CONTRACT

MANAGEMENT
Non-Compete Clauses in Employment Contracts and its Legal
Implications

- Group 9
Div G
 What is an Employment Contract?
• An employment contract is a signed agreement between an individual employee and an
employer or a labor union. It establishes both the rights and responsibilities of the two parties:
the worker and the company, essentially laying a foundation of the employment relationship
between an employer and an employee

• Any contract of employment signed with an Indian company is governed by the Indian labour
law. There is no provision in the Indian laws that make it mandatory for an employer to provide a
written contract of employment or a written statement to his newly hired employee
Key Contents of an Employment Contract
Names and Addresses of the Parties
Employee's Job Title and Description
Compensation & Benefits
Leaves and Vacation policy
Duties and Responsibilities
Schedule & Duration of Employment
Restrictive Covenants
Restrictive Covenants
An employment contract
between the employer and
employee has a clause for
restrictive covenants mainly to
prevent nondisclosure of
information such as trade
secrets, non-competition,
non-solicitation as well as
protection of confidential
information.
 Types of Restrictive Covenants
Non – Disclosure
A legal contract between an
employer and employee,
which prevents the latter
from disclosing proprietary or
confidential company
information and processes.
The agreement is active
during the employee’s tenure
and for a specific period after
exiting the company
Non – Compete
A non-compete
agreement restricts one party
from competing directly with
the other party for a specific
period of time or within a
defined geographical location.
The party that agrees not to
compete must be
compensated in some way by
the other party
Non – Solicitation
A non-solicitation agreement
restricts a former
employee from soliciting
employees and/or
customers from their former
employer after leaving
the company. To be
enforceable, the restrictive
covenant must
define reasonable limits (time,
area)
 Purpose of the Non Compete Clause
The employers use such provisions as a tool in order to impose any one or
more of the following restrictions on the employees:

1. Restriction on starting a competing business

2. Restriction on working with enterprises operating in the relevant market
3. Restriction on working in the relevant geographic market
4. Restriction on soliciting the clients of the employer

Besides the said restrictions, such provisions may also specify the time period
for which these restrictions may be applicable after the termination of the
employment contract.
 Non Compete Clause
Non compete agreements overall must be both fair and equitable for all parties. They require
certain information in order to be considered legally binding:
• An effective date on which the agreement will begin
• A reason for enacting the agreement
• Specific dates during which the employee will be barred from working in a competitive sense
and the location covered by the agreement
• Details as to how to the noncompeting party will be compensated for agreeing to the terms
These contracts are also known by the terms noncompete, noncompete clause, noncompete
covenant, covenant not to compete.

Example:
An example of a non-compete agreement might involve a company that is one of only two or
three such companies in a market that offers a specific product or service. The company may ask
salespeople to sign a non-compete agreement because they don't want those salespeople going
to a direct competitor and trying to take their client list with them.
 Enforceability of the Non Compete
• PRE REQUISITES:
• The agreement must be signed by the parties with free consent.
• The conditions stipulated must be reasonable and the conditions imposed on the
employee must be proved to be necessary to safeguard the interest of the employer.
• The Section 27 of the Contract Act clearly states that restraints can be enforced
only when the employee is in the service of the employer and these restraints
cannot be enforced after the employee leaves service of the employer –
irrespective of whether the employee leaves voluntarily or as a result of his/her
service being terminated.
• However, the only restrictions that would be enforceable in an Indian court
after the termination of employment would be non- disclosure of confidential
information and non-solicitation of customers and employees
 Enforceability of the Non Compete
• While dealing with disputes relating to such non-compete clause under an employment
agreement, the Indian courts have considered the pre-termination period of the
employment distinct from the post termination period of the employment

• For any restrictive covenant to fall within the ambit of Section 27 of the Contract Act,
the agreement should be in restraint of trade. The Contract Act does not distinguish
between partial and total restraint of trade and therefore if the clause in the agreement
amounts to post termination restraint, then the same is void.

• Section 27 of the Indian Contract Act, 1872 provides that ‘every agreement by which
anyone is restrained from exercising a lawful profession, trade or business of any kind,
is to that extent void.’

