Non- Compete Arrangements


Overview

In contracts and commercial arrangements, a non-compete clause, or a representation to not compete, is a clause under which one party agrees not to enter into or start a similar profession or trade in competition against another. In most jurisdictions, courts refer to these as restrictive clauses. 

Section 27 of the Indian Contract Act, 1872, imposes a general bar on any contract that puts a restriction on trade. Hence, from a legal standpoint, it appears that all non-compete clauses in India are invalid. There are however exceptions to this rule However, the Supreme Court of India has clarified that a non-compete clause may be mandatorily required in the interest of trade and commerce in certain situations. Such contractual provisions are not barred by the restriction under Section 27 of the Contract Act, and therefore valid in India. Importantly, only the contract clauses with an unambiguous objective, which is considered to be in furtherance of trade and commerce, survive this test. For instance, a co-founder of a startup who signed a non-compete clause can be held to it. However, if a junior software developer or a call center employee signs a non-compete clause with the employer, the same may not be enforceable. Generally, such a clause is kept in employment which is effective during the course of employment.

Benefits

Such an obligation prevents employees from competing and damaging the business of an enterprise. Perhaps the most direct advantage of having a non-compete restriction is that it can prevent employees from leaving to work with a competitor during the course of employment. If an employee desires to go and start their own competing business, a non-compete can save you from the loss of critical customers for a short period of time.

Such a restriction also prevents the company’s “trade secrets” or any formula, pattern, compilation, program, device, method, technique, or process that has value because it is not generally known and because it is being kept secret. When a business owner shares this kind of information, it is essential to maintain confidentiality by using a non-disclosure agreement. However, if a former employee goes to work with a competitor, an NDA does not suffice. Hence a non-compete agreement makes it inevitable that former employees cannot exploit information you gave them for the benefit of another.

Important Points

The law requires some limitations on non-compete agreements such as being reasonable in the length of time, geographic area, and scope of the subject matter. Non-Compete arrangements are mostly unenforceable in India. However, with the right exceptions and restrictions, the obligation can help the organization. 

Procedure

procedure for Non compete

Frequently Asked Questions

Whether Non-Compete restriction is identified under the statute in India?

Yes, Article 19(1) (g), which confers on every citizen the fundamental right to carry any trade and Section 27 of the Indian Contract Act, 1872 prohibits the inclusion of restrictions in contracts. 

What are the reasonable restrictions to make a Non-Compete clause applicable?

  • Geographical location - Often, a non-compete is phrased in a way to restrict the employee from engaging with the third party, which is a potential competitor in a particular location. 
  • Trade Secrets - A non-compete can be in place to protect trade secrets or such intellectual property in the commercial interest of the employer.
  • Time Duration - If the non-compete is in place for a stipulated period then it is acceptable to place such restrictions. Non-compete clause can not put restrictions for an indefinite period. Generally, except in the case of sale of a business, where the restriction could be for many years, the clause for non-compete may impose restriction for a few months.
  • Goodwill - A recognized exception under Section 27

Difference between Non-Compete and Non-Solicitation?

A non-Compete is to create a restriction against entering into similar trade or competition. In contrast, Non-Solicitation is to create a constraint on another company from hiring existing employees of a company. 

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