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Non-Compete Clauses in India: Balancing Business Interests and Individual Freedom

A non-compete clause or non-competition agreement is a legal provision often included in various contracts and business agreements. It restricts the party to engage in a competition with any other party's nosiness interests after employment. It also prohibits an individual or entity from revealing information or secrets to any party of competing interest during or after the employment.

In India, the enforceability of non-compete clause is governed by Section 27 of Indian Contract Act 1872 and their compatibility with Article 19(g) of the Constitution of India, which guarantees the right to practise any profession, trade, or business. This article aims to explore the legal framework surrounding non-compete clauses in India, the factors affecting the enforceability, and balancing between reasonable restrictions imposed and safeguarding individual freedom.

Section 27 of the Indian Contract Act 1872, construe that any agreement which restricts a person from exercising a lawful profession, trade, or business is void to that extent. It also enumerates two exceptions to this rule: agreements made in connection with the sale of goodwill and agreements that contains reasonable restriction to protect the proprietary interest.

Article 19(g) of the Constitution of India guarantees the fundamental right to practice any profession, trade or business. It recognises the importance of individual freedom and the right to earn livelihood. Like other rights, this right is also not absolute and is subject to reasonable restrictions imposed in the interest of general public or for protection of other's rights.

The compatibility between non-compete clauses and Article 19(g) has been a subject of debate. Courts in India have acknowledged that while non-compete clauses restrict an individual's freedom to engage in a similar business or profession, they are permissible if they fulfil the test of reasonableness. The objective is to strike a balance between the employer's legitimate interests and the employee's right to pursue their chosen profession or trade.

To understand the enforceability of non-compete clause it is crucial to interpret the term "reasonable restriction" in its completeness. The specific terms and scope of a non-compete clause can vary depending on the jurisdiction and technicalities of a particular agreement. Various case laws which debate about the validity of non-compete clause are discussed in this article below-

In the case Mitchell v. Reynolds1, English Courts held that any restraint in trade shall be based of reasonability of the terms of covenant. Courts in India have acknowledged that while non-compete clauses restrict an individual's freedom to engage in similar business or profession, they are permissible if they fulfil the test of reasonableness. The objective should always be to strike a balance between the employer's legitimate interest and employee's right to pursue their chosen profession and trade.

In the case of Niranjan Shankar Golikari v. Century Spinning Mills2, it was established that a negative covenant can only be enforced if it is reasonable and fair, the Apex Court on India validated the inclusion of non-compete clause in an employment contract, which upheld the provision preventing the employee holding position of shift supervisor, from joining entity with competing interest for the duration of employment.

In the year 2006, in the case of Percept D'Mark (India) Pvt Ltd vs. Zaheer Khan and Ors3, the Supreme Court of India, declined to enforce a non-compete clause imposed by a media management company, prohibiting a renowned Indian cricketer Zaheer khan, from joining competing entities for a specific duration after termination of the agreement. Further in the same year, The Delhi High Court in Mr. Diljeet Titus, Advocate v. Mr. Alfred A Adebare and Ors4 granted injunction against his former partners from using the confidential data even during post-employment period.

It was in the year 2013, when Madras High Court in the case of FL Smidth Pvt. Ltd. v. Secan Invescast (India) Pvt. Ltd.5, explicitly observed in its paragraph 21 that reasonable restrictions can be placed by distance, time-limit, trade secrets, and goodwill. In the judgment, the Court categorically observed that an employer can place suitable restrictions on the employee to not operate or practise the profession within the limits of the parent company.

However, in Pranshu Mishra Vs. Guru Gowri Krupa Technologies Private Ltd.6 it was laid that in agreements, non-compete clauses can be divided into two categories: contract term and post-term covenants and crucial distinction lies between restrictions that apply during the contract's existence and those that operate after its termination.

The Hon'ble Supreme Court and the High Court consistently hold that negative covenants in effect during the contract term are not affected by Section 27 of the Contract Act. This is because they are intended to fulfil the contract rather than restrict it. Conversely, restraints that operate after the contract's termination are no longer within the contract's purview and are thus subject to Section 27 of the Contract Act.

Similarly, in the case of Tapas Kanti Mandal v. Cosmos Films Ltd.7, Bombay High Court held that negative restrictive covenant after employment period is not enforceable. The defendant took employment in an MNCs where he entered into a secrecy agreement which provided for a non-compete clause for a period of 3 years.

When the defendant abruptly resigned after serving for long years, the plaintiff submitted to the court that he has acquired in-dept knowledge of products and confidential information of the company and defendant taking employment will be against the non-compete clause. However, the Court did not consider the argument plaintiff submitted and held that any clause restraining the right to profession of an employee is non-enforceable.

Considering all the above-mentioned cases, we can conclude that the provision of non-compete clause is the restrictive clause and enforceable pre-termination, that is a negative covenant during the contract period are not considered restraints of trade and therefore not attracted by Section 27 of the Contract Act.

Restraints of trade encompass a broad range of agreements, including master-servant agreements, covenants for the protection of goodwill, exclusive dealing contracts, and agreements that fix prices. But, the concept of prohibiting employees from engaging in a business or enforcing non-compete clauses beyond the contract's terms that is post termination is deemed invalid.

The same principle applies to non-compete agreements between companies. Applying the reasoning of various decision and established legal principles, it is correctly determined that the negative covenants in the agreement can only be enforced during the contract period and cannot extend beyond it.

Non-compete clauses in India, governed by Section 27 of the Indian Contract Act, 1872, and Article 19(g) of the Constitution of India, are subject to the test of reasonableness. While they allow businesses to protect their legitimate interests, including trade secrets and customer relationships, they must not unduly curtail an individual's freedom to practice their chosen profession or trade.

The courts play a crucial role in ensuring a delicate balance between these competing interests, evaluating the duration, geographical scope, and nature of the restriction. By upholding reasonable non-compete clauses, the Indian legal framework seeks to foster a fair and competitive business environment while respecting individual freedom.

  • 24 Eng. Rep. 347 (1711)
  • MANU/SC/0364/1967
  • (2006) 4 SCC 227
  • MANU/DE/1875/2006
  • 2013 SCC OnLine Mad 389
  • MANU/AP/1001/2017
  • MANU/MH/2443/2018

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