Non-compete clauses unenforceable!
Published on Tue, May 1119:15, Updated at Tue, May 11 at
19:29Source : CNBC-TV18 By Valrie Demont and Janaki Rege
Catanzarite With the increase in cross-border trade and an enhanced
competitive climate in India, confidentiality, non-compete and
non-solicitation agreements are becoming increasingly popular
there, especially in the IT and technology sectors. An increasing
number of outsourcing and IT companies are including
confidentiality, non-compete and non-solicitation covenants in
agreements with their employees, with terms ranging from a few
months to several years after the employment relationship is
terminated. The companies claim that such restrictions are
necessary to protect their proprietary rights and their
confidential information.Similarly, foreign companies doing
business in India often seek to include confidentiality,
non-compete and non-solicitation covenants in their agreements with
senior management and employees, as is customarily done in certain
foreign jurisdictions.However, Indian courts have consistently
refused to enforce post-termination non-compete clauses in
employment contracts, viewing them as restraint of trade
impermissible under Section 27 of the Indian Contract Act, 1872
(the Act), and as void and against public policy because of their
potential to deprive an individual of his or her fundamental right
to earn a livelihood.The principles of Section 27 were aptly
summarized by the Supreme Court of India in Percept D Mark (India)
Pvt. Ltd v Zaheer Khan (AIR 2006 SC 3426), in which the Supreme
Court observed that under Section 27 of the Act a restrictive
covenant extending beyond the term of the contract is void and not
enforceable. The court also noted that the doctrine of restraint of
trade is not confined to contracts of employment only, but is also
applicable to all other contracts with respect to obligations after
the contractual relationship is terminated.This long-standing
stance was clearly reaffirmed recently in a 2009 decision by the
New Delhi High Court in Desiccant Rotors International Pvt Ltd v
Bappaditya Sarkar & Anr (I.A. No.5455/2008, I.A. No.5454/2008
& I.A. No.5453/2008 in CS(OS) No.337/2008), which involved a
senior marketing manager at a manufacturer of evaporative cooling
components, products and systems. As part of his employment
agreement with Desiccant, the manager agreed that for two years
following the termination of his employment, he would be bound by a
covenant with Desiccant that would require him to keep Desiccants
matters confidential, and that would prevent him from competing
with Desiccant and soliciting Desiccants customers, suppliers and
employees. Expressly embodied in the employment agreement was an
acknowledgement by the manager that he was dealing with
confidential material of Desiccant, including know-how, technology
trade secrets, methods and processes, market sales and lists of
customers. After a few years of employment, the manager resigned
and, notwithstanding the terms of his old employment agreement,
within three months of his resignation joined a direct competitor
of Desiccant as country manager in charge of marketing and started
contacting customers and suppliers of Desiccant. In injunctive
proceedings against the manager by Desiccant, the High Court
reiterated the principles embodied in Section 27 of the Act and the
individuals fundamental right to earn a living by practicing any
trade or profession of his or her choice. Brushing aside any
argument by Desiccant that the restrictive covenants were primarily
designed to protect its confidential and proprietary information,
the High Court ruled that in the clash between the attempt of
employers to protect themselves from competition and the right of
employees to seek employment wherever they choose, the right of
livelihood of employees must prevail. Similarly, in a 2007 decision
in V.F.S. Global Services Ltd. v. Mr. Suprit Roy (2008 (2) BomCR
446 ) the Bombay High Court held that a fully paid three-month
garden leave agreement with a senior manager did not renew the
employment contract and constituted a restraint of trade
unenforceable by V.F.S.Foreign investors in India need to be aware
of Section 27 of the Act and the well-established line of court
cases under it, as they structure their employment relationships
and incentives with local management. As a general principle,
confidentiality, non-competition and non-solicitation agreements
will be enforceable during the term of the employment relationship.
After termination of employment, however, many provisions of these
agreements will be struck and deemed unenforceable by Indian courts
in enforcement proceedings, even if the provisions are reasonable
in scope and duration, subject to certain exceptions.One of the few
instances in which non-competition clauses will generally be
enforceable is in the context of the sale of a business, where the
owners of the business will agree to a non-compete in exchange for
consideration for the goodwill associated with the business (for
example, in a stock sale where the promoters will sell their stock
in the business to a buyer in exchange for consideration). To be
enforceable, the non-compete will need to be reasonably limited in
time and scope, and consideration will need to be attributed to the
goodwill in the transaction, as evidenced in the documentation.
