In today’s world, with the impetus given to the Intellectual Property a Non-Disclosure Agreements (NDA) has become an obvious necessity.  Be it, a proprietary software, a patent or just documents – an employer, to stay relevant need to make sure that their confidential information should remain within their domain and not end in the hands of their competitor. In the current world, a slight edge over a competing business could mean a world of difference and an entity should not be made to lose it for lack of a NDA.

The concept of trade secret was defined in Ambiance India Pvt. Ltd. v. Shri Naveen Jain ^[1],  where it was held that ” a trade secret is some protected and confidential information which the employee has acquired in the course of his employment and which should not reach others in the interest of the employer. However, routine day-to-day affairs of employer which are in the knowledge of many and are commonly known to others cannot be called trade secrets. A trade secret can be a formulae, technical know-how or a peculiar mode or method of business adopted by an employer which is unknown to others.”

Even though the Indian Contract Act, 1872 (Contract Act) does not explicitly envisage a NDA, the same could be considered as ‘restrictive’ agreements in terms of Section 27 of the Contract Act[2] and hence void. The only exception being in the case of sale of goodwill of a business whereby a buyer may be refrained from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein, provided such local limits are reasonable.

Negative covenant enforceable during the term of employment

In the case of Niranjan Shankar Golikari [3]  the Apex Court held Negative covenants operative during the period of the contract of employment when the employee is bound to serve his employer exclusively are generally not regarded as restraint of trade and therefore do not fall under Section 27 of the Contract Act. Meanwhile, in Wipro Ltd. v. Beckman Coulter International S. A[4]  the court held that negative covenants between employer and employee contracts pertaining to the period post termination and restricting an employee’s right to seek employment and/or to do business in the same field as the employer would be a restraint of trade and therefore, a stipulation to this effect in the contract would be void.

Is an NDA in restraint of trade?

The Bombay High Court in VFS Gobal Services Pvt Ltd [5] held that a clause prohibiting an employee from disclosing commercial or trade secrets is not in restraint of trade. The effect of such a clause is not to restrain the employee from exercising a lawful profession, trade or business within the meaning of Section 27 of the Contract Act.

While the Delhi High Court in Mr. Diljeet Titus, Advocate v. Alfred A Adebare and Ors.[6] restrained the Defendant from misappropriating the information including the lists of clients and other information forming the database of the firm, in Burlington Home Shopping Pvt. Ltd. v. Rajnish Chibber[7]  granted injunction restraining the Defendants from using the compilations, database comprising the list of the clients and in Escorts Const. Ltd v. Action Const.[8], restrained Escorts from manufacturing, selling or offering for sale the Pick-N-Carry Mobile Cranes that were a substantial imitation or reproduction of their industrial drawings.

Conclusion

From the above line of the decisions we can see the courts have tried to draw a line between the rights of the employer and employee. In cases where the confidential information or trade secret is at stake and the same is not available in the public domain then an employer can enforce an NDA, provided that the employee cannot be confronted with decision of either working for the employer or remain idle. An NDA could be enforced only if the restraint imposed was only with respect to not using the confidential information they acquired from their employment and not with respect to carrying on a similar service.

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[1] 2005 (81) DRJ 538

[2] Section 27 of the Contract Act provides that ‘every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.’

Exception 1: Saving of agreement not to carry on business of which good will is sold – One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein, provided that such limits appear to the court reasonable, regard being had to the nature of the business

[3] Niranjan Shankar Golikari v. The Century Spinning and Mfg. Co. 1967 AIR 1098

[4] 2006 (3) ARBLR 118 (Delhi)

[5]  VFS Global Services Private v. Mr. Suprit Roy 2008 (2) BomCR 446.

[6] 2006 (32) PTC 609 (Del.), On termination of employment, the defendant took away important confidential business data, such as client lists and proprietary drafts, belonging to the plaintiff.

[7] 1995 (35) DRJ 335, The Court went on to hold that such database in fact amounted to a copyright and thereby deserved protection.

[8] AIR 1999 Delhi 73