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.

Madhu.T.K

12 comments:

  1. Sir, tell me whether this provision in the contract makes this contract void or not.

    - I shall not, directly or indirectly, engage in or carry on either on my own accord or otherwise or serve in any capacity with any person, firm, or company, carrying on business in India or abroad which is similar or substantially similar to the business carried on by L&T for the unexpired period of the said period of 2 years.


    The period they are talking about here is the contract period of 2 years which if breached amounts to payment of 2 lakh rupees to L&T.

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  2. Certainly yes. There can be an undertaking from an employee while he is your employee but it cannot be extended beyond the termination of employment.

    Madhu.T.K

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  3. Dear Sir,
    What is legal standing on the concept of notice period that employee has to serve prior to his release from the organization? Can an employee challenge this?

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  4. Workers category employees can challenge it provided the Standing Orders of the company is silent about notice period or notice pay. At the same time, supervisory and managerial cadre employees are bound to follow the terms of appointment orders

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  5. Sir,

    To add I may cite an example - I am an officer in a CPSU and in our appointment letter it was written - you have to withdraw from any competitive examination before you join and after joining you cannot appear in any competitive exam or interview without permission.....how strange..... and that too, least expected from a PSU. Now a days most PSUs are behaving like small time pvt. cos.

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  6. It is unfortunate that they include such negative clauses in the appointment orders.Some public sector banks demand BOND from employees!

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  7. Hello i am newly in HR field,

    i just join a small company from last six month. In our company there is no PF & Esic contribution have provided.
    But there is a Salary amount Deduction Called PLI. In that the employer deduct 6% of Gross salary in every month, with promise that he will refund it double after One year. One of my employee have complete his 5 months and resign, but now my employer have refuse to give any amount (even the amount which have deduct from his salary)
    So My query is that Is It Legal??? If yes then how? If no then what should the employee do??? will he go for any legal action???

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  12. This opinion deserves wider pubilicity as there are many people who for fear of losing both the jobs refrain from changing over to a competitor.
    V.Raghunathan

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