Many contracts are a part of daily life in the modern era when globalisation and industrialization are at their height. Employment contracts are the most typical of these agreements. Employment terms and conditions are outlined in employment contracts. These days, the non-competition provision is one of the frequent clauses found in most employment contracts. In light of worries about the secrets held by every organisation, this is done. Since employees are an essential component of a company or organisation, they have access to information that is thought to be highly confidential during the course of their job. As a result, “Non-Compete Clauses” have been included in employment agreements in order to protect this information.
NON-COMPETE CLAUSE: WHAT IS IT?
A non-competition clause, often known as a non-compete agreement, is a condition in an employment contract that prohibits an employee from working for a competitor company or beginning a similar trade or profession for a predetermined amount of time after leaving their present employer. This assists businesses in protecting valuable information and trade secrets and stops employees from abusing confidential information. This clause attracts both positive and negative covenants, as noted in the case of Deshpande v. Arbind Mills Co., where it was determined that a service agreement contains both a positive covenant requiring the employee to give the employers his full attention as well as a negative covenant barring the employee from working for another employer during the term of the agreement.
Enforceability of Non-Compete Clause
Whether or not such non-compete clauses are enforceable has long been debated. In this regard, the legal professionals who are opposed to non-compete clauses base their arguments on Section 27 of the Indian Contract Act, while the legal professionals who are in favour of the exemption to Section 27 and other precedents. Section 27 of the Indian Contract Act states that –
27. “Every agreement by which anyone is restrained from exercising a lawful profession or trade or business of any kind, is to that extent void.
Exception: One who sells goodwill of a business with a buyer to refrain from carrying on a similar business within specified local limits so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein provided that such limitations appear to the court reasonable, regard being had to the nature of business.”
Employees have argued that these non-compete clauses are in violation of Section 27’s prohibition on contracts created in an effort to limit trade and are therefore unenforceable. Therefore, any such restriction would nullify the non-compete agreement. The Contract Act’s interpretation under Section 27 is not, however, res Integra.
Exceptions to Non-Compete Clause
Despite the fact that Section 27 of the Indian Contract Act expressly states that agreements that restrict trade are unlawful from the start, recent judicial rulings have made it apparent that this is not always the case where the court judges the restraint to be fair and in line with a public purpose. These agreements are legal. In Mr Diljeet Titus, Advocate v. Mr Alfred A. Adebare and Ors, the Hon. Delhi High Court explained the same by holding that sensitive workplace information can be covered even after employment.
It is solely up to the judiciary to decide what qualifies as reasonable and falls within the parameters of public policy; no set formula has been established to do so. The case’s facts and circumstances, as well as the job’s character, will determine what is reasonable and whether it advances public policy or not.
A few examples of appropriate limits are:
- Distance: Reasonable restrictions on employees that prevent them from engaging in the same line of work for a set amount of time.
- Time frame: If the clause has a time limit, it must be within reasonable bounds.
- Trade secrets: With reasonable constraints, the contractor may divulge trade secrets.
- Goodwill: Section 27 allows for an exception to the allocation of goodwill.