Are Non-Compete Clauses in Appointment Letters Really Enforceable and Worthwhile?

Effectiveness of Non-Compete Clauses in Appointment Letters

I need to know how effective the non-compete clause can be in the appointment letter. Are employees legally bound to obey it, and is it worthwhile to incorporate the clause in the appointment letter?

Thank you.

Regards

Yes, I feel it should be provided that such an act by an employee would greatly impact your business.

Time Limit for Non-Compete Clauses

Usually, a non-compete clause needs to be followed with a "Time Limit," say, for example, 2 years. You will also have to have an entire "write-up on this policy." Usually, a non-compete is included as part of a "Confidentiality and Non-Disclosure Agreement."

Industries Implementing Non-Compete Clauses

Especially in the mobile marketing, VAS, media, and online content companies, this clause is included in their offer letters. I have personally seen that such companies actually ensure that the same is adhered to "to the letter and spirit" since the business impact due to such acts by employees is very significant.

Ukmitra

PS: Note that ultimately, it remains the employer's responsibility to prove before the governing body/court any non-conformity by an employee signing such an agreement has affected their business, in case of any grievance.

The clause is essential as it prepares for future situations, hence protecting the employer in case of any violation if reported. However, the implementation remains the prerogative of the users of the system.

Please share if you were asking this question as an employer or an employee. If you are to design this system for your firm, you may consider sharing a little more.

Regards

As per Section 27 of the Indian Contract Act, 1872, every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind is void to that extent. The inclusion of a non-compete clause in the agreement may not be enforced in a court of law.

Despite this, many companies are still including such clauses in appointment letters. Furthermore, this type of negative covenant is reasonable as long as the employee is in service, but if this condition applies post-termination or resignation, it will be considered a restraint on trade or service under the following laws: Section 27 of the Contract Act and Article 19 of the Constitution of India, which provide the fundamental right to pursue a profession, business, and occupation subject to the law.

In the case of Pepsi Foods Ltd. & Others v. Bharat Coca-Cola Holdings Pvt. Ltd. and Ors. 1999 LLR 1027 (Del.), the enforceability of a negative covenant restraining employees from engaging or undertaking employment in another company has been deemed economic terrorism.

Regards,
Amit.

You have touched on a very important discussion in your post, which I wanted to avoid since it involves legality, and being not a lawyer, I am not the right person to comment. However, here are some views from the legal fraternity below, from my library chest, which I hope will be useful to all readers interested in the subject:

Not only have all Indian courts struck down non-compete clauses that completely restrain an employee after termination of employment, but they have also struck down the argument and the principle of partial restraint with respect to post-employment non-compete clauses.

Having said that, post-employment restrictive covenants are considered to be prima facie void. It is important to note that one void clause in an agreement does not automatically render the entire agreement void and unenforceable. The remaining valid clauses may continue to be enforced.

Therefore, even though such negative covenants do not operate after the termination of the contract and have been held void by the courts of India, it is still common practice to include such covenants in an employment agreement to serve as a deterrent.

Based on the above, companies still include the clause, as we have seen a few employees post-termination trade with the company's secrets like programming code, research materials, business margins with clients, poaching high net-worth clients by illegal means, etc., which I feel can be contested in a court of law for grievance.

Hope to hear from you and other senior professionals in the subject.

As per Section 27 of the Indian Contract Act, 1872 - Every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind is, to that extent, void.

So, the inclusion of a non-compete clause in the agreement may not be enforced in the court of law.

Despite this, many companies are including such clauses in the appointment letter.

Furthermore, this kind of negative covenant is reasonable as long as the employee is in service (during service). But if such a condition is made applicable post-termination/resignation, then it will be treated as a restraint in trade/service under the following laws:

Section 27 of the Contract Act and Article 19 of the Constitution of India, which give the fundamental right to profess and do business and occupation subject to the law.

Refer to Pepsi Foods Ltd. & Others v. Bharat Coca-Cola Holdings Pvt. Ltd. and Ors. 1999 LLR 1027 (Del.) where the enforceability of a negative covenant restraining employees from engaging or undertaking employment with any companies was discussed.

Regards