Dear All,
Brief fact of the case:
My friend served more than 14 years in a company. Initially, he joined as an Executive and subsequently reached the level of GM. When he was promoted to a senior position, the management required him to sign a "No Compete Agreement" on a non-judicial stamp, which is unregistered. Since he received an excellent opportunity, he submitted his resignation and, as per the terms and conditions of his appointment letter, he followed the leave notice. However, the management refused to accept his resignation and reminded him of the "No Compete Agreement," which he had duly accepted.
My friend tried to convince the management that he would not contact any customers of the company nor share any business secrets. However, the management is forcing him to work for another 4 to 6 months, failing which they will be constrained to take legal action. It is very difficult for him to follow these conditions as he has informed his new employer that he will join duties after observing a 2-month leave notice. Being in a senior position, the new employer will not accept and allow him for another 4 to 6 months (practically, it is not acceptable).
I would like to share the main contents of the agreement below:
"I, [Name] s/o [Father's Name], hereby undertake not to join employment or be associated in any manner with any organization or organizations competing with the company or newly formed organizations likely to compete with the company, for a period of five years on cessation of my employment, however caused.
In the event I join a competing business organization or associate myself with such an organization in any capacity, I agree to pay liquidated damages of Rs [Amount] forthwith without demur. I realize that the company can also file a suit against me in an appropriate court and obtain an order of restraint against my association with competitors.
I am giving this undertaking on this day of [Date] voluntarily with full understanding of the consequences of the same."
Legal considerations:
I would like to mention here that, as per Section 27 of the Indian Contract Act, 1872 ("Contract Act"), every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind is, to that extent, void. The Indian courts have more or less adhered to the letter of the law and have given a consistent view, treating such clauses more as a concept of equity than a contract.
Observations of courts / Case laws:
The Supreme Court of India, while dealing with such a contractual issue in Superintendence Company of India (P) Ltd. v. Sh. Krishan Murgai, raised the question of whether a post-service restrictive covenant would fall within the mischief of Section 27 of the Contract Act. The court held that a contract, which had for its object a restraint of trade, was prima facie void. Even the Delhi High Court in Foods Ltd. and Others v. Bharat Coca-Cola Holdings Pvt. Ltd. & others observed, "It is well settled that such post-termination restraint, under Indian Law, is in violation of Section 27 of the Contract Act. Such contracts are unenforceable, void, and against public policy. What is prohibited by law cannot be permitted by Court's injunction."
The judgment of the Supreme Court in Percept D'Mark (India) Pvt. Ltd. v. Zaheer Khan and Anr. sheds some light on the legality of such clauses. The Apex Court observed, "Under Section 27 of the Contract Act (a) a restrictive covenant extending beyond the term of the contract is void and not enforceable. (b) The doctrine of restraint of trade does not apply during the continuance of the contract for employment and it applied only when the contract comes to an end. (c) As held by this Court in Gujarat Bottling v. Coca Cola (supra), this doctrine is not confined only to contracts of employment, but is also applicable to all other contracts."
In view of the aforesaid observations, it can be inferred that while dealing with disputes relating to such non-compete clauses under an employment agreement, the Indian courts have considered the pre-termination period of the employment distinct from the post-termination period of the employment. Whilst the courts have been tolerant about the application of the non-compete clause, they have walked an extra mile to ensure that such clauses do not have an effect after the cessation of employment and have held that such clauses would fall within the mischief of Section 27 of the Contract Act.
However, the Supreme Court in Niranjan Shankar Golikari v. The Century Spinning and Mfg. Co. Ltd., thereby giving a liberal interpretation to Section 27 of the Contract Act, further clarified that not all non-compete clauses effective after the termination of the employment agreement are prima facie prohibited and held, "a negative covenant that the employee would not engage himself in a trade or business or would not get himself employed by any other master for whom he would perform similar or substantially similar duties is not therefore a restraint of trade unless the contract as aforesaid is unconscionable or excessively harsh or unreasonable or one-sided."
Therefore, in order to qualify for being enforceable by law, it is important to ensure that the restriction imposed by the employer is reasonable and not harsh on the employees. It may not be out of place to specify that the restrictions to the extent of "non-solicitation" and/or "non-disclosure" may be viewed as an exception to this rule. Though the non-solicitation clause may be prima facie viewed as negative in nature, they are valid and enforceable by law. The Delhi High Court in Wipro Limited v. Beckman Coulter International S.A. held that a non-solicitation clause does not amount to a restraint of trade, business, or profession and would not be hit by Section 27 of the Contract Act as being void. Similarly, in Mr. Diljeet Titus, Advocate v. Mr. Alfred A. Adebare and Ors., the Delhi High Court clarified that confidential information of the employer can be protected even in the post-employment period.
Recently, the Bombay High Court in VFS Global Services Private Limited v. Mr. Suprit Roy laid down that "to obstruct an employee who has left service from obtaining gainful employment elsewhere is not fair or proper." Further, the Court also pointed out that the clause is prima facie in restraint of trade and is hit by Section 27 of the Contract Act.
