Dinesh Divekar
Business Mentor, Consultant And Trainer
+2 Others

Dear All,
In my Appointment Letter, Company has mentioned that, Within 12 months I can't join any competitor company or Vendor or Customer Company. If I break that clause, can Employer take legal action???
Along with that, Can you please give the copy of SC/HC verdict on that issue???
Regards,
Dibyendu
28th February 2018 From India, Bhubaneswar
One year is a reasonable term for asking you not to join competitors,Especially
If your previous employer had arranged any specific training for you and if you had signed a bond for the same and if the employer had invested sufficient funds for that and by your resignation if there were to be any impact on the working of the company, then only the previous employer would have the right to refrain you from joining their client company.
Take specific advice from a lawyer after showing him the agreement and nature of job being done by you and whether any special training etc was given to you.
28th February 2018 From India, Pune
Dear Mr. Nathrao,
Thank you for your reply.
The company has not done any induction or training program. And I have not signed any bond. That clause is only written in my Appointment Letter, which I got 2.5 months after joining the organisation.
Kindly reply if any legal point there for employer against me???
2nd March 2018 From India, Bhubaneswar
It is a debatable point.
At some stage some kind of restriction was imposed on you and you had agreed.
What I suggest consult a local lawyer and show him all the papers and then decide.
2nd March 2018 From India, Pune
Is there any penal clause that would attract you in case of your taking employment with competitor, vendor. In the absence of such clause, taking any action on your taking such employment is not sustainable before the court of law. Clauses refraining to take employment with competitor known as negative covenants. But these kind of clauses are not enforceable before the court of law as they are hit by the Sec 27 of the Indian Contract Act 1872, which reads as " Agreement in restraint of Trade Void - Every Agreement by which anyone is restrained from exercising a lawful procession, trade or business of any kind, is to that extent void". On this basis the Madras High Court made a ruling in R Babu & Others VS TTK LIG Ltd on 01.03.2004 that "An Agreement whereby an employee agrees not to join another competitive concern for a specific period after cessation of employment will be violative of public policy as stipulated by Indian Contract Act".
Therefore, you are having every chance to challenge the Legal Action, if any, initiated against your taking employment in competitor concern, vendor and so on and succeed. The Employers are all very well known the fact that this kind of legal action in court of law will not succeed but they can initiate legal action to give some sort of harassment in which case you may bear the same but I am sure you will succeed. Regards,
2nd March 2018 From India
Dear friend,
You could have checked this forum. Anyway, check the following thread:
https://www.citehr.com/571397-delhi-...n-compete.html
Thanks,
Dinesh Divekar
2nd March 2018 From India, Bangalore
You are governed by the bond as long as in employment. On cesation of employment bond has got no role to play.
The indian Contract act has restricted all these clause that restrict one from employing his rights.
The section 27 of Indian Contract Act pronounces ; Any 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.
You just relax and work freely avoiding any unjust thought in your mind.
3rd March 2018 From India, Mumbai
Dear Prabhat,
My view differs;
The law of contract states that any agreement in restraint of trade or practice can be challenged. Accordingly, the terms and conditions of a contract that prevent an employee from joining another organisation would be invalid.(Sec27 of Contract Act )
However, the law permits reasonable terms and conditions to be laid down in a contract. While an employment bond is being prepared, ensure that all the stipulated terms and conditions are reasonable and valid. e.g, the period of time for which the employee is obligated to work with the organisation and the compensation payable in case of any violation should not be harsh and must be justifiable.
The Courts have laid down a 2-fold principle while dealing with such cases of bonds:
The interests of the employers must be considered, and they need to be compensated in case of a breach of contract.
Air India trains pilots abroad at huge cost and they leave for better pay.So bonds by AI have been upheld in courts.
The penalty that may be imposed on an employee or his guarantor cannot be exorbitant and unreasonable.
There have been several cases where the court has held that under certain circumstances, an employer is entitled to prevent the employee from joining another organisation. For example, if there is a possibility that the employee may reveal trade secrets of company A to company B, company A is entitled to prevent such employee from joining company B.
So ban is not absolute and has to be examined on case to case basis.
