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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 various restrictions.

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 India

According 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 located.

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 restrictions.

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 workers.

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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