Non-Compete and Confidentiality Clauses

By Aditi Khanna, ILS Pune

Editor’s Note: This paper deals with the nature of non-compete and confidentiality clauses vis-a-vis the Indian Contract Act with the help of case law.”

Non-Compete Clauses

Non-Compete clause or covenants are used in contracts under which an employee agrees not to pursue a similar profession, trade or business in competition against the employer. The Indian Contract Act, 1972 provides a framework of rules and regulations regarding formation, performance, discharge and breach of contracts and deals with the legality of such covenants.

Section 27 of the Act says, “Every agreement by which anyone is restrained from exercising a lawful profession or trade or business of any kind, is to that extent void.” Exception being, one who sells goodwill of a business with a 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 business.

Although Section 27 states that all restraint to trade is void, off late, judgments permitting reasonable restraint (depending on various factors) aren’t considered to be void ab initio,  provided they are not against public policy.

Public policy is a vague term that cannot be defined but reasonable restraint depends on reasonable restriction with respect to time and space. It has been quoted[i] “As the time of restriction lengthens or the space of its operations grows, the weight of the onus to justify it grows too.” But in Fitch vs. Dews[ii] a lifetime restraint was granted. Restraint against competition is justifiable if its object is to prevent exploitation of trade secrets.

Courts in India refuse to make non compete clauses enforceable holding them to be in restraint of trade u/s 27 of the Indian Contract Act.

VFS Global Services Pvt. Ltd. vs. Mr Suprit Roy[iii]:

It has been held that the clause in question, called “the garden leave clause” whereby the company reserved the right to require the senior manager to remain away from work/employment for a period of 3 months after termination or resignation of his services. It was held to be in a restraint of trade and hit by Section 27 of the Indian Contract Act.

 Niranjan Shankar Golikari vs. Century Spinning & Mfg Co.[iv]

Negative covenants operative during the period of contract of employment when the employee is bound to serve the employer exclusively are generally not regarded as restraint of trade and do not fall under Section 27 of the Indian Contract Act, 1872. A negative covenant, one that the employee would not engage himself in a trade or business or would not get employment under any other employer for whom he/she would perform similar or substantially similar duties, is not a restraint of trade unless the contract is unconscionable or excessively harsh or unreasonable or one sided.

Article 21 of the Indian Constitution guarantees the right to livelihood. It cannot be violated, it being a fundamental right. Hence, enforcement of non-compete clauses is even more difficult in India.

Confidentiality Clauses

 Under such a clause, both parties acknowledge that the Confidential Information to be disclosed is of a unique and valuable character, and that the unauthorised disclosure of the Confidential Information would destroy or diminish the value of such information. The damages to disclosing party that would result from such disclosure of the Confidential Information would be impossible to calculate.

Remedies

Usually both parties agree that the Disclosing Party shall be entitled to injunctive relief preventing the dissemination of any Confidential Information in violation of the terms of the agreement. Such injunctive relief shall be in addition to any other remedies available. Disclosing Party shall be entitled to recover its costs and fees, including reasonable attorneys’ fees, incurred in obtaining any such relief. Further, in the event of litigation relating to this Agreement, the prevailing party shall be entitled to recover its reasonable attorney’s fees and expenses. The nature of confidential information is such that in case it is known to those who aren’t meant to know of it, its value diminishes drastically. A party seeking injunction must prove that apart from a serious issue to be tried, severe harm would be done to the party seeking injunction in case it isn’t granted and that there is high prudence in granting injunction so sought. Permanent injunction may further be sought. The burden of proving that the covenant is in restraint of trade lies on the covenantee. Whichever party claims that a contract is such that it raises prices to an unreasonable limit shall bear the burden of proving it too.

Functions

The Confidentiality clause serves many purposes. Some of the functions are:

  • Protecting the sensitive, technical, commercial information from disclosure to others.
  • Preventing forfeiture of valuable patents rights.
  • Defining what information can or cannot be disclosed.
  • Limiting each party’s use of information that is confidential.

