Void Employment Agreements by Outsourcing Companies in India
Almost every contract of employment in India contains a non-objective privacy and confidentiality clause, and is widely recognized as one of the important clauses in the employment contract. However in India it is generally restricted to the period during the subsistence of services, and any restriction beyond that has been recognized as unreasonable restriction by Indian Courts. This aspect of contract employment is governed and regulated by Section 27 of the Indian Contract Act, 1872 which provides that every agreement by which one is restrained from exercising a lawful profession, trade or business of any kind is to that extent void.
According to the section 27, relates to the agreement in restraint of trade, void, every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. Exception to this section includes, saving of agreement not to carry on business of which good will is sold - One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein, provided that such limits appear to the court reasonable, regard being had to the nature of the business.
After four years of working for a leading software company as a senior executive (marketing), Mr Sharma believes he knows everything about the market. He’s also sure about what it would take to rake in good money if he could start his own BPO. He has saved the ‘‘seed’’ money he needs to get started. And customers are eager to hire him. But there is a problem troubling Mr Sharma as he had once signed a contract with his former employer that now forbids him from working in a competing business for a period of 3 years from cessation of his employment. The case referred to above is perhaps no different from that of many people encumbered by a non-compete agreement after leaving a job.
Actually, most companies don’t have any difficulty with getting their employees to sign these agreements in an effort to reduce the risk of economic harm when the employment relationship ends and an employee goes to work for a competitor
In a recent case, a Division Bench of the Madras High Court (Coram K Govindarajan and N Kannadasan, JJ) in R Babu and Anr Vs TTK LIG Ltd, formerly London Rubber Co (India) Ltd., vacated the injunction order issued by the learned single judge whereby an employee after tendering his resignation had joined another company despite signing an agreement with his former employer that upon cessation of his employment, he would not seek any employment in any establishment elsewhere of similar nature for a period of five years. The Division Bench held that such negative covenant restraining the employee from taking up employment with the third party after he ceases to be an employee is violative under Section 27 of the Indian Contract Act, 1872 and thus will be violative of public policy.
As per Section 27 of the Indian Contract Act, 1872- Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.
The courts do not generally and historically, favour non-compete agreements/clauses because they are viewed as restraints on trade. In a landmark case, (Pepsi Foods Ltd and Others Vs Bharat Coca-cola Holdings Pvt Ltd. & others), which came up before the Delhi High Court (Coram Dalveer Bhandari,J), the petitioner had its employees sign an agreement that they would not take up any employment with its competitor within a year of leaving employment.
The High Court declined to grant the injunction and held: ‘‘Admittedly in the service and employment contracts of the plaintiffs, there is a negative covenant clause, restraining an employee from engaging or undertaking employment for 12 months after he has left the plaintiffs’ service. It is well settled that such post termination restraint, under Indian Law, is in violation of Section 27 of the Contract Act. Such contracts are unenforceable, void and against the public policy. What is prohibited by law cannot be permitted by Court’s injunction.’’
References: 1.http://www.asialaw.com/default.asp?Page=20&PUB=68&ISS0=12855&SID=477518 2.http://www.vakilno1.com/bareacts/indiancontractact/s27.html 3.http://www.sjalanco.com/content/11.03.06FE.pdf 4.http://www.taxmann.net/Commerciallaws/general_commercial_law/div2.htm#s27
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