This is the second part of the two-part series wherein we discuss about the types of Restrictive Covenants under the Employment Contracts. This article aims to describe certain commonly used Restrictive Covenants in the Employment Contracts. It may well be noted that in the first part we have looked across ascertaining the legal validity of Restrictive Covenants.
Commonly used Restrictive Covenants
Non-Compete clause:
A Non-Compete clause allows the employer to restrain an employee from competing with him under the same or a similar area of business. To ensure that the clause is valid, firstly, the rule that it must not be ‘excessively unconscionable, harsh or one-sided’ must be followed. In a 2006 Supreme Court judgment of Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan & Anr. [1], on a question of non-compete clauses it was held that, the doctrine of restraint of trade does not apply during the continuance of the contract of employment and it applies only when the contract comes to end.
Based on this, it can be concluded that while an employee is working under an employer, the non-compete clauses may be applicable, but post-termination/resignation, they may be difficult to implement. However, as per this judgement, the doctrine may apply post-termination/resignation, but unless the contract is unreasonable as per the standards laid down (kindly refer to Part – 1 of this series to know about the standards that is laid down), it shall not be struck down.
Non-Solicitation clause:
Non-Solicitation clauses are those which restrain an outgoing employee from engaging in any business with the company’s employees or clients against the interests of the company. Besides the traditional employer-employee binary, Non-Solicitation agreements can also be signed between two or more commercial entities.
Solicitation is essentially a matter of fact. In FL Smidth Pvt Ltd v M/s Seacan Investcast (India) Pvt Ltd.,[2] the Madras HC held that to prove solicitation, the appellant(the company) must establish that the defendant (the employee) approached the latter’s clients/ employees and that they placed orders to the defendant upon such solicitation.
In the case of Desiccant Rotors International Pvt. Ltd v Bappaditya Sarkar[3] an obligation agreement was signed between the plaintiff company and the defendant, which basically provided that, (i) the defendant would not compete with the plaintiff’s business for two years, (ii) the defendant would not interfere with the relationship of the plaintiff with its customers, suppliers and employees for two years, (iii) the defendant would deliver back all the properties of plaintiff which were in defendant’s possession, and (iv) the defendant will not retain any copies of the above mentioned properties of the plaintiff. Here, the Court observed that the view of the employer should be considered and hence employers, by enforcing a negative stipulation only sought to protect private and confidential information and the secrets of their own trade. Hence, a non-solicitation agreement can also be enforced to protect one’s trade secrets.
Non-Disclosure clause:
A Non-Disclosure clause restricts an employee either during the term of employment or after the termination for a certain period of time from revealing information the employer considers to be proprietary or confidential in nature to any third party. This confidential information includes client lists, trade secrets, inventions, etc. Besides the traditional employer-employee binary, Non-Disclosure agreements can also be executed between two or more commercial entities, investors, vendors, consultants, etc.
The case in Dilieet Titus v. Mr Alfred A. Adebare[4] is important while discussing Non-Disclosure Covenant. Here it was alleged that the employee took away confidential data from the firm like the client lists and proprietary data belonging to the plaintiff. However, the defendant argued that the creation was independent and the same was so created by advising and counselling the clients during the employment. Here, the Court divided information into general and confidential information. The term general information is such information that can be acquired from various sources or which lies in the public domain. It held that the confidential information can be protected through an injunction, but the general information gained during the service in his earlier employment cannot be protected by the Company.
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[1] AIR 2006 SC 3426.
[2] (2013) 1 CTC 886.
[3] CS (OS) No. 337/2008.
[4] 2006 (32) PTC 609 (Del).