Dear All.
Brief fact of the case:
My friend had served more than 14 years in a company. Initially he was joined as Executive and subsequently he reaches to the level of GM. While he promoted on senior position, the management has taken “No Compete Agreement” on Non-judicial stamp which is unregistered. Since he got excellent opportunity he submitted his resignation and as per the terms & conditions of appointment letter he followed leave notice. However, the management has refused to accept his resignation and brought to his notice of "No compete agreement" which is duly accepted by him.
My friend tried to convince management that, he will not try to contact any customers of the company nor will share any business secrete. However, the management is force him to work for another 4 to 6 months failing which they will constraint to take legal actions. It is very difficult him to follow this conditions as he has informed his new employer that he will join duties after observing 2 months leave notice and being a senior position the new employer will not accept and allow him for another 4 to 6 months (practically also it not acceptable).
I would like to share the main contents of the agreement are given below.
“ I ………… s/o ………………….
I hereby undertake not to join employment or be associated in any manner with any organization or organizations’ competing with the company or newly formed organizations likely to compete with the company, for a period of five years on cessation of my employment howsoever caused.
In the event I join a competing business organization or associate myself with such organization in any capacity, I agree to pay liquidated damages of Rs….(……..)forthwith without demur. I realise that the company can also file a suit against me in an appropriate court and obtain an order of restraint against my association with competitors.
I am giving this undertaking on this day of …………………voluntarily with full understanding of the consequences of the same.
I would like to mentioned here that, as per section 27 of the Indian Contract Act, 1872 ("Contract Act"), whereby every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. The Indian courts have more or less adhered to the letter of the law and have given a consistent view treating such clauses more as a concept of equity than a contract.
Observations of courts /Case laws:
The Supreme Court of India, while dealing with such a contractual issue in Superintendence Company of India (P) Ltd. v. Sh. Krishan Murgai, raised the question that whether a post-service restrictive covenant would fall within the mischief of section 27 of the Contract Act. The court held that a contract, which had for its object a restraint of trade, was prima facie void. Even the Delhi High Court in Foods Ltd. and Others v. Bharat Coca-cola Holdings Pvt. Ltd. & others observed,
"It is well settled that such post termination restraint, under Indian Law, is in violation of Section 27 of the Contract Act. Such contracts are unenforceable, void and against the public policy. What is prohibited by law cannot be permitted by Court's injunction."
The judgment of the Supreme Court in Percept D'Mark (India) Pvt. Ltd. v. Zaheer Khan and Anr. sheds some light on the legality of such clauses. The Apex Court observed,
"Under Section 27 of the Contract Act (a) a restrictive covenant extending beyond the term of the contract is void and not enforceable. (b) The doctrine of restraint of trade does not apply during the continuance of the contract for employment and it applied only when the contract comes to an end. (c) As held by this Court in Gujarat Bottling v. Coca Cola (supra), this doctrine is not confined only to contracts of employment, but is also applicable to all other contracts."
In view of the aforesaid observations, it can be inferred that while dealing with disputes relating to such non-compete clause under an employment agreement, the Indian courts have considered the pre-termination period of the employment distinct from the post termination period of the employment. Whilst the courts have been tolerant about the application of the non-compete clause, they have walked an extra mile to ensure that such clause do not have an effect after the cessation of employment and have held that such clause would fall within the mischief of section 27 of the Contract Act.
However, the Supreme Court in Niranjan Shankar Golikari v. The Century Spinning and Mfg. Co. Ltd., thereby giving a liberal interpretation to section 27 of the Contract Act further clarified that not all non-compete clause effective after the termination of the employment agreement are prima facie prohibited and held,
"a negative covenant that the employee would not engage himself in a trade or business or would not get himself employed by any other master for whom he would perform similar or substantially similar duties is not therefore a restraint of trade unless the contract as aforesaid is unconscionable or excessively harsh or unreasonable or one-sided".
Therefore, in order to qualify for being enforceable by law, it is important to ensure that restriction imposed by the employer is reasonable and not harsh on the employees. It may not be out of place to specify that the restrictions to the extent of "non-solicitation" and/or "non-disclosure" may be viewed as an exception to this rule. Though the non-solicitation clause may be prima facie viewed as negative in nature, they are valid and enforceable by law. The Delhi High Court in Wipro Limited v. Beckman Coulter International S.A. held that a non-solicitation clause does not amount to a restraint of trade, business or profession and would not be hit by Section 27 of the Contract Act as being void. Similarly, in Mr. Diljeet Titus, Advocate v. Mr. Alfred A. Adebare and Ors., the Delhi High Court clarified that confidential information of the employer can be protected even in the post-employment period.
Recently, the Bombay High Court in VFS Global Services Private Limited v. Mr. Suprit Roy laid down that "to obstruct an employee who has left service from obtaining gainful employment elsewhere is not fair or proper". Further the Court also pointed out that the clause is prima facie in restraint of trade and is hit by section 27 of the Contract Act.
Considering the contradictory judgements, my friend is confused and seeking legal opinion on this subject. It is to be noted here that management has referred huge amount of liquidated damages in said agreement, which he could not able to pay. Under the circumstances, if he joins the new employment, in light of above court order, can company may proceed to recover liquidated damages mentioned in agreement and can legally proceed further for filing suit against him for breach of agreement.
Kindly advice.
From.
Shaikh.