Similarly, a non-compete clause in a joint venture in which
shareholders mutually agree not to compete with each other on
certain terms and conditions, which include time and geographic
restrictions, will generally be enforceable in
India.Non-solicitation obligations post-termination of employment
may be enforced in limited circumstances, based upon the facts of
each individual case. For example, they were upheld in the
Desiccant case, in which the High Court did allow an injunction
against the manager prohibiting him from soliciting Desiccants
customers and suppliers to stand in effect. In the V.F.S. case,
however, relief for breach of non-solicitation obligations was
denied on the basis of vagueness of the relief
claimed.Confidentiality obligations post-termination of employment
will similarly be enforced in limited circumstances so long as they
remain reasonable and limited in time and scope and the employer
can support that the information is confidential and proprietary to
it. This case and others show that Indian courts will in certain
circumstances enforce confidentiality agreements intended to
protect an employers proprietary rights. But the courts remain
sensitive to the possibility that employers may try to use these
covenants as a back-door means of restraining employees from
exercising their trade and will place an extremely high burden of
proof on employers seeking to enforce these provisions. In the
Desiccant case for example, the court held that a marketing manager
could not be deemed to possess confidential information and that
his written declaration to that effect in his employment agreement
were meaningless; the court rejected Desiccants claim to enforce
the confidentiality obligations of the manager.Therefore, when
dealing with local management and key employees in India, foreign
investors need to remember that the position of Indian courts on
the question of non-competes is unmistakably clearany restriction
with regard to freedom of employees to seek employment and earn a
living after termination of their employment contract will
generally be unenforceable as contrary to public policy as set
forth under Section 27 of the Act.Quote-pull, if needed: Indian
courts remain sensitive to the possibility that employers may try
to use restrictive covenants as a back-door means of restraining
employees from exercising their trade and will place an extremely
high burden of proof on employers seeking to enforce these
provisions.
http://indiacorplaw.blogspot.com/2008/09/non-compete-and-non-disclosure.html
http://www.leagle.com/xmlResult.aspx?xmldoc=In%20INCO%2020110411172.xml&docbase=CSLWAR3-2007-CURR
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Title :Negative Covenants And Agreement In Restraint Of Trade-an
Insight Into Indian Laws
Author :Mr. Durani Murugan P.v.k
Durai Murugan P.V.K*The article analyses whether negative
covenant restraining the employee from taking up employment with
the third party after he ceases to be an employee are "agreement in
restraint of trade" which is against the Indian Contract Act.
IntroductionAn attempt has been made in this article to visualize
how far negative covenants can be stretched and skillfully drafted
vis--vis "agreement in restraint of trade" enshrined under the
Indian Contract Act. The focus of this article would be more
towards delving upon "non-disclosure agreement", "non-compete
agreement", "non-solicitation agreements" and "garden leave
clause". The negative clauses always had an unpleasant time with
freedom of contract and were prone to be easily charged as
agreement in restraint of trade which is generally considered to be
valid during the time of employment and the Courts have been less
willing to enforce agreements relating to post-employment
restraints on the employee.Non-compete Clause and its
FortificationIf there is a negative covenant restricting the
employee from taking any other employment, and the employee leaves
the service, the negative covenant can be enforced to the extent
that the unexpired part of the term of service would be essential
for the fulfillment of the contract.1 In Gujarat Bottling2 case the
Supreme Court said any non-disclosure clause shall be applicable
only during the period of service and any restraint beyond the
service is violative of Section 27 of the Indian Contract Act. A
negative covenant that the employee would not engage himself in a
trade or business or would not get himself employed by any other
manner or whom he would perform similar or substantially similar
duties, it is not therefore, a restraint of trade unless the
contract as aforesaid is unconscionable or excessively harsh or
unreasonable or one sided.3A contract which is in restraint of
trade cannot be enforced unless (a) it is reasonable as between
parties and (b) it is consistent with the interest of the public.4
In BLB Institute case5, the Court reiterated that under Section 27
of the Contract Act-(a) a restrictive covenant extending beyond the
term of the contract is void and not enforceable, (b) the doctrine
of restraint of trade does not apply during the continuance of the
contract for employment and it applies only when the contract comes
to an end, (c) as held by this Court in Gujarat Bottling v.
