Non-competing clauses in Employment Contracts

Employee attrition continues to be a burning issue for all Indian IT companies. Through this blog, I tried to briefly analyze the legal validity of a non-competing clause in employment contracts.

Employment contracts that restrain employees specifically in any manner have always been a subject matter of debate and, consequently, have come under immense scrutiny by the judiciary. Often non-competing agreements have been confused with non-poaching agreements. A non-competing agreement is different from non-poaching agreements, where unlike the non-poaching agreements, which is between two employers; non-competing agreement is between an employer and an employee.

Even though the universal principle of contracts is based on the concept of “free will”, Indian courts took the view that an employment contract is a contract among un-equals. When there is a contract, the presumption is that it reflects the free consent and actual intention of the parties to the contract. One of the prominent reasons for the validity of employment contracts usually questioned is due to the presumption of “undue influence” in executing a contract. A contract is said to be induced by ‘undue influence’ where a person who could exercise undue influence over the other, and one person “holds a real or apparent authority over the other”.

As per Indian Contracts Act, every agreement by which anyone is restrained from exercising a lawful profession, is to that extent is invalid. However, there is an exception provided to this general rule. This exception applies when a person sells his business along with goodwill to another person and that person may enter into an agreement with the seller restraining the seller from engaging in the same business for a specific period of time or within a specified territory.

In a case filed by American Express Bank, Delhi High court refused to believe the contention of the bank that the employee had taken confidential information and opined that her right to search for a better employment cannot be curbed. In the garb of confidentiality the Bank cannot be allowed to perpetuate forced employment. In Pepsi Foods Ltd. case, there was a negative clause in the employment agreement restraining an employee to work with a competitor for a period of 12 months. The court held that any such post-employment restrictions are not enforceable. The law is well settled that any restrictions imposed on an employee during the employment are legally valid while the ones relating to post-employment period, which are meant to coerce the employee to not leave the employment or not join a competitor is invalid.

Having said that, an employer has every right to proceed against the employee, if there is a clear breach of confidentiality obligations or intellectual property rights. An employee also has every right to engage in any activity after his employment ceases but not at the cost of the confidential and intellectual property of the employer. But such an action for breach of confidence succeeds only if the employer could identify clearly, what was the information he was relying on and has to be shown that it was handed over in the circumstances of confidence and could be treated as confidential.

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