Legality Of Non-Compete Clauses In Employment Agreements In India
When the success of a corporation depends greatly upon delicate processes,
technological supremacy, and trade secrets employers are keen to adopt all sorts
of protective measures for shielding such personal information from any kind of
leaking in the current age of globalisation. As a result of these worries,
"Non-Compete Clauses" are frequently included in employment contracts and other
types of agreements to prevent current employees and/or former employees from
working for a competitor of the business after their employment ends.
The idea of a "Non-Compete Clause" has been widely accepted by Businesses over
the past few decades, but it dates back to the middle of the nineteenth century.
With a few exceptions, restrictive terms in employment contracts that forbid
employees from working for competitors may not always be upheld by the law.
Non-compete provisions have taken centre stage because of the high increase in
attrition rates at some software services businesses like Infosys. Businesses
increasingly utilise them to stop employees from directly joining their rivals
and providing the same clientele.
What does a Non-Compete Clause mean?According to Contractual Laws, a non-compete clause is a provision in an
employment contract wherein the employee agrees to the employer's requirement
that he will not compete with the employer in the form and nature of work while
he is employed or even after leaving the employer's services. By way of a
non-compete founders and key executives who leave the company are subject to
By a non-compete agreement, a person promises not to create a new company, work
for another competitor, or interact with them in any way. Such limitations are
typically imposed, and a person is prohibited from working for rival companies
for a set period and within a defined geographic area. In M&A deals, the
commercial value of the purchase is jeopardised if employees join a rival
business, as this results in the acquirer losing its competitive edge inside the
designated geographic area.
Legal Position in IndiaAccording to section 27 of the Indian Contract Act of 1872, unless they fall
within the specific exception set forth by the statute, any agreement that
prevents someone from engaging in a lawful profession, trade, or business of any
type is invalid to that extent. The fundamental idea behind this is that the law
protects against interference with a person's right to practise their lawful
trade or vocation whenever they see fit.
According to the strategy used by Indian courts when dealing with employees,
such limits during the employment time are valid and regarded legitimate for the
preservation of the commercial interests of the corporation and thus do not
infringe section 27. Given that it only requires the employee to work
exclusively for the employer, it is merely a means of carrying out the terms of
the employment contract and not a trade restraint. It is debatable whether these
limits should continue after the job period.
Despite the existing agreement between the employer and employee, the courts
have generally ruled that the employee's right to work must take precedence over
the interests of the employer. A negative covenant in an employment contract
that forbids the continuation of a rival firm after the term of the contract has
expired was held illegal and unenforceable in Delhi High Court's judgement in
Affle Holdings Pte Limited v. Saurabh Singh.
In M&A agreements intriguingly, while non-compete restrictions go together with
the transfer of a company's goodwill, courts may not see them negatively if they
extend beyond the engagement period between buyers and vendors. However, these
limitations are only valid within a given local area, and they must appear to
the court to be reasonable given the nature of the firm. For instance, the Delhi
High Court in the case of Ozone Spa Pvt Ltd v. Pure Fitness & Ors.
prohibited the defendants from starting, operating, or establishing any
competing company in the neighbourhood where the plaintiff's facilities were
The courts in India have laid down that for a non-compete restriction to be
valid, there must be a legitimate business interest to be protected. The purpose
of the covenant cannot be greater than that which is necessary to protect
legitimate business interests, and noncompete restrictions cannot be indefinite.
These rules may be used to enforce non-compete agreements reached as part of the
sale of a business, together with goodwill, if necessary. If the party seeking
to enforce the restriction proves that a transaction has been made out of
goodwill, the courts are reluctant to allow the enforcement of such
Alternatively, "Garden leave clauses" have been inserted into purchase
agreements as a result of uncertainty regarding the enforcement of a non-compete
clause. Employees are paid their full wage during the time they are prohibited
from participating under "garden leave" conditions. However, the payment of
compensation during garden leave does not renew the employment contract and
therefore we can conclude that the garden leave clause is presumptively an act
of restraint of trade and is subject to section 27 of the Contract Act.
Nevertheless, the idea of "garden leave" is well-liked and frequently used in
India. Additionally, Indian courts have the authority to impose restrictions on
the dissemination of proprietary information and the solicitation of clients and
Non-compete clauses are not a general-purpose notion, and their enforcement will
be determined by the laws of the applicable jurisdiction. It is crucial to
confirm that a business' goodwill has been sold to enforce a post-termination
covenant, and the purchase agreement should make this clear. Both the test of
reasonableness and the principle of the restraint being partial would not be
applicable in India, unless it comes under the exception to section 27 of the
Contract Act, i.e., the sale of goodwill of a business.
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