Many contracts are now a part of daily life in an era of rapid industrialization and globalization. Employment contracts are the most common sort of these arrangements. Contracts of employment specify the terms and circumstances of employment. The non-compete clause is now a regular component in most employment contracts. A non-compete clause is a provision in an employment agreement that prohibits employees from engaging in a similar company or profession during or after termination of employment for a set period of time in order to safeguard the employer’s business.
HISTORICAL BACKGROUND:
In 1414 while hearing Dyer’s case[1], “English Common Law denied the execution of non-compete agreements due to their nature”. The non-enforceability was maintained until 1621 because it hampered commerce. After a restriction limited to a specific geographic place was permitted as an exception, the exception became the rule with the 1711 watershed case of Mitchel v. Reynolds[2] which created the contemporary framework for analyzing the enforceability of non-compete agreements.
Indian courts have previously taken a severe view to non-compete clauses. In the majority of cases, honorable judges have declined to recognize the constitutionality of non-compete clauses, citing Section 27 of the Indian Contract Act and Article 19(1)(g) of the Indian Constitution. Section 27 of the Indian Contract Act of 1872 states 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.” Article 19(1)(g) guarantees every Indian citizen the freedom to trade and practice their profession.
However, in the historic decision of Niranjan Shankar Golikar v. The Century Spinning Company[3], “the Court first acknowledged the non-compete clause by adopting the concept of ‘the norm of reasonableness’. The following factors must be considered while applying this rule:
- The period of the restriction,
- The geographical scope,
- The nature of the employee’s role,
- The availability of other employment options.”
In the Brahmaputra Tea Co., Ltd. v. Scarth[4] decision, the court affirmed the same approach noting that “It is difficult to see how that can be unlawful, which is essential to its fulfilment and the due protection of the employer’s interests, while the agreement is in force.” A legally binding commitment to service someone exclusively for a specified period of time.
EXCEPTIONS TO RESTRAINT OF TRADE:
Section 27 of the Indian Contract Act states that agreements that restrict trade are null and void from the beginning. However, a growing collection of legal opinions indicates that this is not necessarily the case as long as the court judges that the constraint is fair and consistent with the public purpose. These kind of agreements are accepted. The Hon’ble Delhi High Court confirmed this in Mr. Diljeet Titus, Advocate v. Mr. Alfred A. Adebare and Ors.[5] by declaring that private workplace information can be released even after an employee quits the organization.
A trade restraint is only permissible if it is both reasonable and essential to defend the legitimate interests of the party seeking to impose it. When considering the reasonableness of a trade restraint, the following considerations are considered:
- The nature of the trade or business: Certain types of enterprises are more vulnerable to trade restrictions than others. For example, a trade barrier that prohibits a doctor from practicing medicine is more likely to be deemed unreasonable than one that prohibits a salesperson from selling products for a competitor.
- The duration of the restraint: A longer-term restraint of commerce is more likely to be deemed unreasonable than a shorter-term restraint.
- The geographic breadth of the constraint: A trade restraint that covers a broad geographic region is more likely to be deemed unreasonable than one that covers a limited geographic area.
- The effects of the constraint on the employee: A limitation of trade that prohibits an employee from earning a livelihood is more likely to be regarded unreasonable than a restraint of commerce that has no major influence on the employee’s capacity to earn a living.
LEGALITY OF NON-COMPETE CLAUSE:
According to Section 27 of the Indian Contract Act 1872, an agreement that prohibits someone from engaging in a lawful profession, trade or business of any kind is to some extent void. This means that non-compete clauses are not legally enforceable in India because they are deemed a restraint of trade and violate Section 27 of the Indian Contracts Act.
Orchid Pharma Ltd. versus Hospira Healthcare Pvt. Ltd.[6]: “This is one of the first cases in which the Competition Commission of India (CCI) has voiced its opinion on the non-compete provision. The CCI stated that a non-compete agreement should be reasonable in terms of duration, scope and geographical region to ensure that it does not have a significant adverse effect on competition.”
However, there are some exceptions and instances when a non-compete agreement can be legitimate and enforceable such as:
- During the course of employment, one may prohibit the employee from engaging in any conduct that directly or indirectly competes with the employer’s legitimate interests.
- After termination of employment, an employee may be restrained from using or disclosing any of the employer’s trade secrets, confidential information or proprietary data as long as the restraint’s duration, scope and geographical area are reasonable and do not jeopardize the employee’s livelihood. The idea of “the rule of reasonableness” is used by the court to determine whether the limits are legal.
- A non-compete clause may also be valid and enforceable if it is included in a sale of goodwill or partnership agreement in which the seller or outgoing partner agrees not to conduct a similar business within a specific area and time in order to protect the buyer or remaining partners from unfair competition.
- The courts have the authority to consider each case on its own merits and determine whether a non-compete clause is reasonable and necessary to preserve the legitimate interests of the parties.
CONCLUSION:
Non-compete clauses in Indian employment contracts are closely scrutinized under Section 27 of the Indian Contract Act which generally invalidates agreements that impede trade. Courts have made exceptions in cases where these clauses are found fair and necessary to protect genuine corporate interests. Landmark cases such as Niranjan Shankar Golikar v. The Century Spinning Company and Mr. Diljeet Titus, Advocate v. Mr. Alfred A. Adebare and Ors. have established that non-compete clauses can be enforced if they are limited in duration, scope and geographical area and do not unduly limit the employee’s ability to earn a living.
[1] (1414) 2 Hen. V
[2] (1711) 1 PWms 181
[3] 1967 AIR 1098
[4] (1885) ILR 11CAL 545
[5] 130 (2006) DLT 330
[6] MA/91/2018 in CP/540/IB/CB/2017