3rd March 2018 From India, Pune
Dear colleague,
The question is whether the employer can proceed against you for breaching the clause relating to not joining competitor company within stipulated period, the answer is yes, provided the relevant clause in the Appt letter provides for recovery of damages in the event of breach which you have accepted.
Regards,
Vinayak Nagarkar
HR-Consultant
3rd March 2018 From India, Mumbai
Dear Mr Nathrao,
Thank you to come out with views and suggestion on the topic. It is obvious to have a different view because we interpreted the things from different angles & prospective.
In law there is nothing concrete and absolute.
The contract acts restricts employee by prohibiting employment with competitors by which threat is for one’s trade & business. (Employer friendly)
At the same time employer is restricted under the section 27 of Indian Contract Act that every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. But allowed to incorporate clause of compensation towards loss and damage caused due to non-compliance.[Employee friendly]
In most of times some discussions become very interesting and always leads to know more, if there is something.
Some information are exceptionally given below for enhancement of information:
[Restraint after Employment:
The succeeding paras discuss contemporary and moot issue of the enforceability of negative covenants beyond the period of employment.
In 1966, the Gujarat High Court7 attempted to consolidate the fundamental principles relating to the negative stipulation in a contract of service during the service period and after the service period. It tried to balance the anti-thetical interests of the employer and employee.
The Court said that it must be seen whether the enforcement of the negative stipulation is "reasonably necessary for the protection of the legitimate interests of the employer. If it is not going to benefit the employer in any legitimate manner, the Court would not injunct the employee from exercising his skill, training and knowledge merely because the employee has agreed to it".
Further, in the Pepsi Food Limited case8, the Court held that a negative covenant clause in the employment agreement restraining the employees from engaging in employment for a period of 12 months from leaving the employment was void as being opposed to public policy and the action for temporary injunction was denied. It is important to note here that the Court expressly stated that what is prohibited by law cannot be permitted by Court.
In a recent case, the Bombay High Court9 held that considering that an employer has right to terminate the contract of employment on the ground of misconduct; it would be unfair to the employee if he had absolutely no right to resign from the employment on account of better prospects or other personal reasons.
Further, in Jet Airways case10 the defendant was employed by the plaintiff aircraft company as a pilot. The plaintiff had organized necessary training for the defendant and other pilots. In consideration, the defendant agreed and undertook that during a period of seven years from the date of completion of training in India and abroad and on resuming actual services with the plaintiff as first officer, he would not accept employment, similar in nature, either in full time or part time with any other employer. The defendant resigned from the services for which the plaintiff had invoked the negative covenant clause along with other stipulated remedies under the agreement.
In this case the Bombay High Court held that the plaintiffs can be suitably compensated by award of damages in the event the suit is finally decreed against the defendants and in favour of the plaintiffs. Further the Court pointed out the plaintiffs have failed to show prima facie any legal or equitable right for the grant of injunction against the defendant.
In the above cases, the Courts appear to rely heavily on the employees' contention that it would be unfair and unreasonable to enforce such restraints after their period of employment as they have a right to explore new business opportunities and it goes to their very fundamental right to earn a livelihood. This argument can be given credence to as long as termination of employment is done in good faith by the employee and there is no intention by the employee to disseminate or misuse or disclose confidential information, trade secrets and intellectual property of the employer.
An argument can be made about accepting the all encompassing statement of the Court in the Pepsi Food Limited case, where the Court held that what the law prohibits, the Court cannot permit. The pivot of this opinion would be the letter of the law rather than the spirit of law. Therefore, although Section 27 of the Indian Contract Act is an absolute prohibition on restraint of trade (subject to the one exception), it is important to note that this was a provision that was enacted in the 1900s. The vagary of the modern transactions was far from the law's contemplation at that time and the Indian Contract Act in its wisdom attempted to address the existing nature of transactions at that time.
Also, if one were to strictly go by Section 27 and the statement of the Court in Pepsi Food Limited, the judiciary may have erred to have passed the type of decisions it did in the Niranjan Golikari case.
