Introduction
The 21st century has witnessed a significant increase in employee mobility across various sectors which in turn poses a major challenge for any organisation that thrives on innovation and cannot afford to disclose its trade secrets or any other type of high-value sensitive information. As a result, the inclusion of restrictive covenants like non-compete clauses in employment contracts is getting increasingly popular and more important than ever. These clauses allow the employers to protect their interests by restricting certain acts of the employees during and in some cases even after the course of employment. However, the enforceability of non-compete clauses is still somewhat contentious and the jurisprudence on restrictive covenants in the employment sphere has been gradually evolving in India to suit the recent trends in the market. In this article, the author examines the relevance and validity of non-compete clauses in employment contracts in the present times.
What is a non-compete clause?
Although there is no specific legislation that mandatorily requires a written employment contract between an employer and employee to be signed, it is a common practice to sign such contracts to lay out the specific terms and conditions of employment in India. In an employment contract, a non-compete clause is typically one through which an employee agrees that he or she will not start working with a competitor or as one, for a given period of time. For example, an employee working at, let’s say, a beverage company ‘A’ is restricted from working for another beverage company, let’s say, ‘B’ which is its competitor simultaneously or for a given period of time after signing a non-compete clause. Hence, this clause is considered as a restrictive or negative covenant like a non-solicit or non-disclosure clause as it essentially poses a restriction on the employees’ conduct. However, the enforceability of these clauses is more complicated and debatable than their content in India.
The conflict between ‘Restraint to Trade’ doctrine and non-compete clauses
The Indian Courts have read into Section 27 of the Indian Contracts Act, 1872 for determining the validity of restrictive or negative covenants in India. Section 27 states:
“Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.”
Further, Article 19(1)(g) and Article 21 of the Indian Constitution grant the freedom to practise any profession or to carry on any occupation, trade or business and the right to livelihood respectively. These provisions might be striking the question: How are employees required to sign such restrictive clauses when they appear to be violating the Indian Constitution and Section 27 by imposing a restriction on the employee’s conduct The answer to this question lies in the fact that firstly, the fundamental right given under Article 19 is subject to reasonable restrictions and secondly, the Indian courts have discussed various cases where such clauses would fall outside the purview of Section 27 and hence, have upheld their validity. The author, however, focuses on the conflict of non-compete clauses with the latter.
Before diving into the Indian judiciary’s stance on restrictive covenants, it is important to reflect upon the relevance of Section 27 itself in the present times. The 13th Law Commission Report, while highlighting the Allahabad High Court’s observation in Bholanath Shankar Dar v. Lachmi Narain regarding the Section’s negative impact on an individual’s liberty in contractual matters, suggested the amendment of the same in order to permit reasonable restraint according to the changing trade scenario in India. The Law Commission stated:
But today, trade in India does not lag far behind that in England or the United States and there is no reason why a more liberal attitude should not be adopted by acknowledging such restraints as are reasonable not only as between the parties to the agreement but also regards to the general public.
Hence, one can possibly argue that the Law Commission’s report promotes the inclusion of the reasonability test as an exception to Section 27 and indicates a liberal and more receptive attitude towards the enforceability of reasonable restrictive covenants in contracts including employment contracts in India.
Judicial Precedents
The Apex Court in Niranjan Shankar Golikari v. The Century Spinning And Mfg Co. initiated the discussion about the enforceability of non-compete clauses and held that negative clauses prohibiting an employee from getting employed by any other employer to perform similar tasks during the course of employment would fall outside the purview of Section 27 as the employee is bound to serve his employer exclusively.While this judgment did not throw any light on the enforceability of restrictive covenants after the course of employment, the court in Gujarat Bottling v. Coca Cola Co. held that application of restrictive clauses beyond the period of employment violates Section 27. Further, the court stated that negative covenants in employment contracts do not amount to restraint to trade unless they are “unconscionable or excessively harsh or unreasonable or one-sided”.
The same was upheld in the case of Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan and Ors. in which the Indian cricketer Zaheer Khan was restricted from joining a media company that was the appellant’s competitor in the market for a specified time period after the expiry of the contract. Though the court did not uphold the validity of the particular restrictive covenant, it highlighted an important observation regarding the nature and significance of such covenants in employment contracts made by Lord Pearce in Esso Petroleum Co. Ltd. v. Harper’s Garage (Stourport) Ltd. where he stated:
Somewhere there must be a line between those contracts which are in restraint of trade and whose reasonableness can, therefore, be considered by the courts, and those contracts which merely regulate the normal commercial relations between the parties and are, therefore, free from doctrine.
Similarly, the Court in Kumar Apurva v. Valuefirst Digital Media Pvt. Ltd. upheld that the employees can also be restrained from interfering or disrupting or attempting to disrupt the relationship between a company and any third party through such clauses. It has also been held that the onus of proving the reasonability of a given non-compete clause is on the employer or the party supporting its validity.
Here, it must be noted that Section 27 provides only for the sale of goodwill as an exception to restraint to trade but the Indian Courts have emphasized on the reasonability of restraint or restrictive clause among other tests for upholding it as outside of the purview of Section 27 and therefore, valid and enforceable. However, the Delhi High Court in Desiccant Rotors International (P) Ltd v. Bappaditya Sarkar has clearly stated that in case of a clash between an employee’s right to livelihood and the employer’s interest, the former must prevail. The Delhi High Court’s statement here keeps the discussion about the validity of these clauses open as their reasonability and the question: whether a given job or profession is the only source of livelihood of an employee can be determined on the basis of the facts of the given case. It also ensures that the employees are not unfairly restrained through these negative covenants.
Conclusion
From the above discussion, it is clear that all forms of non-compete clauses have not got a clear nod from the Indian courts. Nevertheless, they continue to be a must-have in every carefully and consciously drafted employment contracts as every employer wishes to protect its interests and prevent any potential conflicts in the future while hiring a new employee. Not just that, these negative covenants have proven to be effective in proper and efficient utilization of the organisation’s efforts and resources put in to train the new hires and finally have the employers as well as the employees fit well into the system. In an era of globalisation, employees tend to move on to better opportunities at new organisations but the COVID-19 outbreak has had an adverse impact on the job market leaving the unemployment rate at 6.9% in India. Surprisingly, according to a report, 35% of the employees are still considering shifting to a new job despite the COVID-19 pandemic in India. Hence, these clauses can play a key role in ensuring that such type of employee mobility does not hurt the interests or waste the resources of their current organisation, especially in the present scenario. In recent years, the Indian courts have thus, entertained and accepted numerous other arguments in favour of non-compete clauses in employment contracts in multiple varied facts and circumstances even though the judiciary is generally considered to be more inclined and empathetic towards the employees. To sum up the discussion, it can be said that the courts have broadly held that the restrictive clauses in employment contracts are enforceable if they are reasonable and do not appear to be harsh or overtly biased towards any of the parties to the employment contract during the period of employment.
Snehal Walia,
a third Year student at Rajiv Gandhi National University of Law, Punjab.
Image credits: iPleaders Blog
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