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Written by: Hridya Harikumar
Introduction
In this age of the advent of globalization, where competition is at its peak, every business organization is keen on preventing its sensitive information, such as trade secrets, plans, technologies, customer relations, and so on, from leaking out to rivals.
Thus, companies, while entering into a contract, frequently perceive the necessity of including restrictive covenants that prevent the other party from enjoying their freedom to use confidential data of the company or from engaging in a particular profession, trade, or business without obtaining prior consent from the contracting party. This is done in an effort to safeguard and preserve the interests of the company. There are distinct varieties of such negative covenants, such as non-compete, confidentiality, and non-solicitation clauses.
Employers frequently utilize non-compete and non-solicitation agreements to secure their commercial interests. These contracts are intended to safeguard employers by preventing their personnel from using essential data for the benefit of a rival company after departing their current company. These agreements forbid employees from taking part in certain actions that might jeopardize the employer's business, like competing with the employer or attempting to poach its customers or staff.
Meaning
Non-compete Agreements
Non-compete agreements are drafted when the employer-employee relationship is established. They empower the employer to influence certain acts by the employee even after the relationship has ended. A non-compete agreement is a legal pact or a clause in a contract that provides that an employee may not compete with his or her employer after the end of the employment period. These agreements also prevent employees from disclosing private information or trade secrets to any third party while on the job or afterward, thereby maintaining their competitive advantage.
Here, the employee agrees to the employer's condition that he will refrain from competing with the employer in the manner and scope of the employment relationship while he is employed or even after departing the company he works for.
Non-Solicitation Agreements
A non-solicitation agreement is an agreement that prohibits someone, usually a former employee, from soliciting current or potential clients or employees after leaving a company. The agreement may take the shape of a separate document or a specific clause included in a contract of employment.
They are utilized to stop the theft of customers or the persuasion of other employees to quit their current job and join a rival. In this contract, the employee promises not to approach any employees or customers of the business after leaving the job.
Distinction
Contrary to popular belief, a non-solicitation agreement and a non-competition agreement are two separate legal terms.
A non-solicitation agreement prohibits a party from soliciting customers or employees of the former employer, whereas a non-compete agreement requires the party to agree to refrain from starting or joining an identical business that competes with the former employer.
A non-solicitation clause only places reasonable constraints on the employee because he is open to work anywhere he desires, in contrast to a non-compete clause that completely restricts the freedom of an employee to pursue other employment in a similar industry.
Laws governing non-compete and non-solicitation agreements
In India, non-compete and non-solicitation clauses are governed primarily by contractual and common-law principles. Some of the major laws that regulate these agreements within India are as follows:
1. The Indian Contract Act of 1872: The Indian Contract Act of 1872 is the fundamental law that regulates contracts in India, which also includes employment contracts. This Act establishes the general principles that govern contracts.
2. The Competition Act of 2002: The Competition Act of 2002 governs competition in India. This Act forbids anti-competitive arrangements and the misuse of dominant market positions. Even though non-compete and non-solicitation clauses are not inherently anti-competitive, they may be scrutinised under this Act if they cause a negative impact on competition in a specific market.
3. Labour laws: In India, there are several labour laws that govern the employment relationship, such as the Industrial Disputes Act of 1947, the Factories Act of 1948, and the Minimum Wages Act of 1948. These laws grant employees a variety of rights and protections, including the right to fair wages, safe work environments, and protection from unfair labour practices.
4. The Constitution of India: Article 19 (1) (g) of the Indian Constitution guarantees every citizen of India the freedom to practice any profession or carry on any occupation, trade, or business.
5. Judicial precedents: In India, case laws also play an important role in the enforcement of non-compete and non-solicitation clauses. To evaluate the enforceability of these clauses, the courts have established several principles according to their interpretation of the Indian Contract Act along with other relevant laws throughout the years.
Legality of Non-Compete and Non-Solicitation Agreements
Non-compete and non-solicitation agreements are legally enforceable in India under certain conditions. Section 27 of the Indian Contract Act of 1872 provides for restrictive covenants such as non-compete and non-solicitation agreements in contracts. However, in order to be regarded as legally binding, such agreements have to fulfill specific requirements.
Firstly, the contractual arrangement must be fair and reasonable in terms of the restriction's scope and duration. A non-compete agreement that restricts an employee from being employed in any industry for an irrational period of time, such as a few years, may be regarded as excessive by a court of law and thus unenforceable.
