INTRODUCTION
An employment contract, like any other valid contract, is founded on an offer, acceptance, consideration, competent parties, lawful object, and free consent. An employment contract is a bilateral agreement for the exchange of services and monetary compensation for a pre-determined period of time.
In today’s digital era where everything and anything is available on a click, it has become a tedious job for businesses to restrict the flow of sensitive information, which if falls in the rival hands, can cost huge amount of losses and irreparable damage to the businesses. In the backdrop of the same, employment contracts enforce restrictive terms and conditions and outlines other important details about the employment relationship between the parties.
The main objective behind the employment contracts is not only to enumerate the responsibilities and duties of the parties but also to protect the trade secrets, confidential information, proprietary knowledge and human resources.
Restrictive covenants essentially restrict and limit an employee’s leverage to trade, solicit, or engage with workers, customers, or clients of their previous firm, as well as the manner in which he or she is permitted to use the information gained in the course of its employment.
Herein below is discussed the role played by restrictive covenants and the disputes arising out of them.
DISPUTES PERTAINING TO EMPLOYMENT CONTRACTS IN INDIA
Disputes in the employment contracts are usually related to the following stages:
1. Talent acquisition stage;
2. During employment;
3. Termination stage;
4. Post-termination.
In contemporary transactions, businesses attempting to protect their trade secrets and confidential information manifest themselves in the use of restrictive agreements between employers and employees, which place limitations and restrictions on the latter pertaining to the manner in which the employees are allowed to use and disseminate the information they become privy to, solely as a result of being in the business.
When compared to employees’ constitutional and statutory rights to pursue occupations of their choice and earn a living by using the full range of knowledge and skill at their disposal, the diverging interests sought to be advanced by employers for the protection of confidential information in order to maintain the competitive edge.
NON-COMPETE CLAUSE
Given modern globalisation, where the success of any corporate body is heavily reliant on sensitive processes, technological superiority, and trade secrets, employers are eager to take any and all precautionary steps to secure such confidential information from any kind of exposure or divulgence.
As a result of these concerns, the “Non-Compete Clause” has become widely acceptable in various employment contracts and other forms of agreements for prohibiting employees and/or former employees from pursuing similar professions or trades with the employer’s competitor after the cessation of employment.
Employers utilise such contractual stipulations as a means to impose any one or more of the following restrictions on employees:
1. Restriction on founding a competitive business;
2. Restriction on dealing with firms or companies in the relevant market;
3. Restriction on working in the relevant geographical market;
4. Restriction on soliciting the employer’s clients;
5. Restriction, and in most circumstances, outright restriction, on disclosing trade secrets or confidential information;
Apart from the aforementioned limitations, a non-compete clause may also define the time period after the termination of the employment contract for which these restrictions may be effective.
However, Section 27 of the Indian Contract Act, 1872 (“Contract Act“), states that any agreement that restricts someone from engaging in a lawful profession, trade, or business of any type is void to that extent. The Indian Courts have agreed and interpreted the legislation in its true spirits and have taken a consistent view regarding such clauses as more of an idea of equity than a contract.
The Supreme Court in Superintendence Company of India (P) Ltd. vs Sh. Krishan Murgai, 1980 SCR (3)1278, raised the question that whether a post-service restrictive covenant would fall within the ambit of Section 27 of the Contract Act. It was held that a contract, which had for its object a restraint of trade, was prima facie void.
In Percept D’Mark (India) Pvt. Ltd. vs Zaheer Khan and Anr., AIR 2006 SC 3426, the Supreme Court observed that:
“Under Section 27 of the Contract Act (a) a restrictive covenant extending beyond the term of the contract is void and not enforceable. (b) The doctrine of restraint of trade does not apply during the continuance of the contract for employment and it applied only when the contract comes to an end. (c) As held by this Court in Gujarat Bottling v. Coca Cola (supra), this doctrine is not confined only to contracts of employment, but is also applicable to all other contracts.”
Based on the foregoing facts, it may be deduced that when dealing with disputes relating to such non-compete clauses in employment agreements, Indian courts have distinguished between the pre-termination period of the employment and the post-termination period of the employment.
While the Courts have been tolerant of the use of non-compete clauses, they have also ensured that such clauses do not have a severe impact after the termination of employment and would fall within the ambit of section 27 of the Contract Act.
