Non-Compete Clause Contract -

Its Legal Implication

Name Roll No
Oliver Coelho 10
Mayur Kunder 25
Priyanka Surve 55
Krunal Thakkar 56
Dinu Thomas 57
Devendra Singh 62
Shrikant Chippa 63
What is a Non-Compete Clause-

•In contract law, a non-compete clause (NCC), or covenant not

to compete (CNC), is a clause under which one party agrees
not to enter into or start a similar profession or trade
in competition against another party.

•Asa contract provision, a CNC is bound by traditional

contract requirements including the consideration doctrine.

•These contract are usually between employer and employee.

Background of Non Compete Clause-

•Section 27 of Indian Contract Act has a general bar on any

agreement that puts a restriction on trade.
•On this basis, it would appear that all non-compete clauses in
India are invalid. However, the Supreme Court of India has
clarified that some non-compete clauses may be in interest of
trade and commerce, and such clauses are not barred by
Section 27 of the Contract Act, and therefore valid in India.
•Notably, only those clauses backed by a clear objective that is
considered to be in advantage of trade and commerce survives
this test.
• For instance, a co-founder of a startup who signed a non-
compete clause can be held to it, but if a junior software
developer or a call center employee signs a non-compete
clause with the employer the same may not be enforceable.
Aspects of Non-Competition Agreements

1)Purpose-

•A Non-compete clause should have a clear purpose to

protect certain confidential information within a company
that employees partners or business clients may come in
contact with while working with the company.
•However, it doesn’t prevent the individual from merely
maintaining a right to earn a living.

2) Type-

•Only individuals with access to a company’s sensitive

information that affects the entire operation of the business
or has the potential to widely impact the business operation
will need to sign a non-competition agreement.
3)Stipulations-

 The non-competition agreement must stipulate exactly what must be kept

confidential and how the confidential information relates to employee,
contractor or business clients’ connection with the business.

4)Legal Aspects-

 Non-Compete agreement may be upheld in court when it is reasonable in

scope and duration, and it provides a balance between the interests of
both parties
 Some non-competition agreements may be hard to enforce. However,
they must adhere to applicable state law, and the restrictions must
reasonably protect the company’s interest without preventing fair
competition
Is Non-Compete Clause Valid in India ?

 A non-compete contract or a clause is valid when it is

reasonable, and when it promotes trade and commerce
rather than hindering it.

 What this exactly translates into a specific situation, is

subject to judicial interpretation. However, from a drafting
perspective, it is seen as a very strong measure, that must be
used with great caution.

 It must be limited by geographical jurisdiction and time. A

perpetual and global non-compete is unlikely to survive
judicial scrutiny.
Example 1:You put a non-compete clause while hiring an employee. It is very
unlikely to be effective, unless the person is at a CxO position . As after
quitting it is unreasonable to expect that the employee will not work with
a competing venture. Non-competes are not very effective to control
employee behavior after quitting.

Example 2:You enter into a non-compete agreement with a distributor or a

supplier. This is more likely to be approved as a measure that promotes
trade and commerce rather than hindering it.

Exclusive arrangements during the subsistence of a business relationship is

almost always considered to be reasonable ,but keeping the non-compete
after such ties are cut through contractual obligations is difficult.You can
attempt to put such restrictions for 2-3 years - but anything beyond is
likely to be considered unreasonable
Enforceability Of Non-Compete Clauses In India

 Employees that enter into a contract with an employer may agree

to neither compete with the employer nor join a competitor
during their term of the employment and/or a period after.

 This limits parties to an extent, depending on the contract, in their

ability to restrict certain practices of one party that may compete
with the other party, despite their agreement.

 Section 27 of the Act that makes a clause of certain intention void

and allows it to be valid only when it meets the conditions to be
considered as an exception.

 Courts are obligated to take into consideration the terms of the

contract in each individual case and assess the case based on
reasonableness, nature of circumstances, and even the nature and
relation of the parties in this context.
Enforceable areas of Non-Compete Contract

1) Distance-

 Appropriate restrictions on employee that may prohibit from

practicing some profession within a reasonable stipulated distance
(Eg- Operating in different Zone / Region etc)

2) Time period-

 If there is a reasonable time period provided in the clause, then it

would be considered under reasonable restrictions (Generally a 3
Yrs restriction in acceptable).
3) Trade secrets and Goodwill-

 The employer may put reasonable restrictions on disclosure of trade

secrets.
 Article 27 of the Indian Contract Act, 1872, provides an exception for the
cases of distribution of goodwill.
 ‘Injunction’ is used in addition by the Judiciary with the intention of
preventing one party from releasing confidential information, using trade
secrets, and for the purpose of ‘compensation’.
Case Laws-
1) Garden Leave - V.F.S. Global Services Ltd. v. Mr. Suprit Roy

Facts-
 Employees of VPS were restrained from competing after termination of contract
for a specific time period.
 VPS duly paid full salary during this period.
 Suprit Roy joined another organization and was subsequently sued by VPS.

