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InternationalIn-house Counsel Journal
Vol.14, No. 56, Summer 2021, 1

Non-Compete Provisions Under The Indian Contract Act and its

Applicability: An Analysis

HARISH NAMBIAR
Vice President - Legal, General Counsel (Atos Syntel), General Counsel (Atos - India)
and Compliance Officer, Atos Syntel

It is a common practice amongst employers in India to have a provision incorporated into

the employment contracts that in some fashion restricts the employees from pursuing
activities contrary to the business interests of the employer. While it is settled in law that
such a restriction will be enforceable during the term of the employment, questions are
raised on what happens to those restrictions after the employment ceases.
While many people hold the opinion that such a restriction will not apply after the
employment has come to an end, the question is that is this opinion a hypothesis, or is it
the actual position of law. Most often, the starting point of this hypothesis is section 27 of
the Indian Contract Act, 1872 (IC Act for short) which states that "Every agreement by
which any one is restrainedfrom exercising a lawful profession, trade or business of any
kind, is to thatextent void". But then, this Section 27 itself indicates that it is not an absolute
rule because that section itself provides for an exception that where goodwill is sold and
there is a non-compete agreement, the said agreement is not void. Before concluding on
whether Section 27 is an absolute rule or not, one needs to see the history of Section 27
and of the history of IC Act itself and the judicial pronouncements on this subject over a
period of time (the first one that is seen is of 1874, about two years after the IC Act came
into existence).
Section 27 stems from the Field's Draft Code for New York, which interestingly was never
adopted in New York. The reason for this section was that "contracts in restraintof trade
have been allowed by modern decisions to a very dangerous extent" (Gooderson [1963]
79 LQR 410). The purpose, closer home and in the later 1800s, seems to be the belief that
"trade in India is in its infancy; and the legislaturemay have wished to make the smallest
number of exceptions to the rule against contracts whereby trade may be restrained"
(Oakes & Co v Jackson (1876) ILR 1 Mad 134). If this indeed was the reason, the reason
seems quite shallow because India had a thriving trade system much before British came
to India and it was in fact that same trade that had attracted the British to India and kept
the British busy for some three and half centuries in India. The paradox is too palpable to
be missed. The First Law Commission of India (i.e., the First Law Commission of
independent India, constituted in 1955) came down heavily on this provision of the IC Act
and went to the extent of saying that India is tied down with a law which is very rigid. The
First Law Commission, in its Thirteenth Report (1958) recommended that the law be
amended to allow exceptions "in so far as the restraintis reasonablehaving regardto the
interests of the parties to the agreement and of the public" (Para 55, Thirteenth Report,
First Law Commission). This was an excellent recommendation because the interests of
the contracting parties as well as public interest was to be equally taken care of. The
importance lies in the fact that the supporters of Section 27 use the concept of public policy
as one of the pillars to support the unbridled and overarching restriction.

