Non- Compete clauses in a partnership deed : Judicial Interpretation
Authored By : Anjali Chaudhary
This article talks about the non-compete clause and Indian Judiciary’s take on the same in recent years. Indian Legal framework has laws for almost everything as the constitution is a well-framed document but the laws that do not find their place in the constitution have their way through precedents. Similarly, this article talks about the non-complete clauses in a partnership deed and how they are facilitated by the precedents in their functioning.
Non-compete ; Judiciary ; Contracts ; Reasonability
Non-compete Clause is a well-known clause under contract law. This clause imposes a legal prohibition upon one party by the other, to avert such party from indulging into trade/commerce practices upon the termination of employment in hand, for a specific period. This clause is widely acclaimed abroad and especially in western societies. The idea behind this clause is to protect ideas, innovations, and intellectual property secrets of these businesses/enterprises. The clause does not find much validation in the Indian scenario when it comes to employer-employee contracts, even though Indian courts have approved for usage of this clause in some cases. The view, however, changes when this clause is applied to business partnerships, between partners. Judicial pronouncements are slightly more liberal in applying non-compete clauses in partnership deeds.
Valid but Subject to Reasonability :
Indian law, followed by Judicial pronouncements in various cases, is very clear and strict on the point that the non-compete clause is non-binding concerning employer-employee contracts and shall be null and void. Indian courts have time and time again stated that – “Restraint on trade is impermissible under section 27 of the Indian Contract Act”, and has called it as void and against public policy, stating that this clause has the potential to deprive an individual of the fundamental right to earn a living. Article 21 of the Indian Constitution guarantees to its citizen the right to livelihood and since it is a fundamental right it is held to be inviolable. Section 27 of the Contract Act explains that an agreement by which a person is restrained from exercising/practicing a lawful profession, trade or business, shall be, to that extent, void. The only exception provided in the Act is in the section itself, involving the sale of goodwill. This trend, however, has witnessed a shift towards leniency in favor of non-compete.
Non-compete clause restrains a person from practicing a profession for a certain period, and for that period that person has no means to earn a living for himself. Usually, such a period ranges from 2-5 months, and in some cases, it can even continue for 1-2 years. The prospect of restraining a person from earning a livelihood from a profession of his choice has been discussed, debated, and rejected in Indian courts for years. However, only in recent years, Indian courts accepted the applicability of the non-compete clause, subject to reasonability.
As far as Partnerships go, it is a usual yet fair practice for partners to sign a non-compete. The law in India that extensively covers partnerships in India is the Indian Partnership Act, 1932. The Act, however, does not talk about partnerships vis-a-vis non-compete, and thus, the Indian Judiciary relies on precedents regarding such matters. Partnerships require a non-compete clause between partners to ensure that partners do not branch out and start a separate business and compete with the original business. This element of reasonability is the reason that non-compete is also supported in various Judicial pronouncements by Indian courts.
Keeping in view the growth in cross border trade and the improved competitive scene in India, non-compete agreements are becoming highly popular, especially in the IT and Tech sector partnerships. A huge number of outsourcing and IT companies are including non-compete covenants within contracts with partners and employees, with terms ranging from several months to even a few years after the relationship is dissolved/terminated. Such companies do so with the claim that these restrictions are necessary to protect IP rights and other confidential information of such nature.
Though Section 27 of the Indian Contract Act states that all agreements that are in restraint of any lawful profession, trade, or business stand void ab initio, the current course as per various judicial pronouncements take us to a conclusion that reasonable restraint can be permitted to some limit and does not make the contract void ab initio. The reasonability of restraint depends upon several factors. While taking into consideration what courts have stated in their recent Judgement about non-compete, it can be safely concluded upon careful analysis of Section 27 of the Indian Contract Act that the section implies that, to be valid, an agreement in restraint of trade between such parties, in this case, the partners, must be reasonable and consistent with the interest of public/individual.
Even though Non-compete clauses are a widely accepted phenomenon abroad, regarding the sphere of Indian Judiciary, it does not find a similarly applicable scenario in India. Article 21 of the Indian Constitution acts as a shield to protect the livelihood of its people and since it is a fundamental right it is held as inviolable. This makes the enforcement of non-compete in India even more strenuous. It is also very pertinent to be taken into consideration that, the present circumstances – socio, legal, economical, have evolved and developed in India and abroad to a higher extent, and to stay in sync with this evolved climate, social engineering needs to be done. The recent course of Indian Judiciary tending to give a nod to non-compete clauses in line with the principle of reasonability is a commendable step in the right direction.
[i] Raunak Singh, Enforceability of Non-Complete clause under an Employment Agreement, published July-26-2016, < https://www.mondaq.com/india/contract-of-employment/614370/enforceability-of-non-compete-clause39-under-an-employment-agreement> [ii] Shivam Bhardwaj and Samyak Shibashish, Treatment of a Non-Complete clause M&A: Finally Clarifying the Indian Position, < http://docs.manupatra.in/newsline/articles/Upload/44719F24-8EC8-4FCE-9EF5-804ECCC1E597.pdf> [iii] Non Complete clauses under Indian Law of Contracts, published November-30-2012, < https://www.lexology.com/library/detail.aspx?g=31ca32d5-6c37-4f0e-a647-869666352b17> [iv] Validity of Non complete clauses, < https://indianlegalsolution.com/validity-of-non-compete-clauses-in-indian-law/>