Finally, more important than anything, if the Courts start adopting such a myopic view of law, the beautiful surge of judicial activism would be reduced to a mere ripple. The role of the judiciary is germane to any developing society. The law may be enacted at a time where certain instances or circumstances would not be within the contemplation of either the legislature or society itself (who indeed could have imagined that signatures could be affixed to documents digitally). Therefore, it is left up to the judiciary to provide a cogent and pragmatic interpretation of the law within the dynamics of a changing world. If the judiciary was to apply only a strict interpretation of the laws, it would curb development and render the judiciary a mere observer rather than a custodian of the legal system itself.
The above decisions of the Court making any restriction after the term of employment void got a reprieve in the case of Lloyd Electric Engg11.
In this case the High Court considered the applicability of a negative covenant imposed by the company on the employee wherein the employee was required not to compete with the company for three years from date of termination of employment, directly or indirectly. It was held that the negative covenant was not harsh or opposed to public policy so as to make it void.
In another case in point12, the plaintiff obtained an ex parte injunction against an ex employee of the plaintiff from working with the sub-contractor of the plaintiff. The 1st defendant who was an employee of the plaintiff left the service of the plaintiff and joined the service of the 2nd defendant. The plaintiff and the 2nd defendant had been discussing the possibility of teaming and working together in order to undertake a joint initiative and bid for one particular customer. The plaintiff had some skill sets and the 2nd defendant had some other skill sets which together would have become a successful venture. The 1st defendant was the key link between the plaintiff company and 2nd defendant and it was established that the sole reason for the 1st defendant joining the employment of the 2nd defendant was to utilize the confidential information and trade secrets of the plaintiff. This would benefit the 2nd defendant and render the involvement of the plaintiff in the proposed venture redundant. In an action for permanent injunction, the Trial Court granted a temporary injunction in favour of the plaintiff restraining the 1st defendant from joining the 2nd defendant and disclosing vital, confidential and proprietary information of the plaintiff to 2nd defendant or anybody till the disposal of the suit. Although, on appeal13, the High Court set aside the order of injunction issued by the Trial Court granted in favour of the plaintiff restraining the 1st defendant/appellant from working with the 2nd defendant was set aside (since there had also been a considerable lapse of time from the decision of the Trial Court till when the case was heard and decided by the High Court), the remaining part of the order restraining the 1st defendant from revealing disclosing vital, confidential and proprietary information of the plaintiff to 2nd defendant was upheld.
This was at that time thought to be a radical judgment of the Trial Court as the 2nd defendant was not even a competitor of the plaintiff. However, the Trial Court recognized the circumstances of termination of employment by the employee and accordingly determined that it was reasonable to restrain the employee from working with the 2nd defendant for some time.
In another recent case14, the plaintiffs were running a law firm where the defendants were working. It was alleged that one of the defendants came to the office of the plaintiffs after a dispute arose between the parties after the office hours and downloaded 7.2 GB of database of plaintiff's crucial data. The plaintiffs' also claimed that the defendants stole even the hard copies comprising of over 10 proprietary drafts of the plaintiffs. The plaintiffs prayed for protection of their exclusive data under the Indian Copyright Act, 1957.
However, the defendants claimed ownership of the copyright in the work done by them while they were in the organization of the plaintiff.
This was refuted by the plaintiffs who contended that it had spent a substantial amount of money in training skills, computer network, specialized and customized software, law library, office infrastructure, etc., and the work of the defendants in fact belonged to the plaintiffs.
The Delhi High Court after considering rival arguments concluded the plaintiffs had a prima facie case in respect of the data which was taken by the defendants and restrained the defendants from using such data.
Therefore, although the Court did not restrain the defendants from carrying on a similar service per se, it definitely recognized the protection that needed to be afforded to the plaintiffs under law and to that extent there was a restraint on the use of information by the defendants, after the term of their employment.
In yet another case in 200615, the central issue in the appeal was whether the right of first refusal under clause 31(b) of the permission agreement entered into between the appellant employer and the respondent employee is void under Section 27 of the Indian Contract Act and, therefore, in restraint of trade.
Clause 31(b) of the agreement merely provided that the employee had an obligation to provide an opportunity to the employer to match an offer of employment from a third party (prospective employer) after the original term of the agreement, before the employee could accept the third party offer of employment.
Here, the Supreme Court left all the issues open on the basis that considerable time had elapsed.