InternationalIn-house Counsel Journal ISSN 1754-0607 print/ISSN 1754-0607 online

 HarishNambiar

Public policy is not really a defined item, particularly in the context of commercial law. It
is a fluid concept that changes and even acquires the shape of the container that it is
railroaded into. Burrough J., rightly observed in Richardson v Mellish ((1824) 2 Bing 229)
that "publicpolicy is a very unruly horse, and when once you get astride it you never know
where it will carry you". Kekevich J., in Davies v Davies ((1888) 38 Ch D 499) observed
that "publicpolicy does not admit of definition and is not easily explained. It is a variable
quantity; it must vary and does vary with the habits, capacities, and opportunities of the
public". Unfortunately, the variation recommended by the First Law Commission in 1958
was never accorded the place it deserved, and without a shred of doubt, it proved to be an
unruly horse too.
Indian legal system is considered to be a positivist legal system. While it is true that
Supreme Court has plenary powers vested in it under Article 142 of the Constitution of
India and that both the Code of Civil Procedure (Section 151) and the Code of Criminal
Procedure (Section 482) allows savings of the inherent powers of the court, and the courts
do use these plenary powers to pass orders that secures the ends of justice, the fact still
remains that Indian legal system does not really have a legal position that is vastly separated
from the promulgated statutes. The Supreme Court, in Prem Chand Garg v Excise
Commissioner, UP (1963 SCR Supl. (1) 885) held that "an orderwhich this court can make
in order to do complete justice between the parties, must not only be consistent with the
fundamental rights guaranteedby the Constitution, but it cannot even be inconsistent with
the substantiveprovisions of the relevantstatutory laws". This observation was directly in
relation to the powers vested in the Supreme Court under Article 142 of the Constitution
of India.
In fact, the legal system quite follows the positivist alignment which more or less fully
corresponds to the principles of H.L.A. Hart to the extent that "laws are commands of
human beings" and "there is no necessary connection between law and morality, that is,
between law as it is and as it ought to be" (HLA Hart- Positivism and Separationof Law
and Morals (1958), 71 HarvardLaw Review 593, 601-602). What is a simple fact is that if
the legislature decides today to repeal Section 27 of the IC Act, IC Act minus that repealed
provision becomes the law. It is safe to assume that public policy and its applicability
applies only to the extent that it is sanctioned by a law. Of course, the law has to satisfy the
constitutional tests failing which it can always struck down (Supreme Court of India has
indeed struck down several laws that were found to be falling short of the constitutional
mandates. The most recent example is of the striking down of Section 87 of the Arbitration
and Conciliation Act, 1996 as that section was found to in violation of Article 14 of the
Constitution of India. Manifest arbitrariness will not be allowed.).
The recommendation of the First Law Commission mentioned above would have addressed
this issue of balancing commercial interests and public policy quite satisfactorily.
We discussed in the previous paragraphs on how Section 27 is itself not stating it to be an
absolute law, as Section 27 itself provides for the exclusion of sale of goodwill based
contract as an exception in that section itself. Now, let us examine as to what the IC Act
speaks about itself. Section 1 of the IC Act inter alia states that "Nothingherein contained
shall affect the provisions of any Statute, Act or Regulation not hereby expressly repealed,
nor any usage or custom of trade, nor any incident of any contract, not inconsistent with
the provisions of thisAct. " IC Act was never intended to be a complete and exclusive code
of or on contracts. Of course, it did provide a detailed structure and guidance thereto. Privy
Council, in Ramdas Vithaldas Durbar v Amerchand & Co (43 IA 164), held that "the
Indian ContractAct recites the expediency of defining and amending certainparts of the
law relating to contracts. It is therefore an amending as well as consolidating Act, and
beyond the reasonable interpretationof its provisions there is no means of determining
whether any particularsection is intended to consolidate or amend the previous existing
 Non-Compete Provisions 3

law ". The IC Act does not hold itself to be a complete code dealing with the subject of
contracts. It is quite summed up in Burn & Co v McDonald (ILR 36-37 Cal 208) that
"where a law is codified, it is of little avail to enquire what is the law apartfrom that
codification. The code itself must be looked to as the guide in the matter". The relevant
issue, however, is that the IC Act is not a self-contained code on contracts.
In fact, there exists several other laws in India that covers various kinds of contracts and
contractual remedies like the Sale of Goods Act, Specific Relief Act etc. and several other
laws that touches upon special contracts like the Factoring Regulation Act which are
statutes that completely cover their subject matter. IC Act, as stated in Burn & Co v
McDonald ILR 36-37 Cal 208, is of course a guide in the matter, but a
special law prevails over general law (held in R.S. Raghunath v State of Karnataka (1991
SCR Supl. (1) 387) by the Supreme Court) and hence, the IC Act cannot never hold itself
to be the sole code on contracts law in India.
The Indian Contract Act was promulgated in 1872. In Madhub Chanderv Rajcoomar Das
((1874) 14 BLR 76), just within two years of the IC Act being promulgated, the Calcutta
High Court was faced with the exact question on whether the law of restraint of trade,
which is not disallowed under Hindu law of contract, applies under the IC Act to a dispute
where the parties are exclusively Hindus. This was particularly raised in the context of the
now repealed Schedule of the IC Act did not include the statutes of contracts of 1781 and
1797 as being repealed by the IC Act, which did not contain such a provision. Court held
that the IC Act applies to all.
Pollock & Mulla on Indian Contract Act & Specific Relief Act specifically states that "the
Contract Act did not cover the entire field of contract law."
Now, let us progress to examine the position of precedents on this topic. Cases decided by
the Supreme Court are considered first as the Supreme Court is the highest court in India
and "the law declared by the Supreme Court shall be binding on all courts within the
territoryofIndia" as provided under Article 141 of the Constitution of India.
In Niranjan Shankar Golikari v. Century Spinning and Manufacturing Company Ltd.,
(1967 AIR 1098), the Supreme Court of India considered a case of an employee who had
accepted the employment offer and signed a contract for a period of five years. The said
contract contained a stipulation that during the period of employment, the employee shall
not engage in any other business. The Contract also contained a stipulation that during the
continuation of employment as well as thereafter the employee shall keep confidential, the
information, instruments and documents of the employer that might come to his
knowledge. In the said case the employee after receiving training and acquiring certain
confidential information, initially remained absent and then tendered resignation, as he had
obtained another employment. The employer did not accept the resignation and took
recourse against the employee by seeking injunctive relief and damages. The employee
challenged the validity of non-compete and confidentiality clauses, contending that the
same constituted a restraint on trade. Dealing with the said contention, the Supreme Court
held as under: "The rule now is that restraintswhether general or partialmay be good if
they are reasonable.A restraintupon freedom of contractmust be shown to be reasonably
necessary for the purpose of freedom of trade. A restraint reasonably necessary for the
protection of the covenantee must prevail unless some specific ground ofpublic policy can
be clearly established against it. [E. Underwood & Son Ltd. v. Barker [(1899) 1 Ch 300
CA] J. A person may be restrainedfrom carrying on his trade by reason of an agreement
voluntarily entered into by him with that object. In such a case the general principle of
freedom of trade must be applied with due regard to the principle that public policy
requiresfor men offull age and understanding the utmostfreedom of contract and that it
is public policy to allow a trader to dispose of his business to a successor by whom it may
be efficiently carried on and to afford to an employer an unrestricted choice of able
4 HarishNambiar