Considering the contradictory judgments, my friend is confused and seeking legal opinion on this subject. It is to be noted here that management has referred to a huge amount of liquidated damages in the said agreement, which he could not pay. Under the circumstances, if he joins the new employment, in light of the above court orders, can the company proceed to recover liquidated damages mentioned in the agreement and legally proceed further for filing a suit against him for breach of agreement?
Kindly advise.
From,
Shaikh.
From India, Nashik
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5Brief fact of the case:
My friend served more than 14 years in a company. Initially, he joined as an Executive and subsequently reached the level of GM. When he was promoted to a senior position, the management required him to sign a "No Compete Agreement" on a non-judicial stamp, which is unregistered. Since he received an excellent opportunity, he submitted his resignation and, as per the terms and conditions of his appointment letter, he followed the leave notice. However, the management refused to accept his resignation and reminded him of the "No Compete Agreement," which he had duly accepted.
My friend tried to convince the management that he would not contact any customers of the company nor share any business secrets. However, the management is forcing him to work for another 4 to 6 months, failing which they will be constrained to take legal action. It is very difficult for him to follow these conditions as he has informed his new employer that he will join duties after observing a 2-month leave notice. Being in a senior position, the new employer will not accept and allow him for another 4 to 6 months (practically, it is not acceptable).
I would like to share the main contents of the agreement below:
"I, [Name] s/o [Father's Name], hereby undertake not to join employment or be associated in any manner with any organization or organizations competing with the company or newly formed organizations likely to compete with the company, for a period of five years on cessation of my employment, however caused.
In the event I join a competing business organization or associate myself with such an organization in any capacity, I agree to pay liquidated damages of Rs [Amount] forthwith without demur. I realize that the company can also file a suit against me in an appropriate court and obtain an order of restraint against my association with competitors.
I am giving this undertaking on this day of [Date] voluntarily with full understanding of the consequences of the same."
Legal considerations:
I would like to mention here that, as per Section 27 of the Indian Contract Act, 1872 ("Contract Act"), every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind is, to that extent, void. The Indian courts have more or less adhered to the letter of the law and have given a consistent view, treating such clauses more as a concept of equity than a contract.
Observations of courts / Case laws:
The Supreme Court of India, while dealing with such a contractual issue in Superintendence Company of India (P) Ltd. v. Sh. Krishan Murgai, raised the question of whether a post-service restrictive covenant would fall within the mischief of Section 27 of the Contract Act. The court held that a contract, which had for its object a restraint of trade, was prima facie void. Even the Delhi High Court in Foods Ltd. and Others v. Bharat Coca-Cola Holdings Pvt. Ltd. & others observed, "It is well settled that such post-termination restraint, under Indian Law, is in violation of Section 27 of the Contract Act. Such contracts are unenforceable, void, and against public policy. What is prohibited by law cannot be permitted by Court's injunction."
The judgment of the Supreme Court in Percept D'Mark (India) Pvt. Ltd. v. Zaheer Khan and Anr. sheds some light on the legality of such clauses. The Apex Court observed, "Under Section 27 of the Contract Act (a) a restrictive covenant extending beyond the term of the contract is void and not enforceable. (b) The doctrine of restraint of trade does not apply during the continuance of the contract for employment and it applied only when the contract comes to an end. (c) As held by this Court in Gujarat Bottling v. Coca Cola (supra), this doctrine is not confined only to contracts of employment, but is also applicable to all other contracts."
In view of the aforesaid observations, it can be inferred that while dealing with disputes relating to such non-compete clauses under an employment agreement, the Indian courts have considered the pre-termination period of the employment distinct from the post-termination period of the employment. Whilst the courts have been tolerant about the application of the non-compete clause, they have walked an extra mile to ensure that such clauses do not have an effect after the cessation of employment and have held that such clauses would fall within the mischief of Section 27 of the Contract Act.
However, the Supreme Court in Niranjan Shankar Golikari v. The Century Spinning and Mfg. Co. Ltd., thereby giving a liberal interpretation to Section 27 of the Contract Act, further clarified that not all non-compete clauses effective after the termination of the employment agreement are prima facie prohibited and held, "a negative covenant that the employee would not engage himself in a trade or business or would not get himself employed by any other master for whom he would perform similar or substantially similar duties is not therefore a restraint of trade unless the contract as aforesaid is unconscionable or excessively harsh or unreasonable or one-sided."
Therefore, in order to qualify for being enforceable by law, it is important to ensure that the restriction imposed by the employer is reasonable and not harsh on the employees. It may not be out of place to specify that the restrictions to the extent of "non-solicitation" and/or "non-disclosure" may be viewed as an exception to this rule. Though the non-solicitation clause may be prima facie viewed as negative in nature, they are valid and enforceable by law. The Delhi High Court in Wipro Limited v. Beckman Coulter International S.A. held that a non-solicitation clause does not amount to a restraint of trade, business, or profession and would not be hit by Section 27 of the Contract Act as being void. Similarly, in Mr. Diljeet Titus, Advocate v. Mr. Alfred A. Adebare and Ors., the Delhi High Court clarified that confidential information of the employer can be protected even in the post-employment period.
