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Validity Of Non Compete Agreement
Validity Of Non Compete Agreement
Majmudar & Co., International Lawyers, India 1
Mumbai Office – Tel: +91 22 6630-7272; Fax: 6630-7252; E-mail: mailbox@majmudarindia.com
Bangalore Office – Tel: +91 80 4147-0000; Fax: 4147-0010; E-mail: mailbox@majmudarindia.com
Integrated Network Offices – New Delhi, Chennai and Hyderabad
VALIDITY OF NON-COMPETE COVENANTS IN INDIA
By: Mr. Anoop Narayanan, Senior Associate, Majmudar & Co., International Lawyers, India
The law has, as a matter of public policy, always opposed any interference with
the freedom to contract and restraints on the liberty of an individual, unless
injurious to the interests of the state. This principle is not confined to restraints of
trade in the ordinary sense of the word “trade,” but includes restraints on the right
of being employed. (Niranjan Shankar Golikari v. Century Spg. and Mfg. Co.
Ltd., AIR 1967 SC 1098) An agreement in restraint of trade has been defined as
“one in which a party agrees with any other party to restrict his liberty in the future
to carry on trade with other persons who are not parties to the contract in such a
manner as he chooses.” (Petrofina (Great Britain) Ltd. v. Martin, (1966) Ch. 146
as cited in I, Pollock & Mulla, Indian Contract and Specific Relief Acts (12
th
ed.)
at p. 794)
Section 27 of the Indian Contract Act, 1872 (“IC Act”) stipulates that an
agreement, which restrains anyone from carrying on a lawful profession, trade or
business, is void to that extent. The reasoning behind this section is that
agreements of restraint are unfair, as they impose an undue restriction on the
personal freedom of a contracting party. However, as an exception, if a party sells
his goodwill to another he can agree with the buyer that he will not carry on a
similar business within the specified local limits.
As can be seen from the foregoing provision, Indian law is rigid and invalidates all
restraints, whether general or partial. Neither the test of reasonableness, nor that
of partial restraints applies to a case governed by section 27 of the IC Act, unless
the restraint falls within the exception of that section. Upon a literal construction,
section 27 of the IC Act invalidates all agreements that impose a total bar on the
exercise of a lawful business.
The Supreme Court of India has held that to the extent the IC Act deals with a
particular subject, importing principles of English law dehors the statutory
provisions cannot be permitted, unless the statute is such that it cannot be
understood without the aid of the English law. The question whether an
agreement is void under section 27 of the IC Act must be decided upon the
wording of that section alone. (Superintendence Co. of India Pvt. Ltd. v. Krishan
Murgai, AIR 1980 SC 1717)
In Superintendence Co. (Id.), the contract of employment placed the employee
under a post-service restraint preventing him from serving in any other competing
firm for two years within the local limits of his last posting. As such, the restraint
was operative for a period of two years after he left the company. The two
substantial questions involved were:
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