assistantsand the opportunity to instruct them in his trade and its secrets without fear of
their becoming his competitors. [Fitch v. Dewes [(1921) 2 AC 158, 162-167]]. Where an
agreementis challengedon the groundof its being a restraintof trade the onus is upon the
party supporting the contract to show that the restraintis reasonably necessary to protect
his interests. Once, this onus is discharged, the onus of showing that the restraint is
nevertheless injurious to the public is upon the party attacking the contract.
[See Cheshire'sLaw of Contract, (6th Edn.) 328, Mason v. Provident Clothing and Supply
Co. Ltd. [1913 AC 724] and A.G. of Commonwealth of Australia v. Adelaide Steamship
Co. Ltd. [1913 AC 781, 796] ].The courts however have drawn a distinction between
restraints applicable during the term of the contract of employment and those that apply
after its cessation. [Halsbury's Laws of England (3rd Edn.), Vol. 38, p. 31]. But in W.H.
Milsted & Son Ltd. v. Hamp [(1927) 2 AC 158, 162-167] where the contract of service was
terminable only by notice by the employer, Eve, J. held it to be bad as being wholly one-
sided. But where the contract is not assailable on any such ground, a stipulation therein
that the employee shall devote his whole time to the employer, and shall not during the
term of the contract serve any other employer would generally be enforceable. A similar
distinctionhas also been drawn by courts in India and a restraintby which a person binds
himself during the term of his agreement directly or indirectly not to take service with any
other employer or be engaged by a thirdparty has been held not to be void and not against
Section 27 of the Contract Act. The result of the above discussion is that considerations
againstrestrictive covenants are different in cases where the restriction is to apply during
the period after the termination of the contract than those in cases where it is to operate
during the period of the contract. Negative covenants operative during the period of the
contractof employment when the employee is bound to serve his employer exclusively are
generally not regardedas restraintof trade and therefore do not fall under Section 27 of
the ContractAct. A negative covenant that the employee would not engage himself in a
trade or business or would not get himself employed by any other masterfor whom he
would perform similar or substantially similar duties is not therefore a restraintof trade
unless the contract as aforesaidis unconscionable or excessively harsh or unreasonable
or one-sided as in the case of W.H. Milsted & Son Ltd. Both the trial court and the High
Court have found, and in our view, rightly, that the negative covenant in the present case
restrictedas it is to the period of employment and to work similar or substantially similar
to the one carried on by the appellant when he was in the employ of the respondent
Company was reasonable and necessary for the protection of the company's interests and
not such as the court would refuse to enforce. There is therefore no validity in the
contention that the negative covenant contained in clause 17 amounted to a restraintof
trade and therefore againstpublicpolicy".
It is seen that in Niranjan Shankar case (supra), the Supreme Court dealt with the case of
restriction operating during the term of employment. In the said case, the court did not find
a restrictive covenant precluding the employee from employing himself in another similar
employment during the term of the employment to be in violation of Section 27 of the IC
Act. However, in Niranjan Shankar case, the court did not deal with validity of restrictive
covenants applying to the period following the cessation of the employment. The court was
also pleased to restrain the employee from divulging the confidential information of the
employer. Niranjan Shankar case was decided by a Two Judge bench of the Supreme Court.
In Superintendence Co. of India v. Krishan Murgai ((1981) 2 SCC 246), a Three Judge
Bench of Supreme Court considered the validity of a non-compete obligation in an
employment contract, post cessation of employee's employment. In the said case, the
employer terminated the services of the employee and the employee thereafter started his
own business which was similar to that of the employer. Based on the non-compete clause
the employer sought injunctive relief and damages. While the court found it unnecessary
to decide the question whether non-compete restrictions operating post service, if
 Non-Compete Provisions 5

