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Non-Compete Clause

Employers make their employees sign a non-compete clause that protects the company's trade secrets. Read about non-compete clause in Indian scenario.
Written by:
Shivi Gupta
Published on
24-Jul-18

The Indian laws prohibit any contract or restriction on a person’s liberty to practice any trade or profession unless it is injurious to the State’s interest.

However, employers include a non-compete clause in employment agreements to prevent employees from working with or as a competitor. 

What is a Non-Compete Clause?

A non-compete clause is a stipulation in the employment agreement whereby the employee accepts the conditions that during their course of employment or even after leaving the job, the employee will not work as competitor or join the employer’s competitor. Such clause is used by employers and added by employment lawyers in Delhi to prevent their employees from leaking trade secrets and client information and using it against the company.

Section 27 of the Indian Contract Act, 1872 lays down that all agreements which restrain a person from exercising any lawful profession, trade or business are void. The legality of a non-compete covenant becomes a subject of question when it comes to deciding the validity of restraint imposed on the employees from joining or starting a trade, business or profession of similar nature.

 

The Indian judiciary has considered the changes in social, corporate and legal in deciding the enforceability of non-compete clause in employment agreements. The courts have also taken into consideration, required confidentiality that the employee has to practice and the terms stipulated in every employment contract. The reasonableness of restriction imposed on an employee is tested to check validity of the negative covenant on a person’s freedom of practicing a lawful trade, profession or business.

The restraint-on-trade clause or non-compete clause is categorised into ‘term and post-term’ covenants. In India, the restriction imposed on employees during the course of employment is considered to be reasonable and valid. A negative covenant that imposes restriction post-employment is unreasonable and void. 

However, keeping in mind the competition trends and practices by employers of poaching employees from their competitors, the courts have come to conclusion that a reasonable restraint can be permitted to a limited extent, and a non-compete clause which is added by expert employment lawyers and applicable post-employment would not be considered void.

The courts have stated that a negative covenant will be enforceable if it protects the interest of employer against an employee from divulging any business connections or trade secrets. In a case, the employee was restrained from using trade secrets and confidential information, that included the information relating to company’s patented product, even after he leaves the job. The court held that an injunction that prevented the employee from engaging into a similar product was completely valid.

In a completely opposing view, the Delhi High Court has held that when it comes to the right of employers to protect themselves from competition, and the right of livelihood of an employee, the right of a person to seek employment would prevail. 

Just like an employment bond, non-compete clause in India can be added by the labour lawyers and is valid to an extent decided by the courts based on facts and circumstances of every case. In general parlance, the restraint that is imposed during the term of employment is valid and post-employment restraint is void as per Section 27 of the Indian Contract Act.

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