Subsequently, the Supreme Court also took a liberal approach for the interpretation of Section 27 of the Contract Act and clarified that not all non-compete clauses that take effect after the termination of an employment agreement are prima facie unlawful, and the same has been observed in Niranjan Shankar Golikari v. The Century Spinning and Mfg. Co. Ltd., 1967 AIR 1098.
The Supreme Court held that:
“a negative covenant that the employee would not engage himself in a trade or business or would not get himself employed by any other master for whom he would perform similar or substantially similar duties is not therefore a restraint of trade unless the contract as aforesaid is unconscionable or excessively harsh or unreasonable or one-sided”
As a result, in order to be a legally enforceable Employment Contract, the restrictions imposed by the employer must be reasonable and not unnecessarily harsh on the employees. It may be appropriate to state that the limitations on “non-compete” and such similar clauses may be considered as an exception to this rule. Although the non-compete clause or agreement appears to be negative in nature, it is legal and enforceable.
NON-SOLICITATION CLAUSE
Non-solicitation clause is intended to prohibit a company’s employee from soliciting other employees or customers of the company during and after termination of employment. Companies state that such restrictions are required to preserve their Intellectual Property (IP) and confidential information.
Non-solicit covenants, like non-compete restrictions, have been the subject of Court scrutiny in India. Typically, Courts have observed that, while restrictive covenants for non-solicitation are enforceable in India throughout the duration of employment, such requirements post-termination may be enforced in limited circumstances, depending on the facts and circumstances of each case.
In Desiccant Rotors International Pvt. Ltd. v. Bappaditya Sarkar & Anr., CS (OS) No. 337/2008, the Delhi High Court granted injunction against the manager, the Respondent, prohibiting him from soliciting Desiccant’s, i.e., the Appellant’s customers and suppliers to stand in effect. It is pertinent to note that on the contrary, the Delhi High Court held that a marketing manager could not be deemed to possess confidential information and that his written declaration to that effect in his employment agreement was also meaningless and thus the Delhi High Court rejected the Appellant’s claim to enforce the confidentiality obligations on the manager.
Further, in FL Smidth Pvt. Ltd. v. M/s. Secan Invescast (India) Pvt.Ltd., 2013 (1) CTC 886, the Madras High Court held that merely approaching customers of a previous employer does not amount to solicitation until orders have been placed by such customers based on such approach. The Madras High Court laid down the standard to establish non-solicitation:
“….solicitation is essentially a question of fact. The appellants should prove that the respondents approached their erstwhile customers and only on account of such solicitation, customers placed orders with the respondents. Mere production of quotation would not serve the purpose. It is not that the appellant is left without any remedy. In case the Court ultimately holds that the appellant has got a case on merits, they can be compensated by awarding damages. The supplies made by the respondent to the erstwhile customers of the appellant would be borne out by records. There would be no difficulty to the appellant to prove that in spite of entering into a non-disclosure agreement, respondent has solicited customers and pursuant to such solicitation they have actually supplied castings. When there is such an alternative remedy, question of issuing a prohibitory injunction does not arise.”
According to the abovementioned judgement, such clauses shall be construed as legal if appropriate restrictions are imposed on former employees, such as distance, time limit (fair time frame), protection and non-use of trade secrets and goodwill.
CONFIDENTIALITY CLAUSE
Usually, a breach of confidentiality restrictions in an employment contract entitles the employer to terminate the employee’s services. Several parts of the Indian Penal Code, 1860 (IPC), and the Information Technology Act, 2000 (IT Act), are also invoked in cases of breach of confidentiality and disclosure rules, which provide for criminal prosecution and imprisonment, or a fine, or both.
Indian Courts also recognise that confidentiality duties can exist beyond the period of employment and can prevent an ex-employee from exploiting sensitive information relating to his or her previous employer, even if the individual is not barred from joining a rival. An employer may take criminal action against an employee in addition to requesting an injunction to prevent an employee from using sensitive information after termination or demanding damages for breach.
In Hi-Tech Systems and Services Ltd. v. Suprabhat Ray, AIR 2015 Cal 261 the Supreme Court restrained the Respondents from acting as sales agent of other companies, saying that they had acted in breach and they were in process of utilizing trade secrets and confidential information.
Further, in Diljeet Titus v. Mr. Alfred A. Adebare and Others, 2006 (32) PTC 609 (Del), the Defendant, an advocate, was working at the Plaintiff’s law firm. On termination of employment, the Defendant divulged the important confidential business data, such as client lists and proprietary drafts, belonging to the Plaintiff.
