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Meaning of Non-Compete Clause side by side with Section 27

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Meaning of Non-Compete Clause side by side with Section 27

Meaning of Non-Compete Clause

In a legally enforceable contract known as a Non-Compete clause or Non-Compete Agreement (NCA), the employee promises not to work for a competitor’s firm or launch a related business or profession for a fixed timeframe after quitting his present job. Employers can protect sensitive data (company secrets, client databases, business strategies, etc.) and prohibit former employees from using it in the event that they intend to work for the opposition or launch a comparable business by establishing such a contract.


Meaning of section 27

The court declares void any agreement that prohibits two or more people from operating in a legal trade or profession. The court determines that limiting one or more individual’s ability to engage in a particular legitimate business is unjust and infringes on their fundamental freedom to choose the line of work they wish to engage in. As it restricts one’s freedom to pursue a business interest, the court ruled that the restriction of trade agreement is irrational and unlawful.


 Difference between section 27 and Non-compete clause

If we look at the point of view of Indian law, the non-compete clause is considered unlawful under section 27 of the law of contracts. In multiple cases Indian courts have also consistently denied enforcement of post-termination non-compete clauses in contracts of employment as restraint of trade is not allowed under section 27 of the Indian Contract act-1872. Deeming them to be void and against public policy as they have the power to deprive a person of his/her fundamental right to earn a living.

For any restrictive agreement to come under section 27 of the contract act, the agreement has to be in restraint of trade.  Section 27 does not give an idea as to what kind of restraints are not void. Article 19(g) of the constitution of India provides every citizen with the right to practice any profession, trade or business. This is not considered as an absolute right which means that some restriction can be placed on this right in the context of public interest. The courts have always kept the interpretations of such provisions flexible in order to make sure that the principles of morality, fairness and justice are upheld. After considering the required confidentiality and the integrity of the employment, the courts have inclined their view towards giving some regard to the non-compete clause.


 Case Law

In the case of Niranjan Shankar Golikari Vs the Century Spinning and Manufacturing Company Ltd. (1967 AIR 1098 1967 SCR (2) 378), the Hon’ble Supreme Court observed that-restraints or negative covenants in the appointment or contracts may be valid if they are reasonable.

In the case of V.F.S. global services Pvt. Ltd Vs Mr. Suprit Roy (2008(2) Bom CR 446) the Bombay High court established the principle that a restraint on the use of trade secrets during or after the cessation of employment does not tantamount to a restraint on trade under section 27 of the Act and therefore can be enforceable under certain circumstances.


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Collated and Compiled by the internal staff of Karma Global with the knowledge and expertise that they possess, besides adaptation, illustration, derivation, transformation, collection and auto generation for its monthly newsletter Issue 16 of October 2023 and in case of specific or general information or compliance updates for that matter, kindly reach out to the Marketing Team – /

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