Legal Sanctity and Precautions to be taken while Executing a Non-Compete Agreement: Lawyers Advice

A non-compete agreement is known in Contract Law as the agreement between two parties where one party is the employer and the other party is the employee.
Through this non-compete agreement, the employee gives his acceptance to the employer on the restriction set by them that during the course of the employment or even when the employee leaves job under the employer, he will not attempt to be a competitor in the form and nature of trade pursued by the employer.

Law Governing Non-Compete Agreements
Section 27 of the Indian Contract Act, 1872 declares agreements restraining trade to be void. However, the exception to this section says that one who sells goodwill of a business with a buyer to abstain from carrying on a business that is similar within the stated local limits so long as the buyer, or any person having title of the goodwill from him, is carrying on a similar business there, provided that the courts finds such limits reasonable, in relation to nature of business.

Therefore, Indian law has had no doubts on this question of law and is strict on this point, any such non-compete agreement will not be binding on the parties to the agreement and the same shall be void and unenforceable.

Legal Sanctity of Non-Compete Agreements
Indian courts have also constantly rejected enforcement of post-termination non-compete agreements in employment contracts terming them as a “restraint of trade” that is impermissible under the principles laid down in Section 27 of the Indian Contract Act, 1872 and have held such agreements as null and void while being against the public policy because of a likelihood of depriving a person of their fundamental right to earn a living.

Even though Section 27 of the Indian Contract Act says that all agreements in restraint of any profession, trade or business are void, new trends based on various judicial pronouncements lead to the deduction that reasonable restraint can be acceptable to some extent and will not make the contract ‘void ab initio’. Reasonabiity of restraint rests on various aspects, and the restraint in order to avert disclosure of trade secrets or business connections has to be rational in the interest of the parties to guarantee suitable protection to the covenantee.

However, in the case of Niranjan Shankar Golikari v. the Century Spinning and Manufacturing Company Ltd. (1967 AIR 1098), the Supreme Court observed that restraints or negative covenants in contracts may be valid if they are reasonable.

Furthermore, in the case of V.F.S. Global Services Pvt. Ltd Vs Mr. Suprit Roy (2008 (2) Bom CR 446), the Bombay High Court laid down the principle that a limitation on the use of trade secrets during or after the termination of employment is not equivalent to a “restraint on trade” under Section 27 of the Act and thus, can be enforced under certain situations.

In the case of Wipro Limited v. Beckman Coulter International S.A. (2006 (3) ARBLR 118 Delhi), the High Court of Delhi established four principles regarding restrictive covenants.

These principles are also inspired by various previous judgments of the High Courts and the Supreme Court: –
• Restrictive covenants during the sustenance of a contract would not typically be considered as being a restraint of trade, business or profession except if the same is unacceptable or solely one-sided,
• Limiting an employee’s right to hunt for employment and/or to do business in the same field as the employer as part of post-termination restrictive covenants between employer and employee, would be considered restraint of trade and hence would be void,
• Courts need to take a harsher view in employer-employee contracts as opposed to other contracts since the norm is that in employer-employee contracts, the employer has an benefit over the employee and,
• The question of reasonablity as well as the question of whether the restraint is limited or whole is not needed to be thought of at all when a question comes on whether a particular clause of a contract is or is not a restraint of trade.

Restrictions and Precautions Relating to Non-Compete Clauses
Certain reasonable restrictions can be imposed to validate such agreements like: –
• Distance: Employee can be prohibited practice same profession within a specified distance, the specification being reasonable.
• Time Limit: Employee can be prohibited practice same profession for a specified time. Provided that it is a reasonable time restriction provided in the agreement, then it will be considered a reasonable restriction.
• Trade Secrets: The letting out of trade secrets can be prohibited by the employer only if they are reasonable restrictions.
• Goodwill: Article 27 of the Indian Contract Act already lays down an exception on the giving out of goodwill.

Additionally, the Judiciary uses injunction as a tool to stop any third party from leaking confidential information, using trade secrets etc.
The Legislature has also made efforts to corroborate the confidentiality etc. such as through Section 72 of Information Technology (IT) Act, 2000, which deals with infringement of confidentiality and privacy and any such breach will result in imprisonment of up to two years, or a fine of Rs. One Lakh.

In conclusion, even though non-compete agreements are legal in foreign countries, when it comes to Indian Judiciary, it does have a very wide and effective scope. At the same time, it is also very relevant to consider that socio, legal, economical and corporate circumstances have developed and changed in India and abroad to a huge degree and recent trends of the Indian Judiciary having a tendency to hold non-compete agreements as being reasonable and just show the intent of courts to keep up with changing times.
Authored By: Adv. Anant Sharma & Parinay Gupta