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Validity Of Non Compete Agreement
Majmudar & Co., International Lawyers, India 2
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
(a) whether a post-service covenant in restraint of trade between the parties
was void under section 27 of the IC Act; and
(b) whether the said restrictive covenant, assuming it to be valid, was on its
terms enforceable at the instance of the employer against the employee
The court concluded that the negative covenant during the term of the contract was
not in restraint of trade, and that the doctrine of restraint of trade could never apply
during the continuance of the contract. However, a restrictive covenant extending
beyond the term of service was void. The court referred to Madhub Chunder v.
Rajcoomar Doss, (1874) 14 Beng LR 76 at pp. 85-86, where it had been held that
whether the restraint was general or partial, unqualified or qualified, if it was in
the nature of a restraint of trade, it was void.
While deciding Superintendence Co.’s (Id.), the court observed that employee
covenants in agreements should be carefully scrutinized, because there was an
inequality of bargaining power between the parties; and, more often than not, no
bargaining power, especially in cases where the employee was presented with a
standard form of contract that he had to accept or reject.
Pursuant to the foregoing decisions, the Bombay High Court held that a restraint
operating after termination of the contract to secure freedom from competition
from a person who no longer worked within the contract, was void. The court
refused to enforce the negative covenant and held that, even if such a covenant
was valid under German law, it could not be enforced in India. (Taprogge
Gesellschaft MBH v. IAEC India Ltd., AIR 1988 Bom 157)
In another case filed by a former employer seeking to enforce an agreement to
restrain the employee from adopting and using any of the processes invented by
the former employer in a subsequent employment, the court held that the
agreement was void, because an employee could not be restrained from using
knowledge which he gained during the course of his previous employment,
foreover. (M/s. Sociedade de Fomento Indl. Ltd. v. Ravindranath Subraya Kamath,
AIR 1995 Bom 158)
On the basis of all the aforesaid judgments, the Supreme Court of India held that,
since the underlying principle governing all contracts in restraint of trade was the
same, the principle not only applied to contracts of employment but to other
contracts as well. The court, however, ruled that a negative stipulation contained
in a franchise agreement restraining the franchisee from dealing with competing
goods was to facilitate the distribution of the goods of the franchiser and could not
be regarded as a restraint of a right to trade. (Gujarat Bottling Company Ltd. v.
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Validity Of Non Compete Agreement