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The non-compete clause: Need for a relook

It is time to take a studied view and amend Section 27 of the Indian Contract Act, written for the 19th century, in the India of today

Ruby Singh Ahuja and Anupm Prakash

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The non-compete clause
The non-compete clause

While the think tanks were anticipating a global economic downturn on account of various factors across the globe, the Covid-19 pandemic struck unannounced and brought the world economy to a grinding halt. Reports suggest that there are hardly any businesses that have been spared, big or small. Now, projections by experts regarding losses to businesses, closures and unemployment are alarming, surpassing impact by any previous global crisis and perhaps, still not quantified.

In India, a recent snap poll of CEOs indicates significant loss of profit to businesses and estimates job losses in the range of 15-30% due to the ensuing lockdown. An economic downturn, generally, leads to rise in disputes, prominently in the sphere of labour/employment and contractual arrangements. Reduction of exposure to expense by companies and cutting fixed costs, like salaries and benefits, may be attributed for such disputes.

A spike in litigations is seen in such times as, inevitably, pay cuts, job losses and movement of talents in respective sectors rise. Whether pay cuts by enterprises, because of the current lockdown, can be a valid and legitimate act or not, is an issue pending before, the Supreme Court of India. However, this piece seeks to bring forth another contentious issue that permeates an employer and employee relationship–the enforcement of non-compete, non-solicitation and confidentiality–the boilerplate clauses of an employment contract.

Such clauses are put to protect the employer’s know-how, trade secrets and confidential information during employment and beyond. India has a long chain of judicial decisions dealing with enforcement of such “negative covenants” and at the heart of all of them is Section 27 of the Indian Contract Act, 1872. This provision states that every agreement that restrains a person from exercising a lawful profession, trade or business is neither valid nor binding. The only exceptions being–cases of partnership and where goodwill of a business is sold to the person seeking reasonable enforcement of the negative covenant. The broad contours of the provision provide it with inflexibility to encompass any reasonable exception–something the courts in India have found difficult to unshackle.

While, the Supreme Court in the case of Niranjan Shankar Golikari (1967) settled that such clauses can be enforced during the course of employment or during subsistence of a contract, the rigid and overarching impact of Section 27 is felt when enforcement of such clauses are sought beyond the period of employment or contract. Rendering postemployment enforcement of such clauses invalid, courts in India have taken the view that restraining an employee from pursuing his employment is not only a restraint of trade and free will, but is also an embargo on the employee’s ability to earn a living.

Though, the ways and means of recruitment and training of human resource by companies have undergone a paradigm shift over the years, the courts in India continue to be bound by the Section as it stands, making enforcement of such clauses difficult. However, over a period of time and to a limited extent, the courts have started enforcing nonsolicitation and confidentiality clauses post cessation of employment. It’s not that arguments have not been advanced to import the concept of reasonable restrictions or partial restraints in Section 27 in aid of enforcement of the negative covenants.

This concept is borrowed from the views taken by courts in England, who, while testing the negative covenants, have followed a flexible approach to permit reasonable restrictions to trade, in sync with evolution of trade and commerce. In contrast, courts in India have refrained from invoking the doctrine of reasonableness while judging the validity of negative covenants and have declared such covenants to be invalid keeping in view of the statute. There is no escape from the prohibition imposed by Section 27 unless the contract falls within the statutory exception.

It has been the view of the courts that it is the domain of the Legislature to consider the inclusion of the concept of reasonable restrictions in Section 27. This interpretation of Section 27 has consistently been followed by courts in India since its inception. Other than the sphere of employer-employee relationship, the principle of invalidity of any contract that restrains trade also pervades into contractual arrangements between business partners, vendors, franchises and agents. But the principle and scope of Section 27 has remained unchanged.

Like, a right of first refusal under a contract for promotion of services of a famous cricketer that operated beyond the term of the contract was held to be in restraint of trade by the Supreme Court [Percept D’Mark v Zaheer Khan (2005)]. The doctrine of restraint in England is flexible: that if reasonable, post-employment negative covenants are enforceable. Further, the concept of reasonableness there has expanded so as to allow severance of any unreasonableness from a clause and to enforce the remaining portion of the clause, if possible.

