This article is written by Amulya Bhatia, currently pursuing B.B.A. LL.B from Symbiosis Law School, NOIDA. This article is an overview of a Non-Solicitation Agreement and also explains the extent to which such an agreement is legally valid within India as well as internationally. Moreover, the article also discusses the evolution of legal validity of a Non-Solicitation Agreement with the help of judicial pronouncements in India.
Table of Contents
Introduction
A business or company may be able to predict the potential profit or loss in a particular year, or even the resources needed, but it cannot predict human behaviour. No business can forecast whether the employees will get along and it is no surprise that employee conflicts have the potential to hamper the growth of the business. While forecasting employee behaviour may not be an option, controlling such behaviour is still a possibility. This can be done by way of employee contracts.
An employee contract is a contract between an employee and employer that safeguards the interest of all parties involved. Such a contract binds the two parties in terms of their roles and duties and remuneration for the same. With rising competition in the world, businesses are doing everything in their power to protect their needs. Therefore, such employee contracts contain certain clauses that restrict employee behaviour during and post the employment period, with the sole intention of not hampering the growth of the business. A non-solicitation agreement is one such clause that is in favour of the employer and has therefore been widely discussed to understand how valid it is.
This article discusses the definition as well as deciphers the scope of a non-solicitation agreement and its practical application in the world in detail.
Non-Solicitation Agreement : an overview
The word ‘solicit’ in a general legal sense means contacting customers with the purpose of getting involved in business with them. The stakeholders in any business are the employees and the customers. Acquiring a good customer base requires a lot of effort, and losing even a single customer is as good as losing something extremely valuable for a company. This is where a non-solicitation agreement comes into play.
Definition
A non-solicitation agreement is an agreement between a company and its employees. It is basically a clause in a contract according to which if an employee stops working at the company or starts working for, let’s say a competitor, such a contract refrains the employee from soliciting or poaching any business clients or using any confidential information that was obtained by virtue of working at the respective company. In layman’s language, such a clause abstains the employee from using contacts made during his employment for his personal advantage. More specifically, the scope of such an agreement is only extending to refraining an ex-employee from acquiring the customers they worked with during the course of their employment. The validity of a non-solicitation agreement was upheld by the Delhi High Court in the case Wipro Ltd v. Beckman International (2006).
Examples of a Non-Solicitation Agreement
A non-solicitation agreement may also include within it certain restrictions. One such example would be if, under circumstances where an employee chooses to leave the company, the employee cannot attempt to take other employees along by luring them through a new job opportunity.
Let’s understand such an agreement with an example. Imagine that you are posted at a high-ranking position as a salesperson in ABC Ltd., a company that sells mobile phones. You have been working here for 10 years and have therefore built a lot of contacts and know the suppliers to source the necessary resources from for optimum results. Another company that sells mobile phones, say, XYZ Ltd., offers you a job with a higher salary and you accept it. Now, if the employment contract you signed for your first job contains a non-solicitation agreement, you cannot use the built contacts and ask the suppliers to switch companies because you work at a new company now. This would also apply to cases where one was to start their own business.
How is a Non-Solicitation Agreement imposed
As is clear from the definition, a non-solicitation agreement is used by employers where the employees interact with customers on a daily personal basis. For example, a salesperson of a company would have a personal connection with customers, or a hairstylist working at a parlour would have made a lot of contacts during the course of their employment. Now, how exactly can a company prevent an employee from poaching their clients, or even stealing the existing employees? A non-solicitation agreement exists for this purpose. Let’s say a woman working in a beauty parlour named ‘LOOKS’ decides to open her own parlour, and asks her friends and previous customers to join her in her new venture. This would amount to a solicitation.
Now how exactly does a non-solicitation agreement work? Such agreements are usually a part of larger contracts such as non-disclosure agreements, employee contracts, or even non-compete agreements. However, in rare cases, they may even exist as unique contracts. Such a contract is known as a restrictive covenant. How enforceable restrictive covenants are in reference to Indian law has attracted divergent views on the matter, and therefore, has been largely discussed further.
