Overview

A non compete clause is a term generally used in contract

law under which one party agrees not to engage in or start a

similar profession, which may be in competition which the

other party, i.e. the employer. Being a contract between two

parties, consideration is a necessary part of such a clause.

• Necessary to protect the employer’s legitimate ininterest(s).

• Is seen as designed to simply restrain all competition orto gain an unfair economic advantage over the formeremployee, the non-competition covenant will not beupheld.

• Legitimate protectable interests for an employer.• Non Compete Clause is only valid where the termination

of employment is involuntary. [Lucente v IBM 310 F.3d243 (2d Cir. 2002)]

Section 27 of the Indian Contract Act:

Every agreement by which any one is restrained from

exercising a lawful profession, trade or business of any kind, is

to that extent void.

Exception

Saving of agreement not to carry on business of which

goodwill is sold.

But it is important to trace the history of this section which is

dealt in the next slide.

The original draft of the Indian Law Commission did notcontain any specific provision on the subject. The provisionwas incorporated in this Act at a time between theresignation of the Indian Law Commission and theenactment. The object seems to be protection of trade.

In Oakes & Co v Jackson (1876) ILR 1 Mad 134, the Courtnoted that ‘trade in India is in its infancy; and thelegislature may have wished to make the smallestnumber of exceptions to the rule against contractswhereby trade may be restrained’.

The Indian Courts mainly look at two points while

determining cases involving Non Compete clauses. They

are:

1) Public Policy

2) Reasonableness

• Whatever tends to injustice of operation, restraint ofliberty, commerce and natural or legal rights; whatevertends to the obstruction of justice or violation of statutesand whatever is against good morals can be said to beagainst public policy.

• In this regard, the Law Commission of India hasrecommended in its 13th report that section 27 of the ICAct should be amended so as to allow restrictions andcontracts in restraint of trade, if they are in the interest ofthe parties as well as of the public. However, no action hasbeen taken so far.

• As defined by the dictionary reasonable means – accordingto reason. Hence whatever a reasonable man would do, usingcommon sense and knowledge, under the givencircumstances, will account as reasonable. Therefore the testof reasonability depends on the facts and circumstances ofeach case.

• A reasonable restraint of trade was held to be valid.[NiranjanShankar Golikari Vs The Century Spinning AIR 1967 SC 1098 ]

Reasonable restrictions can be placed in the followingways:1. Distance: suitable restrictions can be placed on employee

to not practice the same profession within a stipulateddistance, the stipulation being reasonable.2. Time limit: if there is a reasonable time provided in theclause then it will fall under reasonable restrictions.3. Trade secrets: the employer can put reasonable restrictionson the letting out of trade secrets.4. Goodwill: There is an exception under section 27 of theIndian Contract Act on the distribution of goodwill.

• Madhub Chunder v. Rajcoomar Doss, (1874) 14 Beng LR 76-Restraint on trade, partial or complete, held to be void.

• Superintendence Co. of India Pvt. Ltd. v. Krishan Murgai,AIR 1980 SC 1717- Restrictive covenant during period ofemployment will not void, post termination will be void.

• Gujarat Bottling v. Coca-Cola Co. and Ors 1995 SCC (5)545- Restraining the franchisee from dealing withcompeting goods was to facilitate the distribution of thegoods of the franchiser and could not be regarded as arestraint of a right to trade.

Accepted restrictive principles are broadly of four types:

1) Non solicitation clauses

2) Non competition clauses

3) Restriction on use of confidential information

4) Non poaching clauses

• The employee does not have to work for the employer.

• It is a paid withdrawal from workforce.

• Loyalty towards employer is expected.

• Notice period should be given.

• Protect confidential information and goodwill

• Standard Life Health Care Ltd v Gorman [2009] EWCA Civ 1292-Withdrawal from workforce in lieu of a payment was held to be a garden leave clause- Injunction granted.

• Restrict individuals and organizations from providing services or engaging in businesses in certain markets and geographies for a period of time.

• Employee forfeits certain payments, which would be payable to him otherwise. The employee has the choice of competing and forfeiting benefits or retaining benefits and forfeiting the right to compete.

• Holloway v. Faw, Casson & Co 319 Md. 324, 572 A.2d 510 (1990).- Non solicitation & Succesfull forfeiture clause.

• Courington v Birmingham Trust National Bank 347 So.2d 377 (Ala. 1977)- Forfeiture from EPS held to be valid.

• A clawback provision might require the executive to reimburse the company specified amounts if the executive breaches a non-compete agreement and goes to work for a competitor within a certain number of months after leaving the company.

• May even include reimbursement of advances

• Not enforceable as to the clawback of equity compensation or the prevention of competition because the non-compete would be deemed an agreement in restraint of trade.