Sanctity Of Restrictive Covenants In Employment Contracts

Restrictive covenants:

An employment contract generally includes restrictive covenant clauses to protect the interest of the employer after an employee leaves their organization or business. In most of the cases employees will not have any bargaining power while entering into an employment contract, as they are simply given a standard contract to either accept or reject. Often, the employee may not fully consider the restrictions imposed, as their main focus is on securing the job opportunity and they tend to sign such dotted line contracts.

Interplay between Section 27 of ICA & Article 19(1)(g) of the Constitution:

The enforceability of non-solicitation and non - compete clauses in India is controlled by Section 27 of the Indian Contract Act, 1872, which says that "Every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, is to that extent void.” And by Article 19(1)(g) of our Constitution, which gives the fundamental right to practise any profession, or to carry on any occupation, trade or business to the Citizens.

Employment vs post-employment:

These clauses can be generally categorized into two types: employment term clauses and post-employment term clauses, employment term clauses are typically included in agreements to protect the interests of the parties involved during the existence of the contract. These clauses may restrict one party from engaging in certain activities that could be detrimental to the other party's business or competitive advantage. For example, a non-compete clause in an employment agreement may prevent the employee from starting a competing business while the contract is still in effect.

On the other hand, post-term clauses come into play after the contract has been terminated. These clauses are designed to prevent one party from unfairly competing with the other party once the contractual relationship has come to an end. For example, a non- solicitation clause in an employment contract may prevent a former employee from soliciting the clients or employees of the company. The following are some of the cases, wherein the Hon'ble Constitutional Courts have considered the validity of such post-employment clauses.

Time limit a valid restraint.

Wipro Limited v. Beckman Coulter International S.A^[1] was one of the landmark judgments that addressed the legality of a non-solicitation. It is a case were the employees of the Petitioner responded to the advertisement of the Respondent and were granted employment, and non-solicitation agreement between them was agreed for a period of two years after the termination of the agreement. The Hon'ble Court held that the non-solicitation clause does not amount to a restraint of trade, business or profession and would not be hit by Section 27 of the Indian Contract Act, 1872 as being void and referred the matter to arbitration and held that the respondent would be liable to compensate the Petitioner for such breach of the non-solicitation clause, if so established in the arbitration proceedings.

Further, in E-merge Tech Global Services p Ltd vs. Mr.M.R.Vindhyasagar and ors^[2] while granting permanent injunction against non-soliciting the customers/clients of the Plaintiff company, the Hon'ble Court has held that the first defendant who was the main contact on the side of the Plaintiff Company in touch with its clients until his resignation, had an obligation under the non-solicit and confidentiality/ non-disclosure clauses and if the same is violated, he is bound to face the consequences. The Hon'ble Court has also upheld the validity of the non-solicit clause for a period of 3 years even after leaving the employment and also decreed for payment of damages.

In Brahmaputra Tea Co. Ltd. v. E Scarth^[3], the employer restrained its employee from engaging directly or indirectly in the cultivation of tea for a period of five years from the date of the termination of his agreement. The Hon'ble Court had held that contracts by which persons are restrained from competing, after the term of their agreement is over, with their former employers within reasonable limits, are well known in English Law, and the omission to make any such contract an exception to the general prohibition contained in Sec. 27 indicates that it was not intended to give them legal effect in this country.

Non solicitation a civil wrong?

In the case of Embee Software Pvt. Ltd. v. Samir Kumar Shaw & Others^[4], which involves dispute between a former employer and employee, wherein the non-solicitation provision in an employment contract was examined and it was held that the non-solicitation clause does not amount to restraint of trade, business and profession, and would not be hit by Section 27 of the Contract Act as being void. It was also held the principle of law is that in soliciting, which has the effect of breaking a contractual relationship, is a tort and cannot be practised by an ex-employee to damage the business of the ex-employer.

Freedom of employment v/s persuading to break present employment

In Nian Media Pvt Ltd vs. Rahul^[5], it was held that it is for employees to choose any kind of employment on their own volition, the Respondent shall not voluntarily encourage or solicit the employees of the Applicant's company and persuade them to change their employment. It was also observed that the Respondent should be restrained from executing, soliciting, inducing, or encouraging the Applicant's employees to quit their employment with the Applicant's Company and requesting them to join his direct competitors in the industry.

Restrictive covenants a boon or bane?

While these restrictive covenants are a valuable tool for protecting business interests, their enforceability under Indian law is subject to strict scrutiny. From the above discussions we would derive that Contract term clauses are generally considered valid and enforceable, recently the Hon'ble High Court of Delhi^[6] while dealing with a dispute related to lock-in period in employment contract held that “The lawful and reasonable covenants which are operative during the term of employment are valid and enforceable. Such covenants are not in violation of the fundamental rights as provided in the Constitution of India”. But whereas post-term clauses are subject to rigorous scrutiny by the Courts under Section 27 of the Contract Act, which prohibits agreements that restrict trade or profession. Further, the Courts may be more inclined to strike down post-term clauses if they are found to be overly broad or unreasonable in scope. Hopefully, in the nearby future, the Hon'ble Apex Court might settle the law on restrictive covenants once for all.

The author is a Research Associate Cum Law clerk at Supreme court of India. Views are personal