reasonable, could be valid A.P. Sen. J., (though concurring with the outcome decided by
majority), held as under: "Neither the test of reasonableness nor the principle that the
restraintbeing partialwas reasonable are applicable to a case governed by Section 27 of
the ContractAct, unless it falls within Exception L Under Section 27 of the ContractAct,
a service covenant that extended beyond the termination of the service is void." As can be
seen, the opinion of A.P. Sen. J., in Krishan Murgai is only a minority view, the majority
having stated that they were not expressing any view on the issue. This being the position,
it may not be said that the issue was decided by the Supreme Court in Krishan Murgai.
In GujaratBottling Co. Ltd. v. Coca Cola Co., ((1995) 5 SCC 545), the Supreme Court
considered the question whether a negative covenant in a contract precluding the petitioner
therein not to manufacture, bottle, sell, deal or otherwise be concerned with the products,
beverages of any other brands or trademarks / trade names during the subsistence of the
agreement, was in restraint of trade and thus void under Section 27 of the IC Act. The
following observations of the decision in said case are relevant: "Under the common law
in England a man is entitled to exercise any lawful trade or calling as and where he wills.
The law has always regarded zealously any interference with trade, even at the risk of
interference with freedom of contract, as it is public policy to oppose all restraints upon
liberty of individual action which are injurious to the interests of the State. A person may
be restrainedfrom carrying on his trade by reason of an agreement voluntarily entered
into by him with that object and in such a case the general principle offreedom of trade
must be appliedwith due regard to the principles thatpublic policy requiresfor persons of
full age and understanding the utmost freedom to contract. Traditionally the doctrine of
restraintof trade applied to covenants whereby an employee undertakes not to compete
with his employer after leaving the employer's service and covenants by which a trader
who has sold his business agrees not thereafter to compete with the purchaser of the
business. The doctrine is, however, not confined in its applicationto these two categories
but covenants falling in these two categories are always subjected to the test of
reasonableness. Since the doctrine of restraint of trade is based on public policy its
application has been influenced by changing views of what is desirable in the public
interest. The decisions on public policy are subject to change and development with the
change and development of trade and the means of communication and the evolution of
economic thought. The general principle once applicable to agreements in restraint of
trade has consequently been considerably modified by later decisions in England. In the
earliesttimes all contracts in restraintof trade, whether general orpartial, were void. The
severity of this principle was gradually relaxed, and it became the rule that a partial
restraintmight be good if reasonable, although a general restraintwas of necessity void.
The distinctionbetween generaland partialrestraintwas subsequently repudiatedand the
rule now is that restraints, whether general or partial, may be good if they are reasonable
and any restrainton thefreedom of contractmust be shown to be reasonablynecessaryfor
the purpose offreedom of trade. A covenant in restraintof trade must be reasonable with
reference to the public policy and it must also be reasonably necessaryfor the protection
of the interest of the covenantee and regardmust be had to the interests of the covenantor.
Contracts in restraintof trade are prima facie void and the onus of proof is on the party
supporting the contract to show that the restraint goes no further than is reasonably
necessary to protect the interest of the covenantee and if this onus is dischargedthe onus
of showing that the restraintis nevertheless injurious to the public is on the party attacking
the contract. The court has to decide, as a matter of law, (i) whether a contract is or is not
in restraintof trade, and (ii) whether, if in restraintof trade, it is reasonable. The court
takes afar stricter and less favourable view of covenants entered into between employer
and employee than it does of similar covenants between vendor and purchaser or in
partnership agreements, and accordingly a restraint may be unreasonable as between
employer and employee which would be reasonable as between the vendor and purchaser
6 HarishNambiar