In India, Section 27 leaves no room for such severance. Recently, the UK Supreme Court, while adjudicating the case of a global head of financial services division of a UK company, severed a part of the non-compete clause to enforce it. While doing so, the court invoked the ‘blue pencil test’ whereby unreasonable parts of a clause, found to be in restraint of trade, can be severed (akin to marking with a blue pencil) to leave the remainder of the clause enforceable.

The decision appears to be in sync with the evolution of trade as it observes, “High-ranking employees can do particular damage to the legitimate interests of their employers following termination of their employment; and it may be that, when they enter into their post-employment covenants, they are able to negotiate with their employers on nearly an equal footing.” [Tillman v Egon Zehnder Ltd. (2019)] There have been calls in the past for amending Section 27 of the Indian Contract Act (which was promulgated in 1872) and probably bringing the same in line with the relevant developments in the English Common Law.

In 1876, Kindersley, J., while deciding whether the law of contract of India (Section 27) or England would be applicable to the particular case, observed the difference in both the laws [Oakes v Jackson (1876)]. He attributed the rigidity of Section 27, as compared to English law, to the infancy of trade in India at that time.

According to him, the Legislature must have decided not to provide many exceptions to Section 27 in order to prevent any hinderance to trade and its expansion. This exposition was noted by the Law Commission of India in 1958 in its Thirteenth Report. Besides this, the Commission observed that Section 27 invalidates many agreements which the English Common Law otherwise permits.

Owing to subsequent advancement of trade and commerce in India, since the nineteenth century, the Commission recommended amendment to Section 27 to permit reasonable restraints, in line with the English Commons Law. Unfortunately, the said amendment never took place.

In 2019, India surpassed the United Kingdom to become the fifth largest economy in the world. For the past 25 years, Indian economy has grown exponentially, with large multinational corporations setting shops here. Consequently, the employer-employee paradigm has also undergone a change. Today, a company invests heavily to search, skill and retain its top talents.

Joining bonus is not unknown to the corporate world and sponsored international assignments and trainings are a norm. If any, a senior-level executive is privy to expensive, novel and sophisticated models and know-how, which are critical for a business. It may be something that helps a company to remain competitive. Therefore, in some cases, a cooling-off period (non-compete clause), before an employee joins a rival company, may be critical for the ex-employer and it may be reasonable for the employer to ask the employee to wait before knocking the doors of the competitors.

To an extent, India has realised that changes in legal regime is imperative and it has tried to catch up with changing economic landscape with the introduction of a new insolvency resolution regime, establishment of commercial courts, etc. However, the retention of Section 27 of the Contract Act in the statute book, as it stood in the nineteenth century, is an example of the law being static when the world has moved on. If Section 27 ever had to be amended, it is now.

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Legally Speaking

MP HIGH COURT SEEKS DGP’S REPLY: DOES POLICE’S FAILURE TO COMMUNICATE FULL CRIMINAL ANTECEDENTS OF ACCUSED AMOUNTS TO MISCONDUCT, INTERFERENCE WITH JUSTICE?

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The Madhya Pradesh High Court in the case Kuldeep Dohare Versus the State of Madhya Pradesh observed, recently the Gwalior bench directed the Director General of Police, State of Madhya Pradesh to file an affidavit explaining as to whether non-communication of criminal antecedents of an Applicant or Accused to the Court is a minor misconduct or if it amounts to interference with the criminal justice dispensation system. Before the next date of hearing, the affidavit is to be filled.

The bench comprising of Justice G.S. Ahluwalia observed and remarked that the court was frequently finding that the police authorities were not sending the complete criminal antecedents, in spite of the circular issued by Police Headquarters.

It was observed that the police authorities did not send the criminal antecedents of the applicant. Furthermore, it is clear that it is a clear attempt to facilitate the applicant to obtain bail by projecting that he has no criminal antecedents. The issue raised is weather the conduct of police officers can be said to be a minor negligence or it is an interference with the criminal justice dispensation system?

In the present case, the court was dealing with a bail application moved by the accused applicant for offences punishable under section 307, Section 149, section 148, section 147, section 506, section 294, section 201. On an earlier hearing, the court had observed that even though the case diary did not reflect any criminal antecedents on the part of the Applicant. The impugned order passed by the lower court rejecting his bail application mentioned otherwise.

It was observed that a reply was sought by the court from the Superintendent of Police, District Bhind as to why the important information with regard to the criminal antecedents of the Applicant were withheld by the respective SHO. The SP informed the Court on the subsequent hearing that the SHO concerned as well as the Investigating Officer in the case were found guilty of misconduct and were fined with Rs. 2,000 and Rs. 5,000, respectively.

