- within Employment and HR, Compliance and Transport topic(s)
- in Asia
- with readers working within the Law Firm industries
Introduction
In India, as per Section 9 of the Indian Contract Act, 1872, contracts can be made either orally or in writing; these are called express contracts. They can also be formed through the behaviour of the parties, which are referred to as implied contracts. A contract is considered valid when it includes certain key elements. These elements are offer, acceptance, consideration, and legal purpose. These elements are necessary to make the contract binding on the parties who enter into such contract. However, beyond these conventional forms, there exists another type of contract that plays a significant role in modern commerce, also known as the standard form contract.
The Standard form of contract is commonly referred to as a "take it or leave it" contract. This type of agreement is created by one party, often the stronger one, leaving the other party with minimal options to negotiate. Although these contracts are valid under Indian law, they are examined by the courts to make sure that no unfair or unreasonable terms take advantage of the weaker party.
An example of such agreements is the employment contract, where employees often have no real choice but to accept the terms imposed by the employer. The legal interpretation of standard form employment contracts in India is grounded in the recognition of unequal bargaining power between employers and employees. For instance, an employment agreement that contains a strict termination clause wherein the Employer has the right to terminate the services of the employee immediately without any reason. However, the employee has no opportunity to negotiate this harsh condition, the employee must either accept the employment on those terms or forgo the opportunity altogether. Such clauses reflect the inherent imbalance in bargaining power embedded in standard form employment contracts.
The Indian courts in various judgements have held that the standard form of contracts is prima facie evidence of inequality, and any clause in the Employment Agreement alleged to be unfair, coercive, or opposed to public policy must be examined by the Indian Courts. When an employee challenges a restrictive covenant of undue influence or injustice, the courts should carefully assess the context and relative position of the parties in the contract. The onus of proof lies on the employer to show that these restrictive clauses are reasonable and not in restraint of lawful employment. The Court, while deciding the same, should ensure that contractual dominance is not misused by the Employer, and there should be fairness in employment relationships. Through this discussion, we aim to understand the impact of these standard forms of employment contracts post-resignation, particularly concerning restrictive covenants, non-compete clauses, and confidentiality obligations that continue to bind employees even after they leave the Company.
Post-Employment Restrictions and Public Policy
The Employer in the employment contract often includes a Clause prohibiting the Employee from joining or starting a similar business for a period of two to three years post-resignation from the Employer Company. However, these clauses are void and unenforceable, as per Section 27 of the Indian Contract Act, as these clauses will amount to restraint of trade and are against public policy.
The same was upheld in the recent judgment of the Hon'ble Delhi High Court, wherein the High Court, while relying on several past precedents, held that since the employee had resigned and the company was incorporated thereafter, the employment relationship had been terminated. The Court further held that post-service restrictive covenants are unenforceable under the Indian Contract Act, and any attempt to extend the non-compete period beyond employment would constitute an unlawful restraint under Section 27 of Contract Act, besides infringing Article 19(1)(g) of the Constitution, which guarantees the right to practice any profession or trade.
Exclusivity Clauses and Reasonableness
Another common clause in employment contracts is a requirement for employees to serve a minimum fixed term, often two to three years, with financial consequences for early resignation. However, such exclusivity clauses cannot be considered restrictive of trade practices under Section 27, as they do not restrain future employment but merely impose a financial penalty for premature termination. The Hon'ble Supreme Court of India in Vijaya Bank & Anr vs Prashant B Narnaware, held that this clause did not prevent the employee from seeking future employment; rather, it aimed to enforce the agreed duration of service. Therefore, it was not considered a violation of Section 27. The Court further held that such clauses are reasonable, especially in the context of public sector undertakings that invest substantial resources in recruitment and training. The Court noted that premature resignation forces these institutions to undergo a prolonged and costly recruitment process, in line with Articles 14 and 16 of the Constitution. Accordingly, the Court concluded that the imposition was justified and proportionate.
Conclusion
These standard employment contracts are common and often unavoidable, but they create complex issues in Contract law and Employee rights. Indian courts in various judgements have upheld the validity of reasonable clauses in the employment Contracts, however, Courts have ensured that these contracts did not harm employees' fundamental rights. The changing legal landscape regarding non-compete and exclusivity clauses shows a commitment by the courts to balance business interests with constitutional freedoms. In the end, Indian law ensures that fairness, reasonableness, and public policy should guide the enforcement of standard employment contracts, particularly when these employment contracts impose obligations on the employee post-resignation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
