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Non-compete provisions in employment contract: Are they enforceable?

Non-compete provisions in employment contract: Are they enforceable?

It is now standard practice for companies to include 'non-compete' provisions in contracts of employment. But, are such provisions enforceable?

Akila Agrawal, Partner, Amarchand & Mangaldas & Suresh A Shroff & Co Akila Agrawal, Partner, Amarchand & Mangaldas & Suresh A Shroff & Co
It is now standard practice for companies to include 'non-compete' provisions in contracts of employment. It restricts an employee from competing with the employer or joining a competitor during the term of the employment and for a period thereafter. But, are such provisions enforceable?

Non-compete provisions for the term of employment are not regarded 'restrictive covenants' under Indian law. However, having such provisions applicable after a person leaves the organisation is against the Indian Contract Act, and, therefore, not enforceable.

Section 27 states that any agreement that restrains anyone from 'exercising a lawful profession, trade or business' is void. Courts have interpreted it on the presumption that all employees are alike and will not have the ability to injure the company when furthering a lawful profession. Any restraint on the employee, reasonable or otherwise, is treated as void.

So, currently, Indian companies make a distinction between 'key' employees and 'non-key' employees. Key employee contracts provide for a non-compete restraint during employment along with either a 'garden leave' or a fixed-term clause.

A 'garden leave' clause requires an employee to spend notice period at home, prohibiting him from joining a competitor, while receiving remuneration. Also, courts have ruled that, while it is not possible to stop an employee from leaving, he can be restricted from joining a competitor during the term of employment. A fixedterm contract is for this purpose.

Another clause is the employee bond. An employee, having received training, is required to work with the company for a period. If not, he would be liable to pay a fixed amount as compensation.

Enforceability of non-compete obligations on consultants is debatable. The expression 'lawful professional' used in Section 27 has been interpreted to include both consultants and employees. Therefore, a consultant who agrees to provide services to a single client on a fulltime basis could be subject to non-compete obligations.

AKILA AGRAWAL
Partner, Amarchand & Mangaldas & Suresh A Shroff & Co