Coca-Cola this doctrine is not confined only to contracts of
employment, but is also applicable to all other
contracts.Therefore, it may be said that a negative covenant which
restricts a person post-employment period may be struck down as
violative of agreement in restraint of trade as it is pronounced by
the Supreme Court in Percept D'Mark case6 a covenant is a
restrictive covenant when it restricts the other person from his
future liberty to deal with the persons he chooses for his
endorsements, promotions, advertising or other affiliation and such
a type of restriction extending beyond the tenure of the contract
is clearly hit by Section 27 of the Contract Act and is
void.Non-solicitation AgreementNon-solicitation agreements are
those agreements which the employee promises not to solicit the
employer's clients or employees for a given period after
terminating the employment. Generally, negative covenant during the
period of the agreement is considered not to be hit by law but
there are certain non-solicitation agreement which is prima facie
negative in nature but still stand as an exception and are
enforceable even after the conclusion of the employment are held by
the Courts to be valid in law. The Delhi High Court in Wipro case7
held "the non-solicitation clause does not amount to a restraint of
trade, business or profession and would not be hit by Section 27 of
the Indian Contract Act, 1872 as being void". But in Pepsi Co8
case, which was an earlier case, the Court, prohibiting non
solicitation agreement, held that where an attempt by one company
to induce the employees of Competitor Company to join the
employment of inducing company in contrast to the contract of
employment, is not permissible and that the non-solicitation clause
is hit by the provisions of Section 27 of the Indian Contract Act,
1872.Non-disclosure agreementEven though India has an obligation to
comply with TRIPs Agreement, unlike the US and other developed
countries, India has no legislation dealing with trade secrets. In
India, protection of trade secrets is a common law based.9
Generally, an agreement which restraints a person after the period
of employment are considered to be unreasonable restraint of trade
and are struck down but "non-disclosure" agreement also stand as an
exception to this general rule and the Courts have upheld the
validity of such clauses post-employment period. In Gujarat
Bottling case10 the Supreme Court asked a relevant question that
how Pepsi may ask Coca Cola to part with its trade secrets to its
business rival by supplying the syrup, etc. for which Coca Cola
holds the trade marks to GBC which is under effective control of
Pepsi. The recent Delhi High Court decision in Diljeeth Titus11
case also further vouches for the fact that confidential
information of the employer can be protected post employment
period.In Escorts case12, the Delhi High Court restrained from
manufacturing, selling or offering for sale of the Pick-N-Carry
Mobile Cranes that are substantial imitation or reproduction of the
industrial drawings of the Plaintiffs or from using in any other
manner whatsoever, the technical know-how. In Burlington13 case the
Delhi High Court again restrained carrying on any business
including mail Order business by utilising the list of
clientele/customers included in the database of the
petitioner.Protection of Confidential Information under Indian IPR
lawsThe issue of Copyright protection to confidential information
was discussed by the Delhi High court in Diljeeth Titus14 case and
the Court held that "thus the real test was the degree of
employment control to determine whether it was a contract of
service. There may not be employment in the strict sense of
employment of a workman or a labourer but the degree of control
would determine the obligations of the parties", by pronouncing
this the Court upheld the Copyright in database which was
considered as confidential information. 'The employee shall not,
during his employment nor at any time afterwards, divulge nor
communicate to any person corporation or firm, any information
which he may receive or obtain in relation to the company's affairs
and customers and, all instructions drawing notes and memoranda
made by the employee or which may come into his possession while
engaged as aforesaid shall be the exclusive property of the
company.'15 In Zee Tele film case16, the Bombay High Court approved
triple test that where a Plaintiff sues, relying upon breach of
confidence, he must establish three elements. These are- (1) that
the information was of a confidential nature; (2) that the
information was communicated in circumstances importing an
obligation of confidence and (3) that there has been an
unauthorised use of the information to the detriment of the person
communicating it.Where, it was undertaken by the parties "not to
publish or cause to be published any work on the same subject at or
about the price of sale which might reasonably be regarded as
conflicting or likely to conflict with the sale of copyrighted
works" this kind of confidentiality clause protecting copyright was
held not to be violative of Section 27 of the Indian Contract
Act.17Remedies for Protection of Confidentiality under the Indian
LawInjunction preventing the third party from using trade secrets,
return of confidential information and Compensation for damages are
the common remedies which are available under the Indian
Jurisdiction. Section 72 of the Information Technology Act, 2000
deals with breach of confidentiality and privacy and any breach
will attract imprisonment upto 2years, fine upto Rs. 1 lac.The
Bombay High Court in Urmi Juvekar 18 held that an action for breach
of confidence succeeds only if the Plaintiff could identify
clearly, what was the information he was relying on and has to be
shown that it was handed over in the circumstances of confidence
and could be treated as confidential. "Garden leave" Clause-Is it
the Solution?The uncertainty of the judicial decision's over the
non-competitive clauses made the Corporate guru's to develop a
concept called "garden leave," in which employees are paid their
full salary during the period in which they are restrained from
competing, this had its genesis in England.19However, when "garden
leave" clause came for consideration before the Bombay High Court
it was argued that "The Garden Leave Clause is therefore, prima
facie in restraint of trade and is hit by Section 27 of the
Contract Act. The effect of the clause is to prohibit the employee
from taking up any employment during the period of three months on
the cessation of the employment". The Court accepting the argument
held "to obstruct an employee who has left service from obtaining
gainful employment elsewhere is not fair or proper".20 "Garden
leave" clauses have not received much appreciation as they are
considered to be as unreasonable restraint of trade which goes deep
into the root of freedom of contract which is a fundamental
postulate of right to contract.Conclusion-Negative covenant which
restricts the employee beyond the period of employment are
considered to be unreasonable. The exception being extended to
confidential information and non-solicitation agreement to a
reasonable period of time are valid and clauses like "garden leave"
does not seem to protect the employer when it comes to Court of
law; as they are considered to be agreement in restraint of trade
and does not serve the purpose for which it was intended.
