INTRODUCTION:
The common law principle against trade restrictions was enshrined to curb monopolies and the stifling of competition in Section 27 of the Indian Contract Act, 1872 (“ICA”). Section 27 of the ICA provides as follows: “Every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, is to that extent void.” This provision categorically invalidates agreements that impose restrictions on an individual’s ability to engage in any lawful profession, trade, or business.”
In terms of S. 27 of the ICA, an agreement is null and void to the extent that it prohibits someone from engaging in a legitimate trade, business, or profession. This rule is absolute and does not consider whether the restraint is reasonable or not.
The Section provides a very strict standard that nullifies restraints of any nature whether general and partial, and forbids the exception of particular local restrictions.
JUDICIAL INTERPRETATIONS
There are plethora of judgements by Indian courts on which kind of restraint are valid and reasonable in the light of the general rule enshrined in S. 27 of the ICA. The Supreme Court dealt with the validity of negative covenants vis-à-vis Section 27 in the landmark judgement Niranjan Shankar Golikari v. The Century Spinning and Manufacturing Company Ltd., where it was observed that negative covenants in an agreement can be valid as long as the restriction imposed on them is ‘reasonable’ and they are not against public policy. It was held that the considerations against restrictive covenants are different in cases where the restriction is to apply during the period after the termination of the contract, than those in cases where it is to operate during the period of the contract.
In the case of V.F.S. global services Pvt. Ltd Vs Mr. Suprit Roy , the Bombay High court and Pepsi Foods Ltd. and Ors. v. Bharat Coca-Cola Holdings Pvt. Ltd. and Ors established the principle that a restraint on the use of trade secrets during or after the cessation of employment does not tantamount to a restraint on trade under section 27 of the Act and therefore can be enforceable under certain circumstances.
Similar to these, a number of other High court rulings have developed standards or rules to assess the legitimacy and acceptability of placing constraints on such non-competing agreements.
ENFORCEABILITY OF NON-COMPETE CLAUSE UNDER EMPLOYMENT CONTRACTS
A non-compete clause is a provision in an employment agreement to prohibit employees from engaging in a similar business or profession during the course of employment or following the termination of employment for a specified period of time in order to protect the employers’ business.
Article 19(g) of the Constitution of India provides every citizen the right to practice any profession, trade, or business. This is not an absolute right and reasonable restrictions can be placed on this right in the interest of the public, the courts have always been wary of upholding such restrictions and have kept the interpretation of this provision flexible to ensure that principle of justice, morality, and fairness are aptly applied, depending upon facts and circumstances of each case.
The pre-termination non-compete provision is only effective throughout the period of the employment contract. On pre-termination violation of a non-compete clause, the law is established and enforceability of this condition has been affirmed in several court rulings including Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan and Anr., where the Apex Court.
It is a question of fact and circumstances to prove that the post-termination non-compete clause are valid and reasonable restrictions or not and has to assessed in each case by legal experts drafting the contracts.
Protection of trade secrets and confidential information
In an employment contract, the employer has trade secrets and business connections, worthy of protection. In case of restraints in contracts of employment, it is necessary to show that employee has entered into a contract with a customer, or has trade secrets of the employer. An employer can lawfully prohibit his employee from accepting any position, after determination of his employment, where the employee is likely to utilise the information of trade secrets acquired by him.
Exception – Sale of goodwill
Regarding the exception to the section relating to sale of goodwill, when a person sells the goodwill of his business, he may give an undertaking to the buyer of the goodwill that he will not carry on that kind of business of which the goodwill is being sold.
CONCLUSION
While there is a general law that every agreement is void if it’s restraining someone from exercising a lawful profession, trade or business, however, non-compete clauses are mutually agreed upon and allowed in some exceptional cases which requires thoughtful and meticulous drafting. Non- compete clauses require a balanced approach to save the interests of both the employer and employee. However, the judicial principles regarding enforcement of such restrictive clauses vary based on the nature of the agreements, taking into consideration the protection of proprietary information, the reasonability of restrictions imposed and the balance of convenience between the contracting parties.