The Court observed that since the problem was stemming from different police stations. However, the DGP should file his reply regarding the prevailing situation-

Since in different police station, this situation is prevailing. Therefore, an affidavit is directed to be filled by the DGP, State of Madhya Pradesh as to whether non- communication of criminal antecedents of an applicant is a minor misconduct or it amounts to interfere with the criminal antecedents of justice dispensation system.

Accordingly, the affidavit needs to be filled within a period of 1 week, the matter would be heard next on 08.07.2022.

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Legally Speaking

HIGH COURT OF MADHYA PRADESH: SECTION 5 OF THE LIMITATION ACT APPLIES TO ARBITRATION REFERENCE UNDER NATIONAL HIGHWAY ACT, 1956

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The High Court of Madhya Pradesh in the case Ghanshyam Gupta v. State of Madhya Pradesh and Ors observed and stated that Section 5 of the Limitation Act would be applicable to reference to arbitration under the National Highways Act, 1956.

The Division Bench comprising of Justice Ravi Malimath and Justice Purushiandra Kumar Kaurav observed and reiterated that since no limitation is provided under Section 3G (5) of the National Highways Act. The bench stated that the provisions of Article 137 of the Schedule to the Limitation Act, 1963 would apply to such proceedings.

Therefore, the court held that the limitation period for filing an appeal against the decision of the competent authority before the arbitrator from the date of expiry of 90 days is three years from the decision of the competent authority.

FACTS OF THE CASE:

The petitioner, Mr. Ghanshyam Gupta was the landowner of the land which was acquired by the Respondent, Madhya Pradesh Road Development Corporation. Thereafter, the competent authority determined the quantum of compensation payable to the petitioner and passed an award to that effect on 30.07.2015.

The petitioner being dissatisfied with the quantum of compensation determined by the competent authority. On 04.12.2019, an appeal was filled by the petitioner before the arbitrator. The appeal was dismissed by the arbitrator as time-barred filed after the expiry of three years limitation period.

the petitioner filed a writ petition before the High Court, Aggrieved by the decision of the arbitrator.

Contentions Raised by the Parties:

It is stated that Section 5 of the Limitation Act is applicable to arbitration reference under Section 3G (5) of the National Highways Act, 1956.

It was observed that the petitioner was unaware of the availability of the remedy of appeal against the decision of the competent authority, the petitioner only after consulting his lawyer, that the petitioner came to know that he could seek enhancement. Further, there is a valid ground to condone the delay.

The submissions of the petitioner were countered by the Respondent on the following grounds:

Though, in the absence of a period of limitation for filing an appeal under Section 3G (5) of the Act of 1956, it was construed that the provisions of Article 137 of the Limitation Act would stand applicable.

It was stated that Article 137 provides for 3 years period, and the petitioner filed the appeal after a delay of 4 years.

COURT ANALYSIS:

The court observed and stated that since no limitation is provided under Section 3G (5) of the National Highways Act, the provisions of Article 137 of the Schedule to the Limitation Act would apply to such proceedings.

Therefore, the court held that the limitation period for filing an appeal against the decision of the competent authority before the arbitrator from the date of expiry of 90 days is three years from the decision of the competent authority.

The court observed that there is nothing in the National Highways Act that excludes the applicability of Section 5 of the Limitation Act. However, Section 5 of the Limitation Act would be applicable to reference to arbitration under the National Highways Act, 1956 and the arbitrator has the power to condone the delay against the award, in filing an appeal by the competent authority.

The court noted that the petitioner was not aware that an appeal could be filed against the decision of the Competent Authority and it is only after consulting his lawyer that the petitioner came aware of any such right, therefore, there is sufficient reason to condone the delay.

Accordingly, the application was allowed by the court and the court directed the arbitrator to decide the case of the petitioner on merit.

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KERALA HIGH COURT APPOINTS AMICUS CURIAE IN SARITHA NAIR’S PLEA; IS A STATEMENT RECORDED U/S 164 CRPC A PUBLIC DOCUMENT?

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The Kerala High Court in the case Saritha S. Nair v. Union of India & Anr observed and appointed an amicus curia to assist the court to decide the legal question of whether a statement recorded under Section 164 of the CrPC is a public document.