Therefore, it requires the mind of an artist to draft a negative
clause and the foresight of a prophet to view the consequences of
such a clause which has now become absolutely imperative
considering the decisions made by the India
Courts._____________________________* The author is a IInd Year
LL.M student at National law School of India University. Bangalore.
He can be contacted at E-mail- [email protected] 1. Niranjan Shankar
Golikari v Century Spg and Mfg Co Ltd [1967] 2 SCR 397 2. Gujarat
Bottling Company Limited (GBC) vs. Coca Cola Company
MANU/SC/0472/1995: AIR1995SC2372, (1995)5SCC545 3. Niranjan Shankar
v. Century Spg. Mfg. Co Ltd. MANU/SC/0364/1967: AIR 1967 SC 1098 4.
Vancouver Malt and Sake Brewing Co. v. Vancouver Breweries Ltd.,
1934 PC 101 5. BLB Institute of Financial Markets Ltd v. MR.
Ramakar Jha MANU/DE/1359/2008: 154(2008)DLT121 6. Percept D'Mark
(India) Pvt. Ltd. V. Zaheer Khan and Anr. MANU/SC/1412/2006: AIR
2006 SC 3426, (2006) 4 SCC 227 7. See Wipro Limited v. Beckman
Coulter International S.A. MANU/DE/2671/2006 : 131(2006) DLT 681 8.
Pepsi Foods Ltd. v. Bharat Coca-cola Holdings Pvt. Ltd
MANU/DE/0740/1999: 81(1999)DLT122 9. Gaurav Wahie, Evaluating Trade
Secrets under the IPR Paradigm. CLJ 03 (01), 2005; 17-23. 10.
Gujarat Bottling Company Limited (GBC) V. Coca Cola Company
MANU/SC/0472/1995 : AIR1995SC2372, (1995)5SCC545 11. Mr. Diljeet
Titus, Advocate v. Mr. Alfred A. Adebare and Ors.
MANU/DE/1875/2006:130 (2006) DLT 330, 2006 (32)PTC 609 (Del) 12.
Escorts Const. Equipment Ltd v. Action Const. Equipment P. Ltd
S.No. 533/98 Decided On: 16.10.1998 MANU/DE/0185/1999 13.
Burlington Home Shopping Pvt. Ltd.v. Rajnish Chibber
MANU/DE/0718/1995: 61(1995)DLT6 14. Mr. Diljeet Titus, Advocate v.
Mr. Alfred A. Adebare and Ors. MANU/DE/1875/2006: 130 (2006) DLT
330, 2006 (32)PTC 609 (Del) 15. Herbert Morris Ltd v Saxelby 1916 1
AC 688 16. Zee Telefilms Ltd. V. Sundial Communications Pvt. Ltd
MANU/MH/0243/2003: 2003(3)MhLj695, 2003(27)PTC457(Bom) 17. The
Chancellor Masters and Scholars of the University of Oxford v.
Orient Longman Private Limited MANU/DE/2021/2002: 103(2003)DLT139
18. Urmi Juvekar Chiang v. Global Broadcast News Limited
MANU/MH/0315/2007: 2008(2)BomCR400 19. Evening Standard Co. Ltd. v.
Henderson [1987] I.R.L.R. 64. (This case is credited with giving
rise to the concept of garden leave. The court found that Henderson
"ought not, pending trial, to be allowed to do the very thing which
his contract was intended to stop him doing, namely working for
somebody else during the period of his contract." 20. VFS Global
Services Private Limited v. Mr. Suprit Roy MANU/MH/1043/2007:
2008(2) Bom CR 446, 2008 (3) MhLj 266.
Non Confidentiality In India With the increase in cross-border
trade and an enhanced competitive climate in India,
confidentiality, non-compete and non-solicitation agreements are
becoming increasingly popular there, especially in the IT and
technology sectors.
An increasing number of outsourcing and IT companies are
including confidentiality, non-compete and non-solicitation
covenants in agreements with their employees, with terms ranging
from a few months to several years after the employment
relationship is terminated. The companies claim that such
restrictions are necessary to protect their proprietary rights and
their confidential information.
Similarly, foreign companies doing business in India often seek
to include confidentiality, non-compete and non-solicitation
covenants in their agreements with senior management and employees,
as is customarily done in certain foreign jurisdictions.
However, Indian courts have consistently refused to enforce
post-termination non-compete clauses in employment contracts,
viewing them as restraint of trade impermissible under Section 27
of the Indian Contract Act, 1872 (the Act), and as void and against
public policy because of their potential to deprive an individual
of his or her fundamental right to earn a livelihood.
