Understanding Non-Compete Clauses in Employment Agreements
A non-competition clause or non-compete clause in an employment agreement is a clause by which an employee agrees not to work with a rival company or start a similar business or profession on their own during a specified period after leaving their current employer.
Phases of Non-Compete Clauses
The operation of the non-compete clause is of two phases: (1) during the period of employment and (2) post-termination of employment.
Legal Views on Non-Compete Clauses in India
However, the Indian Judiciary has divergent views on the legality of such a clause. The enforceability of the non-compete clause is vehemently opposed by certain jurists under the main provision of Section 27 of the Indian Contract Act, 1972, which declares that every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind is void to that extent. The jurists who are against this proposition derive support from the exception clause of the same Section 27 of the Act. In India, the higher judiciary has held that the non-compete clause post-termination of employment is void ab initio as it curtails one's fundamental right to earn their livelihood through lawful means and as such, it is opposed to public policy. In some other cases, the higher judiciary has held that such a negative clause can be justified in the backdrop of confidentiality of modern business strategies combined with the integrity of the persons employed therein.
Judicial Precedents
In Superintendence Company of India Pvt Ltd v. Krishan Murugai, the Honorable Supreme Court of India held that a contract which has an object of restraining trade is prima facie void. It was also observed by the Apex Court that even if the restrictive covenant was to include cessation of employment at the volition of the employee, there could be no post-employment restriction under Section 27 of the Contract Act. Again in the year 2006, the two-Judge Bench of the Supreme Court refused enforcement of a post-employment restriction on the same ground of Section 27 of the Indian Contract Act, 1872 in Percept D'Mart India (P) Ltd v. Zaheer Khan and Others.
However, in V.F.S Global Services v. Mr. Suprit Roy, the Bombay High Court held that a restriction on the use of trade or business secrets during or after the termination of employment does not constitute a "restraint on trade" under Section 27 of the Contract Act, 1872, and can thus be enforced in certain situations. Besides, in Niranjan Shankar Golikari v. the Century Spinning and Manufacturing Company Ltd, the Supreme Court held that restraints or negative covenants in the appointment or contracts may be legal if they are justified. The ratio decidendi of these judgments reflects the conviction of the higher judiciary that the validity of the non-compete clause in an employment contract can be tested on the anvil of protection of confidentiality of an organization and its proprietary rights of patents and trademarks.
Conclusion on Non-Compete Clauses
Juxtaposing the above two sets of views of the higher judiciary, we can conclude that a non-compete clause operative during the course of employment is legally sustainable, but after cessation of employment, its maintainability is dependent on reasonable factors such as the position held by the employee, the limits of time and distance of debarment, compensation, if any payable under the contract for the compulsory period of unemployment, trade secrets, etc.
Of course, the response of Mr. KK!HR is one arising out of practical wisdom because the post-termination ban period of reemployment with certain specified competitor companies seems reasonable. Since the poster has stated that such an agreement was obtained from him after his joining, he can fight the case if he has the wherewithal and patience after taking the prospective employer into confidence as suggested by Mr. Banerjee.