The Delhi High Court has ruled that employment contract clauses restricting an individual’s right to seek new employment after leaving a job are void, citing Section 27 of the Indian Contract Act.
The verdict delivered on June 25 by Justice Tejas Karia, was in a case concerning a software developer whose previous employer attempted to enforce a non-compete clause to stop him from joining a client organisation.
“An employee cannot be confronted with the situation where he has to either work for the previous employer or remain idle. In employer-employee contracts, the restrictive or negative covenant are viewed strictly as the employer has an advantage over the employee and it is quite often the case that the employee has to sign standard form contract or not be employed at all,” the court observed.
Any terms of the employment that impose a restriction on right of employee to get job post-termination of the contract of employment shall be void, contrary to Section 27 of the Indian Contracts Act, it added.
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What does Section 27 of Contracts Act say?
The Section 27 of the Indian Contracts Act declares all agreements that restrains any person from practising a lawful trade, profession or business as void.
“Agreement in restraint of trade, void — Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void,” reads the Section 27.
This legal provision formed the basis of the High Court’s judgement.
What is the case about?
In the present case, listed as ‘Varun Tyagi v. Daffodil Software Private Limited’, Tyagi had resigned from the company after working on a project for Digital India Corporation (DIC) and later accepted an offer from DIC.
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The former employer invoked the non-compete clause arguing that the employee possessed proprietary knowledge developed during his tenure.
Daffodil Software claimed that the restriction was reasonable, limited only to preventing employment with DIC for three years post termination, and allowed Tyagi to work elsewhere. However, the High Court emphasised that an individual cannot be confronted with the situation where he has to either work for the previous employer or remain idle.
Freedom of changing employment a right
The bench cited American Express Bank Ltd v Ms Priya Malik case of 2006, and reiterated that the “freedom of changing employment for improving service conditions is a vital and important right of an employee, which cannot be restricted or curtailed on the ground that the employee has employer’s data and confidential information”.
The Court clarified that confidentiality cannot be misused to reinforce continued employment. “In the garb of confidentiality, the employer cannot be allowed to perpetuate forced employment,” the bench said.
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