NON-COMPETE AND NON-SOLICIT CLAUSES

Non-Compete clause bars employees from competing with the business of the former employer during the term of the employment, as well as post termination of the employment agreement. The non-compete clause is a relatively common to employment agreements with key employees, directors and promoters. 

Non-Solicitation clause prohibits the employees from persuading the former employer’s customers, workforce, third parties like agents or suppliers etc from terminating their relationship with the employer and join the former employee. 

Below are the frequently asked question on non compete and non solicit clauses and their impact on employee agreements in India.

1. Whether a non-compete clause is enforceable against an employee in India as a matter of law. 

1.1 Pursuant to the provisions of the Indian Contract Act, 1872, the law governing commercial agreements and transactions, agreements wherein any restraint or limitation is imposed, which restricts either party from exercising their profession, trade or business is not enforceable in the court, thereby making such an agreement void. The relevant provision is reproduced hereunder, for your perusal:

“Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.”

In a landmark judgment of the ancient Division Bench [Madhub Chunder Poramaniek v. Rajcoomar Doss & Ors.;reported in (1875) (Vol. XIV) Bengal Law Reports Page 76;] it was opined that the meaning that was to be ascribed to the word "restraint" was any kind of restraint. Therefore, any kind of restraint by which a person was prevented from exercising a lawful profession, trade or business was void. It did not matter whether that restraint was partial or appeared to be reasonable. This dictum has been substantially followed. 

The general rule followed in India is that interference with the individuals liberty in trade by imposing restraints is contrary to public policy therefore void. However negative covenants i.e. restrictions on actions of one party, that are in force during the term of contract of the employment are generally not regarded as restraint of trade and therefore do not fall under aforementioned provision. However, a negative covenant requiring that that the employee would not engage in a trade or business or would not get employed by any other competing employer which would require performance of similar or substantially similar acts, would be considered as a restraint of trade regardless of the terms of contract being reasonable. 

A non-compete clause would be considered as a negative covenant especially if in force beyond the term of the contract, restricting the employee from exercising his profession, as upheld in Percept D' Mark (India) Pvt. Ltd v. Zaheer Khan . The Supreme Court held that the doctrine of “restraint of trade” was applicable in cases where the contract is terminated. A prohibition or bar in force and operative after the conclusion of the employment would be regarded “restraint of trade” especially if it restricted an employee from working elsewhere or from setting up own business, such a clause would be unenforceable, being in violation of Section 27 of the Contract Act. 

A non-compete would amount to compelling an employee either to serve the employer only or to remain wholly idle or starve, if so, it will be considered as against the provisions of the Contract Act, 1872 and thereby unenforceable. Enforcing such a clause would amount to a situation where, “where he has to either work for the present employer or be forced to idleness” [Wipro Ltd. v. Beckman Coulter International SA; 2006 (3) ARBLR 118 (Delhi) ] 

Furthermore, in cases where an employee breaches a clause with regards to Intellectual Property Rights (IPR’s), bonds, trade secrets (upheld in Hi-Tech Systems & Services Ltd. Suprabhat Ray and Ors. ) or training/ knowledge imparted for a very specialized skill (upheld in Niranjan Shankar Golikari v The Century Spinning and MFG. Co. Ltd. ) the employer has the right to enforce the confidentiality clause. 

In summation the broad principles as laid down by Indian courts are:

(i) after the expiry of the term of employment, an agreement that prohibits or bars an employee from working elsewhere would be considered as a restraint of trade, unless there is a proprietary interest of the employer, and

(ii) an employee may be restricted from serving any other person or carrying on independent business during the term of employment [Niranjan Shankar Golikari v The Century Spinning and MFG. Co. Ltd.; AIR 1967 SC 1098;].

2. Whether a non-solicitation clause is enforceable against an employee in India as a matter of law. 

2.1 The settled position on non-solicitation is that, “non-solicitation clause did not amount to a restraint of trade, business or profession and would not be hit by Section 27 of Act, as being void” [Para 48; Wipro Ltd. v. Beckman Coulter International SA; 2006 (3) ARBLR 118 (Delhi)] however, it is pertinent to note that the aforementioned decision was taken in respect of a non-solicitation between two employers and not between an employer-employee. 

In cases where an ex-employee has solicited the clients and personnel of the former employer, the Court has observed that, if the act of soliciting takes such an active form that it induces the customers of the employer to break their contract with and enter into a contract with the employees or prevents other persons from entering into a contract with the employer, such acts of soliciting cannot be permitted [Embee Software Private Ltd v. Samir Kumar Shaw & Ors.; 2012(3) CHN 250]. The Court thereafter directed the former employee that they could carry on their business however subject to the condition that they, “will not be allowed to solicit the clients or customers of the plaintiff so as to induce them to break their contract or their legal relationship with the plaintiff or prevent them from entering into a contractual relationship with the plaintiff”.  