Judgment-
 The Bombay High Court held that a fully paid three-month ‘garden leave’
agreement with a manager did not renew the employment contract and
constituted a ‘restraint of trade’ unenforceable by V.F.S.
 It was argued that such a clause is prima facie in restraint of trade and hence void
as per Section 27.
 Its aim is to prohibit the employee, after employment, from taking up other
employment during the period of three months. The Court held that such a
practice is “not fair or proper” and unreasonable restraint of trade.
2) Employee bond- V.V. Sivaram and others v. FOSECO India Limited.

Facts-
 Employees of Foseco India Limited was restrained, after leaving the job,
from using secrets and confidential information that was gained during the
job, including information about the patent ‘Turbostop’.
 After leaving under voluntary retirement VV. Siravaram along with other
collogues started manufacturing similar product as to Turbostop
 Injunction in his contract that restrained him from manufacturing and
marketing products similar to ‘Turbostop’

Judgment-
 The court failed to believe that Sivaram had not received information
regarding the manufacturing process of Turbostop during the course of
their employment
 Issue of enforceability of non-compete obligations was held valid under
Section 27
3) Right of First Refusal- Zaheer Khan v Percept D’marks (India)

Facts-
 Zaheer had signed a contract with the company in the year 2000 for a
period of three years with the contract ending in October 2003.

In July 2003 the company sent him a draft agreement for extending the
contract for another five years. Zaheer turned it down saying he was not
interested.
 Percept D'Mark then approached the Bombay High Court in December
that year saying Zaheer had been paid huge amounts of guarantee money
every year under the contract and asked for an injunction on his signing a
contract with a third party before fulfilling his obligations under their
agreement.

The company, invoking a clause in the deal, had asked Zaheer to provide
all the details of any contract he intended to sign with a third party and
demanded that it get the first opportunity to offer the contract.
 Zaheer had refused to abide saying the agreement was one-
sided and unfair.
 Percept D'Mark's appeal was granted by the High Court and
Zaheer and the new company (Adidas) that wished to
represent him filed separate pleas against the judgment.
 The matter was then taken to the Apex Court .
Judgment -

 The HC then granted Zaheer's petition against the judgment and Percept
brought the matter to the apex court.

 The SC bench, while dismissing its plea, said restraining Zaheer from acting
upon the agreement entered into with the new firm would amount to
compelling him to be managed by Percept D'Mark. '‘

 Injunction in the present would result in irreparable injury and great

injustice to the first respondent (Zaheer) which is incapable of being
remedied in monetary terms as he would be compelled to enter into a
relationship involving mutual faith, confidence and continued trust against
his will,'' the bench said.
4) Premature Termination (Employee on the Restraint )
Superindence Co. of India Pvt Ltd v Krishna Murgai-

Fact-
Company had build up reputation on grounds of technique
for quality control and some Trade Secrete Employee post
service were restrained –
i)Taking up service with a firm in competition with former
firm
ii)Start his own business at the place of his last position for
2 Yrs.

•Employees service was terminated and he started his own

business substantially similar as his former employee.

•Employer sued for Injunction and Damage.

Judgment-

 Term of contract only applied to voluntary giving up service and

therefore suit failed.

 A service convent extending beyond the term of service is Void.

 Negative Convent in contract with employee that he shall not

serve any other competitor firm for 2 Yrs at the place of his last
posting after employee left is void.

 However a term restricting an employee from disclosing trade

secretes can be enforced.
5) Gopal Paper mill v Surendar Kumar Ganesh Das
Malhotra

Facts -

 Plaintiff had appointed the defendant as an apprentice to

service for 20 Yrs ( 1st 3yrs apprenticeship)

 During 20 Yrs the defendant was not to give advise / service

to any other person / company to divulge information which
he may receive with regard to affairs of the plaintiff.
 Starting salary of Rs.15/month , rising in time to Rs.
300/month

 Apprentice left after 1 Yr.

Judgment-

Injunction was refused to employer as ,-

•The contract gave the employer an arbitrary power to

terminate the service without notice , if he decides not to
retain the employee during the 3 Yrs if apprenticeship.

•No trade secret was imparted to the defendant

•Therefore question of trade secret did not arise

Conclusion

 Non-Compete Clause in India is valid but to a limited extent. This extent is

decided by the Courts in different cases based on the facts and
circumstances of the case. But, in general the restraint that is imposed during
the term of employment is a valid and post-employment restraint is void. This
rule has been set up by the precedents so established by the Court in
different cases.
 It is stated unambiguously in Section 27 of the Indian Contract Act, 1872
that agreements in restraint of trade are void to that extent. In order to
maintain the confidentiality of their trade secrets, an employer cannot be
permitted to disseminate forced employment, as it is prohibited by Section
27.
 Another approach towards this issue can be that Article 21 of the
Constitution of India ensures the right to livelihood; therefore an
employer cannot restrict his employee not to earn his living.