Can an Employer Enforce a Non-Compete Clause?

Percept D'Mark (India) Pvt. Ltd. is a company that carried on celebrity endorsement and management, among other businesses. It signed a promotion agreement with Zaheer Khan, then the best fast bowler in the Indian Cricket Team and a rising star in international cricket. Under the agreement dated November 1, 2000, Percept became his sole and exclusive agent. It was to market and manage his media affairs, endorsements and advertising.

The term was fixed: October 30, 2000 to October 29, 2003, unless both sides agreed to extend it. Percept's lawyer told the Court the deal guaranteed Zaheer at least Rs. 55 lakhs a year and that he actually earned Rs. 1 crore a year. Clause 31(b) was the sticking point. Before accepting a third-party offer for similar services, Zaheer had to give Percept written notice and the right to match it within ten days. If Percept did not match, he could sign with the third party.

On September 10, 2003, Zaheer wrote that he did not want to renew, and the term ended on October 29, 2003. Percept had sent draft extension terms on July 29, 2003. Its lawyer said Zaheer's statement that he did not intend to appoint any agent was misleading. In a letter dated November 18, 2003, Zaheer took two positions. He said he owed Percept nothing after October 29, 2003, except honouring agreements already in place, such as the one with Adidas. He also said, for the first time, that the agreement was one-sided and unfair. Percept called that an afterthought, since he had never complained during the three years.

Zaheer then entered into an agreement dated November 22, 2003 with another management company, which became his agent for all his media affairs with effect from December 1, 2003. The judgment elsewhere refers to the same contract as dated November 20, 2003. Percept said it became aware of the arrangement on December 1, 2003, from some sources and from the website of the second company. On December 4, 2003, it filed Arbitration Petition No. 514/2003 in the Bombay High Court under Section 9 of the Arbitration and Conciliation Act, 1996. The Single Judge granted ad-interim relief on December 10, 2003, in terms of Percept's prayer (a). That relief restrained Zaheer from acting on the new deal without first complying with Clause 31(b).

Zaheer and the new company appealed. On December 19, 2003, the Division Bench allowed the appeals and dismissed Percept's petition. It held that Clause 31(b), when enforced after the term, was void under Section 27 of the Indian Contract Act. Percept took the matter to the Supreme Court.

The central question was whether the right of first refusal in Clause 31(b) was void under Section 27 of the Indian Contract Act, 1872. Percept argued that it was merely regulatory and furthered trade, and that celebrity contracts customarily carry such clauses. It also pointed to Section 42 of the Specific Relief Act, 1963. That section lets a court enforce a negative covenant by injunction even when the affirmative promise cannot be specifically enforced. Percept added that Section 9 relief could reach even a third party.

Zaheer's side said the agreement could not be specifically enforced under Section 14 of the Specific Relief Act, so no injunction could be granted. It argued that Clause 31(b) was a patent restraint of trade once the contract ended. His senior counsel also argued that Percept's failure to invoke arbitration between December 4, 2003 and March 2, 2006 was fatal to its claim for an injunction under Section 9. That was an argument made by Zaheer's counsel. It is not a holding of the Supreme Court. Section 27 voids every agreement restraining a person from a lawful profession, trade or business, saving only the sale-of-goodwill exception.

The Supreme Court relied on Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. Ltd., Gujarat Bottling Co. Ltd. v. Coca Cola Co. and the 1874 decision in Madhup Chunder v. Rajcoomar Doss. It noted that the Division Bench's reading of Section 27 had been followed by all High Courts from 1874 to 2006. The Court said the test of reasonableness and the idea of partial restraint do not apply unless the restraint falls within an express exception in Section 27.

The Court dismissed the appeals. It agreed with the Division Bench's prima facie conclusion and said Clause 31(b) was meant to operate only during the term. That meant the period from July 29, 2003 to October 29, 2003, which Zaheer had scrupulously complied with. Read that way, it "may be valid and enforceable". The moment Percept tried to enforce it beyond the term, against the contract he entered into in November 2003 and which came into effect on December 1, 2003, it became prima facie void.

The Court set out the rule in these words:

The Court also closed two doors that Percept had tried to use:

• A first-refusal clause cannot keep working after the term. Enforcing it against the later contract would restrict Zaheer's freedom to enter fiduciary relationships of his choice. It would also force him into a fresh contract with Percept even though he had fully performed the old one.
• An interim injunction cannot achieve what specific performance forbids. Forcing Zaheer to be managed by Percept would compel specific performance of a contract of personal, confidential and fiduciary service. The Court held that this is barred by Clauses (b) and (d) of Section 14(1) of the Specific Relief Act, 1963. Separately, it said such specific performance is also barred by Clause (a), and that the Court has consistently held there is no specific performance of contracts for personal services.

Even if the clause were enforceable, the Court said the injunction should not have been granted at the interim stage. It gave Percept the entire relief it could claim after trial, and it ignored the balance of convenience and irreparable injury. Percept could be compensated in money if it won at trial, but Zaheer could never be compensated for being forced to deal with a party he did not want. The Court also noted that no injunction had operated for about two and a half years, during which the new contract ran. It refused to set the clock back at the interim stage.

The Court stressed that all its observations were for the limited purpose of deciding an interlocutory application and would not bind the parties at trial. It left all contentions open, and it expressed no opinion on the merits of the rival claims.

• Gather the paperwork first. You need the signed agreement, the exact restrictive clause (here Clauses 31(a) and 31(b)), and proof of the date the term ended. Add every renewal, extension or non-renewal letter, and the new contract with both its date and the date it took effect. These records decide whether the restraint is being enforced during the term or after it.
• Check the dispute forum. In this case, Clause 32(g) sent all claims about the agreement to arbitration in Mumbai under the 1996 Act. Percept sought interim relief from the Bombay High Court under Section 9. The Court's final directions left Percept at liberty to proceed for breach before the appropriate forum and to invoke Clause 32(g).
• If you are the person leaving, the arguments that succeeded here were Section 27 of the Indian Contract Act, because the clause was being enforced after the contract's term had ended, and Section 14(1) of the Specific Relief Act, because the order sought would force a personal, confidential and fiduciary relationship.
• The mistake to avoid: do not ask a court for an interim order that gives the whole relief or forces continued dealings. Do not wait years and then seek a mandatory order to undo a contract that has been running. The Court rejected exactly this approach.