Sample of a Non-Solicitation Agreement
An employee contract contains various clauses dealing with terms of confidentiality, payment methods, and timings, resignation process, promotion, bonus, etc. A non-solicitation agreement is generally a clause in an employment contract. The following is a sample of a non-solicitation clause in an employee contract:
“Non-Solicitation. The Executive agrees that, during his employment and for the Restricted Period, the Executive shall not, directly or indirectly, other than in connection with the proper performance of his duties in his capacity as an executive of the Company,
(a) interfere with or attempt to interfere with any relationship between the Company Group and any of its employees, consultants, independent contractors, agents or representatives,
(b) employ, hire or otherwise engage, or attempt to employ, hire or otherwise engage, any current or former employee, consultant, independent contractor, agent or representative of the Company Group in a business competitive with the Company Group,
(c) solicit the business or accounts of the Company Group or
(d) divert or attempt to direct from the Company Group any business or interfere with any relationship between the Company Group and any of its clients, suppliers, customers or other business relations.
As used herein, the term “indirectly” shall include, without limitation, the Executive’s permitting the use of the Executive’s name by any competitor of any member of the Company Group to induce or interfere with any employee or business relationship of any member of the Company Group.”
Important terms in a Non-Solicitation Agreement
For the non-solicitation agreement entered into to serve the purpose for which it is signed, it needs to incorporate all the necessary terms and provisions to make such an agreement completely intact. Skipping even a single important provision or document can create scope for legal rights to be violated. Moreover, it is also important for all the parties involved to fully understand the contract they are signing which is only possible once they familiarize themselves with the key terms in such an agreement.
The terms of your contract need to be specific to your industry and geographical area. All parties to the contract must be aware of the legal implications of the contract. The following are a few of the terms that are important to a non-solicitation agreement.
- Contract introduction: A contract introduction would have the names, addresses, and other necessary details of the parties involved, along with the date of signing of the agreement.
- Term/non-solicitation period: Since a non-solicitation agreement lasts only for a specific period, the term basically refers to the duration for which the agreement is applicable. There is no definitive limit on the term; it could be for months or years, but it will have an end. Longer terms are usually looked at as suspicious by Indian Courts as they appear to be less reasonable.
- Definitions: It is important to define the legal jargon used in a contract to make the contract easier to understand.
- Exclusions: The contract should clearly include all exclusions, and mention the behaviour that is restricted. Moreover, the required guidelines on the scope of the non-solicitation agreement need to be outlined within such an agreement.
- Covered employees: Now it is known that non-solicitation agreements are only considered by courts in India if they seem reasonable. Most businesses have many employees working for them, but not every employee is valuable to the company. Therefore, a company should only protect those employees who are essential to the running of a business via a non-solicitation agreement. By understanding the judicial trend regarding non-solicitation agreements in India, it has been observed that if such an agreement moves to court, the company must be able to prove that losing the employees who are being poached would be detrimental to their business, or even make it impossible to run the business. These could include employees who hold confidential information, or ones who have a personal relationship with customers. Those employees who are protected from being poached by an ex-employee are called covered employees, and this is one of the most important terms in this agreement.
- Severability: It is necessary to make sure that the non-solicitation agreement does not fall flat simply because any other provision of the contract becomes unenforceable.
- Transition provisions: There are certain contractual relationships whereby a company hires an agency temporarily for the purpose of completing a specific task. Basically, contractors who work with companies under a service agreement might work with their competitors once the work with the company is done. Therefore, under these circumstances, details regarding the transition period, i.e. time period between ending a contract and working as per a new one. Keeping in mind the porosity of time, such terms are critical to be included in a non-solicitation agreement.
Difference between a Non-Solicitation Agreement and a Non-Compete Agreement
Now we know that companies, where the entire business is dependent upon customer loyalty, use legal means to prevent employees from ‘stealing’ their clients. However, inserting the non-solicitation agreement in employee contracts is not the only way to do so. Non-compete clauses more or less perform the same function. Thereby, despite being completely different definitions, these two clauses are often confused with each other in the legal world.
A non-compete agreement is more restrictive in nature, in comparison to a non-solicitation agreement. The former focuses on refraining the employee from competing with the company the employee is leaving altogether, while the latter only prevents the employee from working with previous clients of the company.
