Introduction: Non-compete clauses are pivotal in employment and business sale agreements, aiming to protect proprietary information. However, in India, their enforceability is restricted under Section 27 of the Indian Contract Act, 1872. This provision generally renders post-employment non-compete clauses void due to their potential infringement on individuals’ rights to earn a livelihood. Exceptions exist, notably in the sale of business goodwill, where reasonable restrictions may apply.
So to understand first we will know what is void and voidable contract.
Void contract
- A void contract is a contract that is not legally enforceable from the moment it is created. It is null and without legal effect. This means that no party can enforce the contract or claim damages based on it.
- Example of void contracts are Illegal drug transactions, Contracts with mentally unsound individuals and Violations of public policy.
- Reason for contract to turn into Void contract are Change of laws that makes the contract invalid, Illegal purposes that is a contract formed to facilitate drug trafficking, money laundering, or any other criminal activity is void ab initio.
Voidable contract
- A voidable contract is a valid and enforceable contract but may be legally declared void at the option of one of the parties involved. Until it is voided, the contract remains valid and enforceable.
- Example of voidable contract can be contracts that were made when one party had undue influence on the other may be voidable. An illustration would be if a caretaker put pressure on an old person to transfer their assets to them.
- Reason for a contract to be voidable are the person entering in the contract is a minor, the consent of parties were taken under influence it was not free consent, the parties involved in the contract misinterpreted the terms and conditions of the contract.
Now weather the non- compete clause will be void or voidable , So first what is a non-compete clause :
A non-compete clause is a provision in an employment contract or sale of business agreement that restricts an individual from engaging in a similar profession or trade in competition against another party. The primary purpose of a non-compete clause is to prevent former employees or business sellers from exploiting confidential information, trade secrets, or proprietary knowledge to the detriment of the former employer or buyer.
Examples of Non-Compete Clauses
1. Employment Agreement: “Employee agrees that for a period of one year after termination of employment, Employee will not directly or indirectly engage in any business that competes with Employer’s business within a 50-mile radius of Employer’s office.”
2. Sale of Business Agreement: “Seller agrees that for a period of five years following the sale of the business, Seller will not engage in any business that directly competes with Buyer’s business within the state of California.”
And according to section 27 of the Indian Contract Act, 1872, non-compete clauses are generally considered void and unenforceable in India. This is because they are seen as restraints on trade and can infringe on a person’s fundamental right to earn a living.
Relevant Case Laws
- Niranjan Shankar Golikari vs The Century Spinning and Mfg. Co. Ltd. (1967): The Supreme Court held that restraints during the period of employment are enforceable but reiterated that post-employment restraints are generally void.
- Superintendence Company of India (P) Ltd. vs. Krishan Murgai (1980): The Supreme Court reaffirmed the principle that post-termination non-compete clauses are void and unenforceable under Section 27 of the Indian Contract Act.
But there is an exception in the case of the sale of a business’s goodwill. The seller of the goodwill can agree with the buyer to refrain from carrying on a similar business within specified local limits, provided the restrictions are reasonable.
In conclusion, non-compete clauses in India are predominantly void under Section 27 of the Indian Contract Act, barring specific exceptions like those applicable to the sale of business goodwill. Courts uphold this stance to balance trade freedom and individual rights, emphasizing the need for careful drafting and consideration of local legal principles when including such clauses in contracts.
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