of a business. [See: Halsbury's Laws of England, 4th Edn., Vol. 47, paragraphs9 to
26; Niranjan Shankar Golikari v. Century Spg. and Mfg. Co. Ltd. [(1967) 2 SCR 378 : AIR
1967 SC 1098 : (1967) 1 LLJ 740] , (SCR at pp. 384-85.) Instead of segregating two
questions, (i) whether the contract is in restraint of trade, (ii) whether, if so, it is
"reasonable", the courts have often fused the two by asking whether the contract is in
"undue restraintof trade" or by a compoundfinding that it is not satisfiedthat this contract
is really in restraintof trade at all but, if it is, it is reasonable. [See : Esso Petroleum Co.
Ltd. v. Harper's Garage (Stourport) Ltd. [1968 AC 269 : (1967) 1 All ER 699 : (1967) 2
WLR 871], (AC at p. 331) per Lord Wilberforce.] In India agreements in restraintof trade
are governed by Section 27 of the Indian ContractAct. The saidprovision was liftedfrom
Hon. David D. Field'sDraft Code for New York which was based upon the old English
doctrine of restraint of trade, as prevailing in ancient times. The said provision was,
however, never applied in New York. The adoption of this provision has been severely
criticisedby Sir FrederickPollock who has observed that "the law of India is tied down
by the language of the section to the principle, now exploded in England, of a hard and
fast rule qualified by strictly limited exceptions". While construing the provisions of
Section 27 the High Courts in India have held that neither the test of reasonablenessnor
the principle that the restraint being partial or reasonable are applicable to a case
governed by Section 27 of the ContractAct, unless it falls within the exception. The Law
Commission in its Thirteenth Report has recommended that the provision should be
suitably amended to allow such restrictionsand all contracts in restraintof trade, general
or partial, as were reasonable, in the interest of the parties as well as of the public. No
action has, however, been taken by Parliament on the said recommendation.
[See: Superintendence Co. of India (P) Ltd. v. Krishan Murgai [(1981) 2 SCC 246: (1980)
3 SCR 1278], (SCR at pp. 1291, 1296-98: SCC pp. 257, 261-63) per A.P. Sen, J.]. We do
not propose to go into the question whether reasonableness of restraint is outside the
purview of Section 27 of the ContractAct andfor the purpose of the present case we will
proceed on the basis that an enquiry into reasonablenessof the restraintis not envisaged
by Section 27. On that view instead of being required to consider two questions as in
England, the courts in India have only to consider the question whether the contract is or
is not in restraintof trade. It is, therefore, necessary to examine whether the negative
stipulation contained in paragraph 14 of the 1993 Agreement can be regarded as in
restraintof trade. This involves the question, what is meant by a contract in restraintof
trade? These observations indicate that a stipulation in a contract which is intended for
advancement of trade shall not be regardedas being in restraintof trade. If the negative
stipulation contained in paragraph14 of the 1993 Agreement is consideredin the light of
the observations in Esso Petroleum Co. Ltd. [1968 AC 269: (1967) 1 All ER 699: (1967) 2
WLR 871], it will be found that the 1993 Agreement is an agreementfor grant offranchise
by Coca Cola to GBC to manufacture, bottle, sell and distribute the various beveragesfor
which the trade marks were acquired by Coca Cola. The 1993 Agreement is thus a
commercial agreement where under both the parties have undertaken obligations for
promoting the trade in beverages for their mutual benefit. The purpose underlying
paragraph14 of the said agreement is to promote the trade and the negative stipulation
under challenge seeks to achieve the said purpose by requiring GBC to wholeheartedly
apply to promoting the sale of the products of Coca Cola. In that context, it is also relevant
to mention that the said negative stipulation operatesonly during the period the agreement
is in operation because of the express use of the words "during the subsistence of this
agreement including the period of one year as contemplated in paragraph 21" in
paragraph14. Except in cases where the contract is wholly one sided, normally the
doctrine of restraint of trade is not attracted in cases where the restriction is to operate
during the period the contract is subsisting and it applies in respect of a restriction which
operates after the termination of the contract. It has been so held by this Court in N.S.
Golikari [(1967) 2 SCR 378 : AIR 1967 SC 1098 : (1967) 1 LLJ 740] wherein it has been
 Non-Compete Provisions 7

said: (SCR p. 389)- "Since the negative stipulation in paragraph14 of the 1993 Agreement
is confined in its application to the period of subsistence of the agreement and the
restriction imposed therein is operative only during the period the 1993 Agreement is
subsisting, the said stipulation cannot be held to be in restraintof trade so as to attractthe
bar of Section 27 of the ContractAct."
Actually, the court declined to go into the question whether reasonableness of the restraint
was within or outside the purview of Section 27 of the IC Act. The court proceeded on the
basis that an enquiry into reasonableness of restraint was not envisaged by Section 27 of
the Contract, because the law simply did not provide for it. Of course, the court did indicate
on how that law came into existence and the potential changes that were envisaged, but
which never came into play. Further, in Coca Cola case, the court dealt with a case of
negative stipulation applying during the subsistence of the contract and it was held that
such stipulation did not amount to restraint of trade so as to violate Section 27 of the IC
Act. The status / validity of non-compete restriction operating post-employment term was
not a matter in issue in the proceedings. It is settled that a decision is an authority for what
it decides and not what can logically be deduced therefrom (Union of India v. Chajju Ram,
((2003) 5 SCC 568)). The decision in Coca Cola case is thus not an authority as to the
validity of non-compete restriction operating in a post contractual scenario.
In PerceptD'mark (I) (P) Ltd., v. Zaheer Khan ((2006) 4 SCC 227), the Supreme Court
considered if the right of first refusal granted to an employer was void under Section 27 of
the IC Act. The case involved challenge to interlocutory order of court below which was
based on prima facie finding that the impugned restriction was void under Section 27 of
the IC Act. The Supreme Court declined to grant temporary injunction. Significantly, the
court kept all contentions raised by the parties open and clarified that it was not expressing
any opinion on merits of the rival claims and the observations made in the judgment were
only for the purpose of finding out prima facie case. The court said that "The present
appeal challenges the interlocutoryorder of the High Court in which the Division Bench
has itselfmade it clear that it is recording only a prima facie finding that clause 31(b) of
the agreement is void under Section 27 of the ContractAct, 1872 ". In view of the above,
it cannot be said that in Percept D'Mark the court laid down the law on enforceability of
restrictive covenant post cessation of employment.
A careful reading of these decisions of the Supreme Court clearly shows that all restrictions
/ negative covenants restricting an employee are not considered as restraint of trade. The
non-compete restrictions applicable during the term of the contract of the employment are
not regarded as restraint of trade and therefore valid. As regards the non-compete
restriction operating post cessation of employment/contract, there exists no authoritative
pronouncement/binding precedent by Supreme Court. The Supreme Court has not laid
down that all cases of restrictive covenant operating post termination of employment would
amount to restrictive covenant and therefore would be void. It may be noted that Supreme
Court itself, has recognized that a stipulation in contract intended for advancement of trade
is not considered as restraint of trade. In effect, the Supreme Court has actually indicated
that restriction in Section 27 is not an absolute restriction.
Certain High Courts have taken a view that a restrictive covenant precluding an ex-
employee to take up any employment (post cessation of employment), is hit by Section 27
of the IC Act. These decisions have been pronounced on the premise that the Supreme
Court has laid down that all post-employment restrictive covenants are invalid. This
premise does not appear to be correct as discussed above. In some other cases before the
High Courts, the court was considering interlocutory applications and the orders were only
for that limited purpose
8 HarishNambiar

