In the modern era, where globalisation and industrialisation are at its peak, various contracts form a part of daily life. Most common of these contracts are Employment Contracts. Employment Contracts provide for terms and conditions of the employment. One of the common clauses seen in most of the Employment Contract these days is Non-Competition Clause. This is done in light of concerns related to secrets associated with every organisation. Employees being integral part of a Company/ Organisation, during their course of employment are privy to information which is considered to be highly confidential and therefore in order to keep this information safe and secure there has been introduction of “Non-Compete Clauses” in the Employment Agreements..
A. WHAT IS NON-COMPETE CLAUSE ?
A Non-Competition Clause or generally called Non-Compete Clause is a clause as per which the employee agrees not to work with a rival company or start a similar trade or profession for a specified period of time after leaving his/her current employer. This helps the employers keep valuable information and secrets, thus preventing the employees from exploiting sensitive information. This clause attracts both positive and negative covenants, as observed in case of Deshpande v. Arbind Mills Co., an agreement of service contains both a positive covenant, viz., that the employee shall devote his whole-time attention to the service of the employers and also a negative covenant preventing the employee from working elsewhere during the term of the agreement.
B. ENFORCEABILITY OF NON-COMPETE CLAUSES IN EMPLOYMENT CONTRACTS
It has been long in debate as to whether such Non-Compete Clauses are enforceable or not. In this regard the jurists against Non-Compete Clause base their argument on Section 27 of Indian Contract Act, whereas, the jurists take support of exception to Section 27 and various precedents. Section 27 of Indian Contract Act states that -
27. “Every agreement by which anyone is restrained from exercising a lawful profession or trade or business of any kind, is to that extent void.
Exception : One who sells goodwill of a business with a buyer to refrain from carrying on a similar business within specified local limits so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein provided that such limits appear to the court reasonable, regard being had to the nature of business.”
It has been contended by employees that these Non-Compete Clauses are in restraint to trade and are not enforceable as Section 27 considers the Contracts made in restraint of trade void. By virtue of this, any such restraint would make the non-compete clause void. However, the interpretation of Section 27 of the Contract Act is not res integra. Meaning thereby, that the interpretation laid down by courts at various instances and the considerations therein would play a major role in determining whether or not such clauses result in restraint of trade and mere provisional reading is not sufficient to determine the same.
Indian Courts have taken different views while dealing with the concept of Non-Compete during Employment vis a vis Non-Compete post Employments. The Hon’ble Supreme Court, in Niranjan Shankar Golikari v. Century Spinning & Manufacturing Co. Ltd. gave a liberal interpretation to Section 27 of the Indian Contract Act. The Hon’ble Court observed that ‘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 contract of employment. In the facts of that case, it was found that the employee was privy to the special process invented/adopted by the plaintiff and of which the employee was trained and had acquired knowledge. The employee who had left employment prior to the contracted period was thus restrained from joining employment of a competitor for the remaining period for which he had contracted with the plaintiff in that case.’ The same principle was reiterated in the case of Brahmaputra Tea Co., Ltd. v. Scarth wherein the court 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 fulfilment, and to the due protection of the interests of the employer, while the agreement is in force.’
Similarly, while deciding a contractual issue, the Hon’ble Supreme Court in Superintendence Company of India (P) Ltd. v. Krishan Murgai ,the bench was to considera claim for injunction post cessation of employment. The Hon’ble Apex Court while holding that a contract which has an object restraining trade is prima facie void. It was also observed that even if the restrictive covenant was to include cessation of employment at the volition of the employee, there could be no post-employment restriction under Section 27 of the Act. In the year 2006, a two Judge Bench of the Supreme Court in Percept D'Mark (India) (P) Ltd. v. Zaheer Khan &Ors refused enforcement of a post-employment restriction on the grounds of the same being barred by Section 27 of the Act.
Therefore, the judicial pronouncements lead to the conclusion that reasonable restraint depends upon various factors, and the restraint in order to prevent divulgence of trade secrets or business connections has to be reasonable in the interest of the parties to ensure adequate protection.
EXCEPTIONS TO RESTRAINT OF TRADE
Section 27 of the Indian Contract Act, clearly stipulates that Agreements in restraint of trade are void ab initio, the trend of judicial pronouncements provides that in certain cases when the Court finds the restraint reasonable and in accordance with the public policy. Such agreements are permitted. The same has been explained by the Hon’ble Delhi High Court in Mr. Diljeet Titus, Advocate v. Mr. Alfred A. Adebare and Ors wherein the Court held that sensitive workplace information can be covered even during the post-employment period.
What amounts to reasonable and is considered within the meaning of public policy is the exclusive decision of the judiciary and no concrete formula has been laid down to determine the same. The facts and circumstances of the case, as well the nature of the employment determine the reasonableness and whether it is in furtherance of public policy or not.
Some of the reasonable restrictions, can include -
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 process 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.
C. GARDEN LEAVE CLAUSE AND NON-COMPETE CLAUSE
Gardening leave clause stipulates that an employee would not work for the employer or anybody else during the period when the notice of termination is served on him/her till he/she actually terminates the services from the organisation. . However, during this period he is entitled to his salary.. This clause is enforceable and binds the employee to his non-compete obligations that he has during the term of employment, as this leave period is considered to be employment. For example, in the case of M/s. Kouni Travel (I) Pvt. Ltd. v. Mr. Ashish Kishore, the court, while dealing with the issue of validity of the Garden leave clause, found that the plaintiff was required to pay full remuneration to the defendant for the relevant period when the garden leave clause would be in operation and a substantial amount was being paid to the employee and therefore the clause is valid.
D. CONCLUSION
From the above, it may be concluded that the enforceability of the pre-termination clause has been very well settled under the Indian law; however, as far enforceability of non compete clauses post termination infer all negative covenants.