 There are a plethora of judgments that bring out the essence of these points:

 Niranjan Shankar Golikari vs. Century Spinning & Mfg Co[v]

Clause 9 provided that during the continuance of his employment as well as thereafter the employee shall keep confidential and prevent divulgence of any and all information, instruments, documents, etc., of the company that might come to his knowledge. The Court held, “The next question is whether the injunction in the terms in which it is framed should have been granted. There is no doubt that the Courts have a wide discretion to enforce by injunction a negative covenant. Both the Trial Court and the High Court have concurrently found that the apprehension of the respondent company that information regarding the special processes and the special machinery imparted to and acquired by the appellant during the period of training and thereafter might be divulged was justified; that the information and knowledge disclosed to him during this period was different from the general knowledge and experience that he might have gained while in the service of the respondent company and that it was against his disclosing the former to the rival company which required protection.”

Bombay Dyeing vs. Mehar Karan Singh[vi]

The confidentiality clause held thus:

“Mr. Singh shall not, except in the proper course of his duties during the continuance of his employment with the Company or any time thereafter divulge or disclose to any persons whomsoever or make use whatsoever for his own purpose or for any purpose of any information knowledge obtained by him during his employment as to the business and/or affairs of the Company and/or the know-how, technology, methods, machines, compositions, knowledge, information and other data, trade secrets, formulate and process of manufacturing of various products by the Company and/or list of companies customers and suppliers (and likewise in relation to the Company’s associated companies) all of which information is or may be confidential with the exception of any information generally made available to the public or make or take copies of the manuals, tracings, blueprints, drawing books, papers containing such confidential information without authority taken prior to making or taking copies, such copies may contain the whole information substantially similar information from the original manual, tracings, drawings, blueprints, papers, books etc. Mr. Singh shall during the continuance of his employment hereunder, also use his best endeavours to prevent any person publishing disclosing such confidential information provided however that any such divulgence or disclosures by Mr. Singh to officers and employees of the Company solely for the purpose of business of the Company shall not be deemed to be a contravention of his clause.

All notes, books, papers memoranda and other documents or any trade secrets of confidential information concerning the business of the Company (and the associated companies) which shall be acquired, received or made by Mr. Singh during the course of his employment hereunder and/or incidental to his employment, shall be the property of the and shall be surrendered by Mr. Singh to someone duly authorized on their behalf at the termination of his employment or at the request of the Board (or any other designated persons) at any time during the course of his employment.”

It was held by the Bombay High Court, “The Defendant shall not, in any manner, divulge or hand over the confidential information contained in the manual of the software attached to the E-mail of the Defendant dated 15.12.2007 as also the Memorandum of Understanding attached to the Defendant’s E-mail dated 21.2.2008 relating to the Goa property of the Plaintiff to any person or Company or any of the Plaintiff’s competitors or utilise the same for the Defendant’s own use in any manner whatsoever.”

VFS Gobal Services Pvt Ltd vs. Mr. Suprit Roy[vii]:

Here, the employer and employee had an agreement containing a “Garden Leave Clause”. Clause 3 of which, read, “The Employee shall undertake that he will not make use of disseminate or in any way disclose any confidential information of the company whether during the period of employment or after, to any person, firm or business except to the extent of necessary negotiation, discussion and consultation with personnel or authorized representatives of the Company and for any purpose that the Company may hereinafter authorize in writing. The Employee shall treat all confidential information of the company with the same degree and care as it accords to its own confidential information and also represent that he will exercise reasonable care to protect the confidential information provided by the company.” It has been held that, “A clause prohibiting an employee from disclosing commercial or trade secrets is not in restraint of trade. The effect of such a clause is not to restrain the employee from exercising a lawful profession, trade or business within the meaning of Section 27 of the Contract Act.” The Trial Court did grant and injunction and restrained Mr. Suprit Roy from divulging any information to be protected or secrets.

Factors determining whether confidential information is a trade secret or not:

  • Status of employee and nature of work
  • Nature of work itself
  • Whether employer impressed confidentiality of information on employee
  • Whether confidential information can be separated from other information that employee was free to use

Edited by Kudrat Agrawal 

[i] Mulla Indian Contract and Specific Relief Acts Thirteenth Edition Volume I.

[ii] [1921] All ER Rep 13.

[iii] 2008 (2) BomCR 446.

[iv] [1967] 2 SCR 367.

[v] Id.

[vi] 2010 (112) BomLR 3759.

[vii] 2008 (2) BomCR 446.

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