However, certain decisions of High Courts needs a special mention here, as they have
opened up new concepts that actually supports the fact that restrictive covenants are not
necessarily bad in law and can be enforced, during or after the duration of the contract.
Wipro Ltd v Beckman Coulter (131 (2006) DLT 681) is one such case. The said case
involved enforceability of a contract between a distributor and principal and not a contract
between an employer and an employee. The court came to conclusion that a covenant
preventing solicitation of employees between tow companies/employers was not hit by
Section 27 and was thus enforceable. This means that the contracts between employers
disallowing head hunting is held valid, but the court did not give an opinion on such a
restriction as to if put in the employment contract, whether it would be in violation of
Section 27 or not. It is to be noted that this observation would be of immense benefit to
employers who face exodus of employees enticed away by the counter parties to the
contract, in spite of clear restrictions against the same existing in their business to business
level contracts.
In V.M. Deshpande v. Arvind Mills Co. Ltd., (AIR 1946 Bom 423), Bombay High Court
considered the validity inter-aliaof a clause in an agreement which precluded the employee
from divulging any of the secrets, process or information etc., relating to the affairs of the
employer / employer's principals, during the continuance of the agreement or thereafter.
The court held as under: "Clause 9 of the agreement, prevents the appellantfrom divulging
any secret information of the nature mentioned in that clause, after the termination of his
service. As pointed out in Herbert Morris Ltd. v. Saxelby, [[1916] 1 A.C. 688.] the
defendant is not prevented from acquiringknowledge which makes him a better employee
for the publicforfuture employment. It only prevents him from divulging information which
he has received as respondents' employee to another party. It is therefore clear that the
clause as worded is proper and injunction granted in terms thereof is not unreasonableor
of wider latitude than justified in law. " In fact, this decision, though from 1946 is of great
relevance even today when we are speaking of data and trade secrets as valuable property.
The judgement was clear that an individual cannot use the information gained during the
previous employment after the employment is over. It is relevant to note here that the court
did not really distinguish between the kind of usage, i.e., whether for the betterment or
detriment of the previous employer. The restriction on use was supposed to be absolute. It
was extremely farsighted decision. We will address the topic in detail in the latter part of
this discussion.
In Urmi Juvekar Chiang v. Global Broadcast News Ltd. (2007 (109) Bom LR 981), the
Bombay High Court discussed the essence of law on breach of confidentiality and
observed as under: "The principlesrelatingto the action of breach ofconfidence have been
subject matter of catena of decisions. The Division Bench of our High Court in the case of
(Zee Telefilms Ltd. v. Sundial Communication Pvt. Ltd.)], reported in 2003 (5) Bom. C.R.
(O.S.) 404, on analysing the decisions on the subject has expounded that the law of breach
of confidence is different from law of copyright. The law of breach of confidence, is of
breachof trust or confidence- "is a broaderright" than proprietaryright of copyright. The
Court then extracted the dictum in the case of Terrapinv. Builder Supply Company, which
postulates that the essence of law on breach of confidentiality is that whatever the origin
of it may be, is that a person who has obtainedinformation in confidence is not allowed to
use it as a spring-boardfor activities detrimental to the person who made the confidential
communication, and springboardit remains even when all the features have been published
or can be ascertainedby actual inspection by any member of the public. The Court also
went on to observe in Para39 that if such confidential information is going to be used in
competition with the plaintiff it is not merely a matter of compensation in terms ofmoney."
This clearly means that injunction can be sought for, in such circumstances.
 Non-Compete Provisions 9