• Thus, a Non-Compete clause for post termination will not be legally enforceable and is
considered void.
 Superintendence Co. of India Pvt. Ltd. v.
Krishan Murgai, AIR 1980 SC 1717
The appellant company carries on business as valuers and surveyors undertaking
inspection of quality, weighment analysis, sampling of merchandise and commodities,
cargoes, industrial products, machinery, textiles etc. It has established a reputation
and goodwill in its business by developing its own techniques for quality testing and
control and possess trade secrets in the form of these techniques and clientele.
The respondent was employed by the appellant company as the Branch Manager. The
terms and conditions of employment placed the respondent under a post service
restraint that he shall not serve any other competitive firm nor carry on business on
his own in similar line as that of the appellant company for two years at the place of
his last posting. The appellant company terminated the respondent's services post
which, respondent started his own business under the name and style of
"Superintendence and Surveillance Inspectorate of India"
The Section 27 of the Contract Act clearly states that restraints can be enforced only
when the employee is in the service of the employer and these restraints cannot be
enforced after the employee leaves service of the employer – irrespective of whether
the employee leaves voluntarily or as a result of his/her service being terminated.
 Taprogge Gesellschaft MBH v. IAEC India
Ltd., AIR 1988 Bom 157
The plaintiff company, engaged in the business of manufacturing cooling water filters and allied products,
incorporated under the laws of the Federal Republic of Germany, seeks a declaration that the defendants, an
Indian Company and the plaintiffs erstwhile agents in India, are not entitled to sell or offer for sale two of the
plaintiffs' products known as Taprogge Cooling Water Filters and Taprogge Condenser Tube Clearing systems.
The contract of agency which imposes trade restriction on the defendant reads as under :
"The agent must not recommend, offer, sell or represent products in competition with the covered products. The
same applies to the introduction of own products and/or other industrial activities of the agent as well as to
indirect or direct participation in third enterprises or companies inside or outside of the agency territory“
Owing to certain differences Taprogge terminated the agency agreement with immediate effect
The creation and validity of the contract is governed by the German laws, but its performance has to take place
in India. The performance of the contract is illegal as it offends Section 27 of the Indian Contract Act. Having
regard to the rules of conflict of Laws the Negative covenant, even if valid under the German Laws, cannot be
enforced in India as it is opposed to Section 27 of the Contract Act and the public policy of Indian Law
manifested by Section 27 of the Contract Act.
Bombay High Court held that a restraint operating after termination of the contract to secure freedom from
competition from a person who no longer worked within the contract, was void.
The court refused to enforce the negative covenant and held that, even if such a covenant was valid under
German law, it could not be enforced in India.
 Niranjan Shankar Golikari vs The
Century Spinning And Mfg. Co., 1967 AIR
1098
The appellant joined the service of the respondent company as Shift Supervisor and was given
training in the manufacture of tyre cord yarn. The contract was for five years and it was stipulated
that during the said period the appellant would not work in similar capacity in any other concern
and would maintain secrecy as to the technical aspects of his work. However, shortly after
completing his training the appellant joined a rival concern at higher emoluments. The respondent
company thereupon filed a suit for an injunction against the appellant restraining him from working
elsewhere as a shift Supervisor in the manufacture of tyre cord yarn or in similar capacity and from
divulging the trade secrets of the respondent company.
Negative covenants operative during the period of employment when the employee is bound to
serve his employer exclusively are not to be regarded as restraint of trade and therefore do not fall
under Section 27 of the Contract Act. A negative covenant that the employee would not engage
himself in 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 a restraint of trade unless the contract
as aforesaid is unconscionable or excessively harsh or unreasonable or one-sided
In light of the above observations, the agreement was held to be valid and the appellant was
accordingly restrained from serving anywhere else for the duration of the agreement
 Alternative
Garden Leave Clause
• Under a "Garden Leave" clause an employee requires to give a long term notice to the
employer in advance of his resignation from employment and the employer in exchange
pays him full remuneration during this period when he is restrained from competing.
• As per this clause, notice required for the employee to terminate his employment could
be lengthened to one year with the company having the ability to require him to not
attend work for any duration post serving of the aforesaid notice.
• Hence, the company could, after three months, in effect put him on a garden leave.
• Though this concept is a common tool used by the employers as a substitution to the
non-compete clause in other parts of the world, especially United Kingdom, it still lacks
legal backing from the Indian courts.
THANK YOU!