This article is written by Ankita Jangid, pursuing BBA LLB from Bansthali Vidyapith, Rajasthan. This article deals with the right to carry competing business does not mean the illicit use of another party’s confidential information and data with regard to the right to privacy.
In the current scenario, where there exists ruthless competition in the business world, there is a strict need to maintain confidentiality in order to stay powerful in the competition. One of the most popular agreements of the business are known as non-disclosure agreements which are commonly used for the purpose of maintaining the secrecy of the business of the parties. The word ‘confidentiality’ in a non-disclosure agreement can be determined by the receiving party or by the disclosing party.
In a disclosure agreement, a disclosing party shall inform the receiving party of what can be called the confidential information under the contract to ensure that the other party shall not share the information with the unauthorized party or utilize the same for other purposes. Both the parties shall be at the liberty to decide what information can be considered confidential under the contract. The information which is not publicly available and is not intended to be shared with any third party then such information can be regarded as confidential. The contract between the parties is built on trust and confidence.
Recently, the Bombay High Court ruled that the right to carry on a competing business does not extend and cannot extend to the illegal use of another party’s confidential information or data. So the decision of the court had utmost importance to govern the misuse of confidential information of the party.
Laws for setting up a business in India
Starting a new business is more challenging nowadays. There are several legal formalities to be required to follow for both new as well as established businesses. Some of these formalities are financial regulations, employment law regulation as well as the tax obligations which are important to the functioning of every business in India.
Entrepreneurs are the individuals who start a new business bearing the risks and enjoying most of the rewards. The process of setting up a business is well known as entrepreneurship. The beginning of this journey starts with raising funds and creating a business plan which are the topmost priorities of the start-ups. But before setting up a business in an Indian dimension entrepreneurs must understand that business must be legal and abide by the laws for business made by the government.
There are certain laws to keep in mind prior to setting up a business in India.
- Forming a business structure: The decision of formalizing the business structure is crucial as it must consist of the ideas and purpose of the business. So before starting any business, we have to determine the nature and type of business. The different types of business include sole proprietorship, private limited, public limited, partnership liability.
- Licensing and Registrations: After the selection of the nature and type of business, the entrepreneurs must be aware of the types of licenses according to their nature of business. In the absence of relevant licenses, the business may have to face legal penalties.
- Shop and Establishment Act– the Act is regulated by the department of labour and commonly applies to all businesses. It regulates the area where the business is carried out and various aspects such as working hours, maternity leave, rest interval of employees, etc.
- General registrations– Permanent Account Number, GST registration, tax account number, bank account;
- Other specialized registration include IEC code (for importing and export), FSSAI license (Food business), kosher registration (for kosher goods); and
- Other types of licenses for different businesses.
- Taxation and Accounting laws- Taxes are a vital part of any business in India. There are wide varieties of taxes such as central tax, state tax, and even local taxes that apply to some businesses. A person should be aware of the different types that are applicable for different types of businesses. There are various initiatives launched by the Central Government for ‘start-up businesses’ to promote start-up by means of various exemptions and tax holidays.
As per the new guidelines for business laid down by the ‘start-up India’ program any business eligible to be a start-up is exempted from taxes for three consecutive years. Therefore, the entire knowledge about taxes can prove to be convenient for the growth and expansion of a business.
- Labour laws: The labour laws are part of every business in India. These laws govern various issues such as minimum wages, bonus payment, maternity leave, provident funds, etc. The Ministry of Labour and Employment had planned to implement the new labour codes to protect the issues related to health and working conditions, wages of employees, social security and maternity benefits, etc. The new labour codes are:
- The Code on Social Security, 2020;
- The Industrial Relation Code, 2020;
- The Code of Wages, 2019;
- The Occupational Safety, Health and Working Conditions Code, 2020.
- Intellectual Property Rights
Intellectual property law deals with the right to protect the business from any theft of personal data and information. These rights include copyright, trademark, patents, and trade secrets. If a company developed something innovative and faced tough competition in the market. This will protect the company’s ideas, formula from copying.