A non-compete agreement bars any employee from entering the same field as the employer, and as a result competing with the employee. Such agreements are limited through time and scope. This means that a non-compete clause would restrict an employee from working in the same field as the employer or working with any competitors of the employer for a specific time period and a specific geographical area. To understand this with an example, Apple hired Saloni as sales manager of the laptop department. As a result, by inserting the non-compete agreement in Saloni’s employee contract, Apple can prohibit her from working with Samsung, Dell, HP, Lenovo, or any other company selling laptops as they are its direct competitors, during and after the course of her employment, in a reasonable manner.
The following is a sample of a non-compete clause in an employee contract:
“Covenant Not to Compete. You agree that at no time during the term of your employment with the Company will you engage in any business activity which is competitive with the Company nor work for any company which competes with the Company.
For a period of one (1) year immediately following the termination of your employment, You will not, for yourself or on behalf of any other person or business enterprise, engage in any business activity which competes with the Company within ______ miles of the facility in which you were employed.”
It has been argued that a non-solicitation agreement is preferable to a non-compete agreement due to the latter’s restraint on an employee’s ability to work and earn a living. However, it is pertinent to note that the Hon’ble Supreme Court of India in Niranjan Shankar Golikari v. Century Spinning & Manufacturing Co. Ltd.(1967) observed that a non-compete agreement would be valid as long as it is reasonable in terms of its scope.
Therefore, the main difference between these two types of agreements is their scope, even though the main aim is to protect the interest of the employer under circumstances where an employee is leaving the company.
Legal interpretation
In order to fully understand a non-solicitation agreement, it is important to know how this agreement has been inferred by the statutes and the court of law. Furthermore, it is pertinent to know the legal issues that circle a non-solicitation agreement.
Enforceability of a Non-Solicitation Agreement in India
It is to be noted that both, non-solicitation agreements, as well as non-compete agreements, tend to consider the best interest of the employees. However, it is important to understand the extent to which such agreements are legally enforceable. The position of Indian courts in this context is said to be very restrictive in order for such agreements to be deemed valid. Under Indian law, The Indian Contract Act, 1872, hereby referred to as “Act” is the Indian legislation that governs the legal position in agreements whereby there is a restraint on trade, and thus it covers non-solicitation and non-compete agreements. Section 27 of the Act reads as follows:
“Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.”
Section 27 is very clear regarding its stance on agreements that restrict trade and vehemently bars such agreements in express terms. This would make non-solicitation agreements void, but then why is it that such agreements are still a prevalent practice?
The courts in India by understanding the need for a non-solicitation agreement have laid out certain exceptions to this rule. This does not mean that partial or absolute restraint on trade is no longer void. However, under certain circumstances, the court has allowed the inclusion of a non-solicitation agreement in employment clauses.
For the longest time, the judicial trends in India were demonstrative of the fact that courts allow for these agreements to be valid during the court of the partnership/employment, meaning that the Courts leaned towards a more restrictive approach. However, gradually, the courts are becoming more flexible where there has been a lot of discussion about the validity of such agreements post-termination of the employee, even though such flexibility is far from what would serve to be beneficial for the employer. To conclude, the legal enforceability of clauses that impose a restraint on trade, such as non-solicitation and non-compete agreements, differs on a case-to-case basis depending upon the facts and circumstances of each case.
Judicial Pronouncements
The Indian courts have delved into the legal enforceability and ambit of a non-solicitation agreement and other restrictive covenants through a plethora of judgments.
One of the first few cases to discuss the legal validity of a non-solicitation agreement was Wipro Ltd v. Beckman International (2006). In this case, the Delhi High Court observed that a non-solicitation clause is not void per se. Furthermore, it was observed that a non-solicitation clause is reasonable and thus would not be violative of Section 27 of the Indian Contract Act. The Court further focused on the relationship between parties having such an agreement where it was said that a stricter approach is applied in employer-employee contracts. The Court, therefore, highlighted the following features in this judgment:
- Negative as well as positive covenants that are applied during the course of employment cannot be inferred as restrictive of trade, if reasonable.
- Such agreements are not applicable post-termination of the employee contract.
- The Courts shall take a more stringent approach when dealing with employee-employer contracts than in other contracts, such as partnerships. This is because it is believed that in employer-employee relations, one is in a dominant position. However, in the latter, the parties are still expected to be on an equal footing.
Therefore, the Court viewed this case liberally and no injunction was granted in favour of the petitioner.