The principles of Section 27 were aptly summarized by the
Supreme Court of India in Percept D Mark (India) Pvt. Ltd v Zaheer
Khan (AIR 2006 SC 3426), in which the Supreme Court observed that
under Section 27 of the Act a restrictive covenant extending beyond
the term of the contract is void and not enforceable.
The court also noted that the doctrine of restraint of trade is
not confined to contracts of employment only, but is also
applicable to all other contracts with respect to obligations after
the contractual relationship is terminated.
This long-standing stance was clearly reaffirmed recently in a
2009 decision by the New Delhi High Court in Desiccant Rotors
International Pvt Ltd v Bappaditya Sarkar & Anr (I.A.
No.5455/2008, I.A. No.5454/2008 & I.A. No.5453/2008 in CS(OS)
No.337/2008), which involved a senior marketing manager at a
manufacturer of evaporative cooling components, products and
systems.
As part of his employment agreement with Desiccant, the manager
agreed that for two years following the termination of his
employment, he would be bound by a covenant with Desiccant that
would require him to keep Desiccants matters confidential, and that
would prevent him from competing with Desiccant and soliciting
Desiccants customers, suppliers and employees.
Expressly embodied in the employment agreement was an
acknowledgement by the manager that he was dealing with
confidential material of Desiccant, including know-how, technology
trade secrets, methods and processes, market sales and lists of
customers.
After a few years of employment, the manager resigned and,
notwithstanding the terms of his old employment agreement, within
three months of his resignation joined a direct competitor of
Desiccant as country manager in charge of marketing and started
contacting customers and suppliers of Desiccant.
In injunctive proceedings against the manager by Desiccant, the
High Court reiterated the principles embodied in Section 27 of the
Act and the individuals fundamental right to earn a living by
practicing any trade or profession of his or her choice.
Brushing aside any argument by Desiccant that the restrictive
covenants were primarily designed to protect its confidential and
proprietary information, the High Court ruled that in the clash
between the attempt of employers to protect themselves from
competition and the right of employees to seek employment wherever
they choose, the right of livelihood of employees must prevail.
Similarly, in a 2007 decision in V.F.S. Global Services Ltd. v. Mr.
Suprit Roy (2008 (2) BomCR 446 ) the Bombay High Court held that a
fully paid three-month garden leave agreement with a senior manager
did not renew the employment contract and constituted a restraint
of trade unenforceable by V.F.S.
Foreign investors in India need to be aware of Section 27 of the
Act and the well-established line of court cases under it, as they
structure their employment relationships and incentives with local
management. As a general principle, confidentiality,
non-competition and non-solicitation agreements will be enforceable
during the term of the employment relationship. After termination
of employment, however, many provisions of these agreements will be
struck and deemed unenforceable by Indian courts in enforcement
proceedings, even if the provisions are reasonable in scope and
duration, subject to certain exceptions.
One of the few instances in which non-competition clauses will
generally be enforceable is in the context of the sale of a
business, where the owners of the business will agree to a
non-compete in exchange for consideration for the goodwill
associated with the business (for example, in a stock sale where
the promoters will sell their stock in the business to a buyer in
exchange for consideration).
To be enforceable, the non-compete will need to be reasonably
limited in time and scope, and consideration will need to be
attributed to the goodwill in the transaction, as evidenced in the
documentation.
Similarly, a non-compete clause in a joint venture in which
shareholders mutually agree not to compete with each other on
certain terms and conditions, which include time and geographic
restrictions, will generally be enforceable in India.
Non-solicitation obligations post-termination of employment may
be enforced in limited circumstances, based upon the facts of each
individual case. For example, they were upheld in the Desiccant
case, in which the High Court did allow an injunction against the
manager prohibiting him from soliciting Desiccants customers and
suppliers to stand in effect. In the V.F.S. case, however, relief
for breach of non-solicitation obligations was denied on the basis
of vagueness of the relief claimed.
Confidentiality obligations post-termination of employment will
similarly be enforced in limited circumstances so long as they
remain reasonable and limited in time and scope and the employer
can support that the information is confidential and proprietary to
it.
Indeed, while denying enforcement of the garden leave in the
V.F.S. case, the Bombay High Court established the principle that a
restraint on the use of trade secrets during or after cessation of
employment is not tantamount to a restraint on trade under Section
27 of the Act and therefore can be enforceable under certain
circumstances.
This case and others show that Indian courts will in certain
circumstances enforce confidentiality agreements intended to
protect an employers proprietary rights. But the courts remain
sensitive to the possibility that employers may try to use these
covenants as a back-door means of restraining employees from
exercising their trade and will place an extremely high burden of
proof on employers seeking to enforce these provisions.
In the Desiccant case for example, the court held that a
marketing manager could not be deemed to possess confidential
information and that his written declaration to that effect in his
employment agreement were meaningless; the court rejected
Desiccants claim to enforce the confidentiality obligations of the
manager.