In addition to this new start-up program laid down new laws like SIPP (start-ups Intellectual Property Protection). Now the start-ups can take the advantage of this scheme under start-up to nurture new innovative and emerging technologies and help in due protection and commercialization.
- Taking care of contracts: An agreement that is enforceable by law is a contract. The contract proved to be very effective for the proper functioning of a business. A contract is a valid contract only if it satisfies the conditions of Section 10 of the Indian Contract Act, 1872. As per the rules mentioned for a valid contract, it must be the free consent of parties, a lawful consideration with a lawful object and must be not explicitly declared to be void.
- Others laws
- The Companies Act, 2013 includes the provision regarding acquisitions and mergers, corporate social responsibility, decision-making, related party transactions, and shareholders. The Act was further amended by the Parliament in 2015 which eliminated procedural common seal, declarations for commencement of businesses, and minimum paid capital.
- Business laws in India also include the protection of consumer rights. The Consumer Protection Act, 1986 was introduced by the parliament to protect the interests of consumers and safeguards against different types of exploitation such as defective goods, deficiency in services, and unfair trade practices.
- The Foreign Trade (Development and Registration) Act, 1992 Act provides for the development and regulation of foreign trade by facilitating imports and augment exports.
- The Information Technology Act, 2000 is the first law for e-commerce business in India. Due to the expansion of online business, it has become important to create laws to cover cyber law and security in India.
Definition of confidential objects
The term confidence originates from the Latin word fidere which means to trust. Warren Brandeis was the primary model (1890) to give birth or so to say that they were the ‘investors’ to the concept of privacy. Prior to this, it was only a pearl of ethical judicial wisdom but then it was placed as a whole new chapter in law books.
The confidential clause is well known to protect the originality of work from being misused by any unauthorized persons. It is not only known to protect the rights of the parties but also encourages the free flow of information under the pretence of protection provided under the contract.
‘When one person shares any material information which is not in the public and does not intend to be shared with any unauthorized person then such information can be understood as confidential and if any such information is leaked by the confidant of the information, then there shall be a breach’.
In India, the principle of confidentiality comes from English law. In a confidential relationship, one party shares important information with the other party by showing the truth and confidence that the shared information will not be disclosed to any unauthorized person. As per the definition of Thomas M. Cooley “the relations formed by protocol or by acceptance, in which one party trusts his pecuniary and other interests to the loyalty and integrity of another party, by whom, either alone, or in conjunction with himself, he expects them to be protected” is defined as a confidential relationship. To protect the susceptibility of the parties, a backing of the law was required in order to impose liability for a violation of breach of confidence.
Why is there a need for confidentiality clause in an agreement?
There are various reasons to enter into an agreement with confidentiality clause such as:
- To avoid confusion over what the parties considered to be confidential information.
- To allow more flexibility in defining the confidential information to the parties.
- Enforcing written contracts is easier than oral agreements.
- Covering the issues related to confidentiality, such as non-solicitation.
- To maintain the correct standards that are expected in most commercial transactions and relationships.
The obligation to keep the confidential relationship arose from the kind of relationship shared between the parties. When there is no contract, the relationship ‘shared’ gives the information and thereby imposes an obligation on the part not to disclose the shared information to the third party, the intention becomes one of the important parts of a contract. Before entering into a contract, the party holding the confidential information must clarify the motive or intention to the contracting party not to disclose the shared information expressed as confidential with any unauthorized party.
The information to be recognized as confidential must involve the following features:
- It should accurately identify the shared information.
- It should contain the clause of confidence.
- It should be endowed on the defendant to maintain the secrecy of non-disclosed information.
- There lies an actual misuse of the shared information.
The rights and obligations of the parties must be defined concisely. It is to be ensured that both the parties are well-informed about their position and the information shared with them. A party to the contract is under the obligation not to use the confidentiality clause against the other. Therefore, both parties are consensually agreed to share and keep the shared information confidential.
