What Is A Non-Compete Clause In An Employment Contract?

What Is A Non-Compete Clause In An Employment Contract?

LegalKart Editor
LegalKart Editor
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Last Updated: May 16, 2024

A non-compete clause is a provision in an employment contract whereby the employee agrees to the fact that he would not enter into any competition with the employer during the term of his employment or even after the employment period is over. Typically, a fixed period of time is agreed upon for restrictions that extend beyond the term of employment. Non-compete clauses are common in IT Departments, Media, Financial Industry, Corporate World.
 

Enforceability of Non-Compete Clauses

The non-compete clause in an employment contract is governed by certain provisions of the Indian Contract Act, 1872. Section 27, of the Contracts Act, makes agreements that are in restraint of trade void. 

 

A vast number of judicial decisions have emerged on the question of enforceability of non-compete clauses. These decisions are divergent, and hence, no clear answer to the enforceability of non-competes has emerged till now. We have discussed some of these case laws below: 

  1. In Superintendence Company of India (P) Ltd. v. Sh. Krishan Murgai, a question was raised as to whether a non-compete clause in an employment contract is valid. The court held that a contract, with the objective of restraining trade, was void.

  2. A similar case came up in Delhi High Court, wherein, the court observed that any law which restricts an employee from working after the termination of his job is in violation of the Indian Contract Act,

  3. In Arvinder Singh and Anr. v. Lal Pathlabs Pvt. Ltd. & Ors, the court observed that any agreement which restricts the person from carrying any professional activity is contrary to law. 


For fixed-term employment contracts, the restriction can be enforced under specific conditions. If an employee has resigned before the expiry of the term, then the restriction can be enforced for the rest. Non-competes may also be enforced against senior-level employees under certain conditions. If there is suspicion that a senior- level employee possesses proprietary information about the company, such an employee may be prohibited from joining a competing company by enforcing a non-compete clause.

Thus, a non-compete clause in an employment contract is not completely unenforceable and may be enforced in some circumstances. However, it should be drafted carefully and properly. 


Non-compete Clause v/s Non Disclosure Agreement

 

A non-compete agreement is different from a non-disclosure agreement. In a non-compete clause, an employee promises to not enter into any kind of competition with the employer after leaving the job. Whereas a non-disclosure agreement restricts an employee from revealing any confidential information of his previous employer to the current employer or anyone else in the future. While the enforceability of non-compete clauses is still not a settled issue, non-disclosure agreements may be enforced under the law. 

 

Conclusion


In India, any clause which restricts an employee from practicing any professional activity through a contract or an agreement is considered void under the law. The topic of whether a non-compete clause is harsh and extreme and whether it includes consultant is a debatable topic that will continue. However, whether such a clause imposed on an employee is harsh or not depends upon the circumstances of the situation, and the final call can be taken by the courts.
 

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