Analysis of validity of Non-Compete Contracts as per Indian Contract Act, 1872 - Professionals - Legal - TIK Share
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Analysis of validity of Non-Compete Contracts as per Indian Contract Act, 1872


CA Pulkit Sharma

2014-09-04

Case1: Rahul signed an employment contact with his company. The contract has a clause where he was not supposed to work for 2 years in any other company after resigning from his current job.

Case2: Vaibhav, running a startup undertook a sub-contract from another company to develop a software product for a client. Vaibhav was required to sign an agreement, and he was not supposed to undertake any work from the client. (Company A gave contract to Vaibhav to develop software for its client and Vaibhav was not to work for client).

Case3: Raj was working in a company; he was working in research department. Company signed the employment agreement, as per agreement Raj was not suppose to join any other company operating in same business once he quit the current job.

Case4: Ram was working with a company and employment agreement had a condition where Ram was not allowed to carry any profession, trade or employment elsewhere while in employment.

Above are the four typical practical situations which we face in our daily working environments. The big question is whether above contracts are valid if employee or associates after quitting their current work join the company which appointment agreement disallow.

We have to answer whether above Non-compete agreements are valid or not with help of Indian Contract Act, 1872.

Any contract or part of contract which is not a valid as per Indian contract Act, 1872 make the agreement or particular clause void and this cannot be enforced in court of law.

Section 27 of Indian contract Act, 1872 speaks about the validity of above clauses, as per section 27 of Indian contract Act, 1872:

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

Exception: One who sells goodwill of a business with a buyer to refrain from carrying on a similar business, within specified local limits so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein provided that such limits appear to the Court reasonable, regard being had to the nature of business.

It is clear from the above wordings that any clause of agreement which stops a person from carrying on any trade or profession is not valid in India.

But, clause restraining a person from carrying on the profession is valid while the person is in employment.

With help of above quoted text of Indian contract Act, 1872 and other provisions let’s analyze which of the contract or part of contract cannot be enforced in court of law in India.

Case1, Case2 and Case3 restrain the person from carrying on trade or profession which is important for his living. All these clauses in agreement are void and cannot be enforced in court of law in India.

However Case4 is enforceable in India since the agreement restrains employee during the tenure of working in company.

It is evident from the above analysis that any clause in employment contained in employment agreement or general business agreement which takes away the rights of a person to carry any trade or profession is not enforceable in court of law in India.

Apart from law even if we think logically should one be stopped from carrying on a trade or profession using the knowledge which he gained during the employment! Non-compete laws in India are favorable to employees and associates; however in some of the European countries law is different.

Many multinational companies face problem while drafting agreements, in India Non-compete laws do not stop anyone from carrying on the trade or profession, however non-compete agreement are enforceable during the period of employment. If employees pass on the information or engage in any other trade, profession or employment with another employer while in employment can be sued by the company if employment agreement provides so.

Conclusion: In India, Non-compete agreements are not enforceable except in a situation where goodwill of the business is sold. Any clause restraining employees or associates from carrying on any trade, profession or employment are not enforceable in India. Even Notice period or bonds signed with employees are not valid and cannot be enforced.

Disclaimer: These are my personal opinion, however I advise you to contact a professional before drafting or entering a contract and the above notes are only guiding in nature and do not form a professional opinion.

Rahul Rai

2014-09-04

Thanks for sharing this great piece of knowledge.

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Rajneesh Garg

2014-09-04

Hi Pulkit,

It is a very useful information. Generally the lawyers harass people by sending fake notices. This information is important for general public awareness. We thank you for sharing this topic.

Regards,

Rajneesh

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Rahul Rai

2014-12-23

I also got notice from one of client, this article really helped.

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