Employers use non-compete clause in the employment contracts to restrict the employees in working with their competitors or customers after leaving the employment. However, Section 27 of the Indian Contract Act states that every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is, to that extent, void.
Non-compete clause as per Indian Contract Law
Section 27 of the Indian Contract Act-1872 provides that โEvery agreement by which anyone is restrained from exercising a lawful profession or trade or business of any kind, is to that extent voidโ.
Exception: One who sells goodwill of a business with a buyer to refrain from carrying on a similar business within specified local limits so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein provided that such limits appear to the Court reasonable, regard being had to the nature of business.
The Act also provides an exception to the sale of goodwill. The law recognizes the importance of goodwill as it takes significant time, effort, and money to build trust and reputation in the consumer’s mind. The law intends to protect the interests of the Seller from potential abuse and misuse. Except for this, the law is clear on the restraining part.
Along with this section, we need to study the validity of non-compete clause with few judgments where the Court has taken a liberal view to encouraging globalization. In the case of โNiranjan Shankar Golikari Vs the Century Spinning and Manufacturing Company Ltd.โ, the Honโble Supreme Court observed that – “restraints or negative covenants in the appointment or contracts may be valid if they are reasonable.”
In the context of Constitutional Law
Article 21 of the Constitution of India, 1950 provides that, โNo person shall be deprived of his life or personal liberty except according to procedure established by law.โ
Hence, an agreement made to restrain the trade also affects the right to livelihood. Such provisions are held to be against the fundamental right of a Citizen.
Thus, the non-compete agreement made between an employer and the employee is void if such clause restrains an employee from engaging in a business similar to or competitive with that of the employer beyond the term of employment.
Important Judgments
- Niranjan Shankar Golikari v. Century Spg. and Mfg. Co. Ltd., AIR 1967 SC 1098:
This principle is not confined to restraints of trade in the ordinary sense of the word โtrade,โ but includes restraints on the right of being employed. - ย Petrofina (Great Britain) Ltd. v. Martin, (1966):
An agreement in restraint of trade has been defined as โone in which a party agrees with any other party to restrict his liberty in the future to carry on trade with other persons who are not parties to the contract in such a manner as he chooses.โ - Madhub Chunder v. Rajcoomar Doss, (1874):
It had been held that whether the restraint was general or partial. - Percept D’ Mark (India) Pvt. Ltd v Zaheer Khan:
Supreme Court observed that under Section 27 of the Act a restrictive covenant extending beyond the term of the contract is void and not enforceable. - Desiccant Rotors International Pvt Ltd v Bappaditya Sarkar & Anr:
The High Court put forth the laws embraced in Section 27 of the Act and the individual’s fundamental right to earn a living by practicing any trade or profession of his or her choice. Also, ruled that in the conflict between the struggle of employers to protect themselves from competition and the right of employees to seek employment wherever they choose, the right of livelihood of employees must prevail.
