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Validity of Non-Compete Clause in India

By Arunesh Bhardwaj July 29, 2016


Introduction

Non-Compete clause is a clause in an employment agreement by virtue of which anemployee is restrained from, either working with a competitor or carrying out a competing business. In the case of Petrofina (Great Britain) Ltd v Martin [1966] Ch 146[i], Lord Justice Diplock LJ defined restraint of trade as “a contract in restraint of trade is one in which a party (the convenentor) agrees with any other party (the convenentee) to restrict his liberty in the future to carry on trade with other persons not party to the contract in such manner as he chooses.”

 

Indian Law

In India, Section 27 of Indian Contract Act, 1872 says that an agreement restraining any kind of trade is void. The Section further provides an exception, which defines the extent of validity of non-compete clause. The exception to the Section says that in case a person is selling its goodwill of business, then both the parties may agree on the terms where buyer will be refrained from carrying any similar business, within the local limit. This local limit that will be defined in the agreement must be a reasonable one and in regard to the nature of the business.

When a person joins a company as an employee, the goodwill of the firm gets attached to the person and if, during the tenure of one’s employment the person competes with employer, it will harm his goodwill.

In the case of Superintendence Co Of India Pvt. Ltd v Krishan Murgai[ii], the court opined with the view that a non-compete clause for the term of contract is not to be considered a clause in restraint of trade but a clause extending beyond the terms of the contract will be held to be void.

In the case of M/s Sociedade de FomentoIndl. Ltd. V RavindranathSubraya Kamath[iii], it was held by the court that if a former employee seeks to enforce an agreement to restrain the employee from using any process of which he gained the knowledge during the course of employment will be held void.

But, when it comes to trade secrets, in the case of V.F.S. Global ServicesPvt. Ltd vs Suprit Roy[iv], it was established by the Bombay High Court that if an employer is restraining the use of trade secrets during or after the cessation of employment will not be voidable as per Section 27.

 

Validity

Indian Laws with respect to non-compete clause clearly states that if an agreement consists of a clause by virtue of which, it refrains any person from carrying on any trade will be void. However, there is an exception to the section, which is about the goodwill. However, the Court by way of precedents has validated the restraint in the agreement if it is during the terms of contract. But, these restraints must be reasonable in order to be imposed. There is no such legal definition of ‘reasonability’, but it can be interpreted as something ‘according to reason’.

If the agreement is restraining the employee or any other person so connected to the company to practice the same profession or to do a business of same nature, the distance within which such restrictions will be binding must be a reasonable one. Similarly, the time period for which the restriction is being imposedshould also be a reasonable one.

At the end, it will be the discretion of the court to decide whether the terms of such agreement are void or not.

 

Conclusion

Non-Compete Clause in India is valid but to a limited extent. This extent is decided by the Courts in different cases based on the facts and circumstances of the case. But, in general the restraint that is imposed during the term of employment is a valid and post-employment restraint is void. This rule has been set up by the precedents so established by the Court in different cases. However, at the end, it is the discretion of the Court to decide whether a non-compete clause is void or not based on the facts and circumstances of the case.

 

 


End Note:

[i]http://www.australiancompetitionlaw.org/law/rot.html last visited on June 20, 2016

[ii] AIR 1980 SC 1717

[iii] AIR 1995 Bom 158

[iv] 2008 (2) Bom CR 446

Sources:

  1. http://www.lexology.com/library/detail.aspx?g=31ca32d5-6c37-4f0e-a647-869666352b17  last visited on June 20, 2016.
  2. http://lexquest.in/extent-validity-non-compete-clause-india/#_ftn7 last visited on June 20, 2016.
  3. http://www.majmudarindia.com/pdf/Validity%20of%20agreements%20in%20restraint%20of%20trade%20in%20India.pdf last visited on June 20, 2016.
  4. https://indiankanoon.org/doc/1431516/ last visited on June 20, 2016.

Image Credits: http://blog.ipleaders.in/enforceability-non-compete-clauses-india/

Tags: Indian Contract Act , Non-Compete , Validity of Non-Compete , Section 27 , Employee , Employer , Trade Secrets


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