Non Solicitation Clause and its’ Legality: A Controversy

The basic meaning of the term ‘solicitation’ is convincing someone to buy goods or services in order to gain profit from that. But the meaning of this word varies from situation to situation. If analyzed from the legal perspective, the whole meaning of the word changes. This article aims to explain the legal meaning of this particular word. This article also aims to deal with one single perspective of this word and give a brief understanding about the chief constituents of solicitation. 

Introduction

In the legal perspective the word ‘solicitation’ means when a person convinces another person to commit any crime. This means committing solicitation is actually committing crime. For example, in childhood we came across many stories like ‘Oliver Twist’ where small children were taught how to steal, pickpocket etc. And this kind of act also constitutes solicitation. 

The chief constituents constituting solicitation are:

  • Convincing or seeking some other person to commit crime 
  • There should also be an intention to engage some other person to commit that crime.   

If the person, to whom the request was made, does not commit that crime, it will make the defendant liable because the two important elements to constitute solicitation are fulfilled, and thus the defendant is said to have committed solicitation. 

But not all solicitations are crime or they are illegal. Many solicitations are legal, for example an advertisement printed on a newspaper, or any salesman selling some products requests you to buy that product. 

There are many types of solicitation crimes like prostitution, drug dealings, etc. but in this article only one type of soliciting will be discussed and that is the non solicitation agreement. 

What is a Non Solicitation Agreement? 

Non solicitation agreement is an agreement between the company and its employees. In this agreement the employees agree that they will not solicit the clients and customers of that company after leaving that company. An employee cannot even solicit any other employee of that company for their ‘own benefit’. A non-solicitation agreement takes place in most important company agreements like in NDAs (Non Disclosure Agreements), employment contracts, etc. But Non Solicitation Agreements are not always necessary. These agreements take place under the Non Solicitation Clause. An employer wants to protect the company’s proprietary rights or any sensitive information. An employer also can undertake this clause if that company has very less number of potential customers and losing those customers can also create a huge loss in the company and also if the company does not perform monopoly business or  has many competitions.

 So, it is completely visible that this kind of agreement takes place in companies which deal with goods, services and mainly customers or clients. 

What are the applicable laws for the Non Solicitation Clause?

Competition Act, 2020

Section 3(1) of competition act says:

“No enterprise or Association of the enterprise shall enter into any agreement in respect of production, distribution, storage, Acquisition or Control of goods or provisions of services, which causes or likely to cause an appreciable adverse effect on the competition within India” 

So, according to this section the company can impose non solicitation agreement only to protect the customer list of that company which the company gained by their own effort. And if the company imposes non solicitation agreement only to avoid competition, then according to section 3(2) of the competition act it will become void, as India is a developing country there is an increase in the rate of growth of various companies and those companies have various strategies to reach its objectives and the competition rate is increasing. No company should avoid competition as it may hamper the growth of country’s economy.  So, to maintain the legality of the non solicitation agreement one needs to be more precise and keep in minds the rules and regulations. Also this agreement cannot restrict some clients or customers or employees if they want to leave the company voluntarily.

Indian Contract Act, 1872

According to section 27 of Indian Contract Act, a contract becomes void if one is restrained from performing their profession, trade or business.  

Constitution of India

Under the fundamental rights of the Indian constitution, Article 19 (1) (g) says: “To practice any profession or to carry on any occupation, trade or business”. 

This is a fundamental right and fundamental rights can only be dealt against the state, fundamental rights have nothing to do when it comes to private relations. These kinds of issues take place only if there is no ‘reasonability’ in the agreement and is restraining from starting a trade without a reasonable cause.  

After the analysis of the applicable laws, questions may arise regarding the legality of the Non Solicitation Agreement. There is still certain disputation regarding the legality of the Non Solicitation clause. The Non Solicitation Agreement will only be enforceable if it is done under certain reasonability and with the intention of only protecting the goodwill of the company. And the agreement will not be considered legal if there is no reasonability and if it is ambiguous. Also the agreement under the Non Solicitation Clause will be valid only during the course of employment; it cannot be applied after or before the employment.  But most of the time the judgments of a case depends on the facts and background of that particular case. To be more detailed about the legality of this agreement few cases will be discussed below. 

Case Analysis

Embee Software Private Limited v. Samir Kumar Shaw and others

This case was decided on March 27, 2012 in Calcutta High Court. This case has three respondents, first respondent Samir Kumar Shaw, a B.com (hons) worked as a data entry operator, second respondent Pritam Lala, a B.sc graduate, worked as sales executive and the third respondent worked as support executive. These three respondents formed a company which constituted the fourth respondent. The appellate on the other hand has many client networks and the appellate had programmers’ ‘source codes’ to deal with the clients and the respondents had complete access to the ‘source codes’ as they used to deal with the clients on behalf of the appellate. So it was held that the non solicitation clause cannot restraint one from starting their own trade, profession or business and ‘would not be hit by section 27 of Indian Contract Act, 1827’. The source code is the personal property of the plaintiff and the respondents cannot use that ‘source code’ for their own benefit. And also the respondents cannot solicit the appellant’s clients and customers as it will amount to ‘breach of contract’. The appellate has full liberty to approach the bench if there is any infringement of the contract by the respondents in the future. 

Percept D’Mark (India) Pvt. Ltd v. Zaheer Khan

The defendant entered into a contract with the plaintiff for managing his media affairs with the plaintiff’s company. The defendant also agreed with the terms and conditions that he will not enter into any other contract with the third party for a particular period of time. But the defendant entered into an agreement with the third party after the termination of the previous contract. 

The issue was whether this constituted section 27 and is void. 

It was held that the plaintiff was free to enter into a contract with the third party as he entered into the contract only after the termination of the first contract, and this constitutes restraint of practicing his own profession and is void. The court also observed that:

“Under section 27 (a) a restrictive covenant extending beyond the term of the contract is void and not enforceable (b) The doctrine of restraint of trade does not apply during the continuance of the contract for employment and it applies only when the contract comes to an end.”    

Niranjan Shankar Golikari v. The Century Spinning and Mfg. Co. Ltd

In this case the appellate started working in the respondent’s company as shift supervisor. The shift supervisor should have extreme capability to supervise and so, he was given on the job training and he entered into an agreement with the respondent that he will not work for any other company on the same field as it may cause loss to their company. But after the training the appellate joined some other company on the same field and hence the respondent filed a suit against the appellate in the high court and got injunction. The appellate appealed in the supreme court under Article 136 of the Constitution of India. Supreme Court held that:

“A negative covenant that the employee would not engage himself in a trade , or business or would not get himself employed by any other master for whom he would perform similar or substantially similar duties is not therefore a restraint of trade unless the contract as aforesaid is unconscionable or excessively harsh or unreasonable or one sided.” So this does not fall under the section 27 of the Indian Contract Act, 1872. 

Conclusion

In this world full of competition the companies should draft the negotiation in such a manner that it neither constitutes restraint of anyone’s talent nor seems to be avoiding the competition. The one drafting a Non Solicitation agreement should have insight knowledge about the law of the country as well as the company’s rules and regulations. 

There are various other types of Solicitation which are practiced on a daily basis and are not legal in our country should be stopped by amending the necessary laws. Those types of crimes are still neglected and should get reasonable attention.       



References

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