Neha, a software programmer, takes up employment with Macro ware Ltd., a large, software Development Company. Her contract of employment includes the following two clauses.....Is Neha legally entitled to do so? Discuss.

Question: Neha, a software programmer, takes up employment with Macro ware Ltd., a large, software Development Company. Her contract of employment includes the following two clauses:
i. During the course of her employment with Macroware Ltd., Neha shall not take up any other employment or indulge in software development for third parties.
ii. In the event of the termination of the contract of employment, for whatever reason, Neha shall not, for a period of three (3) years thereafter, compete directly or indirectly with Macroware Ltd. or take up employment as a software programmer with any competitor of Macroware Ltd.
a. Would these causes be enforceable in a court of law? Discuss
b. Let us assume that Neha, instead of taking up employment with Macroware Ltd., entered into a partnership with two other programmers Amit and Salma, and set up the firm NASware. Assume further that after two years, Neha retires from the partnership which continues with Amit and Sauna as its partners. While retiring from the firm, Neha is paid whatever is due to her; from the partnership and, additionally, she is also paid an amount of Rs. 25 lakhs for agreeing to give up any claim to the name NASware and the bundle of benefits associated with it. Despite this, Neha starts a sole proprietorship concern using the same name NASware.
Is Neha legally entitled to do so? Discuss. [DJS 2008]

Find the answer to the mains question of the Law of Contract only on Legal Bites. [Neha, a software programmer, takes up employment with Macro ware Ltd., a large, software Development Company. Her contract of employment includes the following two clauses.....Is Neha legally entitled to do so? Discuss.]

Answer

An agreement restraining a person from carrying on a lawful profession, trade or business is void to that extent. However, an agreement not to carry on within specified local limits, a business similar to the business of which goodwill is sold, can be enforced, provided the limits of the restraint are reasonable.

There are two kinds of exceptions to the rule regarding restraint of trade, those created by statutes and those arising from judicial interpretation of Section 27. The first exception is the sale of good will as enshrined in section 27 of the Contract Act.

The principle of sale of goodwill states that the person when one person sells goodwill of his business to another person, then that person can impose certain restrictions to the seller like restricting him from carrying business of similar nature in the same locality.

The only caveat regarding this is that the agreement should be reasonable according to the nature of the business. The whole point of making this exception is to protect the interest of a purchaser of goodwill.

In England the law relating to restraint of trade was elaborately considered by the House of Lords in Nordenfelt v. Maxim Nordenfelt Guns & Ammunition, [1894 AC 535] The case involved a sale of goodwill by an inventor and a manufacturer of guns and ammunition who agreed with the buyer company: (1) not to practise the same trade for 25 years, and (2) not to engage in any business competing or liable to compete in any way with the business for the time being carried on by the company. He afterwards entered into agreement with another manufacturer of guns and ammunition and the company brought an action to restrain him. It was held that the first part of the agreement was valid being reasonably necessary for the protection of the purchaser's interest. But the rest of the covenant by which he was prohibited from competing with the company in any business that the company might carry on was held as unreasonable and, therefore, void.

The first case at hand is the condition of the non-compete clause enshrined in the agreement between the firm Macroware Ltd. and Neha. The first clause states that during the course of her employment with Macroware Ltd., Neha shall not take up any other employment or indulge in software development for third parties. This clause is very much valid reasonable and valid as it is necessary for the protection of the interest of the employer i.e. Macroware Ltd.

The second exception to restraint of trade arises from the Partnership Act. There are three provisions in the Partnership Act which validate agreements in restraint of trade.

• Section 11 enables partners during the continuance of the firm to restrict their mutual liberty by agreeing that none of them shall carry on any business other than that of the firm.

• Section 36 enables them to restrain an outgoing partner from carrying on a similar business within a specified period or within specified local limits. Such agreement shall be valid if the restrictions imposed are reasonable.

• In section 54, a similar agreement may be made by partners upon or in anticipation of dissolution by which they may restrain each other from carrying on a business similar to that of the firm.

It is necessary for the validity of restraint under Section 36 or 54 that—

1. the agreement should specify the local limits or the period of restraint, and

2. the restriction imposed must be reasonable.

The second clause states that in the event of the termination of the contract of employment, Neha shall not, for a period of three (3) years thereafter, compete directly or indirectly with Macroware Ltd. or take up employment as a software programmer with any competitor of Macroware Ltd. This clause is necessary and reasonable because the time period is specified of 3 years and the restriction is only in regard to get employed with the competitors of Macroware and not others,

Moreover, In Hukmi Chand v. Jaipur Ice and Oil Mills, AIR 1980 Raj 155, An agreement by a retiring partner not to carry on similar business on the land belonging to him and adjoining the factory of the firm, has been held to be reasonable and binding on the persons buying the land from him.

Under Section 36(1) of the Partnership Act, an outgoing partner has a right to carry on a business competing with that of the firm, and to use the firm name. Still, under Subsection (2) of Section 36, the partners can enter into an agreement in restraint of trade and can bind themselves not to carry on any business similar to that of the firm within a specified period or within the specified local limits and notwithstanding anything contained in Section 27(1) of the Contract Act, such an agreement shall be valid if restrictions imposed are reasonable. The agreement not to carry on similar business may be with regard to the local limits or for a specific period.

In the second case at hand, Neha had voluntarily entered into an agreement with Amit and Salma that she would give up any claim to the name NASware and the bundle of benefits associated with it. She had done so after taking Rs. 25 Lakhs as her share in the goodwill. So, the agreement shall be held binding or enforceable as it is in complete interest of the partnership firm that no outgoing partner uses the name and goodwill of the firm for their benefit of employment with others. So, the restraint is reasonable and valid under section 27 of the Indian Contract Act.