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NON-COMPETE ARRANGEMENTS (ORGANIZATION BASED)

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 party. 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. However, the Supreme Court of India has clarified that in certain situations a non-compete clause may be mandatorily required in the interest of trade and commerce. Such contractual clauses 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 survives this test. For instance, a co-founder of a startup who signed a non-compete clause can be held to it, but if a junior software developer or a call center employee signs a non-compete clause with the employer, the same may not be enforceable.

Benefits

Such an obligation prevents ex-employees from competing. Perhaps the most direct advantage of having a non-compete restriction is that it can prevent employees from leaving to work with a competitor. In the event an employee desires to leave and start their own competing business, a non-compete can also save you from the loss of key customers.

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 important to try to maintain its 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 certain 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 length of time, geographic area, and scope of subject matter. Non-Compete arrangements are largely unenforceable in India, however with the right exceptions and restrictions, the obligation can help the organization.

Procedure

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FAQ

1. Whether Non-Compete restriction is identified under 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 inclusion of restrictions in contracts


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

(i)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.

(ii)Trade Secrets - A non-compete can be in place to protect trade secrets or such intellectual property in the commercial interest of the employer.

(iii)Time Duration - If the non-compete is in place for a stipulated period of time then it is acceptable to place such restrictions

(iv)Goodwill - A recognized exception under Section 27


3. Difference between Non-Compete and Non-Solicitation?

Non-Compete is to create a restriction against entering into similar trade or competition whereas Non-Solicitation is to create a restriction on another company from hiring existing employees of a company.

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