Introduction
The Constitution of India, in accordance with Article 19 (1)(g)[1], confers on each and every citizen with the fundamental right to practice any profession, or to carry on any occupation, trade or business. This right, however, is not absolute in nature and is subject to reasonable restrictions. One such restriction is the non-compete clause in employment agreement. In today’s highly competitive world, every employer seeks to take preventive steps or safeguards for the anticipated threat they hold from their competitors. However, the most anticipated threat employers hold is from their employees themselves.
An employee of a company holds much confidential and crucial information, disclosure of which is certain to cause irreparable harm to the company. Hence, it has become imperative for an employer to take some preventive measures. The non-compete clause is one such defence that seeks to curtail this threat to some extent. This clause carries a condition that says, in case the employee does not want to continue with the company, he cannot directly or indirectly engage in the same kind of activity which the company carries and neither can join its competitor for a certain period of time. Furthermore, the employee is restrained to disclose any confidential information to any competitor of the employer. Therefore, it is a common practice by companies to include a non-compete clause in the employment agreement with their employees in order to ensure the protection of their business.
Types Of Non-Compete Clauses
Pre-termination non-compete clause – Where the restraint is only applicable during the subsistence of the employment of contract, for instance, if a worker entered into a contract of 10 years with the company, so during the term of the contract i.e. 10 years, the employee cannot join any other rival company of the employer.
Post-termination non-compete clause – Where the restraint clause is added in the contract that prohibits an employee from working in a rival industry or profession for a set length of time or in a defined geographic region, with the goal of protecting the employer’s company after the term of employment has ended.
Enforceability
The Indian Contract Act, 1872[2], which provides a framework of rules and regulations, governing the formation and performance of a contract in India deals with the legality of such non-compete covenants. It stipulates that an agreement, which restrains anyone from carrying on a lawful profession, trade or business, is void to that extent. Under section 27[3] of the Indian Contract Act, 1872 agreements in restraint of trade are void Section 14[4] of The Specific Relief Act, 1963, is another relevant provision in this context. It is important to note that non-Compete clause shall be valid only if it is for specific period of time say 1 year or so.
Civil Remedies for Breach of Non-Compete Clauses
If an employee breaches a non-compete clause in their employment agreement, the employer may seek civil remedies such as:
- Injunction (Stay): The employer may seek an injunction from a court, prohibiting the employee from engaging in any activities that breach the non-compete clause.
- Damages: The employer may also seek damages from the employee, as compensation for any losses suffered as a result of the breach of the non-compete clause. The amount of damages will depend on the actual harm suffered by the employer as a result of the breach.
Further in Gujarat Bottling Co. Ltd. v. Coca Cola Co. (1995),[5] the Supreme Court of India held that a non-compete clause that prevented the employee from engaging in any business that was similar to the employer’s business for a period of five years after leaving the job was reasonable and necessary to protect the employer’s trade secrets and confidential information.
Criminal Remedies for Breach of Non-Compete Clauses
In some cases, the breach of a non-compete clause may be deemed to be fraudulent or dishonest, and the employer may choose to pursue criminal remedies.
In the landmark case of Pepsi Foods Ltd. & Or’s. v. Bharat Coca Cola Holdings Pvt. Ltd. & Ors. (1999),[6] the Delhi High Court held that an employee who had misappropriated confidential information and trade secrets belonging to his former employer and used it for the benefit of his new employer, in violation of a non-compete clause, could be held liable for criminal breach of trust and cheating under the Indian Penal Code.
The Court observed that the employee’s actions had caused substantial harm to the former employer’s business interests, by enabling the new employer to gain an unfair advantage in the market. The Court held that the employee’s actions amounted to a deliberate and dishonest breach of his contractual obligations, and that criminal sanctions were warranted.
Conclusion
Non-compete clauses can be an effective way for employers to protect their business interests, but they must be drafted carefully and reasonably to be enforceable under Indian law. Employers should ensure that their non-compete clauses are tailored to the specific circumstances of their business, and that they do not impose undue hardship on employees. The enforceability of a non-compete agreement is a contentious issue. The enforceability of the Indian judiciary system is not as broad as in other countries. As a result, non-compete clauses have become a matter of disagreement in a number of cases. Unless it is coupled by certain reasonable restrictions, a non-compete is totally valid during employment and afterward. Therefore, it should be kept in mind that while drafting post termination non-compete clauses, be it for any employment contract or any other commercial transaction, it is only the bare minimum interest of the employer which should be protected. There should not be a harsh imposition of restraint of employment post termination since that would be detrimental towards the interest of the employee and thus may lead to rendering such clauses void.
Author : Minal Raut, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at IIPRD.
References:
[1] Article 19 (g) of the Indian Constitution, 1950
[2] The Indian Contract Act, 1872.
[3] The Indian Contract Act (1872), §27 (India).
[4] The Specific relief act (1963), § 14 (India).
[5] Gujarat Bottling Co.Ltd. & Ors vs The Coca-Cola Co. & Ors 1995 AIR 2372, 1995 SCC (5) 545.
[6] Foods Ltd. and Others v Bharat Coca-Cola Holdings Pvt. Ltd. 1999 VAD Delhi 93 (India)
