Effect of Clauses Imposing Restrictions on Employees During and After Employment

This article is intended to give the readers an insight on the provisions of law on certain restrictions which may have been imposed on a person in India during or after his or her employment with an organisation.

In this regard, we are specifically referring to several instances where we may have come across a clause in our employment contracts which imposes an obligation on the employee to not compete with the activities of the company in which he or she is employed with, during and after his or her employment. Another commonly found restraint is the obligation to keep proprietary information of the employer confidential during and after his employment.

Section 27 of the Indian Contract Act, 1872 states that “… every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind is void in law…”. The only exception to this provision is “…an agreement not to carry on business of which goodwill is sold”. A reading of this section makes it amply clear that any clause in any agreement which restrains a person from exercising his lawful profession, trade or business is void in law.

Having stated the provisions of law, we would now proceed to examine the clauses which are in restraint of trade and which are commonly found in employment contracts.

Non-Compete Clauses

This clause normally imposes a restriction on the employee to not take employment with another employer during the term of his employment and further, not to compete with the business of the organisation in which he is employed with during the course of his employment and thereafter. What needs to be considered in such cases is to what extent such a clause is void in law. The India courts look at the restrictions mentioned by us above from two different perspectives – firstly, the effect of restrictions during employment and secondly, the effect of these restrictions after the termination of the employment.

Normally, negative covenants operating during the period of the contract of employment which require an employee to serve his employer exclusively during the term of his employment are not considered void in law. Similarly, an obligation on the employee not to carry on competitive activities during his employment is not considered void in law as long as such restriction is reasonable in law.

However, where a restraint is put on an employee to not be employed with a competitor after he leaves the services of the company or to not start a business which may compete with the business of the employer will be void in law, being in direct violation of the provision of law mentioned above.

The above being the legal position, the Hon’ble Supreme Court of India inNiranjan Shankar Golikari v. Century Spinning And Manufacturing Company Limited [AIR 1967 SC 1098] has held that where a contract contains a negative covenant restraining an employee from taking up employment with a competitor for a certain fixed term of his employment and the employee leaves the company before such a term expired then the negative covenant can be enforced to the extent of the unexpired part of the terms of service which would be essential for the fulfillment of a contract. In other words, if an employee has agreed to be in the services of a company for a certain period of time and he has also agreed not to work with a competitor during this period, then if such an employee leaves the services of the company on his own accord before the expiry of such term then the negative covenant would be operative against him for the unexpired period of a fixed term agreed to be served by him.

Confidentiality Clauses

Contrary to post-termination non-compete clauses, a clause restraining an employee from disclosing confidential or proprietary information of the company after he leaves the services of the company and which does not restrain the employee from practicing his trade, business or profession is valid and enforceable in law. In 2009, the Government of India has introduced a provision for protection of confidential and proprietary information in The Information Technology Act, 2000 (through an amendment to this Act) whereby any person having access to confidential information under a contract who intentionally and knowingly discloses such information to a third party which causes wrongful loss or gain loss to the party disclosing such information would be punished with imprisonment or a fine or both.

In addition to the above, a person violating the obligations imposed upon him under a contract to keep information disclosed under a contract may also be sued for:

  • Compensation under Section 73 of the Indian Contract Act, 1872;
  • Criminal breach of trust under Section 405 of the Indian Penal code.

However, it is important to note that the questions of whether or not the necessary circumstances required to be satisfied to grant relief have been fulfilled in a case and the extent of relief or compensation allowed in each case will be determined by the Indian courts on a case-to-case basis.

To conclude, one can understand that whilst most restrictions imposed on an employee during his employment are valid and enforceable in law, any restrictions imposed on an employee after the termination of his employment and which in any manner restricts the employee from practicing his trade, business or profession is not valid and cannot be enforced under Indian laws.

Disclaimer: As already stated above, this article is aimed at bringing to the notice of the readers the law on post-termination employment restrictions in India. The above information / suggestions / guidelines / tips are generic in nature and should not be acted upon unless a professionally qualified legal consultant has examined the requirements of the relationship and has advised that some of the above terms may be made applicable to each case.

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