Here is a detailed guiding explaining about the enforceability and validity of the non-compete clauses in the employment agreements.
Non-compete clause in employment agreements once reserved for high-ranking and crucial managerial staff. Today it become pervasive in nearly every employment contract, affecting individuals at various professional levels. This blog clearly outlines every aspect of the non- compete clauses and its legal enforceability aspect.
A non-compete clause limits an employee’s capacity to work for a competitor or participate in similar business activities. Usually within a defined geographical area and for a specified duration—applying both during and after their departure from the current position. These clauses primarily aim to safeguard an employer’s trade secrets, proprietary and confidential information, as well as customer relationships, preventing potential exploitation by former employees.
In general, Non – compete agreement outlines the following:
- Restrictions on entering the relevant geographic market with similar goods
- Restrictions on soliciting the clients of the employer with similar products/market strategies
- Complete prohibition on disclosing trade/marketing secrets or confidential information
- Restrictions on starting a business having similar nature of goods
- Restrictions on working with enterprises operating in the identical area
- Restrictions on dealing in the relevant geographic market with the equivalent goods.
Non-Compete Clause In Employment Agreement
While no law requires an employer and employee to put their working relationship in writing, it is common practice in India for the two parties to agree to a written contract that details the terms and conditions of the employment relationship. An employee who signs a non-compete clause in their employment contract promises not to begin working for or as a rival during the length of their employment. For instance, after signing a non-compete clause, an employee at beverage company ‘A’ cannot work for beverage company ‘B,’ a competitor of ‘A,’ at the same time or for a specified amount of time. The Employee NDA Contract is also very crucial for all the Business Holders.
Therefore, this provision is a restrictive or negative covenant, much like a non-solicitation or non-disclosure clause, because it limits the employees’ freedom of action. The complexity and debate surrounding these clauses’ enforceability in India far outweigh any concerns over their content.
Non-Compete Clause Significance
It is in the best interests of any company to keep their operations secret and their employees’ intimate knowledge of the company’s inner workings safe. When an employee leaves a company and immediately sets up shop in a similar industry, they may be using the inside information they gained there to their former employer’s detriment. Companies typically include a non-compete clause in their Employment Contracts to safeguard their interests.
Validity of Law on Non-Compete Clause
The question at hand is whether or not a non-compete clause is valid in India. Any agreement by which anyone is deprived of exercising trade, or business, a lawful profession of any kind is void to that extent, including ‘Non-Compete’ clauses in India, which are controlled by the codified provisions of Section 27.
A minority of experts, however, argue that non-compete clauses in employment agreements in India should be upheld if the company in question trades in the good name of its clients. Niranjan Shankar Golikari v. The Century Spinning and Mfg. Co. Ltd; however, the Hon’ble Supreme Court has provided a liberal arrangement to Contract Act’s section 27, further explaining that all non-compete clauses cannot be preserved to be non-effective after the termination of the employment agreement, nor can such a clause be declared prima facie prohibited and held, to be unenforceable.
Although courts in India have generally followed the law to the letter, they have provided a consistent view in which such provisions are viewed more as an equity concept than a contractual provision.
In short, a non-compete clause in an Indian employment agreement is only in effect while the employment agreement itself is in effect, meaning as long as the employee is performing work for the company by the terms of that agreement.
However, a covenant restraining employees following resignation or termination is void if the company has not provided for the employee’s support throughout the covenant.
Exceptions to Restraint of Trade
Section 27 of the Indian Contract Act,1872 declares agreements restraining trade void from the outset. However, judicial trends suggest that under certain circumstances, if a restraint is deemed reasonable and aligns with public policy, it may be upheld. This was illustrated in the case of Mr. Diljeet Titus, Advocate v. Mr. Alfred A. Adebare and Ors, where the Delhi High Court ruled that sensitive workplace information can still be protected post-employment. Determining reasonableness and adherence to public policy rests with the judiciary, without a set formula, and depends on case specifics and employment nature.
Acceptable restrictions may include geographical limits, timeframes, protection of trade secrets, and goodwill preservation, as outlined in case law such as Tapas Kanti Mandal v. Cosmos Films Ltd, where the Bombay High Court ruled against enforcing a post-employment non-compete clause. Despite arguments regarding the employee’s access to confidential information, the court maintained a strict stance against clauses impeding professional rights.
The Enforceability of a Non-Compete Clause in Employment Agreement
The enforceability of a non-compete clause in India depends on the actions of the Indian courts and the precedents they have set. Such restraints may also be referred to as a ‘negative covenant,’ which is not enforceable due to its lack of completeness; however, it is clear that to be enforceable, such a restriction would have to fall under the ‘positive covenant’ and would have to win its shortfalls first.
Therefore, it is essential to make sure that any restrictions imposed by the employer are reasonable and not overly harsh on the employees for them to be enforceable by law. It may also be helpful to note that ‘non-solicitation’ and ‘non-disclosure’ restrictions may be considered exceptions to this general rule. The non-solicitation provisions may appear unfavorable at first glance, but they are legal and enforceable.
According to the Delhi High Court’s decision in Beckman Coulter International S.A. v. Wipro Limited, a non-solicitation clause is not a restraint of trade, business, or profession. It is, therefore, not invalid under Section 27 of the Contract Act. Similarly, in Mr. Alfred A. Adebare and Ors. vs. Mr. Diljeet Titus, Advocate The Delhi High Court made it clear that an employee’s right to privacy about their former employer’s confidential information extends beyond the termination of their employment.
Conclusion
To adequately protect the covenant, any restrictions placed on the covenantor to prevent the disclosure of trade secrets or business connections must be reasonable in the interests of the parties. In light of the exception, it is abundantly evident that Section 27 implies that for an agreement to prohibit trade from being lawful, there must exist between the parties a level of reasonableness that is consistent with the interest of the public.
To know further intricate details about the enforceability and validity of the non-compete clauses present in the employment agreements, get in touch with professionals at VakilSearch.
Frequently Asked Questions
Are non-competition clauses legal?
The Indian Contract Act of 1872 prohibits agreements that restrain trade. Hence, any non-compete obligation extending beyond employment duration is invalid and cannot be enforced.
Are non-competes enforceable in India?
The Indian Contract Act of 1872 prohibits agreements that restrict trade. Hence, any non-competition obligation lasting beyond employment is invalid and cannot be enforced.
What is an example of a non-competition clause in an employment contract?
For instance, a TV network could have valid worries that a beloved weather forecaster could draw viewers to a competing station within the same region if they were to switch jobs. This would typically justify implementing a non-compete agreement in many regions.
Do non-compete agreements hold up in court?
The non-compete clause remains valid only during the duration of the employment contract. Legal precedent confirms that breaching this clause before termination has been upheld in various court decisions.
What can I do if an employee breaks a non-compete clause?
An employee cannot be prevented from leaving their job to work for a competitor. However, if an employee receives monetary compensation in exchange for agreeing not to compete, they may be required to reimburse a reasonable portion of that compensation if they violate the non-compete agreement.
What is a non-compete clause in an employment contract?
In accordance with a non-compete provision, an individual commits to refraining from initiating a new enterprise, or accepting employment or involvement with any competing entity.
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