By Eashaan Agrawal
---
The employees are often subjected to extremely harsh agreements prohibiting them from working in other competitive companies or institutions after they leave their current employers. Such terms often come as a rude shock to employees who then have very little option than to comply or face prosecution and pay damages to the employers. In this article, we will look at one such agreement, the Non-Compete Agreement, and discuss its validity.
Non-Compete Agreements
The purpose of non-compete agreements is to safeguard the interests of the employer. Non-Compete Agreements often seek to protect interests like trade secrets, future business plans, information about customers, and client lists. Non-Compete Agreements restrict the employee from gaining employment in another similar business or setting up a competing business.
A Non-Compete Agreement often contains clauses specifying important details like:
- Restricted Period: This clause specifies the duration for which the non-compete agreement remains enforceable and the employee is restricted from joining another similar employment. Usually, this period starts from the beginning of employment and extends for a specified period after the termination of employment.
- Restricted Activities: This clause specifies the activities an employee is prohibited from doing for the restricted period. This clause usually specifies that a person is restricted from opening a competing business or joining other business which is in competition with the employer.
- Non Solicitation Clause: This clause seeks to prevent the employee from either soliciting or contacting his clients or colleagues to leave or terminate their relations with the employer.
- Damages Clause: This clause specifies the damages that an employee will be liable to pay in case of breach of the agreement and the right of the employer to take legal actions for the breach thereof.
The validity of the Non-Compete Agreements
Non-compete agreements seek to restrict an employee from gaining employment in other establishments after the end of their employment. Prima facie such an agreement is in restraint of trade and is covered by Section 27 of the Indian Contract Act.
“Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.”
Thus, any agreement where one party agrees to restrict his liberty in the future to carry trade with others amounts to restraint of trade. Now that we have understood Section 27 of the Indian Contract Act, we will look at the validity of different clauses of the non-compete agreement.
Restricted Period and Activities
In the case of Gujarat Bottling Company Limited v. Coca Cola Company, the Supreme Court held that where the contract mandates the employee to work exclusively for the employer, it is held not in restraint of trade. Further, where the contract prohibits the employee from working under someone else for the duration of the employment is also not in restraint of trade as long as the contract is not extremely harsh or unconscionable.
Non-compete provisions after the termination of the contract, however, are violative of Section 27 and hence void. An exception to this rule is, however, the protection of interests of the employer. According to the court’s decision in Mr. Diljeet Titus, Advocate v. Mr. Alfred A Adebare And Ors, the employer can enforce a non-compete clause to protect his proprietary interests, confidential information, and trade secrets. In order to claim this defence, however, the employer needs to show
- the employee actually acquired some knowledge of the proprietary interest of the employer and
- the court will also examine whether the terms of the contract are reasonable in sense of the geographical limits and time period.
Thus, a non-compete clause that is reasonable in terms of its geographical extent, time duration, and seeks to protect the legitimate interests of the employer is enforceable in law.
Damages
The courts in India award damages under sections 73 and 74. Section 74 provides that where the parties have decided the amount to be paid in case of breach of contract, in such a case the court will order a reasonable amount not exceeding the amount specified. Thus, the specified amount in the contracts acts as a ceiling for the maximum compensation payable. Further, If the amount of damages is already specified then in such case the employer need not show any actual damage caused by the breach of the contract.
An important point is that the damages should not be of the nature of a penalty and it should be a genuine pre-estimate of damage likely to be caused by the breach. In the case the specified damages are punitive in nature the court will award damages as it deems reasonable.
Damages are further explained here.
Finally, the court will look at the contract and analyse if the non-compete clause is violative of “public policy” u/s 23 of the Indian Contract Act. If the court finds the contract to be violative of public policy it will not enforce the contract.
---
Eashaan is a 2nd year law student at National Law University Delhi. A voracious reader, he loves to travel to new places and experience the culture of different places. His interests include Constitutional Law, Contracts and Law of Crimes.
No comments:
Post a Comment