Author – By CHITWANDEEP KAUR and Tanmay Sharma (Intern)
During this boom of globalization a large amount of success of any business majorly relies on trade secret
Meaning of Non-Compete Clause
In a legally enforceable contract known as a Non-Compete clause or Non-Compete Agreement (NCA), the employee promises not to work for a competitor’s firm or launch a related business or profession for a fixed timeframe after quitting his present job. Employers can protect sensitive data (company secrets, client databases, business strategies, etc.) and prohibit former employees from using it in the event that they intend to work for the opposition or launch a comparable business by establishing such a contract.
How to create a Non-compete clause (NCC)
The following information is necessary in order to create a Non-compete clause:
- The name and addresses of the parties involved (both the protected party, or the party requesting the agreement and the non-competing party, or the party who is being prohibited from working for a competitor)
- The effective date and the duration of the agreement
- The reason for the agreement
- The geographic area covered by the agreement
- The compensation or “consideration” for signing the agreement
- The names of the individuals who will sign the agreement
Agreement in restraint of trade, void.—Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. —Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.
Meaning of section 27
The court declares void any agreement that prohibits two or more people from operating in a legal trade or profession. The court determines that limiting one or more individual’s ability to engage in a particular legitimate business is unjust and infringes on their fundamental freedom to choose the line of work they wish to engage in. As it restricts one’s freedom to pursue a business interest, the court ruled that the restriction of trade agreement is irrational and unlawful.
Scope of section 27
The Section provides a very strict standard that nullifies restraints—general and partial—and forbids the exception of particular local restrictions. In a broad sense, contracts in restraint of commerce are those in which one or the other parties impose limits on their ability to labor, practice their profession, or run their business. Such agreements are usually criticized because they go against the interest of the public and are unfair since they excessively restrict human freedom. Every commitment made in connection with business activity acts, in certain ways, as a trade restriction since it restricts the promisor’s potential future liability.
Analysis of section 27 and Non-compete clause
If we look at the point of view of Indian law, the non-compete clause is considered unlawful under section 27 of the law of contracts. In multiple cases Indian courts have also consistently denied enforcement of post-termination non-compete clauses in contracts of employment as restraint of trade is not allowed under section 27 of the Indian Contract act-1872. Deeming them to be void and against public policy as they have the power to deprive a person of his/her fundamental right to earn a living.
For any restrictive agreement to come under section 27 of the contract act, the agreement has to be in restraint of trade. Section 27 does not give an idea as to what kind of restraints are not void. Article 19(g) of the constitution of India provides every citizen with the right to practice any profession, trade or business. This is not considered as an absolute right which means that some restriction can be placed on this right in the context of public interest. The courts have always kept the interpretations of such provisions flexible in order to make sure that the principles of morality, fairness and justice are upheld. After considering the required confidentiality and the integrity of the employment, the courts have inclined their view towards giving some regard to the non-compete clause.
In the case of Niranjan Shankar Golikari Vs the Century Spinning and Manufacturing Company Ltd. (1967 AIR 1098 1967 SCR (2) 378), the Hon’ble Supreme Court observed that-restraints or negative covenants in the appointment or contracts may be valid if they are reasonable.
In the case of V.F.S. global services Pvt. Ltd Vs Mr. Suprit Roy (2008(2) Bom CR 446) the Bombay High court 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. It demonstrates that Indian courts may, under certain conditions, impose confidentiality agreements meant to safeguard an employer’s intellectual property rights.
The Supreme Court of India, while dealing with such a contractual issue in Superintendence Company of India (P) Ltd. v. Sh. Krishan Murgai (1980 AIR 1717, 1980 SCR (3)1278) raised the question whether a post-service restrictive covenant would fall within the mischief of section 27 of the Contract Act. The court held that a contract, which had for its object a restraint of trade, was prima facie void.
Even the Delhi High Court in Pepsi Foods Ltd. and Others v. Bharat Coca-cola Holdings Pvt. Ltd. & others (1999 VAD Delhi 93, 81 (1999) DLT 122, 1999 (50) DRJ 656, ILR 1999 Delhi 193, (1999) IILLJ 1140 Del) observed,
“It is well settled that such post-termination restraint, under Indian Law, violates Section 27 of the Contract Act. Such contracts are unenforceable, void, and against public policy. What is prohibited by law cannot be permitted by Court’s injunction.”
