Enforceability of Non-Compete clauses in Bangladesh
Simply, a non-compete clause is a clause seeking to refrain a particular employee to compete or pursue similar line of profession, trade or business against his employer for a given period of time and within the prescribed geographical limits after discontinuation of employment with the employer.
General Rule
The validity and enforceability of a non-compete clause is governed by Section 27 of the Contract Act 1872 of Bangladesh which reads that ‘Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void’. On a strict literal interpretation of the provision, it is quite clear that an agreement restraining trade, profession or business is void.
Reported case-laws from the higher courts in Bangladesh shed little light on this matter. The Indian jurisprudence, on the other hand, contains an identical provision in their law of contract regarding this issue, thus reliance has been placed on such case laws. Where a restraint is in the nature of a restraint of trade, whether general or partial, qualified or unqualified, the agreement is void to that extent (Shaikh Kalu v. Ram Saran Bhagat), i.e. to the extent the non-compete clause applies. The only exception to the law of restraint of trade is mentioned in the statute itself and deals with a situation involving the sale and purchase of the goodwill of a business, whereby after the sale of the goodwill of a business, the seller is restricted from operating or conducting the same line of profession, trade or business as the sold business.
In Superintendence Company of India (P) Ltd. vs. Sh. Krishan Murgai, the Supreme Court of India held that any such covenant which restrains the employee to work in the future after the termination of his service is completely void. Similarly, in Desiccant Rotors International Pvt. Ltd. vs Bappaditya Sarkar and Anr, the Delhi High Court held that in the battle between the employer’s right to protect its confidential information from its competitors and a person’s right to earn his livelihood, the latter will any time prevail over the former. The bottom line therefore is that all agreement in restraint of profession is void pro tanto. The underlying principle against restraint of trade stems from the right of a worker to earn his living by using his own experience, skill and knowledge (even if it was acquired in the employment of another) as well as from the overarching public policy promoting competition and trade.
Exception to the General Rule
In Nilanjan Golokari v. The Century Spinning and Mfg, the Indian Supreme Court showed a favourable attitude towards this type of clause and departed from the general law on restraint of trade. In this case, the Hon’ble Court ruled that a contract of service preventing an employee from working elsewhere during the course of employment, is not void. The Supreme Court here ordered that the employee shall abstain from taking up other employment for the remainder of the fixed term period. In this case, the termination of the employee occurred before the stipulated term of employment of 5 years. The court held that the restrictive covenant on the employee will keep on operating till the end of 5 years. However, this case does not create a general rule rather is only an exception to it. In particular, the application of this case may be limited to restraint of trade or profession during a contractual period, and not thereafter.
English courts have seemingly adopted a more relaxed approach; such approach only carries a persuasive authority over the courts of Bangladesh. In English jurisprudence, Lord Macnaghten in Nordenfelt v Maxim Nordenfelt Guns and Ammunitions Co Ltd introduced the ‘tripartite’ approach where the validity of restraint is assessed in three stages. Firstly, whether the agreement amounts to a restraint in order to attract the doctrine. Secondly, whether the restraint protects a legitimate interest of the covenantee. Thirdly, whether the covenant is ‘reasonable’. A non-compete clause may be valid if, and only if, it is reasonably necessary to protect the legitimate interests of the promisee. It was observed by the court in Herbert Morris Ltd v Saxelby, that a restrictive covenant will not be enforced unless the protection sought is reasonably necessary to protect trade secrets or to prevent some personal influence over customers being abused in order to woo them away.
Therefore, the restraint on trade does not appear to be absolute in English jurisdiction and is qualified by a test of reasonableness, legitimate expectation, adequacy of purpose and nature of employment.
Nonetheless, the interpretation of English courts and Indian Courts on the doctrine of restraint of trade may be used to establish that the restraint was such that it was reasonable, adequate and voluntarily entered by the employee so as to protect the legitimate interest of the employer in view of protecting trade secret and confidential information.
Penal Provisions relating to Confidentiality and Trade Secret
If the idea for “non-compete” is to protect the confidential information or trade secret, then a separate clause containing non-disclosure agreement or protection of trade secret or confidential information may be useful. The confidential information and data are protected by the general provisions of contract laws. While section 27 of the Contract Act, 1872 prohibits agreement in restraint of trade, it does not, however, prevent employer from initiating an action against an employee for unauthorised or unlawful disclosure of data or confidential information. The actual leakage or disclosure, however, may be a question of trial and subject to proof before a court of law.
An employer may also seek redress against his grievance under criminal law of Bangladesh, specifically against offences under section 408 and 415 of the Penal Code, 1860 provided the employer has sufficient proof in respect of unauthorised disclosure of confidential information.
However, these offences are relating to property and in an action for criminal breach of trust and/or cheating against the employee, the employer is required to establish that the breach of trust or cheating was related to that property. Unless the information is proprietary, it would be difficult to establish a cause of action under the aforesaid penal provisions.
In conclusion, employers may attempt to put such restriction by including a carefully drafted, clear and precise ‘non-compete’ clause with a provision for liquidated damage in the contract for service of employment for a limited period of time with a view to protecting its confidential information and trade secret. But such a clause must be able to withstand the stringent and narrow test of 'reasonableness' before a court of law.
Disclaimer - This instant publication or article should not be construed as legal advice. The contents of this article are intended for general information purposes only and do not necessarily represent the thoughts or opinions of any particular lawyer.