The Defendant contended that, he was the owner of the copyright work as it was done by him during his/her employment since the relation between parties was not that of an employer and employee and was a contract of service. The Delhi High Court rejected this contention and ruled that the Plaintiff had rights on the material taken away by the Defendant.
Accordingly, the Delhi High Court restrained the Defendant from using the information which has been taken away illegally. However, it should be noted that the Delhi High Court did not prohibit the Defendant from carrying on a similar service. The Defendant was only restrained from using the information that he took, as such restriction was necessary to protect the interests of the Plaintiff.
In addition to prohibiting employees from utilising such personal information after termination by seeking an injunction or claiming damages, criminal legislation also comes to the aid of employers, allowing them to take criminal action against the employees in addition to seeking civil remedies.
Because of the increasing reliance on technology, remedies have been provided under the IT Act to deal with hacking (Section 66); causing damage to computer system (Section 43); tampering with computer source document (Section 65); punishment for violation of privacy policy (Section 66E), and so on. These remedies may also be considered by the employer as remedies against the employee in case of breach of confidentiality and disclosure provisions.
In Abhinav Gupta v. State of Haryana, 2008 CriLJ 4356, the accused, an ex-employee of a company had resigned and joined another company after final clearance from the previous company. During his course of exit interview, he had continuously maintained that he would not be joining any company which was in direct competition with the company. However, two weeks later, it came to the knowledge of the previous company that he had joined a company which was its direct competitor.
Later, it was also discovered that the accused had transferred or downloaded various confidential information of the previous company into his personal e-mail id. Screenshots of the mail id of the accused was produced by the previous company which showed that such information was indeed passed on to the new company which was joined by the Accused.
Thus, the High Court of Punjab and Haryana observed that such act amounted to hacking under Section 66 of the IT Act; cheating and dishonestly inducing of property under Section 420 of IPC and criminal breach of trust under Section 406 of IPC.
The varied interpretation of the judiciary over the non-compete, non-solicitation or confidentiality clauses has resulted in the development and taking recourse to a concept called ‘Garden Leave’ in the corporate industry.
Having its genesis in England, Garden Leave is a concept under which the employees are paid their full salary during the period in which they are restrained from competing.
GARDEN LEAVE CLAUSE
A Garden Leave clause requires an employee to submit a long-term notice to the employer in advance of his resignation from employment, in exchange for the business paying him full payment during this period when he is not allowed to compete.
According to this clause, the notice required for the employee to terminate his employment might be extended to one year, with the employer having the ability to order him not to attend work for whatever amount of time following the serving of the aforementioned notice.
Though this concept is widely utilised by businesses across the globe, as a substitute for a non-compete provision, it lacks legal support in Indian courts.
The Bombay High Court in VFS Global Services Private Limited v. Mr Suprit Roy, 2008 (2) BomCR 446, has held as under:
“…to obstruct an employee who has left service from obtaining gainful employment elsewhere is not fair or proper“
Furthermore, the Bombay High Court stated that the said Garden Leave clause appears to be in restraint of trade and is thus prohibited by Section 27 of the Contract Act.
AMLEGALS REMARKS
In an era of fierce competition and high employee turnover, employers typically try to protect their trade secrets. In order to compete in the market, the employers require their employees to sign contracts/agreements that prohibit them from disclosing the job profile in the future, competing with the same establishment, or working with the competitors. These agreements entered into between the employer and the employee should not impede the employee’s advancement while also protecting the employer’s interests.
The need of incorporating restrictive covenants into all types of contracts has grown over time, particularly in light of the growing tendency of employer-employee disputes. Restrictive covenants must be evaluated on a case-to-case basis.
While the judgements establish broad principles, whether a condition is violative or not is an issue of fact that only a Court of Law may consider and reach an appropriate conclusion depending on facts and circumstances.
However, it is also crucial to remember that, due to the unequal bargaining power between organisations and the majority of their rank employees, terms that are overly aggressive or one-sided, risk being overturned by Courts.
As a result, in addition to the fact that employment in India is extensively regulated, it is critical to thoroughly analyse the contents of an employment contract before signing it and, if in doubt, one should obtain consultation and advice from a legal counsel.
-Team AMLEGALS assisted by Mr. Shrenik Dave (Intern)
For any queries or feedback, feel free to get in touch with chaitali.sadayet@amlegals.com or mridusha.guha@amlegals.com.
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