Non-Solicitation Agreement and its Legality in India

In modern times, where globalization and industrialization are at their highest, companies are in constant competition; every company wants to be stable, growing, and profitable at a great market standing. Protecting trade secrets and the clients is very necessary. A non-solicitation agreement is a formal contract in which two parties agree not to solicit the resources of the other party from the other. A contract that protects the interests of both the employer and the employee is known as an employee contract. The conditions of the two parties’ roles, responsibilities, and compensation are set forth in this type of contract. Amidst intensifying global rivalry, enterprises are taking all necessary precautions to safeguard their specifications. As a result, these types of employment contracts have specific provisions that limit employee conduct both during and after the work time frame, all for the purpose of preventing obstacles to the company’s expansion. A non-solicitation agreement is a clause in an employee’s contract that states, among other things, that they will not solicit business from the company’s clients or attempt to persuade other workers to quit in order to work for another company. A non-solicitation agreement can be a standalone document itself, while it can also be a clause in an agreement or contract.

LITERATURE REVIEW

“Non-Solicitation Agreement by Amulya Bhatia” provides a summary of a non-solicitation agreement and discusses the legal validity of such an arrangement both domestically in India and abroad. The article points out that should this agreement go to court, the employer would have to demonstrate that forfeiting the employees who were being snatched would harm the company’s operations or even render them unworkable.

“Non-solicitation in the Context of Competition and Labour Laws by CAM Competition Team & CAM Corporate Team”[1] reports that businesses need to carefully balance keeping talent and the regulations that protect those workers in the labor market in the current context of rising employee turnover and difficulty in maintaining talent. Since Indian competition law is relatively new, there haven’t been any cases involving wage-fixing or no-poaching agreements between rival businesses in the job market. The Competition Act also doesn’t specifically address these types of agreements. Companies should make sure that all top executives and human resource staff members complete antitrust compliance training and refrain from discussing or exchanging sensitive personnel information with rival companies.

“What is a Non-Solicitation Agreement by Diksha Shastri”[2] states that a non-solicitation agreement is a formal contract in which two parties agree not to solicit the resources of the other party from the other. Employees, information, suppliers, vendors, and any other similar company relationships can all be considered resources. Employment contract terms are where non-solicitation is most frequently used. However, the necessity for distinct non-solicitation agreements is growing as a result of the escalation of competition, the expansion of commercial partnerships, etc.

RESEARCH QUESTION

What are the types and importance of non-solicitation clauses?
What is the enforceability of a non-solicitation agreement in India?

RESEARCH OBJECTIVE

The study focuses on understanding the non-solicitation clause. The importance and composition of a non-solicitation clause for a company. The paper also evaluates multiple prior research on the topic to understand its reasonable enforceability. The paper also discusses a few landmark judgments of non-solicitation clause enforceability in India.

RESEARCH METHODOLOGY

Any research can be carried out in a doctrinal or non-doctrinal way. The doctrinal method comprises conducting a study and analyzing the results using already published materials from the library and the internet. Contrarily, non-doctrinal research comprises going on a field trip and gathering information from legitimate sources. The current study, however, was carried out using the doctrinal technique since it necessitates a theoretical analysis of various papers, journals, books, newspaper articles, and court decisions. The current study used analytical, descriptive, and critical methodologies to accomplish this goal.

ANALYSIS

A non-solicitation agreement is a clause in an employee’s contract that states, among other things, that they will not solicit business from the company’s clients or attempt to persuade other workers to quit in order to work for another company. A non-solicitation agreement is a contract that a business has with its staff members. This is essentially a clause in a contract that states that an employee cannot solicit or poach business clients or use any confidential information they have obtained as a result of working for the company in question if they leave or start working for, say, a competitor.

Within the legal context, “solicitation” refers to reaching out to potential clients in order to pursue a business relationship. In any firm, the consumers and staff are the stakeholders. It takes a lot of work to build a solid customer base, and losing even one customer is equivalent to losing something really significant to a business. A non-solicitation agreement is relevant in this situation. A “non-solicitation” clause is sometimes included in employment agreements to forbid employees from using or approaching clients, customers, vendors, or other staff members of the company for a set amount of time after employment ends.

A contract that protects the interests of both the employer and the employee is known as an employee contract. The conditions of the two parties’ roles, responsibilities, and compensation are set forth in this type of contract. Amidst intensifying global rivalry, enterprises are taking all necessary precautions to safeguard their specifications. As a result, these types of employment contracts have specific provisions that limit employee conduct both during and after the work time frame, all for the purpose of preventing obstacles to the company’s expansion.

