Employees are often required to sign employment contracts with clauses prohibiting employees from engaging in competing activities during and after employment. This presentation discusses the legality of such clauses.

1. Apoorva Dixit
Anil Chawla Law Associates LLP
MF-104, Ajay Tower, E5/1 (Commercial),
Arera Colony, BHOPAL – 462 016 (MP) INDIA
www.indialegalhelp.com
indialegalhelp@gmail.com
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2. Introduction
Typical Restrictive Clauses
Applicable Laws
Relevant Case Laws
Summary of Legal Position
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3. Introduction
On joining, one is asked to sign a
contract by the employer. It has a set of
clauses labeled as "Non-disclosure" and
another set called "Non-compete”.
These are what can be called as
restrictive clauses.
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4. Typical Restrictive Clauses
4

5.  Non-Disclosure Clauses covering confidentiality during
employment as well as after employment ceases – Such clauses
typically prevent an employee from sharing confidential information
with outsiders.
 Non-Compete Clauses during employment – These clauses
prevent the employee from engaging in activities that clash with his
employment responsibilities.
 Non-Compete Post-Employment Clauses – Some employers do not
want their employees to join competitors even after the employee has
quit the job. Restriction in this category may also prevent an
ex‑employee from starting a competing business or even advising a
relative who is in a similar line of business.
 Non-use Post-Employment Clauses – Such clauses are tighter than
the previous ones. They not only prevent from using information
gained during employment for competition use. They go a step
further and even stop an ex-employee from making a non-competitive
use of the information.
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6. Applicable Laws
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7. Indian contract act 1872
 Section 27 of the Indian Contract Act
makes void all contracts that impose
‘restraint of trade’. The provision is as
follows: ‘
 “Every agreement by which anyone is
restrained from exercising a lawful
profession, trade or business of any kind,
is to that extent void.”
 The only exception that is permitted to
the above is when goodwill of a business
is sold. The exception is not relevant to
the discussion in this article. Hence, we
shall ignore it.
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8. Constitution of India
 Article 19 1 (g) of the Indian constitution guarantees that all the
citizens shall have the right:
“to practice any profession, or to carry on any occupation, trade or
business.”
 However, the right to carry on a profession, trade or business is not
unqualified. It can be restricted and regulated by the authority of law.
The restrictions have to be reasonable and in public interest.
 Moreover, it is important to understand that fundamental rights are
available only against the state or in other words government or
government undertakings. Fundamental rights have almost no scope
when the relationship is between a private employer and an individual
employee.
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9. Competition Act 2002
 According to Section 3(1) of the competition Act 2002,
“no enterprise or association of enterprises shall enter into
any agreement in respect of production, supply, distribution,
storage, acquisition or control of goods or provision of
services, which causes or is likely to cause an appreciable
adverse effect on competition within India”.
 According to Section 3(2) of the competition Act 2002,
Any agreement entered into in contravention of the
provisions contained in subsection (1) shall be void.
 Agreements which cause or are likely to cause appreciable
adverse effect on competition in markets in India are anti-
competitive and are void.
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10. Competition Act 2002 (cont.)
 According to Section 4 of the competition Act 2002,
(1) No enterprise or group shall abuse its dominant position.
(2) There shall be an abuse of dominant position under sub-section
(1), if an enterprise or a group.—-
(a) directly or indirectly, imposes unfair or discriminatory—
(i) condition in purchase or sale of goods or service; or
(ii) price in purchase or sale (including predatory price) of goods or
service.
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11. Relevant Case laws
Superintendence Company of India
Pvt Limited Vs. Krishnan Murgai
 Under agreement, employee agreed that he will
not engage himself with any of the competitors
during as well as post employment in any capacity.
 After termination the employee joined a competitor.
 The company brought an injunction suit against the employee.
 Supreme Court held (a) ex-employee can only be restrained from
disclosing trade secrets of the Company (b) he cannot be prevented
from carrying out any business or employment in competition with
the Company.
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12. Relevant Case laws
Desiccant Rotors International Pvt. Ltd. Vs.
Bappaditya Sarkar and Anr.
 The employee signed an obligation agreement under which he agreed
that for two years after termination of employment:
 he will not in any capacity compete against the company,
 he would not disclose the confidential information to which he
was privy as employee of company to any third party;
 In addition to this obligation agreement employee signed two
declarations declaring that if he failed to comply with the
declarations, he would take full liability and responsibility for the
same.
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13. Desiccant Rotors International Pvt. Ltd. Vs. Bappaditya
Sarkar and Anr. (Continued)
 Within three months of leaving employment the employee joined one
of the competitors of the company.
 Delhi High Court held that restrictions which interfere with the right
of livelihood cannot be allowed and such negative covenant would be
held invalid.
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14. Percept D' Mark (India) Pvt. Ltd. Vs. Zaheer Khan and
Anr.
 Agreement with a cricketer of national repute for a period of three
years.
 The agreement included a condition that the player could not accept
any offer for endorsements or promotions and that prior to accepting
any such offer, he would provide the company in writing all the terms
and conditions of such third party and offer the company right to
match such third party offer.
 The cricketer informed the company that he was not interested in
renewing and/or extending the terms of the said agreement. Entered
into an agreement with a third party. The company protested and
pulled the cricketer to court.
 Supreme Court affirmed that even if a restraint is reasonable it would
be null and void under section 27 of the Contract Act.
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15. Dr. S. Gobu vs. The State of Tamil Nadu
 Dr. Gobu was Associate Professor in General Surgery department of a
Medical College.
 He did Post Graduate Degree as a service candidate. He executed an
agreement to serve the institution for six years, failing which bound to
pay six months' salary together with three months' notice pay.
 (1) Was he was entitled to wriggle out of an agreement reached
between him and the management? (2) Was he entitled to leave his
service as a matter of right without fulfilling his obligations?
 The High Court refused to let the employee have the benefit of
section 27 of Contract Act and also ruled that the agreement executed
by him does not suffer from any arbitrariness and it was not done due
to any unequal bargaining power.
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16. Summary of Legal Position
 Restrictions imposed during the employment are valid
 Post employment covenants are null and void.
 Fundamental Rights under Constitution relevant only for public
sector / government departments or bodies
 The Competition Act imposes penalties on all those who make their
employees sign such documents that impose post-employment
restrictions on employees. Though no one has gone to Competition
Commission of India challenging such restrictive clauses. Possibility
exists of action similar to class action suits.
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17. Apoorva Dixit
Intern at Anil Chawla Law Associates LLP
www.indialegalhelp.com
indialegalhelp@gmail.com
Prepared under the guidance of Mr. Anil Chawla, Senior Partner, Anil Chawla Law Associates LLP
Note: This presentation is an academic exercise. It does not offer any advice or suggestion to any employee or
employer. The reader is advised to consult an advocate for any specific advice. The author and Anil Chawla &
Associates do not accept any liability / responsibility either direct or indirect in relation to this presentation or with
regard to any consequence arising from it.
Copyright – All Rights Reserved by Anil Chawla Law Associates LLP
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