Another important judgment that deciphered the legal validity of restrictive covenants is American Express Bank Ltd. v. Priya Puri (2006). In this case, the American Express Bank requested the Delhi High Court to grant an injunction to limit an ex-worker from (1) revealing any information, and (2) revealing information to poach clients of the Bank. Now, it was held by the Court that revealing important information cannot be used as a ground to restrict one’s ability to work.
In another case, Niranjan Shankar Golikari v. The Century Spinning And Mfg. Co. (1967), the Hon’ble Supreme Court made a clear demarcation in the applicability of restrictive covenants such as non-compete and non-solicitation agreements during employment as well as post the course of employment and further stated that both these situations would be dealt with differently. It was through this case it was concluded that negative covenants would only be legally enforceable when they are operative during employment, and as a result not remain ultra vires to Section 27 of the Indian Contracts Act. The case listed down the test to determine whether a restrive agreement is valid under Section 27.
The above Supreme Court case was used as precedent by the Delhi High Court in LE Passage to India Tours & Travels Pvt. Ltd v. Deepak Bhatnagar(2013). It is observed that while there is a complete ban on any agreement that restrains trade, there is an exception when the limits applied to such agreements are declared reasonable by the Court.
A similar approach was followed by the Supreme Court in Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan & Anr (2006), but the court discussed the possibility of an exception regarding the applicability of restrictive covenants post-termination of the employee contract. The Court observed that if a restrictive covenant is reasonable in terms of its scope, i.e. time and geographical area, it would not be void as per Section 27 of the Act. The Supreme Court also held that “the doctrine of restraint of trade does not apply during the continuance of the contract of employment and it applies only when the contract comes to end.”
The Madras High Court in FL Smidth Pvt. Ltd. v. M/s. Secan Invescast (India) Pvt.Ltd (1967) also known as the ‘Secan Invescast judgement’ held that approaching customers from previous employment shall not amount to solicitation until and unless such customers have placed orders or enters into business with the ex-employee based on such approach. Furthermore, it was held that such agreements will be enforceable only if they are reasonable in terms of distance, time limit, etc.
International perspective
Every country’s legal system is to an extent a reflection of the values that prevail in a society. Naturally, the laws of every country and their judicial set-up differ. However, as far as the legal validity of non-solicitation agreements is concerned, most countries have one basic principle that needs to be followed for such agreements to be valid, and that is ‘reasonability’
Recently, in Canada, the Alberta Court of Queen’s in a landmark judgment, Specialized Property Evaluation Control Services Ltd. v. Les Evaluations Marc Bourret Appraisals Inc., 2016, deciphers the legal validity of restrictive covenants, mainly non-competition and non-solicitation clauses. In this case, an injunction was called for by Specialized Property Evaluation Control Services Ltd. (“SPECS”) against Ross Huartt, a former employee at SPECS, along with the place Ross was currently working at, Les Evaluations Marc Bourret Appraisals Inc. SPECS requested for the injunction in order to prohibit Ross from soliciting any clients of SPECS for a period of 6 months.
The Court placed emphasis on the presence of reasonableness while implementing a restrictive covenant. A test was established wherein certain questions were laid down in order to determine the legal validity of a restrictive covenant. The same is mentioned below:
“ 1. Does the employer have a proprietary interest entitled to protection?
2. Are the temporal and geographic elements of the agreement too broad?
3. Is the covenant unenforceable as being against competition generally, and not limited to proscribing solicitation of clients of the former employee? “
The question that arises here is, what exactly determines the reasonability. The following are certain basic factors or principles that are taken into consideration in most countries internationally such as Canada, the UK, and Australia while determining whether a non-solicitation agreement is valid or not:
- Duration: The duration of a restrictive covenant is an important factor to consider before determining its enforceability. A very long period is often looked down upon.
- Protect the employer: If such an agreement is considered absolutely necessary to protect the employer as well as the growth of the business, the agreement is deemed to be reasonable.
- Geographic scope: The area till which the restrictive covenant is established is also assessed to determine the reasonability of the agreement.
- Public policy: The restrictive covenant must not violate public policy.
- Impact on an employee: The restrictive covenant must not be exceptionally hard on the employee, as a result violating his right to trade.