The judgment of the Supreme Court in Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan and Anr. sheds some light on the legality of such clauses. The Apex Court observed,
“Under Section 27 of the Contract Act:
- A restrictive covenant extending beyond the term of the contract is void and not enforceable.
- The doctrine of restraint of trade does not apply during the continuance of the employment contract and is applied only when the contract comes to an end.
- As held by this Court in Gujarat Bottling v. Coca Cola (supra), this doctrine is not confined only to contracts of employment, but is also applicable to all other contracts.”
Given the aforementioned findings, it can be concluded that the Indian courts have taken into account the pre-termination time frame of the employment separately from the post-termination time frame of the employment when handling disagreements referring to such non-compete clauses under a contract of employment. Although the courts have been understanding regarding the applicability of the non-compete clause, they have gone over and beyond to make sure that it has no bearing after the termination of employment and have determined that such a condition would be in violation of section 27 of the Contract Act.
However, the Supreme Court in Niranjan Shankar Golikari v. The Century Spinning and Mfg. Co. Ltd., thereby giving a liberal interpretation to section 27 of the Contract Act further clarified that not all non-compete clauses effective after the termination of the employment agreement are prima facie prohibited and held:
“a negative covenant that the employee would not engage himself in a trade or business or would not get himself employed by any other master for whom he would perform similar or substantially similar duties is not, therefore, a restraint of trade unless the contract as aforesaid is unconscionable or excessively harsh or unreasonable or one-sided”.
In the case of Brahmaputra Tea Co., Ltd. v. Scarth it was held that ‘An agreement to serve a person exclusively for a definite term is a lawful agreement, and it is difficult to see how that can be unlawful which is essential to its fulfillment, and to the due protection of the interests of the employer, while the agreement is in force.’
The Delhi High Court in Wipro Limited v. Beckman Coulter International S.A. held that the bar under Section 27 of the Act will not be attracted in cases where non-solicitation clauses operate between business partner and distributor contracts or similar partnership contracts between two independent entities as opposed to that between an employer and an employee.
Bombay High Court in the case of Tapas Kanti Mandal v. Cosmos Films Ltd, held that negative restrictive covenant post-employment period is not enforceable. In this case, the defendant took employment as a manager in the Research and Development department in a multinational company supplier of BOPP, before the employment the defendant entered into a service contract, bond and secrecy agreement. The secrecy agreement provided for a non-compete clause for a period of 3 years. However, the defendant after long years of service abruptly resigned and was to take employment against the non-compete clause. The plaintiff submitted that the defendant, by virtue of his employment, had acquired in-depth knowledge of the products of the company and had also come in possession of confidential processes and knowledge of manufacture of its product. He had also been knowledgeable of various projects of the company, formulae, patterns, complexion, programmes, devices, methods, techniques and processes of the plaintiff company. Future plans of the plaintiff company have been known to him and he has also been aware of unique ideas, discoveries and inventions of the plaintiff company. Such knowledge as well as trade secrets, unique ideas, discoveries, inventions, processes, projects are intellectual property of the plaintiff and by virtue of his position in employment, the defendant had come across the same and had been in possession of the same and he is under obligation not to divulge the same to any other person, partnership, company, corporation as per the contractual obligations incurred by him. However, the Court did not consider the argument and held that any clause restraining the right of profession of an employee is non-enforceable.
In light of this, it can be said that the Court did not apply reasonableness as an exception and took a strict approach with regard to enforceability of non-compete clauses.
Therefore, non-solicitation clauses have more sanctity when part of agreements such as those of partnership where there is a strong implicit presumption that each party had an equal opportunity at the negotiation table and there was an absence of dominance of will of one party over another. This however would be dependent on the facts of each case and the language of each contract. Similarly, in Mr. Diljeet Titus, Advocate v. Mr. Alfred A. Adebare and Ors., the Delhi High Court clarified that confidential information of the employer can be protected even in the post-employment period.
Restrictions must be reasonable in the parties’ best interests in order to provide the covenantee with sufficient safeguards. Restrictions to prevent the disclosure of trade secrets or commercial contacts must be reasonable. An agreement in restraint of commerce must be reasonable between both the parties and consistent with the public interest in order to be legitimate.
Under the given conditions, whatever a rational person would do in the same situation using common sense and understanding will be considered reasonable. Therefore, each case’s facts and circumstances will determine how to apply the rationality test.