The term ‘moonlighting’ has found its relevance post-pandemic. Many employees have figured ways to explore the flexibility and spare time to make some extra money. On the other hand, many employers seemed seriously concerned by the dual employment taken up by their employees for many reasons including the leak of confidential and technical know-how, and the lost loyalty of the
employees. While some employers have been vocal about their concerns, others have laid off a huge chunk of employees for moonlighting.
This brings us to the read through ‘non-compete’ clauses in the employment agreements all over again. In general parlance, a non-compete clause restricts the parties to undertake any trade, business or profession, or from joining any competitor, during the term of the agreement and for a defined period of time post the termination of the agreement. A non-compete clause may also define a territory within which such restrictions shall be imposed on the agreeing party.
Section 27 of the Indian Contracts Act, 1872 (“ICA”), provides that “Every agreement by which one is restrained from exercising lawful profession, trade or business of any kind, is to that extent void”. While the provision clearly states that the restriction on undertaking any profession, trade or business is not enforceable, the jurisprudence around non-compete clause has been ever evolving.
The jurisprudence around non-compete clauses in line with Section 27 of the ICA has always been around two principles i.e., (a) the freedom to enter into any contract; and (b) no person being deprived of their skills and talent by any contract. In the case of Mason v. Provident Clothing and Supply Co. Ltd. 1 , Lord Shaw had mentioned that the enforceability of non-compete clauses “involved
a determination between the right to bargain and the right to work.”
Non-compete during the term of the agreement:
The Indian courts have time and again upheld the validity of a non-compete clause applicable during the subsistence of an agreement. In the case of Niranjan Shankar Golikari v. Century Spinning & Manufacturing Company Limited, the Supreme Court held that an agreement by which an employee binds himself, during the term of the agreement, to not compete with his employer is general not in restraint of trade, unless it is unconscionable or excessively harsh or unreasonable or one-sided.
Similar stance has been taken in the case of Percept D’Mark (India) P Ltd. v. Zaheer Khan 2 , wherein cricketer Zaheer Khan was required to pass any endorsement offer to his management and marketing agency even after the termination of agreement. The Supreme Court in this case held that the restriction operated beyond the term of the agreement, and was therefore void.
Non-compete post the termination of agreement:
Non-compete clauses post the termination of agreement restraints the agreeing party from undertaking similar business, trade, profession or employment post the termination of the agreement. Such clauses may also provide for a time period for which such party is restricted from undertaking the activity. Under the Indian law, the views on the enforceability of such clauses have been varying.
Apart from the judgment of the Supreme Court in the case of Zaheer Khan (as provided above), in the case of Superintendence Co of India v. Krishan Murgai, 3 the Supreme Court held that the
1 [1913] AC 724, 738 (HL)
2 (2006) 4 SCC 227
3 AIR 1980 SC 1717
restriction on an employee from joining a competitor for two years after leaving the employment is beyond the term of the agreement and void in restraint of trade.
Non-compete under M&A agreements:
Most of the transactions either buying out the shareholding of the founders or acquiring businesses for the technical know-hows, commercials or a specialised assets, provide for a non-compete clause on the founder restricting them from operating or advising any business which is directly competent to the business bought out.
The ICA provides for an exception to Section 27 as “One who sells the good-will of a business may agree with the 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.”
The above mentioned exception has the following key elements to it: (a) there has to be a transfer of goodwill; and (b) the restrictions/limitations should be reasonable to the courts. While in most of the M&A transactions, the goodwill of the business bought is also transferred to the acquirer, the issue arises around the reasonability of the restriction imposed. The Indian courts determine the reasonability on a case to case basis. Certain factors considered for determining the reasonability include: (a) whether the restriction is necessary to protect the business interest; (b) whether the territory on which such restriction is imposed adequate; and (c) whether the time period for which the restriction is imposed is adequate.
Garden Leave:
Under a ‘Garden Leave’ clause, upon the resignation by an employee, the employee is paid their monthly salary for a pre determined period of time while being restricted from undertaking employment with any third-party. A garden leave clause is used as a substitute to a non-compete clause whereby, the intention of the employer remains the same. The Bombay High Court, in the
case of VFS Global Services Private Limited v. Suprit Roy 4 , had held that a garden leave clause restricts an employee from obtaining gainful employment elsewhere and is thereby, prima facie in restraint of trade under Section 27 of the ICA. Irrespective of the observations from the Bombay High Court, ‘Garden Leave’ clauses continue to be used in acquisition agreements across country.