Non-compete clauses essentially mean that the employee/contractor etc. agrees, through this clause, not to work or engage in any competing activity with the employer during and after his/her/their tenure with the current company.
I must preface this discussion, by saying that under the Indian Contract Act (s.27), any contract or provision that is in restraint of trade will be void and unenforceable.
This clause is the genesis of the puzzle around non-compete provisions. In this article, I seek to make it simpler –
Non-compete provisions can be broken up into two parties – Pre-termination non-compete (i.e. while an employee is working with an employer) and post-termination non-compete (i.e. after completion of his/her employment for any reason). Let it also be noted that while I reference employer and employee, similar rules apply in almost any business exclusivity relationship.
The Indian law is clear on pre-termination non-compete – viz., while an employee is working with an employer, he/she can be restricted from working for the competition or anyone else. Or in other words, the restraint of trade conditions kicks in post – termination of the employment.
Thus, it is with regard to the post-termination non-compete clause, that there is no fixed opinion in Indian legal jurisprudence. Now, in cases where the employee has had access to confidential information or trade secrets, being unable to restrict an employee from joining competitors for a limited period of time, has genuinely hampered the employer’s interests. Therefore, sometimes, Indian courts have read the restraint of trade provision in a slightly broader sense, to protect employers’ interests as well, and have allowed such negative covenants, provided the restrictions are reasonable.
Drawing from various case-law jurisprudence, one can say that a non-compete clause in India, can be effective (but keep in mind: may be subject to challenge) if it follows the below guidelines. If not, it will be considered in restraint of trade, which is not allowed under Indian law;
- The clause must be reasonable. It cannot be in total restraint of trade. This means that the clause must have a defined timeline (usually 3 – 6 months has been considered reasonable, anything about that is likely to be seen as unconscionable) and must be limited by geographical or other defined specifications;
- It must ideally reference its existence on the fact that the employee may access trade secrets/other confidential information which has great commercial value/may cause untold loss to the employer;
- It must be fair – the work conditions cannot be one-sided, unjust, or onerous. It may even provide monetary compensation in consideration for adhering to the non-compete obligations.
Note: Typically, challenges to non-compete clauses have been handled on a case-by-case basis, figuring out whether the non-compete clause was valid/invalid depending on the circumstances, or in other words, balancing gains or losses in that particular case.
Also, the non-compete clause that we are referring to above is only the post-termination non-compete. Pre-termination non-competes [i.e. when the employee is in service with the organization], are entirely valid and an employer can rightfully restrict his employee from working elsewhere while in his/her employ.
