Employees
in the course of their employment may be privy to trade
secrets, confidential information, and other critical information
about the organization and its operations and activities. In order for any
business to protect its interest and to ensure that the aforementioned
information is not disseminated and revealed to competing businesses, certain
restrictive covenants is included within the scope of employment contracts. A
restrictive covenant refers to a clause that restricts or limits an employee
from performing certain acts, both during and after the conclusion of the
employment contract. Such covenants are usually incorporated and subsequently
enforced so that employees can be prevented from disclosing confidential and
other important information to which employees are made privy-to during the
course of their employment.
These are often considered contentious
issues because such provisions seemingly clash with Section 27 of the Indian
Contract Act, 1872 (ICA) and Article 19 (1)(g) of the Constitution of India,
1949.
Section 27 of ICA states,
'Every agreement by which
anyone is restrained from exercising a lawful profession, trade or business of
any kind, is to that extent void.'
Article 19(1)(g )of the
Constitution of India states,
‘All Citizens shall have
the right to practise any profession, or to carry on any occupation, trade or
business’
In this article, we will
find out the enforceability of restrictive covenants in India.
Non-Compete
Clause
A non-compete
clause prohibits an employee from entering into profession into or starting a
trade that is same/similar to that of the employer. Most non-compete clauses
contain this restriction, not only during the term of the employment contract
but also after the contract has concluded. It is imperative to understand
whether such a restriction is enforceable under India law.
Section 27 of the Indian
Contract Act, 1872 (“Act“) deals with the enforce ability of such
restrictive covenants. Section 27 of the Act states that every agreement by
which any one is restrained from exercising a lawful profession, trade or business
of any kind, is to that extent void.
To determine
whether such restrictive covenant would be valid or not, Indian courts have
taken into regard the reasonableness of the restrictions set out as well as the
time, place and manner of such restrictions.
The Apex Court in Percept
D’Mark (India) Private Limited vs. Zaheer Khan & Another has
been of the view that, “… a restrictive covenant extending beyond the
term of the contract is void and not enforceable. 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.”
In order to validate
restrictive covenants in employment agreements, reasonable limits such as
restricted territorial limit, time limit may be imposed.
Non-Solicitation
Clause
A non-solicitation
clause is a clause which prevents an employee (former or current) from
soliciting either the employees or the customers against the interest of the
business. The tenure of this clause is generally not restricted to the period
of the contract but is usually valid even after the expiration/termination of
such contract.
Based on
judicial precedents, a non-solicitation clause has been upheld in some cases
whereas in some circumstances the same hasn’t been enforced.
In FL Smidth
Private Limited vs. M/s. Secan Invescast (India) Private
Limited, the Madras High Court laid down a standard to establish
non-solicitation as follows:
“……solicitation is
essentially a question of fact. The appellants should prove that the
respondents approached their erstwhile customers and only on account of such
solicitation, customers placed orders with the respondents. Mere production of
quotation would not serve the purpose. It is not that the appellant is left
without any remedy. In case the Court ultimately holds that the appellant has
got a case on merits, they can be compensated by awarding damages. The supplies
made by the respondent to the erstwhile customers of the appellant would be
borne out by records. There would be no difficulty to the appellant to prove
that in spite of entering into a non-disclosure agreement, respondent has
solicited customers and pursuant to such solicitation they have actually
supplied castings. When there is such an alternative remedy, question of
issuing a prohibitory injunction does not arise.”
Thus, after
the termination of the employment, non-solicitation clause is applicable only
in certain circumstances. In order for the same to be valid, reasonable
restrictions are required to be imposed such as time frame of the
non-solicitation clause, protection and non-usage of trade secrets and
goodwill.
Non-Disclosure
of Confidential Information vis-a-vis Intellectual Property
The
non-disclosure clause prohibits an employee from disclosing any confidential
information related to the business to any third party. This clause is usually
widely worded and includes information that an employee may have had access to
during the course of employment. Such restriction is valid post the termination
of the employment agreement and non-adherence of the same on the part of the
former employee attracts legal consequences. There are certain exceptions
regarding information already in public domain and disclosure of the same to
government authorities, if required by law.
Confidential
information and intellectual property are two different aspects. Intellectual
property refers to all the patent, copyright, trademarks, trade secrets,
service marks, logos and various other facets of the intellectual property. The
employment contracts should specify regarding the ownership of such
intellectual property.
Though there
are statutes enacted in India to protect intellectual property rights,
companies and Businesses still strongly rely on having watertight employment
contracts so as to safeguard their intellectual property and confidential
information.
Conclusion
Restrictive
covenants are a part and parcel of employment contracts in India. These clauses
tend to set certain responsibilities and obligations on an employee towards the
employer and the company. However, merely by virtue of being present in the
contracts, such covenants cannot be held enforceable by law. The restrictions
imposed in the agreement will have to be reasonable in order for it to be
valid. The reasonableness of the restriction is subject to interpretation and
it will be decided and enforced only by the court of law in case of any
dispute.
This Article has been
Compiled by Aditya Raj (Associate).
You can direct your
queries or comments to the author at aditya@factumlegal.com
Disclaimer-
The contents of this
article should not be construed as legal opinion. This article is intended to
provide a general guide to the subject matter. Specialist advice should be
sought about your specific circumstances. We expressly disclaim any financial
or other responsibility arising due to any action taken by any person on the
basis of this article.
