Introduction
Technological developments occurring on a regular basis have necessitated safeguarding trade secrets and proprietary information. While companies must have the right to restrict their employees from dispensing confidential information, can employers restrict them from utilising any information gathered during their tenure with the company? Do employees have a say on post termination covenants?
What is a post termination restrictive covenant?
A “post-termination restrictive covenant” is a clause in an employment agreement that forbids a departing employee from engaging in activities similar to the employment, post termination. The following types of restrictive covenants are most frequently used in the employment landscape:
These commitments are concurrent with employment and preclude employees from accepting any other employment or engagements without the express authorization of the employer.
Employers use these clauses to prohibit employees from accepting jobs or engagements with competitors or from conducting activities that would compete with the employer, both during and after termination.
These clauses often prohibit an employee from recruiting the employer's clients after the employee's employment with the organisation has ended.
These clauses protect trade secrets or other proprietary information from unauthorised disclosure by an employee during and after employment. A confidentiality clause usually defines what information should be considered confidential, the temporal and geographical scope of the obligation, and related rights and consequences for breach of the obligation.
Enforceability of Restrictive Covenants in India
Based on an old English doctrine of Restraint of Trade, the enforceability of restrictive covenants in employment agreements is governed under the provisions of Section 27 of the Indian Contract Act, 1872 (the “Act”). The Act states that any agreement in restraint of the exercise of a lawful profession, trade, or business shall be void. Article 19(1)(g) and Part XIII of the Constitution too safeguard the right to profess any trade or profession without restrictions. Bear in mind, when interpreting such clauses, courts have made efforts to strike a fair balance between the constitutional right to livelihood and competitive interests inherent to the conduct of business.
In
Percept D’ Mark (India) (P) Ltd. v. Zaheer Khan (2006)4SCC227, the Supreme Court has explained the provisions of the Act as follows:
- A restrictive covenant extending beyond the term of the agreement is void and not enforceable;
- The doctrine of restraint of trade does not apply during the continuance of the employment agreement, and it only applies once the agreement comes to an end; and
- This doctrine of restraint of trade is not confined only to agreements of employment; the same is also applicable to other kinds of agreements as well.
Exceptions
Sale of Goodwill
The Doctrine of Sale of Goodwill suggest that any seller could sell a firm's goodwill, making a deal with the buyer, that such partner will not undertake any business similar to the firm’s for a limited time or within specified jurisdiction. In
Desiccant Rotors International Private Limited v. Bappaditya Sarkar & Another (2009) 112 DRJ 13 (Del) and
Hi Tech Systems and Services Limited v. Suprabhat Ray 2015 SCC OnLine Cal 1192, the Hon’ble Courts observed an exception to the rule covering restrictions wherein the Courts aimed at protecting the employer’s legitimate business interests, such as its business connections and trade secrets.
Therefore, clauses relating to post-employment non-solicitation of employees or customers and protection of confidentiality with respect to trade secrets are not caught by Section 27 of the Indian Contract Act, 1872, and have been enforced by the courts, albeit on a case-to-case basis.
Non-compete clause
As stated above, the Act nullifies any agreement constituting a trade restriction, regardless of the reasonableness or nature of the restriction. Contrary to the strict interpretation of the Act, court decisions clearly show that the Act prohibits a restrictive agreement only when it is for the purpose of enforcing a contract of personal nature i.e., confidential. The courts have also held that
while limited employment covenants can be enforceable on a case-to-case basis, post-employment covenants are often void.For instance, the landmark case of
Niranjan Shankar Golikari v. The Century Spinning and Mfg. Co. Ltd. held that negative agreements have been found to be valid so long as the restrictions imposed on them are reasonable and do not violate public policy. Here, the previous employer was successfully able to demonstrate that the former employee who had joined the competitors had special training and knowledge of specific techniques, processes, and machines from their previous employers. Importantly, the employer pointed about an argument that greatly favoured the - the employee terminated the employment in violation of the fixed term contract.
Therefore, clauses that impose non-compete clauses on employees for the duration of their
employment or for the duration of a fixed-term employment contract may be enforceable. However, the
non-compete clause after termination of the employment relationship is not enforceable.
Non-solicit clauses
In an employer-employee relationship, a non-solicitation agreement prohibits the employee from soliciting the employer's customers, suppliers, or employees, for a specified period after termination of employment. Courts have treated non-solicitation clauses in a manner consistent with their approach to non-compete clauses, but such restrictions have survived in limited cases.
The court ruled that while employees and customers cannot be barred from switching to a soliciting party, the soliciting party can be barred from future solicitation and can be fined for the same.
Confidentiality clauses
Confidentiality clauses are regularly enforced in India, despite the post-employment context. In a landmark judgement passed by the Bombay High Court in
Zee Telefilms Limited v. Sundial Communications Private Limited, the Court recognised that the maintenance of confidence is in public interest. It observed that no one should be allowed to capitalise on the wrongful use of information received in confidence.
- Therefore, a breach of confidence, whether arising from a contract or an equitable right, may be judicially restrained.
In Stellar Information
Tech Private Limited v. Rakesh Kumar, the Delhi High Court also observed that merely approaching clients does not establish a breach of confidentiality, provided details of such clients were already in the public domain.
- Courts have held that while an employer cannot bar a former employee post-termination from using the skill and knowledge acquired during his employment, the employer can bring an action to protect their trade secrets or customers from the influence of the former employee.
Conclusion
While courts have differing views on the validity of restrictive covenants, with the increase in commercial disputes and litigation, it seems justified to include restrictive covenants in employment contracts. While the enforceability of such agreements has been addressed in many cases, courts consider the facts and circumstances of each case, having due regard to the reasonableness of any limitations contained in such agreements.
Indian courts have observed that the mere presence of such a clause in a contract does not render the agreement void at the outset. However, the judicial doctrine for enforcing such restrictions depends on the nature of the contract, considering the protection of confidential information, the reasonableness of the restrictions imposed, and the balance of convenience between the parties.
Conclusively,
negative/restrictive covenants can be valid if the restrictions imposed are reasonable and not against public policy. Since restrictive covenants are enforceable only to the extent, they are reasonably necessary to protect the employer’s interests, and the employer is not required to pay compensation to the employee.
Thank you for getting in touch! 