Therefore, when dealing with local management and key employees
in India, foreign investors need to remember that the position of
Indian courts on the question of non-competes is unmistakably
clearany restriction with regard to freedom of employees to seek
employment and earn a living after termination of their employment
contract will generally be unenforceable as contrary to public
policy as set forth under Section 27 of the Act.
Quote-pull, if needed: Indian courts remain sensitive to the
possibility that employers may try to use restrictive covenants as
a back-door means of restraining employees from exercising their
trade and will place an extremely high burden of proof on employers
seeking to enforce these provisions.
http://delhidistrictcourts.nic.in/Jul09/DESICCANT%20ROTORS%20INTERNATIONAL%20PVT%20LTD%20VS.%20BAPPADITYA%20SARKAR.pdf
cases link Validity of Non-compete Covenants in India
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Agreements that restrain an employee from working with a
competitor or carrying out a competing business are called
Non-compete agreements. Such agreements, when reasonable are
considered to be valid in countries such as USA and UK. However,
under the Indian law Non-compete agreements are valid to a very
limited extent because agreements in restraint of trade or
employment are void under Section 27 of the Indian Contract Act.
The section reads as follows:
"27. Agreement in restraint of trade void . Every agreement by
which any one is restrained from exercising a lawful profession,
trade or business of any kind, is to that extent void. Saving of
agreement not to carry on business of which good-will is sold."
As per the section any provision that restrains a person from
carrying out a lawful profession, business or trade is void.
Non-compete agreements restrain employees from working with a
competitor of the employer or carrying out competing business or
trade and their validity is therefore questionable.
Non-compete provisions in a employment agreement are generally
of two types:a. Covenant against competition during the term of the
agreement; andb. Covenant against competition after the termination
of the employment agreement.
Covenants that fall within the first term of an employment
agreement are considered by courts to fall outside the scope of
section 27 and are considered to be valid. However, non-compete
provisions that survive the termination of the employment agreement
have been held by courts to be invalid. The reasonableness of the
non-compete clause will not make a difference for determining their
validity. A non-compete clause will be void even if there are
reasonable restrictions such term limitation, payment of salary
after termination and so on.
Having said that, if the non-competition is enforced through
confidentiality or secrecy clauses, such provisions may fall
outside the scope of Section 27. For example, a clause that
provides that confidential information of a company cannot be used
or disclosed by an employee after the termination of the agreement
would be valid if the information that is the subject of
confidentiality can be specifically identified. Information such as
customer lists, business processes and so on may be safe guarded
and employees can be prevented from using such information after
the term of employment agreement expires. By enforcing the
confidentiality of client lists and so on, non-competition can be
enforced to a certain extent.
However, it must be noted that if confidential information
becomes a part of employee's knowledge and skill, the employee
cannot be prevented from using the same from exercising his
livelihood. This is also called as the doctrine of inevitable
disclosure and is well recognized by the Indian courts. Though
courts have many a time enforced confidentiality irrespective of
the existence of agreements based on breach of confidence, they
will not issue an order against an employee if it means forced
employment or idleness.
ReferencesPercept D'Mark (P) Ltd. v. Zaheer Khan
MANU/SC/1412/2006Gujarat Bottling Company Limited v. Coca Cola
Company MANU/SC/0472/1995Superintendence Company of India (P) Ltd.
v. Krishan Murgai MANU/SC/0457/1980Niranjan Shankar Golikari Vs.
The Century Spinning and Mfg. Co. Ltd., MANU/SC/0364/1967.Desiccant
Rotors International Pvt. Ltd. Vs. Bappaditya Sarkar and Anr., I.A.
No. 5455, 5454 and 5453/2008 in CS(OS) No. 337/2008.Mr. Diljeet
Titus, Advocate Vs. Mr. Alfred A. Adebare and Ors.,
MANU/DE/1875/2006.Ambiance India Pvt. Ltd. Vs. Shri Naveen Jain,
MANU/DE/0385/2005.
Post-Termination non-compete clauses in employment
contractsIndian courts have consistently refused to enforce
post-termination non-compete clauses in employment contracts,
viewing them as restraint of trade impermissible under Section 27
of the Indian Contract Act, 1872 (the Act), and as void and against
public policy because of their potential to deprive an individual
of his or her fundamental right to earn a livelihood.
The principles of Section 27 were aptly summarized by the
Supreme Court of India in Percept D Mark (India) Pvt. Ltd v Zaheer
Khan (AIR 2006 SC 3426), in which the Supreme Court observed that
under Section 27 of the Act a restrictive covenant extending beyond
the term of the contract is void and not enforceable. The court
also noted that the doctrine of restraint of trade is not confined
to contracts of employment only, but is also applicable to all
other contracts with respect to obligations after the contractual
relationship is terminated.
