attracted in cases where non-solicitation
clauses operate between business partner and distributor contracts or similar
partnership contracts between two independent entities as opposed to that
between an employer and an employee.
Therefore, non-solicitation clauses have
more sanctity when part of agreements such as those of partnership where there
is a strong implicit presumption that each party had an equal opportunity at the
negotiation table and there was an absence of dominance of will of one party
over another. This however would be dependent on the facts of each case and the
language of each contract. Similarly, in Mr. Diljeet Titus, Advocate v. Mr.
Alfred A. Adebare and Ors.
, the Delhi High Court clarified that confidential
information of the employer can be protected even in the post-employment period.
Reasonableness of restraint depends upon various factors, and the restraint 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.
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.