No-compete clauses good only on paper

India Inc's bid to stop people from joining rivals has not found favour with the judiciary.

Six months ago, Akash Joshi, 26, blithely signed an employment contract with a leading software company and thought he had got the mother of all jobs. But when he wanted to shift to greener pastures, he suddenly felt that the contract he signed had placed his future in a straitjacket. The contract had a no-compete clause, saying that he could not join a rival within two years of resigning from the present job.

A few days later, he got a lawyer's notice from his former employer asking him to cough up a hefty compensation or face a court battle. But his new employers asked him to relax as the track record showed the no-compete clauses were good only on paper but almost impossible to implement.

Successive court judgements in India have shown that the judiciary does not back the no-compete clauses as they impose an undue restriction on the personal freedom of a contracting party and interferes with free trade.

Despite such adverse judgements, companies have not stopped including such clauses in employment contracts in a bid to stem the average 30 per cent attrition rate. Infosys is the latest to join the trend, which bars employees from jumping ship for a specified period. Some are even seeking a security deposit from new recruits to pay for the training expenses while others are entering into contracts with the parents/guardians of the employees they are hiring. Freshers who wish to leave sometimes say that they had signed the contract incorporating a no-compete clause without understanding its import.

By roping in the guardian, the companies seek to plug this loophole, a senior executive of a private telecom company said.

But corporate lawyers and experts say the no-compete clause cannot be a long-term strategy to retain talent as they have failed in the past.

No-compete clause agreements are only a 'quick-fix' and do not always work as an effective tool to retain talent, said Sharad Vishvanath, practice leader, Analytics Consulting, India, Hewitt Associates. They only create a lot of suspicion. Besides, the agreement often proves to be difficult to enforce and the recovery record is quite dismal, he adds.

India Inc agrees. Most restrictions do not have any legal merit. They are put there just to create psychological pressure on the employee to warn him that he would face legal hassles if he were not to fulfil the obligations, says an HR manager of a leading Gurgoan-based automobile firm.

Consider the Supreme Court's observations in the case Superintendence Co of India vs Krishan Murgai. The company took the employee to court on the ground that he had joined a competing firm even though his contract of employment specifically prevented him from doing so for two years after he resigned.

The apex court summarily rejected the company's plea, saying any action, which restrained trade, was void. The Supreme Court made it clear again in the Coca-Cola versus Pepsi case in 2000. Leading lawyer M M Kaushal of S Kaushal Associates said: "The issue is whether any technical knowhow has been imparted by the employer and its nature, based on a nexus of reasonability. No general restrictions can apply in the eyes of the law." Mumbai-based law firm Majmudar & Co quotes Section 27 of the Indian Contract Act as stipulating that an agreement that restrains anyone from carrying on a lawful profession is void to that extent. The reasoning behind this is that agreements of restraint are unfair, as they impose an undue restriction on the personal freedom of a contracting party.