A non-solicitation agreement can be found in the business sector for multiple purposes. They are usually a part of employee contracts but can also be found in various other dealings of the business. The various types of non-solicitation agreements are:

Employee Non-Solicitation Agreement: Prohibits present or past workers from enticing other workers to quit the organization.
Customer/Client Non-Solicitation Agreement: Forbids existing or former employees or business partners from approaching potential clients or consumers.
Vendor/Supplier Non-Solicitation Agreement: Averts business partners or current or former employees from approaching the company’s suppliers or vendors.
General Non-Solicitation Agreement: This agreement covers a wider variety of interactions and forbids soliciting any kind of business relationship, including those with suppliers, vendors, customers, employees, and clients.

The legality of the non-solicitation agreement depends on a case-to-case basis. In the context of India, according to Sec 27 of the Indian Contract Act of 1872, any agreement that restricts anyone in the country from exercising their legal right to any trade, profession, or business is void. So non-solicitation agreement should be void; but according to the courts in India, it depends upon the case wherein such instrument is used. Through a series of judgments, the Indian courts have examined the enforceability and scope of non-solicitation agreements in India.

In FL Smidth Pvt. Ltd. v. M/s. Secan Invescast (India) Pvt.Ltd (1967)[3], also referred to as the “Secan Invescast judgement,” the Madras High Court held that contacting former coworkers’ clients does not constitute solicitation unless and until those clients place orders or do business with the former employee as a result of that approach. Additionally, it was decided that these kinds of agreements can only be upheld if they are acceptable with regard to time, distance, etc.

In Niranjan Shankar Golikari v. The Century Spinning And Mfg. Co. (1967)[4], the Hon’ble Supreme Court clearly defined the boundaries between when restrictive covenants, like non-compete and non-solicitation agreements, apply during and after employment and further declared that the two scenarios would be handled differently. This case led to the conclusion that negative covenants would only be enforceable under the law if they were in effect during employment and would not violate Section 27 of the Indian Contracts Act. The case delineated the criteria for ascertaining the validity of a restrive agreement in accordance with Section 27.

Wipro Ltd. v. Beckman International (2006)[5] was one of the first few instances that addressed the legality of a non-solicitation agreement. The Delhi High Court noted in this instance that a non-solicitation clause is not intrinsically illicit. Additionally, it was noted that a non-solicitation condition is equitable and would not violate the Indian Contract Act Section 27. The Court also addressed the relationship between the parties to such an arrangement, stating that employer-employee contracts are subject to a tighter clarification. As a result, the Court emphasized the following aspects of this finding:

If reasonable, conditions, both positive and negative, adopted during employment cannot be interpreted as prohibitive of trade.
The aforementioned contracts become inapplicable once the employment contract is terminated.
Compared to other types of contracts, on these sorts of relationships, the courts will apply stricter rules when handling employee-employer agreements. This is due to the perception that one is in a dominant position in employer-employee relations. The parties are nevertheless anticipated to be on the same level in the latter case, nevertheless.

Consequently, the Court took a liberal view of this issue and refused to award the petitioner an injunction.

Only when the duration of its enforcement is fair is a non-solicitation agreement deemed to be legally enforceable. The duration of the agreement, expressed in months, is known as the non-solicitation term. These clauses are typically seen in employment contracts because they forbid an employee from stealing clients from his former employer after leaving his job.

CONCLUSION

A non-solicitation agreement is a formal contract in which two parties agree not to solicit the resources of the other party from the other. Employees, information, suppliers, vendors, and any other similar company relationships can all be considered resources. A person’s employment or trade may be restricted if they do not solicit. Therefore, for it to be legally binding, it needs to be written quite precisely. Several different perspectives have also been expressed by Indian courts over the legality of non-solicitation agreements. A variety of factors affect enforceability, including the non-solicitation term, amount of tools, instruction, etc., used for the worker’s skill development. The limitation must also only apply for a limited time, and the terms of the agreement shouldn’t be overly repetitious.

[1] Non-solicitation in the Context of Competition and Labour Laws | Competition Law, https://competition.cyrilamarchandblogs.com/2018/05/non-solicitation-context-competition-labour-laws/ (last visited Feb 25, 2024).

[2] What is Non Solicitation Agreement? – LegalWiz.in, https://www.legalwiz.in/blog/what-is-non-solicitation-agreement (last visited Feb 25, 2024).

[3] (FL Smidth Pvt. Ltd. v. M/s. Secan Invescast (India) Pvt.Ltd , 2013)

[4] (Niranjan Shankar Golikari v. The Century Spinning and Manufacturing Company Ltd, , 1967)

[5] (Wipro Ltd. v. Beckman Coulter International SA, 2006)

Author: Harshika Bhutda