This long-standing stance was clearly reaffirmed recently in a
2009 decision by the New Delhi High Court in Desiccant Rotors
International Pvt Ltd v Bappaditya Sarkar & Anr (I.A.
No.5455/2008, I.A. No.5454/2008 & I.A. No.5453/2008 in CS(OS)
No.337/2008), which involved a senior marketing manager at a
manufacturer of evaporative cooling components, products and
systems. As part of his employment agreement with Desiccant, the
manager agreed that for two years following the termination of his
employment, he would be bound by a covenant with Desiccant that
would require him to keep Desiccants matters confidential, and that
would prevent him from competing with Desiccant and soliciting
Desiccants customers, suppliers and employees. Expressly embodied
in the employment agreement was an acknowledgment by the manager
that he was dealing with confidential material of Desiccant,
including: know-how, technology trade secrets, methods and
processes, market sales, and lists of customers. After a few years
of employment, the manager resigned and-notwithstanding the terms
of his old employment agreement-within three months of his
resignation joined a direct competitor of Desiccant as country
manager in charge of marketing and started contacting customers and
suppliers of Desiccant. In injunctive proceedings against the
manager by Desiccant, the High Court reiterated the principles
embodied in Section 27 of the Act and the individuals fundamental
right to earn a living by practicing any trade or profession of his
or her choice. Brushing aside any argument by Desiccant that the
restrictive covenants were primarily designed to protect its
confidential and proprietary information, the High Court ruled that
in the clash between the attempt of employers to protect themselves
from competition and the right of employees to seek employment
wherever they choose, the right of livelihood of employees must
prevail. Similarly, in a 2007 decision in V.F.S. Global Services
Ltd. v. Mr. Suprit Roy (2008 (2) BomCR 446 ) the Bombay High Court
held that a fully paid three-month garden leave agreement with a
senior manager did not renew the employment contract and
constituted a restraint of trade unenforceable by V.F.S.
As a general principle, confidentiality, non-competition and
non-solicitation agreements will be enforceable during the term of
the employment relationship. After termination of employment,
however, many provisions of these agreements will be struck and
deemed unenforceable by Indian courts in enforcement proceedings,
even if the provisions are reasonable in scope and duration,
subject to certain exceptions.
One of the few instances in which non-competition clauses will
generally be enforceable is in the context of the sale of a
business, where the owners of the business will agree to a
non-compete in exchange for consideration for the goodwill
associated with the business (for example, in a stock sale where
the promoters will sell their stock in the business to a buyer in
exchange for consideration). To be enforceable, the non-compete
will need to be reasonably limited in time and scope, and
consideration will need to be attributed to the goodwill in the
transaction, as evidenced in the documentation. Similarly, a
non-compete clause in a joint venture in which shareholders
mutually agree not to compete with each other on certain terms and
conditions, which include time and geographic restrictions, will
generally be enforceable in India.
Non-solicitation obligations post-termination of employment may
be enforced in limited circumstances, based upon the facts of each
individual case. For example, they were upheld in the Desiccant
case, in which the High Court did allow an injunction against the
manager prohibiting him from soliciting Desiccants customers and
suppliers to stand in effect. In the V.F.S. case, however, relief
for breach of non-solicitation obligations was denied on the basis
of vagueness of the relief claimed.
Confidentiality obligations post-termination of employment will
similarly be enforced in limited circumstances so long as they
remain reasonable and limited in time and scope and the employer
can support that the information is confidential and proprietary to
it. Indeed, while denying enforcement of the garden leave in the
V.F.S. case, the Bombay High Court established the principle that a
restraint on the use of trade secrets during or after cessation of
employment is not tantamount to a restraint on trade under Section
27 of the Act and therefore can be enforceable under certain
circumstances. This case and others show that Indian courts will in
certain circumstances enforce confidentiality agreements intended
to protect an employers proprietary rights. But the courts remain
sensitive to the possibility that employers may try to use these
covenants as a back-door means of restraining employees from
exercising their trade and will place an extremely high burden of
proof on employers seeking to enforce these provisions. In the
Desiccant case for example, the court held that a marketing manager
could not be deemed to possess confidential information and that
his written declaration to that effect in his employment agreement
were meaningless; the court rejected Desiccants claim to enforce
the confidentiality obligations of the manager.
Non-Compete and Non-Disclosure Agreements: Are They in Restraint
of Trade? (In the following post, Venugopal Mahapatra and Gautam
Bhatia discuss the Indian legal position regarding non-compete and
non-disclosure clauses in employment and similar contracts in the
context of a Bombay High Court decision. They also compare and
contrast the Indian law on this topic with the position that
prevails in the U.K.)
V.F.S. Global Services Ltd. v. Mr. Suprit Roy is a December 2007
decision of the Bombay High Court. It is notable for some
interesting observations of the Court upon the matters of restraint
of trade and protection of trade secrets.