From India, Nashik
5Brief fact of the case:
My friend had served more than 14 years in a company. Initially he was joined as Executive and subsequently he reaches to the level of GM. While he promoted on senior position, the management has taken “No Compete Agreement” on Non-judicial stamp which is unregistered. Since he got excellent opportunity he submitted his resignation and as per the terms & conditions of appointment letter he followed leave notice. However, the management has refused to accept his resignation and brought to his notice of "No compete agreement" which is duly accepted by him.
My friend tried to convince management that, he will not try to contact any customers of the company nor will share any business secrete. However, the management is force him to work for another 4 to 6 months failing which they will constraint to take legal actions. It is very difficult him to follow this conditions as he has informed his new employer that he will join duties after observing 2 months leave notice and being a senior position the new employer will not accept and allow him for another 4 to 6 months (practically also it not acceptable).
I would like to share the main contents of the agreement are given below.
“ I ………… s/o ………………….
I hereby undertake not to join employment or be associated in any manner with any organization or organizations’ competing with the company or newly formed organizations likely to compete with the company, for a period of five years on cessation of my employment howsoever caused.
In the event I join a competing business organization or associate myself with such organization in any capacity, I agree to pay liquidated damages of Rs….(……..)forthwith without demur. I realise that the company can also file a suit against me in an appropriate court and obtain an order of restraint against my association with competitors.
I am giving this undertaking on this day of …………………voluntarily with full understanding of the consequences of the same.
I would like to mentioned here that, as per section 27 of the Indian Contract Act, 1872 ("Contract Act"), whereby every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. The Indian courts have more or less adhered to the letter of the law and have given a consistent view treating such clauses more as a concept of equity than a contract.
Observations of courts /Case laws:
The Supreme Court of India, while dealing with such a contractual issue in Superintendence Company of India (P) Ltd. v. Sh. Krishan Murgai, raised the question that whether a post-service restrictive covenant would fall within the mischief of section 27 of the Contract Act. The court held that a contract, which had for its object a restraint of trade, was prima facie void. Even the Delhi High Court in Foods Ltd. and Others v. Bharat Coca-cola Holdings Pvt. Ltd. & others observed,
"It is well settled that such post termination restraint, under Indian Law, is in violation of Section 27 of the Contract Act. Such contracts are unenforceable, void and against the public policy. What is prohibited by law cannot be permitted by Court's injunction."
The judgment of the Supreme Court in Percept D'Mark (India) Pvt. Ltd. v. Zaheer Khan and Anr. sheds some light on the legality of such clauses. The Apex Court observed,
"Under Section 27 of the Contract Act (a) a restrictive covenant extending beyond the term of the contract is void and not enforceable. (b) The doctrine of restraint of trade does not apply during the continuance of the contract for employment and it applied only when the contract comes to an end. (c) As held by this Court in Gujarat Bottling v. Coca Cola (supra), this doctrine is not confined only to contracts of employment, but is also applicable to all other contracts."
In view of the aforesaid observations, it can be inferred that while dealing with disputes relating to such non-compete clause under an employment agreement, the Indian courts have considered the pre-termination period of the employment distinct from the post termination period of the employment. Whilst the courts have been tolerant about the application of the non-compete clause, they have walked an extra mile to ensure that such clause do not have an effect after the cessation of employment and have held that such clause would fall within the mischief of section 27 of the Contract Act.
However, the Supreme Court in Niranjan Shankar Golikari v. The Century Spinning and Mfg. Co. Ltd., thereby giving a liberal interpretation to section 27 of the Contract Act further clarified that not all non-compete clause effective after the termination of the employment agreement are prima facie prohibited and held,
"a negative covenant that the employee would not engage himself in a trade or business or would not get himself employed by any other master for whom he would perform similar or substantially similar duties is not therefore a restraint of trade unless the contract as aforesaid is unconscionable or excessively harsh or unreasonable or one-sided".
Therefore, in order to qualify for being enforceable by law, it is important to ensure that restriction imposed by the employer is reasonable and not harsh on the employees. It may not be out of place to specify that the restrictions to the extent of "non-solicitation" and/or "non-disclosure" may be viewed as an exception to this rule. Though the non-solicitation clause may be prima facie viewed as negative in nature, they are valid and enforceable by law. The Delhi High Court in Wipro Limited v. Beckman Coulter International S.A. held that a non-solicitation clause does not amount to a restraint of trade, business or profession and would not be hit by Section 27 of the Contract Act as being void. Similarly, in Mr. Diljeet Titus, Advocate v. Mr. Alfred A. Adebare and Ors., the Delhi High Court clarified that confidential information of the employer can be protected even in the post-employment period.
Recently, the Bombay High Court in VFS Global Services Private Limited v. Mr. Suprit Roy laid down that "to obstruct an employee who has left service from obtaining gainful employment elsewhere is not fair or proper". Further the Court also pointed out that the clause is prima facie in restraint of trade and is hit by section 27 of the Contract Act.
Considering the contradictory judgements, my friend is confused and seeking legal opinion on this subject. It is to be noted here that management has referred huge amount of liquidated damages in said agreement, which he could not able to pay. Under the circumstances, if he joins the new employment, in light of above court order, can company may proceed to recover liquidated damages mentioned in agreement and can legally proceed further for filing suit against him for breach of agreement.
Kindly advice.
From.
Shaikh.
From India, Nashik
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