Non compete covenants in India and ways around Section 27

2. Overview
A non compete clause is a term generally used in contract
law under which one party agrees not to engage in or start a
similar profession, which may be in competition which the
other party, i.e. the employer. Being a contract between two
parties, consideration is a necessary part of such a clause.

3. • Necessary to protect the employer’s legitimate in
interest(s).
• Is seen as designed to simply restrain all competition or
to gain an unfair economic advantage over the former
employee, the non-competition covenant will not be
upheld.
• Legitimate protectable interests for an employer.
• Non Compete Clause is only valid where the termination
of employment is involuntary. [Lucente v IBM 310 F.3d
243 (2d Cir. 2002)]

4. Section 27 of the Indian Contract Act:
Every agreement by which any one is restrained from
exercising a lawful profession, trade or business of any kind, is
to that extent void.
Exception
Saving of agreement not to carry on business of which
goodwill is sold.
But it is important to trace the history of this section which is
dealt in the next slide.

5. The original draft of the Indian Law Commission did not
contain any specific provision on the subject. The provision
was incorporated in this Act at a time between the
resignation of the Indian Law Commission and the
enactment. The object seems to be protection of trade.
In Oakes & Co v Jackson (1876) ILR 1 Mad 134, the Court
noted that ‘trade in India is in its infancy; and the
legislature may have wished to make the smallest
number of exceptions to the rule against contracts
whereby trade may be restrained’.

6. The Indian Courts mainly look at two points while
determining cases involving Non Compete clauses. They
are:
1) Public Policy
2) Reasonableness

7. • Whatever tends to injustice of operation, restraint of
liberty, commerce and natural or legal rights; whatever
tends to the obstruction of justice or violation of statutes
and whatever is against good morals can be said to be
against public policy.
• In this regard, the Law Commission of India has
recommended in its 13th report that section 27 of the IC
Act should be amended so as to allow restrictions and
contracts in restraint of trade, if they are in the interest of
the parties as well as of the public. However, no action has
been taken so far.

8. • As defined by the dictionary reasonable means – according
to reason. Hence whatever a reasonable man would do, using
common sense and knowledge, under the given
circumstances, will account as reasonable. Therefore the test
of reasonability depends on the facts and circumstances of
each case.
• A reasonable restraint of trade was held to be valid.[Niranjan
Shankar Golikari Vs The Century Spinning AIR 1967 SC 1098 ]

9. Reasonable restrictions can be placed in the following
ways:
1. Distance: suitable restrictions can be placed on employee
to not practice the same profession within a stipulated
distance, the stipulation being reasonable.
2. Time limit: if there is a reasonable time provided in the
clause then it will fall under reasonable restrictions.
3. Trade secrets: the employer can put reasonable restrictions
on the letting out of trade secrets.
4. Goodwill: There is an exception under section 27 of the
Indian Contract Act on the distribution of goodwill.

10. • Madhub Chunder v. Rajcoomar Doss, (1874) 14 Beng LR 76-
Restraint on trade, partial or complete, held to be void.
• Superintendence Co. of India Pvt. Ltd. v. Krishan Murgai,
AIR 1980 SC 1717- Restrictive covenant during period of
employment will not void, post termination will be void.
• Gujarat Bottling v. Coca-Cola Co. and Ors 1995 SCC (5)
545- Restraining the franchisee from dealing with
competing goods was to facilitate the distribution of the
goods of the franchiser and could not be regarded as a
restraint of a right to trade.

11. Accepted restrictive principles are broadly of four types:
1) Non solicitation clauses
2) Non competition clauses
3) Restriction on use of confidential information
4) Non poaching clauses

13. • The employee does not have to work for the employer.
• It is a paid withdrawal from workforce.
• Loyalty towards employer is expected.
• Notice period should be given.
• Protect confidential information and goodwill
• Standard Life Health Care Ltd v Gorman [2009] EWCA Civ 1292-
Withdrawal from workforce in lieu of a payment was held to be
a garden leave clause- Injunction granted.

14. • Restrict individuals and organizations from providing
services or engaging in businesses in certain markets and
geographies for a period of time.
• Employee forfeits certain payments, which would be payable
to him otherwise. The employee has the choice of competing
and forfeiting benefits or retaining benefits and forfeiting the
right to compete.
• Holloway v. Faw, Casson & Co 319 Md. 324, 572 A.2d 510
(1990).- Non solicitation & Succesfull forfeiture clause.
• Courington v Birmingham Trust National Bank 347 So.2d 377
(Ala. 1977)- Forfeiture from EPS held to be valid.

15. • A clawback provision might require the executive to
reimburse the company specified amounts if the executive
breaches a non-compete agreement and goes to work for a
competitor within a certain number of months after leaving
the company.
• May even include reimbursement of advances
• Not enforceable as to the clawback of equity compensation
or the prevention of competition because the non-
compete would be deemed an agreement in restraint of
trade.