Misuse of a Non-Solicitation Agreement
Proper implementation of laws is a prerequisite to maintaining order within a society. However, India has witnessed the grave and rising issue of misuse of the law. The same is the case with a non-solicitation agreement. Such an agreement is still being delved upon by Indian courts which increases the scope of it being misused for the advantage of one of the parties. Therefore, in order to make sure that a non-solicitation agreement has legal standing if the court is approached, the following are some points that must be kept in mind while drafting a non-solicitation agreement:
- Scope: Now it is understood that a non-solicitation agreement can only be wide enough for it to cover the possible ways that can be used by a current or former employee to hamper the growth of the business. If for example an ex-employee of a mobile manufacturing company starts to work for a coffee shop and approaches former clients, the contract must specifically mention if a situation like this would also qualify as solicitation since the two companies are not competing.
- Length and ambiguity: It is important for a non-solicitation agreement to be short, crisp, and clear for a better understanding of all parties involved. It must contain all the necessary details, but lengthy sentences and the use of complicated legal language may create a way for there to be loopholes in the clause.
- Generalization: A one-size-fits-all agreement is not the way to go when it comes to a non-solicitation agreement. It may be easy to make but isn’t right for every job. For example, a non-solicitation clause for an employee who is more valuable to the company will be tighter and stricter.
- Reasonability: The stand of the Indian court may not be clear in terms of the validity of a non-solicitation agreement yet, however, their stand on the manner in which this agreement must be framed is clear. It is established that a non-solicitation agreement must be reasonable and must take into consideration the different facts and circumstances of each case.
- Poor wording: Using proper and simple wording is a prerequisite to any contract, especially one where the scope is still not certain. Now, solicitation can mean different things and include many things. It can include stealing clients, inducing employees to leave the company, or even using confidential information for their own advantage. The most important part to make a non-solicitation clause tight-knit, defining what you mean by solicitation is a must. For example, imagine if an employee contacts a former employee. Would that also amount to solicitation? Such aspects need to be considered while framing the clause.
FAQs regarding a Non-Solicitation Agreement
- Why is a Non-Solicitation Agreement important?
A non-solicitation agreement is used to prevent an ex-employee from poaching clients or using the contacts that he made during the course of his employment. Furthermore, this only applies to those customers whom the ex-employee worked with.
- What is a Non-Solicitation period?
A non-solicitation agreement is only considered legally valid when the time period for which it is enforced is reasonable. A non-solicitation period refers to the number of months for which the agreement is imposed.
- When are Non-Solicitation Agreements used?
Such agreements are usually a part of employee contracts so as to prevent an employee after termination of his employment from poaching the customers he worked with during employment.
- What makes a Non-Solicitation Agreement legally valid?
In the majority of countries, a non-solicitation agreement is considered to be legally valid when such an agreement is reasonable in terms of its scope, duration, geographical area, etc.
Conclusion
With growing times, the complexities around ‘white collar’ workers have grown and there have been several situations that require legal assistance. Whether it is the breach of fiduciary responsibilities, terms regarding the course of employment, or even non-compliance with company guidelines, such cases can only be dealt with legally, However, the legal framework in India is still at a very nascent stage and needs to be discussed in depth.
Even though as mentioned above, Section 27 of the Indian Contract Act clearly imposes a ban on any agreement which restrains one’s ability to trade. However, this law has been evolved by the Indian courts and it is concluded that such non-solicitation agreements would in fact be valid during the course of employment only. However, it is to be noted that post-termination validity is also being considered. This shows how the Indian courts are perceiving this matter and keeping in mind the best interest of all parties involved.
Restrictive covenants in India have become more relevant now than before due to the rise in competition in society, and also due to the increasing employer-employee and other corporate disputes. This is also why the courts are now considering the scope of such agreements. It can be concluded that negative or positive covenants need to be analyzed on a case-to-case basis and cannot be looked at through a straightjacket lens because of their controversial nature. Application of principles is important, but such issues can only be judged on the basis of the question of fact, and that can only be examined by the court of law on the basis of facts and circumstances of each case.
References
- https://www.lexology.com/library/detail.aspx?g=09e8927d-4580-4fe2-87e9-8088e8dadb20
- https://www.burkelaw.com/pressroom-news-Non-compete-vs-Non-solicitation-Every-Business-Person-Should-Know-the-Difference.html
- https://www.lawinsider.com/contracts/fNjYBn29sv7#non-solicitation
- https://www.upcounsel.com/non-solicitation
- https://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/Employment_Contracts_in_India.pdf
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