Non-Compete Agreement

What is a Non-Compete Agreement?

The Non-Compete Agreement is a legal document under which the "Restricted Party" (the party agreeing to not compete with the other party) agrees to not enter into the competition of any kind during and for such duration after the termination of the business relationship with the "Protected Party" (the party who wants to protect their business secrets). Non-Compete Agreement can be used by a business to retain valuable employees, protect its confidential information and customers, and prevent unfair competition.

The Non-Compete Agreement ensures that the Restricted Party will not use the information or skills learned during the term of the business relationship to start a business and compete with the Protected Party in the Relevant Market (where the Protected Party does business or such geographical area specified under this Agreement), during or once the business relationship is over.

Non-Compete Agreement is most often used in highly competitive industries like Information Technology, Media, Sales, and Marketing. This agreement can be used for the existing as well as for the upcoming Employees/Consultants of the Protected Party.

Common situations requiring the use of Non-Compete Agreements include the following:

• The Employer wants to ensure that the Employee does not use the inside information about the business to start a competing business during or after the termination of the employment.
• A Company terminating its relationship with a Contractor or a Consultant and wants to ensure that the Consultant will not use the business's inside information to start a competing business or help its competitors.
• Business Partners terminating their business relationship.
• Merger or Acquisition of two companies.

The Restricted Party must receive compensation, known as Consideration, in exchange for entering into this Agreement, for it to be enforceable under the law. Compensation can take the form of an offer of employment/project, money, or any other form of remuneration. Furthermore, this Agreement includes a Non-Solicitation Clause, which prohibits the employee from poaching the employees and customers of the Company.

What is the difference between a Non-Compete Agreement and a Non-Disclosure Agreement?

A Non-Compete Agreement specifically restricts competition or starting a similar business for a particular period in a particular location. On the other hand, a Non-Disclosure Agreement focuses solely on preventing the disclosure of confidential information or secret information of the party disclosing it to the other party.

Is it mandatory to have a Non-Compete Agreement?

No, it is not mandatory. However, having written a Non-Compete Agreement will help in protecting the business interest and prevent unfair competition.

What must a Non-Compete Agreement contain?

A Non-Compete Agreement must include the following clauses:

• Parties involved: The name and address of the parties.
• Scope of restriction: Detailed description of the activities that are restricted.
• Duration: The time period during which the restriction applies.
• Geographical limitations: The area in which the restrictions apply.
• Consideration: What the employee or party receives in return for agreeing to non-compete.
• Consequences of breach: Penalties or legal actions in case of violations.

Who can enter into a Non-Compete Agreement?

Any individual above the age of 18 years or entities registered in India can enter into a Non-Compete Agreement.

What can be the duration of a Non-Compete Agreement?

The duration of a Non-Compete Agreement can vary, typically ranging from 6 months to 2 years. It depends on the nature of the business, industry standards and the role of the concerned employee.

What has to be done once a Non-Compete Agreement is ready?

The Non-Compete Agreement would need to be printed on non-judicial stamp paper or e-stamp paper, which is available in certain states. The value of the stamp paper would depend on the state in which it is executed. Each state in India has provisions in respect of the amount of stamp duty payable on the Non-Compete Agreement. Information regarding the stamp duty payable can be found on the State government websites.

After printing the document on stamp paper or e-stamp paper, as applicable, both parties should sign the lease deed and each party should keep a copy of the Non-Compete Agreement.

What laws are applicable to a Non-Compete Agreement?

In India, Non-Compete Agreements are generally barred under Section 27 of Indian Contract Act, 1872. But the Supreme Court of India in the recent judgements has specified that certain types of Non-Compete Agreements can be enforced to protect the genuine interests of the Companies. A Non-Compete Agreement will be enforceable under the Indian Contract Act, 1872.

The duration and geographical area of duration must be reasonable and protect the interest of the party to be enforceable under the law.

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