Secondly, the agreement should safeguard an employer's legitimate interests, such as client lists, trade secrets, or sensitive data. The agreement might be interpreted as an attempt to unfairly limit an employee's options for future employment if the employer has no justifiable interest to defend.
The agreement must also not be against the law or public policy. For instance, a contract that forbids a worker from ever serving a rival company or from practicing his chosen profession might be considered against public policy and thus invalid.
The scope and duration of the clause, the employee's level of access to confidential information, and the effect of the clause on the employee's ability to earn a living are a number of factors that the courts will take into account as they review each of these clauses on an individual basis.
However, courts in India have occasionally been hesitant to uphold non-compete clauses, particularly if they are thought to be excessively onerous or unjust to the employee. It is also important to note that, depending on the sector and the particulars of the case, non-compete and non-solicitation agreements may or may not be enforceable.
Related case laws
1. Niranjan Shankar Golikari vs. The Century Spinning and Manufacturing Co. Ltd. (1967): In this case, the Supreme Court ruled that a restrictive covenant could not go beyond what was necessary to safeguard the employer's legitimate interests and that it could not be unjust or against public policy. The court further ruled that the restrictive covenant's duration should be sealed at the time frame during which the employer can lawfully safeguard his business interests. This case represents a significant ruling on the enforceability of restrictive covenants.
2. Gujarat Bottling Co. Ltd. vs. Coca-Cola Co. (1995): This case represents yet another significant decision regarding the applicability of restrictive covenants in business contracts. As per the decision of the Supreme Court, a restrictive covenant must not extend beyond what is necessary to safeguard the franchisor's legal interests, it cannot be unconscionable, and it may not conflict with public policy. The court further ruled that the restrictive covenant should only be in effect for as long as the franchisor can legitimately defend his interests.
3. Wipro Limited vs Beckman Coulter International S.A. (2006): In this case, as part of a services agreement, Wipro and Beckman Coulter International signed a non-compete agreement. For a two-year period, the non-compete clause forbade Wipro from offering services to Beckman Coulter's rivals. By bidding for a project with a rival of Beckman Coulter, Wipro violated this agreement. According to the court, Wipro was responsible for breach of contract because the non-compete clause proved reasonable and essential to safeguarding Beckman Coulter's interests.
4. Percept D'Mark (India) Private Limited vs Zaheer Khan (2006): In this case, Zaheer Khan, a cricket player, and Percept D'Mark had a non-compete agreement. Following the expiration of his contract with Percept D'Mark, the agreement restricted Zaheer Khan from taking part in any aspect of cricket, including commentary, for a full year. The non-compete clause, according to the court, was excessive and went beyond what was required to preserve Percept D'Mark's rightful interests. The court invalidated the non-compete clause as it went against public policy.
5. Embee Software Pvt. Ltd. vs Samir Kumar Shaw (2012): In this case, the Calcutta High Court ruled that it is unlawful for previous employees to approach clients of their former employers in an effort to persuade them to terminate their contracts with them or to stop others from entering into contracts with the previous employer.
Conclusion
Non-compete and non-solicitation agreements are instruments that companies use to safeguard their ostensible business interests. A non-compete agreement implies an effort by the employer to prevent the employee from competing against him or joining a rival company while they are employed or for a set time after the employment terminates. A non-solicitation agreement is a measure taken by the employer to stop the employee from luring away other employees or current and future customers from the business, either during the course of their employment or for a specified time period after the end of employment.
The enforceability of any of these clauses is determined by the specific facts of each case, and courts have developed numerous parameters throughout the years in order to assess their legality. Non-compete and non-solicitation covenants may be legally enforceable in India, subject to specific conditions. To enforce these contractual arrangements, employers have to prove that they are reasonable, preserve a genuine interest, and do not violate public policy or the law of the land. Employees ought to thoroughly evaluate any non-compete or non-solicitation agreements they are requested to sign to make sure that they are not being unreasonably constrained in their future employment options.
References
End notes
[1] Niranjan Shankar Golikari v. The Century Spinning and Manufacturing Co. Ltd., AIR 1967 SC 1098
[2] Gujarat Bottling Co. Ltd. and Ors. v. Coca Cola Co. and Ors, 1995 SCC (5) 545
[3] Wipro Limited v. Beckman Coulter International S.A., 2006 (131) DLT 681
[4] Percept D'Mark (India) Pvt. Ltd. v. Zaheer Khan and Anr. (2006) 4 SCC 227
[5] Embee Software Pvt. Ltd. v. Samir Kumar Shaw, 2012 (3) CHN 250
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