The stand that the “right of livelihood” of the employer is of prime consideration in cases like these was emphasized in the case of Desiccant Rotors International Pvt Ltd v Bappaditya Sarkar & Anr., it was held that “It is this attempt to protect themselves from competition which clashes with the right of the employees to seek employment where so ever they choose and in a clash like this, it is clear that the right of livelihood of the latter must prevail."

2.2 Therefore it is observed from perusal of various case laws that non-solicitation clause is enforceable against an employee in India as a matter of law, as the same is not considered as a negative covenant. Please note that this is not the law of the land and the same differs from the facts and circumstances of each case. However the issue with enforceability is that the Courts cannot grant an injunction forcing employees to join their former employer, and Courts have merely directed former employees engaging in solicitation to abstain from soliciting. 

2.3 The onus or liability in the first instance lies on the employer to prove that the negative covenant restraining the employee on termination of service is essential to protect his business. The Courts when deciding whether  or not to grant an order of interim injunction restraining one party from undertaking a competing business or while directing the party to comply with the non-compete obligation would take into account the following:

a. whether the party seeking injunction (i.e., the plaintiff) has a prima facie case; 

b. whether the balance of convenience is in favour of the plaintiff; and 

c. whether the plaintiff would suffer an irreparable injury if his prayer for interlocutory injunction is disallowed.

3. How to enforce a non-compete clause and are there case laws?

3.1 In a major case namely, Pepsi Foods Ltd. and Ors. v. Bharat Coca-Cola Holdings Pvt. Ltd. and Ors.  it has been held that post termination restraint on an employee is in violation of Section 27 of the Indian Contract Act, 1872. A contract containing such a clause is unenforceable, void and against public policy and since it is prohibited by law it cannot be allowed by the Courts injunction. If such injunction was to be granted, it would directly curtail the freedom of employees for improving their future prospects by changing their employment and such a right cannot be restricted by an injunction. It would almost be a situation of "economic terrorism” creating a situation alike to that of bonded labour.

3.2 Enforceability of such a clause is a major issue, and was taken up as a question of law in M/s. Lalbhai Dalpathbhai & Co. v Chittaranjan Chandulal Pandya , the High Court was of the view that where a negative covenant of a contract was sought to be enforced, it was at the prudence and discretion of such court to grant an injunction to enforce the covenant. The grant of injunction should be guided by the principle that, “if the effect of granting the injunction would be to indirectly compel the defendant to specifically perform the contract of personal service, the Court would not grant such injunction”. Therefore, the Court would not grant an injunction restraining a former employee if it would require him to go back to his former employer or remain idle for the time being.

3.3 Further, before enforcing such negative covenants by way of imposing injunction, 2 preconditions must be satisfied , (i) the restraint must be reasonable with respect to the interest of the contracting parties that means that the restraint must offer no more than “adequate protection” to the party in whose favour the restraint is so imposed; and (ii) the restraint must be reasonable with respect to the interest of the public i.e. must not be injurious to the public.  [Para 21; Lalbhai Datpatbhai & Co. v. Chittoranjan; AIR 1966 Guj 189.] 

3.4 Therefore in summation to the above, Court in exercising injunction will examine whether the grant of the injunction would impose a reasonable restriction or an unreasonable restriction on the right of the employee to follow the occupation of his choice . A negative stipulation in a contract of personal service should be enforced by an injunction only if it is necessary to do so for the protection of the legitimate interests of the employer and is otherwise also in public interest.

4. How to enforce a non-solicit clause and are there case laws?

4.1 Reference the discussion in point 2.1 to 2.3, it is a well established fact that non-solicitation clause is enforceable. Further if solicitation is proved by the aggrieved party with sufficient evidence, the tendency of the Court is to grant an injunction against the defaulting party, which prevents preventing them from continuing to offer inducements to the other's employees to give up employment and join them. In the case of Embee Software Private Ltd v. Samir Kumar Shaw & Ors. , the employees were instructed to not undertake any further solicitation.  

4.2 As seen in American Express Bank Ltd. v Ms. Priya Puri , wherein the customers of American Express Bank (“Bank”) decided to no longer be associated with the Bank on account of their investment manager leaving, and decided instead to join the investment manager. The Court held that an injunction against the investment manager will facilitate the Bank to create a situation such as 'Once a customer of American Express, always a customer of American Express' and will affect even those customers /persons who would like to bank with some other banks. 

4.3 Further, in FL Smidth Pvt. Ltd. v Secan Invescast (India) Pvt. Ltd.  the Court observed that to prove solicitation, mere production of quotation (by the former employee to customers) would not suffice to prove solicitation of customers by the former employee and the former employer, alleging solicitation must prove that (i) the employee approached their erstwhile customers; and (ii) on account of such solicitation, the customers placed orders with the respondent company (new employer). On the question of granting a prohibitory injunction, the court opined that even assuming the ex-employer is able to establish the breach of the non-solicitation clause, if they have an alternate remedy in the form of damages, the latter would be ordered.