Therefore, the Court refrained from opining in specific terms on this case as no interim relief having been granted in favour of the appellant during the past two years during which the contract between respondent Nos. 1 and 2 has been in operation and since the contract was soon to be completed, "there is no cause for interference at this late stage by this (Supreme) Court".
However, it is interesting to note that the Supreme Court stated that the appellant is not barred from filing a suit for breach of contract against the respondent. This implied that the Court had not deemed the contract or the condition under it relating to the first right of refusal void and recognized that there may be a sustainable claim for breach of contract by the appellant.
Therefore, sometimes restraints, whether general or partial, may be required and considered reasonable if it protects the bona fide interests of the employer without causing undue detriment or hardship to the employee. Therefore, a strong argument can be made that a restraint reasonably necessary for the protection of a covenant must prevail unless some specific ground of public policy can be clearly established against it.
3rd March 2018 From India, Mumbai
Dear Prabhat,
Nice of you to come up with a detailed answer.
Indian Contract Act is of 1872 vintage but has stood the test of time.
But changing times and circumstance necessitate amendment of the law.
Post-termination of a contract, any non-compete clause in the contract is void as they are treated as "restraint of trade" under Section 27 of Indian Contract Act, 1872. Legal experts note that provisions like non-compete are ubiquitous in modern international contracts, especially if parties have similar bargaining powers.
In the case of ‘Niranjan Shankar Golikari Vs the Century Spinning and Manufacturing Company Ltd.’ , the Hon’ble Supreme Court observed that-“restraints or negative covenants in the appointment or contracts may be valid if they are reasonable”.
Foreign judiciary subject to certain limitations and reasonable boundness, the non compete agreements are declared to be enforceable to the reasonable extent. For example: In ‘HRX Holdings Pty Ltd Vs Pearson(2012) FCA 161’, the Federal Court of Australia upheld a post employment restraint preventing a senior employee from competing with his former employer for two years. The court upheld the two years non compete clause with consideration
How contract is terminated makes a difference.
Pilot getting training for a aircraft and Jet/Indigo etc spending crores on training just o loose him to some other airline patching him/her is not in order.
Courts decide on matters arising in cut cases on case to case basis.
also I may add that Contract Act has stood the test of time though it over a hundred years old.
But the time to recognise:that contract is changing due to privatization, industrialization, urbanization globalization has come. Many new terms have come in contract for example e-contract, escrow agreement, joint venture agreement, contract farming, outsourcing contracts etc.
Any way learnt from your views.
Thanks for an informative discussion.
3rd March 2018 From India, Pune
All our laws and acts are in force to-day were constituted a long back considering the frame of the society was existing and society of post era. There was significant change has come to our society and also lot of cahnages have taken place in the feild of culture. As on date nothing new has come but things are being interpreted case to case basis, keeping priority.
The main objective of the discussion in the forum is "Learning".
Thanks for contributing for restructuring.
3rd March 2018 From India, Mumbai
Hi All,
After working 13 years in a company and recently join another company. My ex company sent me an legal notice that I can't joint any competitor company. I remember that during my service i never heard any competitor word. However, I got to know that my ex company had made some change to their policy after my reveling. Due to to all these, my gratuity of 13yr is also stuck.
I need your support to understand clause 378, 420, 405, 406 and 407 IPC which they add in the legal notice to me.
Also, it has mention that i can't join any client or vendor for 24 months and due to all the above clause, i have to pay to ex company for the their loss.
Regards,
Sujit Singh
5th August 2019 From India, Bengaluru
Hello Prabhat Sir,
I am facing some challenges with my existing employer. May I request your suggestion, please.
After working 13 years in a company and recently join another company. My ex-company sent me a legal notice that I can't joint any competitor company. I remember that during my service I never heard any competitor word. However, I got to know that my ex-company had made some change to their policy after my relieving. Due to all these, my gratuity of 13yr is also stuck.
I need your support to understand clause 378, 420, 405, 406 and 407 IPC which they add in the legal notice to me.
Also, it has mentioned that I can't join any client or vendor for 24 months and due to all the above clause, I have to pay to ex-company for their loss.
Regards,
Sujit Singh
12th August 2019 From India, Bengaluru
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