So, a well-defined obligation enhances the responsibilities of the parties to a contract and aids in following the mistakes committed by the parties.
The clause of confidential information shall exclude information or material that:
- Is publicly available through no action or fault of the recipient party.
- Was already in the possession of recipient party or known to recipient party before being disclosed or provided by the recipient party or on behalf of another party given that source of such information is not bound by any contractual, legal or fiduciary obligation of confidentiality to the non-disclosing party or any other party thereto.
- Is obtained by the recipient party from a third party.
- Is completely obtained by the recipient party without reference to the confidential object.
All the confidential shared information of a party shall remain the sole property of such party and no title, right or interest in or any confidential information or any material therefrom is transferred to the recipient party.
Mutual non-disclosure agreement
A mutual non-disclosure agreement is also known as a mutual confidentiality agreement. The mutual non-disclosure agreement is a legal agreement, where the parties agreed not to disclose any information with the third party. Trade secrets, intellectual property, or any other proprietary information are such kinds of information that shall be protected by the agreement. There exists a confidential relationship between the parties under the contract.
A confidentiality clause in an agreement is a sensitive issue, the essence of the clause should be prepared only after weighing the balance of convenience of both parties. A party to the contract is under the obligation for not disclosing the shared information to the third party. If any hint of confidential information is dropped by the confidant of the information, then there shall lay a breach in a contract.
There are few kinds of information that the disclosing party shall determine to be confidential under the mutual non-disclosure agreement are:
- Trade secrets;
- Financial information;
- Product formula;
- Intellectual property;
- Marketing and business plan;
- Information regarding product development;
- Any other type of proprietary information.
Purpose of a mutual non-disclosure agreement
The major purpose of entering into the non-disclosure agreement is to uphold the originality of the work of the party who is sharing the information with the other party in confidence. It also protects the vulnerability of the party that discloses the information from the third-party usage of its original work. The party who gives consent draws the intention to not disclose the information which is shared in confidence to any unauthorized party or person and so at the time of the dispute, the party cannot question the status of confidentiality of information.
Right to privacy
The right to privacy is protected as an intrinsic part of the right to life and personal liberty under Article 21 and as a part of the freedoms guaranteed under Part lll of the Indian Constitution. The term privacy and confidentiality are interchangeably often used in everyday lives. While confidentiality is an ethical duty, privacy is a right rooted in the common law. The term confidential information is defined as ‘entrusted with confidence of another or with his secret affairs or purposes; intended to be confident or kept secret’. The fundamentals of confidentiality are acquired from English Law. The English law did not recognize the general right to privacy but instead focused on representing the actionable breach of confidence.
When one party shares an important piece of information to the other party beholding a trust on them that the shared information must not be disclosed to any third party but if the confidant of the information disclosed the shared information with the third party there is an infringement of that party’s right to privacy.
Living Audio Systems LLP v. Monika Kanaujia & Ors. (2021)
The case is presented before the Bombay High Court to hear the arbitration petition related to confidential information. In this case, the petitioner company claims that the employee name Kanaujia was bound by an employment contract that had confidentiality, non-disclosure, and non-compete provisions and later set up a competing business. It was alleged that she shared the petitioner’s company’s confidential and proprietary information to her own company namely ITC and TAC.
According to the complaint, it was stated that petitioner Aditya Gupta asked Kanaujia to return the company provided laptop that is used by her for personal email, which was forbidden by the terms of the agreement. It was also found that eight names mentioned in a list of potential clients were all the clients of the petitioner company. Therefore, it was stated that an attempt was made to divert the petitioner’s business by using its confidential information, to TAC, Tijare, and ITC.
The Court observed that it is prima facie that Kananujia and TAC are diverting the petitioner’s client by using the petitioner’s confidential information. The Court also viewed that the Kanaujia must be aware that the third-party professionals will be compromised by her use of the petitioner’s confidential information. The Court opined that the ‘right to carry on a competing business does not and cannot extend to the illicit use of another’s party confidential information and data.