The bench comprising of Justice Kauser Edappagath appointed the amicus curiae, in the petition filled by Saritha S. Nair, the prime accused in the infamous solar panel scam seeking a direction to provide her with copies of the Section 164 statement given by Swapna Suresh, the accused in the gold smuggling case.

The court appointed Advocate K.K. Dheerendrakrishnan, as the amicus curiae in the case.

In the present case, it was observed that Saritha Nair is accused of having duped several influential people to the tune of 70 lakhs, by offering to install solar power units for them or by making them business partners and by receiving advance payments for the same.

Moreover, Swapna Suresh is accused of smuggling 30 kilograms of gold through diplomatic cargo dispatched to UAE Consulate at Thiruvananthapuram.

It was observed that when the petition came up for hearing, the counsel appearing for the petitioner, Advocate B.A Aloor appearing that the statement given by Swapna was a public document and therefore the petitioner was entitled to get a copy.

Further, Nair approached the Court apprehending that certain allegation may have been brought on record against her in the statement given by Suresh. It was prayed by Nair, that the c court allow her plea, directing the production of certified copies of the said document to her, failing which she would sustain an irreparable injury, the hardship and as well as physical and mental agony.

It was observed that the Nair had had initially moved the Principal District and Sessions Court of Ernakulam, with the same request, but this was denied. The court noted and adjourned the matter to July 11, while on a petition filed by the accuse, Saritha S. Nair in the solar scam cases, for seeking a directive to provide a copy of the statement given by Swapna Suresh, accused in the diplomatic gold smuggling case before a subordinate court.

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Supreme Court issues notice in an SLP; can section 156 (3) CRPC be invoked after failing to get desired relief in a civil suit?

It was observed that before the Calcutta High Court, it was contended by the accused that the allegations made in the application under Section 156(3) CrPC fails to make out any offence against them. Further, it was submitted that a frustrated unsuccessful litigant before the Civil Court has approached the Criminal Court and the Criminal Investigation.

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The Supreme Court in the case Usha Chakraborty vs State of West Bengal observed and issued a notice in a Special Leave Petition filled, raising an issue whether in a dispute essentially in a dispute of civil nature that can a person, after having failed to get the desired relief from a civil suit, invoke Section 156(3) of the Code of Criminal Procedure?

In the present case, an FIR was registered against the accused under Sections 323, Section 384, Section 406, Section 423, Section 467, Section 468, Section 420 and Section 120B of the Indian Penal Code, 1860 following an order passed by the Magistrate under Section 156(3) CrPC.

It was observed that before the Calcutta High Court, it was contended by the accused that the allegations made in the application under Section 156(3) CrPC fails to make out any offence against them. Further, it was submitted that a frustrated unsuccessful litigant before the Civil Court has approached the Criminal Court and the Criminal Investigation, which has commenced, is for the purposes of throttling them. The petition was dismissed by the High Court observing that the materials which have already been collected by the Investigating Agency, prima facie, make out a case for investigation. The issue raised before the court was weather the same would make out an offence after the investigation is concluded is absolutely at the end of the investigation to be analysed.

Therefore, challenging this order, one of the accused approached the Apex Court. However, It was submitted that the dispute is essentially of civil nature, for which the applicant in Section 156(3) CrPC petition filed a civil suit but having failed to get the desired relief, he invoked Section 156(3) CrPC.

The bench comprising of Justice Surya Kant and the Justice JB Pardiwala, while issuing notice also stayed further proceedings in FIR lodged against the accused.

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GAUHATI HIGH COURT QUASHES NO-CONFIDENCE MOTION AGAINST GRAM PANCHAYAT PRESIDENT CITING PARTICIPATION OF MEMBER DISQUALIFIED FOR HAVING THREE CHILDREN

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The Gauhati High Court in the case Jugitawali Pawe v State of Assam and 15 ors observed and quashed a resolution expressing no-confidence in the petitioner – the President of a Gram Panchayat, as a result of which she as removed from office. It was stated that it is as per the citing no compliance with Assam Panchayat Act, 1994, reading with Rule 62 of the Assam Panchayat (Constitution) Rules, 1995.