The controversy arose because of a condition in the contract of
employment between the company and the employee whereby the
employee was not permitted to participate with any other company
carrying on similar business, and was also restrained from
commencing similar business during the period of employment or for
a period of two years after. Subsequently, a covenant of
confidentiality was entered into by the parties, whereby the
employee was not permitted to disclose or make use of any
confidential information of the company, whether during the period
of employment or after, except under certain special circumstances;
and also that in the event he left service, or was terminated from
service, he would not enter into the service of any employer who
had a conflict of interest with the business of the plaintiff.
Finally, there was a review of these conditions, and the insertion
of a Garden Leave Clause, whereby the company, among other things,
reserved the right to require the employee to remain away from work
or employment after termination or resignation, and to comply with
the conditions laid down by the company at such time.
In the instant case, the plea was for enforcement of this
negative covenant. The Court first examined the Garden Leave
Clause. It observed that the clause intended to operate after the
cessation of employment. On this ground the defendant (employee),
citing a number of previous judgments, had pleaded that it violated
Section 27 of the Indian Contract Act, and was therefore void. The
Court, following the seminal case of Niranjan Shankar Golikari,
drew a distinction between a restrictive condition in a contract of
employment which was operative during the period of employment and
one which was to operate after the termination of the employment.
The latter amounted to restraint of trade, while the former did
not. On this basis, the Court held that the Garden Leave Clause was
hit by Section 27, observing that neither the principle of
reasonableness of restraint, nor the fact that the restraint was
partial, was of any relevance.
At this point, it would be instructive to briefly discuss the
position of Indian law with regard to negative employment covenants
and restraint of trade. Indian law underwent a well-marked
departure from the common law jurisprudence following the apex
Court ruling in Krishna Murgai. The Supreme Court, giving an
extremely narrow construction to Section 27 of the Indian Contract
Act (which deals with restraint of trade), firmly rejected the
importing of the common law doctrine of reasonability. In the
recent high-profile cases involving Indian Cricketing superstars
Zaheer Khan and Yuvraj Singh, the apex Court reaffirmed the strict
construction of Section 27 and struck down the right of first
refusal clauses which were due to take effect after the end of the
contractual period. The UK position, in this regard, allows for
post-service covenants provided they are reasonable as to time,
market and geographical limits. However, Indian law provides for no
such scope, and validates only those agreements which are necessary
for protection of goodwill. Thus, in the V.F.S. Case, the Bombay
High Court toed the line drawn by the apex Court.
The Court then examined the contentions based on the agreement
of confidentiality. The Court held, straightforwardly enough, that
a clause prohibiting an employee from disclosing commercial or
trade secrets was not in restraint of trade, as the effect of such
a clause was not to restrain the employee from exercising a lawful
profession, trade or business within the meaning of Section 27 of
the Contract Act. It rejected the defendants contention that the
exact nature and scope of the confidential information had not been
precisely defined.
At this juncture, it is again pertinent to cast a glance at the
UKs legal position on the aspect of confidential information. After
the landmark case of Faccenda Chicken, information is graded into 3
tiers. The first tier includes information which is already in the
public domain and could be used by the employees post-service. The
second tier covers confidential information which the employee
cannot use or disclose during the period of employment without
breaching his duty of fidelity to his employer, but which, in the
absence of an express non-disclosure term, could be used
post-service. The third tier includes only specific trade secrets
which the employee cannot disclose or use during or after
employment even in the absence of an express non-disclosure
agreement. Thus, the law balances the interests of employers by
preserving confidential information and trade secrets on one hand
and those of the employees by protecting their skills and assets.
The decision in V.F.S., while pointing to the need for protecting
trade secrets, goes no further. It is submitted that it is
essential to incorporate such guidelines in Indian law to ensure
clarity and predictability.
Thus, though the Indian position on this aspect has been
consistent, it has nevertheless witnessed strong criticism on more
than one count. While the Bombay High Court pronouncement
introduces much needed protection to trade secrets by taking it out
of the ambit of restraint of trade, nevertheless much ground needs
to be covered in order to ensure security to trade secrets. In
V.F.S., the Court had the chance to do just this, as the defendant
expressly pleaded that the nature of the confidential information
was vague and so could not be sustained; however, this plea was
rejected. Therefore, it is submitted that V.F.S. is an important
step in this regard, but needs to be developed further, with the
U.K. position being a possible model.
http://www.efc.ie/full-publications.php?id_publications=109
http://www.mjoc.ie/home_nav_59_nid_13_y_2007_m_10.html
http://www.dynamiclawyers.com/non-solicitation-non-compete-agreements-part-1-introduction/14/
http://articles.manupatra.com/PopOpenArticle.aspx?ID=264fdfb0-bb02-416b-9eed-4ca76ca1ee46&txtsearch=#*
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