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Validity of Non-Compete Covenants in India
First Publication Date: 15th December 2010
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; and
b. 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.
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