Non-Compete and Restrictive Covenants in Employment Agreements: Indian Position – Primitive or Progressive?

Wahi Batra, Preeti

Indian legal mechanism including statutes, legislation concerned and verdicts of the courts of law have time and again regurgitated their pro-employee deportment generally if not specifically; whatever be the area of human resource. The employers, with a view of acquiring longevity in business involvement and employment per se from the employees, afford significant and extensive means to them in the form of orientation, training and sometimes even focussed specialized edification by way of specific expertise, skills and information. Although it’s an another story that as a common routine, following attaining the required skill-sets, expertise and information, employees turn out to be extra prone in the direction of swinging towards other worthwhile career options. Consequently, in order to impede and contain the employees from surfing jobs, employers incorporate archetypal covenants and conditions in the employment contracts that inhibit the employees from departing the jobs for a predetermined duration following the training or taking up similar employment for a preset period/duration of time, following their ceasing to be an employee with the concerned employer.

Unquestionably, in this aforesaid situation, the employer and employee encompass incompatible stands in so far as the negative covenant in the employment contract is concerned which may also have to stand the test of embargo set by Section 27 of the Contract Act, 1872 predominantly bending in favour of the employees. Section 27 of the Contract Act provides that every contract that restricts anyone from taking-up a lawful profession, trade or business of any kind is void to that extent. The lone exclusion is in respect of the sale of goodwill, where the purchaser of goodwill could restrict the vendor from undertaking the similar business within prescribed territorial limits. This statutory provision does not acknowledge any additional legitimate restraint on trade, regardless of its equitability.

Generally, there can exist and subsist an agreement amid employer and employee wherein the employee shall covenant not to establish similar business after departing his employment or to get into employment with a rival organization. The broad doctrine as set down by Indian courts specifies that (a) subsequent to the expiry of the tenure of employment, the contracts which preclude an employee from working elsewhere would be restriction of trade, except where there is a proprietary interest of the employer in the activity/service concerned, and (b) an employee may well be restricted from serving any other employer or person or undertaking or pursuing with private business during the tenure of employment. It is a matter of general acceptance now that through the tenure of employment, an employer can lawfully restrain an employee from competing with it or taking any additional employment while the employment indenture is in force.

The Supreme Court has laid down that concerns opposed to restrictive covenants shall stand differently in the eventualities where the restriction on trade/employment is to pertain during the time following the termination of the agreement than those where it is to run during the period of the agreement. Negative covenants effective during the period of the agreement of employment whilst the employee is obligated to aid his employer solely or completely are by and large not regarded as restraint of trade and consequently do not fall under the ambit of section 27. Accordingly, a negative pledge that the employee would not engage himself in a business or trade or would not get himself employed by any other employer for whom he is expected to carry out comparable or substantially similar duties is not thus a restraint of trade except the contract as aforementioned is unethical or abundantly inconsiderate or imbalanced. The law as it stands today makes the restrictive employment covenants as bad/arbitrary if they are oppressive and unreasonable. The restrictive covenant preventing the employee from working at another place has many a times been held to be unenforceable except where it has been proven to the satisfaction of the court concerned that there has been or likelihood of there being breach of intellectual wealth/rights of the employer by the former employee.

It can thus be gathered that the non-compete covenant through the tenure of employment would not invite the protectionist principles of restraint of trade. The lone exclusion to this would be if the agreement and the non-compete covenant thereof is unethical or abundantly inconsiderate or unjust or imbalanced. In the Indian context, upon termination of the employment contracts, the restrictive covenants restricting the employees from working elsewhere or setting up their own business are by and large not enforceable. The courts have over and over again declined to grant indulgence in favour of post-termination non-compete clauses in the employment contracts on the ground that the same are in contravention of the provisions of Section 27 of the Contract Act; and also being opposed to the public policy because of their impending implication of denying a person of his fundamental right to earn a livelihood. Though, eventually in today’s era of trade and economics, a balance will have to be drawn in order to ensure where and how would one protect the genuinely aggrieved employers on the basis of the principles of reasonability and fairness.

Author: Preeti Wahi Batra, Sr. Partner at Kaden Boriss Partners, Lawyers

New Delhi/Gurgaon, India