Non-Compete Clause in Employment Agreement

Introduction To Non-Compete Clause

The Constitution of India, through article 19(1)(g) provides each and every citizen with the fundamental right to practice any profession, trade or business. However, this right is not absolute in nature. And it is subject to some reasonable restrictions. Non compete clause is also one of those restrictions.
A Non-Compete Clause (NCC) or Covenant Not to Compete (CNC) is a clause under which a party, generally employee, agrees not to enter into or start the similar profession against the employer after the termination of the contract. Though, the last few decades witnessed a paradigm change in acceptance of Non-Compete clause. The employers use certain following contractual provision as a tool to restrict employees from competing against the employer. They put restrictions on

• starting a competing business
• working with enterprises operating in the relevant market
• working in the relevant geographic market
• soliciting the clients of the employer
• and in the majority of cases, a complete prohibition on disclosure the trade secrets or confidential information

Importance of Non-Compete Clause

In this era of Globalization, the success of any business largely depends upon the technical supremacy, trade secrets, and sensitive business information. The employers take all kind of protective measures to safeguard their confidential information and sensitive business knowledge provided with their employee. Consequently, it has become a common practice to put a Non-Compete Clause in Employment Agreement. If an employee quits the job and enters into a similar business or profession, he can hamper the growth of the company by using the information gained earlier. Therefore, in order to safeguard the business, companies use the Non-Compete Clause as a protective measure against the possible threat.

The legality of the Non-Compete Clause in India

In India, non compete covenants during the course of employment is valid. But post-employment restrictions are generally unlawful as it curtails the Fundamental right 19(1)(g). Section 27 of the Indian Contract Act, provides that any agreement by which anyone is restrained from exercising any lawful trade or profession is void. However, there is an Exception in case of selling of Goodwill.

In India, a Non compete Clause is valid up to reasonable restrictions. Apex court, in the case of Percept D’ Mark (India) Pvt. Ltd v. Zaheer Khan[1] laid down that if an agreement has framed any restrictive clause which extends even after the termination of employment, then such clause is void.
Further, in the case of Niranjan Shankar Golikari vs The Century Spinning And Mfg. Co.[2] the apex court stated that, in an Agreement, if any clause restrains an employee from competing against the employer during the term of employment in the market, then such covenant or clause is valid. In short, the Non-Compete clause during the term of employment is absolutely valid.
And, in another case Mr. Larry Lee McAllister v. M/s. Pangea [3] the supreme court of India declared the Non-Compete Clause in an employment contract, not in contravention of section 3 & section 4 of Competition Act, 2002.

Reasonability of Non-Compete Clause

Section 27 of the Indian Contract Act has a general bar over any kind of restraint on lawful trade and profession. Hence, all the Non-Compete Clause in India is invalid. However, the Supreme court has clarified that some Non-Compete Covenants are in the interest of trade and commerce. Section 27 of the contract act does not affect such covenant. Hence, they are valid in India. Here, the validity of the non compete clause is based upon reasonable restriction. And, only the court has the power to decide the reasonability of the clause. For instance, if a Co-Founder of a startup signs a Non-Compete clause, then he is bound to such a clause. On the other hand, if a junior software developer or a call center employee signs accepting such clause, then it is invalid and the employee is not bound by such clause.

Conclusion

In India, the traditional approach is that where any clause causing any restraint in trade is prima facie void. But it may be enforced only in the case where it is justified as reasonable in the circumstances, by considering both the public interest and parties interest. However, different courts have a different approach in deciding the question of such reasonableness. It depends upon the question that the covenant or clause is subjected to a commercial transaction or as a part of an employment contract. However, whether dealing with a non-compete clause in a commercial transaction or any employment contract, there are no defined rules or fixed parameters to decide that what may be the extent of acceptance of such clauses and therefore each case turns on its own facts.

1. AIR 2004 Bom 362

2. 1967 AIR 1098, 1967 SCR (2) 378

3. CCI Case No. 66 of 2013