Calcutta High Court, in Hi-Tech Systems & Services Ltd v. SuprabhatRay & Ors. (2015
SCC OnLine Cal 1192), considered the issue whether the respondents who are ex-
employees of the plaintiff could do a trade which was in direct competition with the
plaintiff and during the course of such trade utilize the trade secrets and confidential
information acquired during their course of employment? The court allowed injunctive
relief to the plaintiff against the ex-employees from utilizing the confidential information
and trade secrets of the plaintiff. The court stated as follows, "a trade secret or a business
secret may relate to financial arrangement, the customer list of a trader and some of the
information in this regard would be of a highly confidential nature as being potentially
damaging if a competitor obtainedsuch information and utilized the same to the detriment
of the giver of the information. Business information such as cost and pricing, projected
capital investments, inventory marketing strategies and customer's list may qualify as his
trade secrets. The Court needs to find out if the information that were acquiredduring the
course of their employment are now being used as the spring board to enable the said
respondents to exploit such database in the course of their business. Since I have held that
the said respondents have acted in breach and are in the process of utilizing such trade
secrets and confidential information the said respondentsare restrainedfrom acting as a
selling agent of Hora, Germany or Sales representativesfor three years from January,
2014. The said respondents shall not procure any breach of any existing contract of the
plaintiffwith the thirdparties. This order, however, shall notprevent the respondentsfrom
carrying any business, which may be same and/or similar to the plaintiff without
using and/or utilizing the database and trade secrets of the plaintiff in course of their
business. " The court made a clear distinction on what the respondents could and could not
do. It was exactly this kind of a distinction that the First Law Commission had
recommended about (supra).
The above discussion now brings us to the importance attached to data, confidential
information, trade secrets and similar items of that genre.
Section 2 (o) of the Information Technology Act, 2000 (IT Act for short) defines 'data' as
"means a representationof information, knowledge, facts, concepts or instructionswhich
are being preparedor have been preparedin a formalised manner, and is intended to be
processed, is being processed or has been processed in a computer system or computer
network, andmay be in any form (including computerprintouts magnetic or optical storage
media, punched cards,punched tapes) or stored internally in the memory of the computer".
This is quite a wide definition. Section 43 (b) of the IT Act read with Section 66 of the IT
Act states that "Ifany person without permission of the owner or any other person who is
in charge of a computer, computer system or computer network downloads, copies or
extracts any data, computer data base or information from such computer, computer
system or computernetwork including information or data held or stored in any removable
storage medium" and "ifany person, dishonestly or fraudulently, does any act referred to
in section 43, he shall be punishable with imprisonmentfor a term which may extend to
three years or with fine which may extend to five lakh rupees or with both ". Accordingly,
data theft is a crime in India. This where V. M. Deshpande (supra) judgement becomes a
prophetic decision.
An employee is under a duty to protect the confidential information and data of his
employer. Failure can result in injunction and damages. There are cases where a lifelong
restraint has been granted like in the case of Fitch v Dewes ([1921] All ER Rep 13).
Injunctions have been granted on the premises that the servant had learnt a secret process
from the master - (Amber Size & Chemical Co v Menzel ([1913] 2 Ch 239) and Forster
&

Sons Ltd v Suggett ((1918) 35 TLR 87)).

Criminal law in India also contains provisions on data theft and misappropriation. Indian
police have started taking data theft and misappropriation cases seriously with several state
10 HarishNambiar

