These clauses are sought to be kept by the employer in an employment contract with an employee and also in commercial agreements e.g. in a Services Contract, in a Share Purchase Agreement, in an agreement for taking over of a business, in an agreement for building an Offshore Development Centre by an Indian Company for an overseas company etc. The author seeks to analyse the aspects pertaining to the enforceability of such covenants and clauses.
Employment Contracts
In India, such a clause is governed by the provisions of section 27 of the Indian Contract Act, 1872 (“ICA”), which provides that every agreement by which anyone is restrained from exercising lawful profession or trade or business of any kind, is to that extent void. There is an exception carved out in case of the Sale of goodwill of a business.
Observations of the Hon’ble Supreme Court of India in the case of Niranjan Shankar Golikari v. The Century Spinning & Mfg. Co. Ltd. liberally interpreting s.27 of ICA holding that:-
“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”;
could form the basis for an argument that all non-compete clauses in an employment contract must be tested for unconscionability or excessive harshness before striking them down as being hit by s.27 of ICA.
However, it is a broadly accepted position that in so far as restrictive covenants/ non-compete clauses applying during subsistence of an employment contract are concerned, they are valid and enforceable but these clauses are not enforceable to the extent they seek to prescribe any post-termination or post-expiry restraints.
Amongst many, relevant decisions in that regard include decisions in the cases of D’ Markr(India) Pvt. Ltd. v Zaheer Khan and Anr. Of Supreme Court of India and Gujarat Bottling v. Coca-Cola.
Other Commercial Contracts
s.27 does not expressly permit such restrictive covenants even in commercial contracts.
In Gujarat Bottling v. Coca Cola, Supreme Court of India has specifically held that doctrine is not confined only to contracts of employment, but is also applicable to all other contracts.
Considering the position, generally all non-competitive agreements will run contrary to s.27 of ICA. However, courts have taken much stricter view as regards restrictive covenants in an employment contract to apply after completion of service period as against such covenants in other contracts. Courts have recognised that a clause in an employment contract might be hit by s.27 of ICA but a similar restrictive covenant in other commercial contracts may not be hit by s.27 of ICA; the validity of non-solicitation clause providing for non-solicitation of employees between Principal and distributor was upheld by Delhi High Court in the case of Wipro Ltd. v. Beckman Coulter International S.A, although refrained from granting an injunction against employing the employees who had already responded to such solicitation on the ground that the same would be tantamount to reading in those employees employment contracts a negative covenant that they would not seek employment after termination and the same would be void being in restraint of trade. The court granted injunction against future solicitation and did not restrain employment of any employees who already responded pursuant to solicitation through advertisements already published.
The author believes that backdrop of a commercial deal/ contract and proper narration of said backdrop will be relevant parameters that will be looked into by the court of law while determining whether a restrictive covenant in a commercial contract is enforceable.
WAY OUT IN INTERNATIONAL COMMERCIAL CONTRACTS
As written above, one of the ways could be proper narration of the backdrop of a commercial contract. However, even with a proper narration, there is not an absolute certainty about the enforceability of such provision under ICA as ICA does not expressly permit such contracts.
Internationally, however, non-compete clauses are ubiquitous and recognized as enforceable under Contract Law of various jurisdictions if parties to a commercial transaction are found to have equal bargaining power. One of the ways therefore could be to choose a foreign governing law of contract in place of ICA. We intend to separately write about when and in what circumstances foreign governing Law of Contract could be chosen in a Contract.
*The content of this article is intended to provide general information. No reader or user should act or refrain from acting on the basis of the information written above without first seeking legal advice from a qualified law practitioner.
Author: Ravish Bhatt, Managing Partner, R & D Law Chambers LLP
Connect with Author on LinkedIn or on Email – info@rdlawchambers.com
*R & D Law Chambers is a firm providing Legal advisory and International and Domestic Tax Advisory services. To know more visit https://rdlawchambers.com/