Lawfarm Team
in Corporate Law Contracts Law Competition Law
Asked May 06, 2016

Am I allowed to start a similar business?

  • 1 Answer
  • 326 Views

I have a signed a document in company letter head where it is mentioned that I cannot work with a competitor or can't start a business in same domain for 3 years. Now I want to start a similar business where I will be using the same open source technologies for the development. So my question is whether the document signed is valid before the law? Is there any issue in starting a similar business?

Answer 1

Your right to practise any profession or to carry on any occupation, trade or business is safeguarded by the Constitution of India, 1949[1], the supreme law of India. Your case is directly dealt by S. 27 of the Indian Contracts Act, 1872[2]. As per this section, every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind is prima facie void.  However, there  exists a  clear distinction between a restriction in a  contract of  employment which  is operative during the period of  employment and  one which is to operate after the termination  of  employmentRestrictions on competitions during the period of service are normally valid. In such cases the restriction is generally reasonable, having regard to the interest of the employer and does not cause any undue hardship to the employee, who will receive a wage or salary for the period in question. But if the covenant or agreement is to operate after the termination of services, the Court may refuse to enforce it.[3]  In this case, the 3 years restriction may have been valid, had you continued to be a part of the company. However, as you are no longer a part of the company and your business will be your sole means of survival, it becomes an unreasonable contract. Contracts restricting employment can be ‘valid contracts’ only if-
  • The agreement in question is a "good will of business", type of contract, i.e., the imposed restriction is attributed to the ‘goodwill’ of the business and not any particular skill or technique; and
  • The restriction is justifiable in the circumstances as being reasonable from the point of view of the parties themselves and also of the community i.e., the restraint may not be  greater than necessary to protect the employer, nor  unduly harsh  and oppressive to the employee.[4]
  • Here, the agreement in question is not a “good will of business”, type of contract rather; the agreement deals with the open source software used by the company. Moreover, since the company uses open source software, anyone has the right to study, change or distribute the software, without any restrictions. This eliminates the ‘reasonable’ clause, as restricting you from using open source software in no way protects the interests of the company. Since, both the clauses essential for the exception to S.27 of Indian Contracts Act, 1872, are negated in this case, the document signed by you is not valid before law.     [1] S. 19(1)(g); available at: https://indiankanoon.org/doc/1218090/. [2] Available at: https://indiankanoon.org/doc/1431516/. [3] Superintendence Company Of India v.  Krishan Murgai, 1980 AIR 1717, 1980 SCR (3)1278. [4] Ibid.
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