police departments like the Maharashtra Police taking a lead here. The first cyber-crime
registered in the Cyber Police Station at Pune, Maharashtra in India was of data theft
(Hindustan Times, 19 th June 2019:
https://www.hindustantimes. com/pune-news/data-theft-is-first-fir-lodged-at-pune-cyber-
crime-police-station/storv-YTEcNndx60ChQRb3o8MnXO.html)
and another similar case was registered in December 2019 too (Pune Mirror, 12 th
December, 2019:
hoys://punemirror.indiatirnes.com/pune/crime/ex-director-of-it-firm-held-or-daa-
robery/articleshow/72481274.cms). Apart from the provisions of the IT Act, Sections 379
(punishment for theft) and 408 (criminal breach of trust by clerk or servant) of the Indian
Penal Code, 1860 (IPC for short) can also apply in such cases. Section 408 of IPC carries
a penal provision of seven years of incarceration and Section 379 IPC carries a similar
provision for three years.
As is evident from the discussion above, restriction provided in Section 27 of IC Act does
not cover an agreement intended for advancement of trade, and neither does any kind of
interpretation of that sections allows an employee to take away the confidential
information, data, IP rights or trade secrets of the employer and use it elsewhere in
competition of the previous employer. An agreement restricting an employee from
disclosing confidential information / trade secrets of the employer or from soliciting
business / employees of the employer, which operates even after cessation of employment,
is not hit by Section 27, and on the contrary, any act by an employee that undermines the
safety and secrecy of a confidential information or data will be a criminal offence.
Advancement of one's own trade or profession cannot be based on misappropriated fruits
of another's labour which has manifested in the form of data, trade secrets or confidential
information belong to that another. It is not only illegal, but immoral and unethical too.
A reasoned and reasonable restriction is likely to pass the test of law. To arrive at what is
a reasonable restriction will be inter alia based on the facts and circumstances of the
individual cases, but a general rule could be that the restriction is necessary for protecting
the legitimate business interest of the employer, the restriction does not affect the ability
of the former employee to seek a livelihood in some other avenue, the restriction is limited
to a particular geography and is for a reasonable time only. Of course, if the restriction is
tied up to a genuine concern that the employee will infringe upon or misuse the intellectual
property rights or misappropriate the data or trade secrets will be a very good point in
favour of the employer. As can be seen in most of the case laws discussed earlier, the
factors brought to the forefront are (a) reasonability of the restriction; (b) utility of the
restriction vis-a-vis the commercial competitive advantage or disadvantage of the
employer; and (c) involvement of trade secrets or confidential data of the employer.
In cases where the employer apprehends a monetary loss which cannot be fully and wholly
compensated by injunctive relief or restraining order alone, the parties to the contract must
consider specifying a compensation in hard monetary terms in the contract that would be
payable in the event of a breach. Any such stipulation will be valid in law and enforceable
in the light of Sections 73 and 74 of the IC Act. Section 74 provides that "when a contract
has been broken, if a sum is named in the contract as the amount to be paid in case of such
breach, or if the contract contains any other stipulation by way of penalty, the party
complaining of the breach is entitled, whether or not actual damage or loss is proved to
have been caused thereby, to receive from the party who has broken the contract reasonable
compensation not exceeding the amount so named or, as the case may be, the penalty
stipulated for " and Section 73 provides that "when a contract has been broken, the party
who suffers by such breach is entitled to receive, from the party who has broken the
contract, compensation for any loss or damage caused to him thereby, which naturally arose
 Non-Compete Provisions 11

in the usual course of things from such breach, or which the parties knew, when they made
the contract, to be likely to result from the breach of it". Please note that indirect liability
is excluded here by an express provision in Section 73 which reads as "such compensation
is not to be given for any remote and indirect loss or damage sustained by reason of the
breach."
A strong legal regime of free contracts and allowances for restrictions and covenants that
adequately protects the interests of the contracting parties will go a long way in instilling
confidence in the ability to conduct business and fully involve all the employees of an
organisation in the process, without the fear of an unfair and illegal competition happening
later from those very employees in whom the employer had reposed the trust with.
Reviving the recommendation of the First Law Commission, Thirteenth Report will be a
good start and will create a level playing field for all concerned, including addressing
genuine concerns of public policy also in the process. As Immanuel Kant said in "The
Critique of Pure Reason", judgements of experience are always synthetic. It cannot be
based only on a metaphysical abstract like a presumption or notions like public policy.
Empirical advancement is necessary to bring the law on par with reality. With the complete
explosion of knowledge and technology based businesses forming part of the major
contributors to the economy, and all these business basing their value on their human
resources and hard earned knowledge base like their unique data, IP or trade secrets, it is
but imperative that the law take into account this as an a posterioriadvancement and make
enough leeway to allow the ones who will potentially lose out in a situation to protect their
assets - in fact, that is what the existence and purpose of law is all about. Technological
advancement, economic growth and destiny of the innovations and innovative capabilities
cannot be left to the mercy of the vagaries of some outdated notion which is completely
detached from reality, and which in the process, both unfortunately and unwittingly allows
individuals with a loophole to escape with valuable assets and use it to the detriment of the
very party who invested the time, money, intellect and energy creating it. The question is
about creating and nurturing a sustainable public policy and law, which reflects the reality,
rather than narrowing it down to a dogma based approach which is outdated, so that
everybody (including employers) benefits from their labours. It is amply clear that the
restriction in Section 27 does not strike down a covenant intended to protect the employer's
trade nor that the provision allows unjust enrichment of oneself at the expense of another
nor does it allow misappropriation of trade secrets, data or confidential information under
the garb of freedom of trade or profession, as is explained above