Zee Telefilms Ltd. v. Sundial Communications Ltd. (2003)
In this case, the plaintiff was a company involved in the business of video and television programming etc. which developed the concept which was firstly titled as ‘Kanahiya’ and registered in the year 2002. The plaintiff intended to further develop the concept to broadcast as a television show. And, therefore they approached the defendant and explained the idea through notes, audio-visual presentations, pilot plots of the concept, etc. There was a clear understanding between parties that the work was an original one and the defendant should not breach the confidence by sharing or using the materials.
Later on, the defendant started working on the same idea and developed their own show based on the plaintiff’s concept. The plaintiff approached the court stating that there was a clear violation of confidence and infringement of their copyright. The Court held that the rule of confidence is broader than that of copyright, the claim of copyright can only be used when the work has been reduced down to a permanent form or otherwise not. The concept of copyright is good against the whole world but the concept of the confidence is operative when the information is disclosed to a particular person in good faith, either oral or written forms of communications. The Court ruled that it is clearly a breach of confidence and so ruled in favour of the plaintiff.
Anindya Mukherjee v. Clean Coats Pvt. Ltd. (2010)
In this case, the petitioner challenged the award of the sole arbitrator where the petitioner was punished with a fine of Rs. 9,40,167.50. The petitioner was appointed as a senior sales executive and promoted as Manager, Project and Sales in the Marketing Department. The respondent entered into an employment agreement with the petitioner that contained the confidentiality clause, wherein it was expressly declared that the petitioner will not disclose the shared information with the third party. It was also stated that the petitioner will not indulge into or start a similar business as that of the respondent for a minimum period of 24 months from the date of resignation or termination.
The Court opined that the relationship between employer and employee contains the elements of commerce and business. And so, any breach of confidence committed by the employee will amount to misconduct and the employer will take legal action against it. The Court ruled in favour of the respondent and directed the petitioner to pay a fine of Rs. 1,00,000 as compensation to the respondent.
Daniel Corus BV v. SAIL (2017)
In this case, the petitioner party entered into a contract to install Blast Furnace N0.5 at the Rourkela Steel Plant of the respondent. The petitioner’s company shared documents, drawings, and other information which were confidential in nature to the respondent. To uphold the purpose of maintaining confidentiality, the parties included the relevant clauses and sub-clauses in the agreement.
The confidentiality clause mentioned that the drawings and other information provided were strictly to be used for the purpose of the present contract and shall not be shared with any third party. The petitioner claimed that the information which was confidential in nature was shared by the respondent with the third party and hence breaching the confidence. The Delhi High Court ruled in favour of the petitioner party, affirming that when both the parties treated an agreement to be confidential in nature, then both the parties are bound to it, notwithstanding the fact that the law permits the parties to claim confidentiality or not.
The confidentiality clauses in non-disclosure agreements have now become an important legal framework to protect the originality and sensitivity of the confidential information from being made available by the recipient of that information. One of the problems that arise with the confidential agreement is the difficulty in determining the various aspects covered under the contract or not. This problem can arise if the said agreement has not been drafted properly in a manner that can reduce the uncertainty. A badly drafted agreement can cause the companies to enter into long litigation battles which can make them pay a lot of costs as well. Confidential information is not something that can be made publicly available.
The term confidentiality propagates inaccessibility and therefore irrespective of the mode in which the confidentiality is recovered by the receiver, he shall be held in breach of confidentiality. A secret does not cease to remain secret when one selects to share it with the intended one and yet it remains a secret for the rest of the world. Hence, the right of the party to indulge in competing business cannot extend to the illegal use of another’s party confidential information and data.
- https://www.taxscan.in/illicit-use-of-another-partys-confidential-information-data-cant-form-a-part-of-right-to-carry-competing-business-bombay-hc/121887/#:~:text=The%20Bombay%20High%20Court%20ruled,right%20to%20carry%20competing%20business.&text=Tijare%20and%20ITS%20through%20their,received%20no%20information%20from%20 Kanaujia.
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