It was preferred by the petitioner to the materials available on record to argue that one of the members of the Gaon Panchayat, the respondent. The respondent voted against the petitioner and had given birth to her third child the previous year. Moreover, by virtue of Section 111(2)(a) of the Assam Panchayat Act, 1994, reading with Rule 62 of the Assam Panchayat (Constitution) Rules, 1995, the petitioner stood automatically disqualified on the date of voting. Following, which her vote was taken by passing No-confidence motion.

It was prayed by the petitioner in the plea for setting aside the impugned resolution and for issuance of a direction to restore his client back in the office. Thereafter, to initiate fresh proceedings, liberty should be granted to the respondent, following the due process.

It was agreed by the Counsel representing for the respondent that the said member of the panchayat had been disqualified but retained on the ground that the disqualification would have no bearing on the petitioner’s case, as the impugned resolution was passed before the declaration of petitioner disqualification.

In the present case, It was noticed by Justice Suman Shyam the member had voted against the petitioner and without her vote. The petitioner would not have been ousted from office. Justice Shyam also found no dispute about the fact that the member had incurred disqualification under the law prior the date of adoption of the impugned resolution. Justice Shyam found it unnecessary to delve into other aspects of the matter which includes the procedural formalities for declaring the member a disqualified candidate.

It is observed that the impugned resolution was declared to be vitiated and liable to be set aside. Further, the Court restored the petitioner to the office of the President of the Bongalmara Gaon Panchayat with immediate effect and it was stated by the court that the order will not stand in the way should the authorities or any member of the Gaon Panchayat propose a fresh motion of “no-confidence” against the petitioner and the due process of law needs to be followed.

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Halt DDA’s demolition action against jhuggis in Nizamuddin’s Gyaspur area, orders Delhi High Court

As per the JJ Rehabilitation and Relocation Policy 2015 and the Delhi Urban Shelter Improvement Board, the residents who can establish their residence prior to 01.01.2015 are eligible for rehabilitation under the JJ Rehabilitation and Relocation Policy 2015.

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plea in Delhi High Court seeking repatriation of 56 pregnant nurses

The Delhi High Court in the case Manoj Gupta & Ors. v. DDA & Ors observed and has ordered status quo on the Delhi Development Authority’s proposal to demolish jhuggi clusters in city’s Gyaspur area in Hazrat Nizamuddin. The vacation bench comprising of Justice Neena Bansal Krishna observed in the petition filled by the residents and the court granted an interim relief.

It was ordered by the court status quo till July 11, the next date of hearing.

The bench orally remarked that a ten-day delay in demolition won’t make a difference but if today it is demolished and later, we come to know that they were entitled, who’s going to… the bench will consider it on July 11, 2022 but in the Meanwhile, some protections are entitled them. Adding this, Status quo be maintained. If since 1995, they have been there, heavens won’t come down if for 10 more days they are protected.

In the plea the petitioner stated that the T-Huts settlement in the area, which was stated by the authorities to vacate. It has been in existence for almost two decades and compromise of 32 jhuggis or households.

In the plea it was alleged that the bulldozers have been parked around the camp and a DDA official has orally asked them to vacate the area and it is noted that till date no proper notice have been sent to them nor has DDA conducted any survey of the area.

Furthermore, the DDA did not provide any alternate arrangement for their rehabilitation which resulted in extreme distress among the residents.

Moreover, it was admitted by the petitioner that the land in question belongs to DDA and they may seek that status-quo to be maintained at the site. It was urged that the residents should not be physically dispose or evicted from the demolition site until the survey is conducted and rehabilitation is provided to the residents as per the DUSIB policy of 2015.

As per the JJ Rehabilitation and Relocation Policy 2015 and the Delhi Urban Shelter Improvement Board. The residents who can establish their residence prior to 01.01.2015 are eligible for rehabilitation under the JJ Rehabilitation and Relocation Policy 2015.

It is observed that in the case Ajay Maken v. Union of India, Reliance is placed on the Supreme Court decision and the High Court decision in the case Sudama Singh & Ors. v. Government of Delhi & Anr, it was held in the case that that removal of jhuggis without ensuring relocation would amount of gross violation of Fundamental Rights under Article 21 of the Constitution. Further, it was held that the agencies conducting the demolitions ought to conduct survey before undertaking any demolition.

It is submitted that these observations would apply across the board, in the entire NCT of Delhi.

Advocates Vrinda Bhandari, Shiyaz Razaq, Kaoliangpou Kamei, Jepi Y Chisho and Paul Kumar Kalai, represented the petitioner.

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