With increasing competition for talent in India Inc and lateral movement of employees becoming commonplace, organizations have created several mechanisms that seek to effectively protect their proprietary knowledge, intellectual property, trade secrets, and other sensitive information, while avoiding infringement of legal and constitutional rights of employees. In this context, non-solicitation, non-compete and garden leave arrangements in employment agreements have gained significant traction, particularly in the context of high-level executives.
At its core, a non-solicitation agreement restricts a former employee from soliciting any of the employees, clients, customers or vendors after the employee's departure from a business. Similarly, non-compete agreements are designed to restrict employees from joining competing firms for a specified duration after leaving their current employer. While such agreements aim to protect a company's interests, being restrictive covenants, these have been actively litigated for a long time.
Under Section 27 of the Indian Contract Act, 1872 (Contract Act), any agreement restricting an individual from exercising a lawful profession, trade, or business is void, with the exception that a seller of goodwill may agree with the buyer to avoid operating a similar business within specific local boundaries, as long as the buyer or their successors continue a similar business, and the Court deems the limits reasonable.
Courts have, however, have consistently taken the view that as long as the negative covenants can only be enforceable to the extent that they are reasonable and not against Public policy the same can be enforced. However, the Courts have taken differing view on what constitutes reasonable limits. In Pepsi Foods Ltd & Ors v. Bharat Coca-Cola Holdings Pvt Ltd & Ors1 the High Court of Delhi stated that the right of employees to seek and pursue better employment opportunities should not be restricted and asserted that an employee's right to terminate their contracts cannot be curtailed by a court injunction, thereby underscoring the importance of protecting employees' freedoms in the labour market and upholding their autonomy in employment decisions. Similarly, in Ambiance India P Ltd v. Naveen Jain,2 the High Court of Delhi held that a restriction on an employee from seeking employment with any current, past, or prospective customers of the plaintiff for a period of 2 years contravened Section 27 of the Contract Act and was, therefore, void. The Court categorically stated that an employee cannot be permanently restricted from using the knowledge and experience acquired during their employment, whether with the original employer or with any subsequent employer and service covenant extending beyond the termination of employment is void.
The Supreme Court's judgment in the matter of Gujarat Bottling Co Ltd v. The Coca Cola Company & Ors3 represents a significant milestone in the interpretation of individual rights in the context of enforceability of restrictive covenants in India. Balancing individual freedom against contractual obligations, the judgment underscored the principle that individuals should be free to pursue their chosen professions without undue restrictions. The Court observed that the test of reasonableness of restraint is beyond the purview of Section 27 of the Contract Act, and the courts in India are only required to consider whether the contract is in restraint of trade or not. Normally, the bar under Section 27 is attracted when the restraint operates after termination of the contract and not when the restraint subsists during the contractual period.
Given the above discourse on Court's taking a negative view on restrictive covenants that do not pass the test of reasonability, the use of garden leave clauses to restrict an employee from engaging with another employer for a specified period is gaining increasing prominence. Generally regarded as a lenient and mild approach, and something that seeks to strike a balance between the needs of the employer and the rights of the employee, an employee on garden leave remains on the payroll of the employer and continues to receive salary and benefits while their access to the job market is temporarily restricted. However, given that this is a restrictive covenant, garden leave clauses too are subject to strict judicial scrutiny to assess their compliance with Article 19 of the Constitution of India, which protects an employee's freedom to trade, and contracts that impose such restrictions on an individual's ability to engage in business may be deemed void.
The difference between garden leave and non-compete clauses was clarified by the Supreme Court in Niranjan Shankar Golikari v. Century Spg & Mfg Co Ltd4 and Percept D'Mark (India) Pvt Ltd v. Zaheer Khan & Anr5, where the Court reiterated that an employer can impose restrictions on an employee during their employment, but such restrictions should not extend beyond the termination of the employment. Thus, garden leave clauses can be invoked to ensure the protection of trade secrets, as long as the employee in question is remunerated during the specified period.6
In general, Courts tend to take a more stringent stance when evaluating negative covenants in employment contracts compared to other commercial agreements. When determining if a contract term restricts trade, Courts often do not consider the nuances of how restrictive the covenant is, focusing instead on whether the term imposes an unreasonable limitation on trade, business, or profession. While Courts have varying views on the validity of restrictive covenants, numerous cases have explored their enforceability, judges typically assess them based on the specific details of each case, emphasizing the reasonableness of the imposed restrictions. Therefore, in order to ensure that any such provisions in employment contracts are enforceable and will pass judicial scrutiny, careful consideration of limits and reasonability of potential restrictions is required.
Footnotes
1. 81 (1999) DLT 122
2. 122 (2005) DLT 421
3. AIR 1995 (SC) 2372
4. (1967) 2 SCR 378 (1967) ILLJ 740 SC
5. AIR 2006 SUPREME COURT 3426
6. Tapas Kanti Mandal v. Cosmo Films Ltd. AIR 2018 BOM 891
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