All corporates are highly sensitive about their technological processes, trade secrets, processes, client details and other information that increases their supremacy over other competitors in the market. For this reason, they also try their utmost to restrain their employees from leaving them and joining competitors or starting a competing business or soliciting their clients by adding Non-Compete clauses in Agreements with their employees. What needs to be understood is how far are such Non-Compete clauses valid and enforceable in law.
Section 27 of the Indian Contract Act, 1872 follows the basic principle that individuals should be free to make a living in any profession they choose. The section provides that every agreement by which one may be restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.
There is, however, an exception to this provision. Where a person sells the goodwill of a business, he may agree with the buyer that he will not carry on a similar business within specified local limits, so long as the buyer carries on a like business, provided these restrictions are reasonable.
The Indian courts have held that an agreement in restraint of trade is Void and cannot be enforced. The Supreme Court in Percept D’Mark (India) Pvt. Ltd. vs Zaheer Khan & Anr (2006) 4 SCC 227 has held that a restrictive covenant will apply during the period of contract and will be hit by Section 27 and be void after the contract has ended. The doctrine of restraint of trade does not apply during the continuance of the employment and applies only when the contract comes to an end. The court also confirmed that as held in Gujarat Bottling Vs Coca Cola (1995) 5 SCC 545, the doctrine is not confined to only contracts of employment but also to other contracts.
The Supreme Court in Niranjan Shankar Golikari Vs Century Spinning & Manufacturing Co. Ltd. (1967) 2 SCR 378, has held that a negative covenant that the employee would not engage himself in a trade or business or would not get himself employed by any other master for whom he would perform similar or substantially similar duties is not therefore a restraint of trade unless the contract as aforesaid is unconscionable or excessively harsh or unreasonable or one-sided.
The court also held that there is nothing to prevent a court from granting a limited injunction to the extent that it is necessary to protect the employer’s interest where the negative stipulation is not void.
In the present case, the injunction issued was restricted as to time, the nature of employment and as to the area and could not, therefore, be said to be too wide or unreasonable or unnecessary to protect the interest of the employer.
To obstruct an employee who has left the employment from obtaining gainful employment elsewhere is not fair or proper. Contracts restraining misuse of confidential information are enforceable. Reasonable restrictions are, therefore, permissible provided they are not excessively harsh or unreasonable or one sided.