28NOV 2020

Is Non-Compete Boilerplate Losing Steam?By Pratham Mohanty, SkillxPro

In the age of growing globalisation, trade and commerce, strict interpretation of non-compete boilerplate clauses has been widely questioned. At the same time, while determining the question of applicability of non-compete, it’s imperative to protect the rights of the parties without jeopardising fundamental rights. Let’s take a look at the series of judgements pronounced over the period of time in the English Courts and in India to understand the progress and current legal scenario.

The principle of freedom of trade is a vital element in running of a successful economy. It has been widely recognized that, business or people of trade are best suited to decide on the terms of their engagement, without significant state intervention. However, the principles of public policy and fundamental principles of a State imposes certain duties on the it to ensure that such party autonomy doesn’t violate the personal liberty enshrined to its citizen.

In furtherance of such public policy, the Constitution of India, under Article 19(1)(g) provides a fundamental right to an individual to practice any profession, vocation or trade of his own desire. Part XIII of the Constitution through Article 301 to Article 307, empowers the State to pass such laws so as to ensure that not only the State, but also the Individuals cannot barter such freedom of trade, through any agreements. Following this, the Section 27 of the Indian Contracts Act [“Sec. 27”] lays that any agreement in restraint of trade, lawful profession or business of any kind shall be void, and the only exception to it being sale of goodwill of a business.

While the Courts of United Kingdom has, over the years, relaxed the doctrine and allowed partial restraint by applying the test of reasonableness, the same is not the case in India. The Indian jurisprudence on the doctrine is well settled and strict in its sense. The Hon’ble Supreme Court, through a series of landmark judgements like Niranjan Shankar Golikari V/s Century Spinning and Manufacturing, Superintendence Co. Vs. Krishna Murgai and more recently in Percept D' Mark Vs. Zaheer Khan, has upheld the validity of Sec. 27 with a narrow interpretation.

The only relaxation recognized by the Indian jurisprudential courts to this doctrine are sale of goodwill, Partnership agreements and restraint during employment. Section 11 of The Partnership Act, 1932, allows the firm to restrict its partners from carrying on any other business than that of the firm, during the continuance of such partnership. Further, Section 36 The Partnership Act, 1932 allows to restraint an outgoing partner from carrying on a similar business within the specified period and specified local limits, provided that such terms are reasonable in the eyes of law. On similar lines, the Supreme Court in the case of Niranjan Shankar Golikar (supra) has upheld the validity of restraints during employments, provided the terms are sound and reasonable.

However, in the age of growing globalisation, trade and commerce, these strict interpretation of the doctrine has been widely questioned. Noting the same, the Law Commission of India in its 199th Report has also suggested that partial restraint and the test of reasonableness, in lines with the Common Law jurisprudence should be allowed, to flourish trade and business.

This reasonable relaxation, however not been widely followed, but has been upheld to a certain extent by various courts, in the recent past. In the recent case of Ozone Spa Pvt. Ltd. v. Pure Fitness & Ors, 222 (2015) DLT 372, the Delhi High Court upheld that a negative covenant restraining the defendants from establishing, running or setting up any competing business in any area within a range of four kilometres from the premises of the plaintiff is valid, as invalidating the covenant would cause irreparable loss to the company, trade or business. On similar lines, the same court in the case of Kumar Apurva v. Valuefirst Digital Media Pvt. Ltd ARB.A.2/2015, restrained the appellant from carrying any activity which is competitive to that of the company and also from soliciting, interfering with, disturbing or attempting to disturb the relationship between the company or subsidiary and third party, including any customer or supplier of the company or subsidiary.

Therefore, in the age of evolving business dimensions, the laws should take into account the party liberty, trade secrets, anti-competitive and pro-competitive elements while deciding the validity of such covenants. A blanket invalidity of such restrictive clauses might be against the principles of natural justice. Thus, an equilibrium must be maintained between public policy and anti-competitive practices, considering the specific industry at hand, to decide the validity of such covenants.

We trust you will find this an interesting read. For any queries or comments on this update, please feel free to contact us at [email protected]

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