Monday, October 7, 2013

Negative clauses restricting employees to join competitors is not valid

Now-a-days, it is becoming a popular practice by established companies to insert a negative covenant clause in their service agreement. Such clauses generally mean to restrain the outgoing employees of a company for a certain period from joining other company or practice similar trade themselves or jointly with others.
The Indian law does not recognize such restrictive agreements. As per Section 27 of the Indian Contract Act, 1872, such contracts to that extent are void and against public policy. No employee can be prevented from pursuing similar work if he/she quits the present one, merely on the pretext that it will be detrimental to the previous employer.

Gujarat High Court in this context, in the case of Sandhya Organic Chemicals v. United Phosphorous held that, an employee cannot be prevented from utilizing the knowledge and experience that he has gained while being in employment. In Ambiance Indai pvt Ltd vs Naveen Jain, an agreement between the parties prohibiting an employee for two years from taking employment with present, past or prospective customer of plaintiff was held to be void and contrary to section 27 of the Indian Contract Act.  It was held that such a stipulation would prima facie be against public policy of India and arm-twisting tactic adopted by employer against young man looking for a job.

The Supreme Court in Superintendence Co. of India v. KrishunMurgai. AIR 1980 SC 1717 has ruled that under Section 27 of the Contract Act. a service covenant extended beyond the termination of the service is void.

Though such post termination restraint agreements are void, confidentiality and non-disclosure agreements are valid and effective when it is exercised during the time when the employee is in service.