Enforceability of Non-Compete Clause in India

The provisions of two legislations are to be considered in

determining whether a non-compete clause is enforceable in
India. These are the Indian Contract Act, 1872 (“Contract Act”)
and the Specific Relief Act, 1963 (“Specific Relief Act”). These
are briefly discussed below.

A. Contract Act

Section 27 of the Contract Act reads as follows:

“Agreement in restraint of trade, void.

Every agreement by which anyone is restrained from

exercising a lawful profession, trade or business of any
kind, is to that extent void.

Exception 1: Saving of agreement not to carry on

business of which goodwill is sold-One who sells the
goodwill 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 the business.”

The section makes it clear that an agreement which restrains

trade, would be void to the extent that it restrains trade or
legitimate business activity.

The Supreme Court and various High Courts in many cases

have ratified this position.

In Superintendence Company of India Pvt. Ltd. v. Krishnan

Murgai1 the Supreme Court held that the law in India, being
statutory, the language of the statute and not Common law
should be the determining factor in a case on restraint of
trade. The court further held that “section 27 is general in
terms and unless particular contract is brought under the
1
AIR 1980 SC 1717

1
exception to section 27, there is no escape from the provision.
Neither the test of reasonableness nor the principle that the
restraint being partial is reasonable, is applicable unless the
contract falls under the exception 1 to section 27.”

This position has been accepted and applied by the Bombay

High Court in Taprogge Gesellschaft MBh v. I. A. E. C. India
Limited2. The Bombay High Court observed in this case that
there was a fundamental difference between restraint during
trade and after termination. It is the restraint after termination
that would be hit by section 27.

The Supreme Court3 has also observed that there was no

Indian decision brought before it where an injunction
restraining a person from following his trade elsewhere was
granted. It was also held in this case that if the agreement
places a restraint on the part of the Respondent, even if such a
restraint is partial, the Agreement to this extent was void and
the agreement is one, which cannot be enforced as far as the
restraint is concerned.

The Supreme Court has also held, in the case of Gujarat

Bottling Company v. Coca Cola Company,4 that except in cases
where the contract is wholly one-sided, normally the doctrine
of restraint of trade is not attracted in cases where the
restraint is to operate during the period in which the Contract
is subsisting and this doctrine applies only in respect of
restraint, which operates after the termination of the Contract.
This would imply that there can be a restraint of trade during
the subsistence of the contract, but not once the contract has
been terminated, whatever be the reason for such termination.

Although Indian law to a large extent has evolved from

common law, it is pertinent to note that the position of law in
India on this point is different from the common law position.
In common law, an agreement in restraint of trade is valid and
enforceable in law as long as the restriction is reasonable
partial and not complete. Common law on the point stipulates
a reasonable restriction on such non-compete in terms of time
2
AIR 1988 Bom 157
3
In Superintendence Company of India Pvt. Ltd. v. Krishnan Murgai
4
AIR 1995 SC 2372 at p. 2385.

2
and place. Thus, under common law, a reasonable partial
restraint would be allowed, while even there, a complete
restraint would be disallowed.

The position of law on the point in India is different in that

there is no concept of partial restraint. The law does not
permit restraint on trade of any sort or to any degree. The only
exception to this is as has been prescribed in the section itself.

The exception that has been recognized by the Act is in cases

where there is a sale of goodwill. Even in these cases, the
restraint can be only within specified local limits and if the
person is carrying on a similar business.

B. Specific Relief Act

Section 42 of the Specific Relief Act reads as follows:

“Notwithstanding anything contained in Clause (e) of Section

41, where a contract comprises an affirmative agreement to do
a certain act, coupled with a negative agreement, express or
implied, not to do a certain act, the circumstance that the court
is unable to compel specific performance of the affirmative
agreement shall not preclude it from granting an injunction to
perform the negative agreement:

Provided that the plaintiff has not failed to perform the contract
so far as it is binding on him.

A reading of the section clearly indicates that there necessarily

has to be a positive covenant (affirmative agreement)
subsisting to do a certain act coupled with a negative covenant
(such as a non-compete clause), before such a negative
covenant can be enforced by grant of an injunction.

This section is primarily intended to protect the interest of a

party when the positive obligation (such as a service contract)
cannot be specifically enforced.

In this regard, it might be worthwhile to examine a few

decisions on section 42 of the Specific Relief Act. In some of
the earlier cases, such as in the case of V. N. Deshpande v.

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Arvind Mills Ltd,5 the Bombay High Court held that the
existence of a negative covenant does not make an agreement
void under section 27 of the Indian Contract Act, 1872, and
added that the Illustrations (c) and (d) of the Specific Relief Act
recognize such negative covenants. This was also the opinion
of the Gujarat High Court in the case of Sunilchand v.
Aryodaya Spinning and Weaving Mills Ltd. 6 Here, the Gujarat
High Court, while upholding a negative covenant which was to
subsist during the period of the agreement between the parties
held (where the Defendant was an employee) that there was no
reason to think that if such “an injunction was granted, the
defendant would either remain idle or starve, as the only
restraint against him is not to serve elsewhere than in the
Plaintiff Company as a Senior Assistant.”

In all these cases, the parties sought injunctions within the

originally contemplated period of the agreement and only to
restrain the person concerned from working for a rival
organisation within this period.

Subsequently, the Delhi High Court, while examining this

issue in the case of Modern Food Industries v. S. K. Bottlers (P)
Ltd., laid down two tests. One, that an injunction may be
granted if it is reasonable in reference to the interests of the
contracting parties and two, that the covenant must be
reasonable in the interests of the public.

However, in more recent decision the courts have been

reluctant to enforce negative covenants, even when the
covenant was sought to be enforced during the course of the
employment. In a recent case, Star India Private Limited Vs.
Laxmiraj Seetharam Nayak and Anr.7 the Bombay Court
initially granted an ad-interim injunction preventing the
defendant from leaving the employment of the plaintiff and
joining a competitor.

However the appellate court, while overruling the ad-interim

injunction order, considered the first point of the two part test
of the Delhi High Court and held that “It must, therefore, be
5
AIR 1946 Bom 423.
6
AIR 1964 Guj. 115.
7
Notice of Motion No. 2933 of 2002 in Suit No. 3452 of 2002

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seen whether the enforcement of the negative stipulation is
reasonably necessary for the protection of the legitimate
interests of the employer. If it is not going to benefit the
employer in any legitimate manner, the Court would not injunct
the employee from exercising his skill, training and knowledge
merely because the employee has agreed to it.". Applying this
test, the appellate court considered but finally rejected the
argument of the plaintiff that the defendant had through his
employment acquired highly confidential information of the
plaintiff, stating that the information acquired by the
defendant in such a position could be considered to be
normally acquired by any person in a similar position and
business. The court further held that by allowing the
defendant to leave the employment of the plaintiff and join the
plaintiff’s competitor “there was no material to consider in what
manner the plaintiffs business would suffer in the absence of
the defendant” and that the plaintiff would be following its
usual business pattern.

C. Conclusion

One could conclude that while normally, agreements in

restraint of trade are not enforceable, though there are certain
cases in which the courts are inclined to grant interim relief to
employers i.e. mainly if the negative covenant is breached by
the employee during the course of employment.