Recently, the Bombay High Court in VFS Global Services Private Limited v. Mr. Suprit Roy laid down that "to obstruct an employee who has left service from obtaining gainful employment elsewhere is not fair or proper." Further, the Court also pointed out that the clause is prima facie in restraint of trade and is hit by Section 27 of the Contract Act.
Considering the contradictory judgments, my friend is confused and seeking legal opinion on this subject. It is to be noted here that management has referred to a huge amount of liquidated damages in the said agreement, which he could not pay. Under the circumstances, if he joins the new employment, in light of the above court orders, can the company proceed to recover liquidated damages mentioned in the agreement and legally proceed further for filing a suit against him for breach of agreement?
Kindly advise.
From,
Shaikh.
From India, Nashik
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Dear Shaikh,
Your friend's situation is indeed complex. It involves a delicate balance between his rights as an employee and the terms of the "Non-Compete Agreement" he signed with his previous employer.
From the information you've shared, here's a proposed course of action:
1. 🕵️ Review the Agreement: Your friend should thoroughly review the terms of the "Non-Compete Agreement" he signed. He should pay special attention to the restrictions, the specified duration, and the geographical scope of the agreement.
2. 🤓 Consult a Lawyer: Given the intricacies of the case, it is advisable to consult a lawyer who specializes in employment law. The lawyer would be able to provide legal advice based on your friend's unique circumstances.
3. 🤪 Collect Evidence: Your friend should collect all the relevant documents such as appointment letters, promotion letters, and any other communication related to his employment terms. These documents might be useful in making his case.
4. 🤝 Negotiate with the Company: If possible, your friend could approach his previous employer to negotiate the terms of the "Non-Compete Agreement". He could propose a shorter duration or ask the employer to waive the agreement, citing his long years of service and loyalty to the company.
5. 🎌 Communicate with the New Employer: Your friend should also keep his new employer informed about the situation. Transparency will help them understand the situation and possibly provide support or solutions.
6. 🧖 Approach the Court: If the company persists with their stand, your friend might have to approach the court for relief. The court will consider the specifics of the case, the reasonableness of the "Non-Compete Agreement", and the prevailing laws and rulings related to such agreements.
As per section 27 of the Indian Contract Act, 1872, any agreement that restrains an individual from practicing a lawful profession, trade, or business is void. However, the interpretation of this provision varies based on the specifics of each case.
In some cases, as you've mentioned, the Supreme Court of India has held that a restrictive covenant extending beyond the term of the contract is void and not enforceable. But in other cases, it has also held that not all non-compete clauses effective after the termination of the employment agreement are prohibited.
Given these contradictory judgments, your friend's case could go either way. Hence, it is crucial to consult a lawyer and consider all possible outcomes before proceeding with any decision.
I hope this guidance helps your friend navigate this complex situation. Please remember that every case is unique, and the advice given is general in nature.
🎈 Best of luck to your friend!
From India, Gurugram
Acknowledge(0)Amend(0)
Your friend's situation is indeed complex. It involves a delicate balance between his rights as an employee and the terms of the "Non-Compete Agreement" he signed with his previous employer.
From the information you've shared, here's a proposed course of action:
1. 🕵️ Review the Agreement: Your friend should thoroughly review the terms of the "Non-Compete Agreement" he signed. He should pay special attention to the restrictions, the specified duration, and the geographical scope of the agreement.
2. 🤓 Consult a Lawyer: Given the intricacies of the case, it is advisable to consult a lawyer who specializes in employment law. The lawyer would be able to provide legal advice based on your friend's unique circumstances.
3. 🤪 Collect Evidence: Your friend should collect all the relevant documents such as appointment letters, promotion letters, and any other communication related to his employment terms. These documents might be useful in making his case.
4. 🤝 Negotiate with the Company: If possible, your friend could approach his previous employer to negotiate the terms of the "Non-Compete Agreement". He could propose a shorter duration or ask the employer to waive the agreement, citing his long years of service and loyalty to the company.
5. 🎌 Communicate with the New Employer: Your friend should also keep his new employer informed about the situation. Transparency will help them understand the situation and possibly provide support or solutions.
6. 🧖 Approach the Court: If the company persists with their stand, your friend might have to approach the court for relief. The court will consider the specifics of the case, the reasonableness of the "Non-Compete Agreement", and the prevailing laws and rulings related to such agreements.
As per section 27 of the Indian Contract Act, 1872, any agreement that restrains an individual from practicing a lawful profession, trade, or business is void. However, the interpretation of this provision varies based on the specifics of each case.
In some cases, as you've mentioned, the Supreme Court of India has held that a restrictive covenant extending beyond the term of the contract is void and not enforceable. But in other cases, it has also held that not all non-compete clauses effective after the termination of the employment agreement are prohibited.
Given these contradictory judgments, your friend's case could go either way. Hence, it is crucial to consult a lawyer and consider all possible outcomes before proceeding with any decision.
I hope this guidance helps your friend navigate this complex situation. Please remember that every case is unique, and the advice given is general in nature.
🎈 Best of luck to your friend!
From India, Gurugram
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Employment Contract agreement.pdf