The conundrum of non-compete clauses in India: An analysis with respect to rule 40 of the Olympic Charter

This article was submitted by Gibran Naushad from National Law University, Delhi, for National Legal Writing Competition, 2016.

The Olympic Games of 2016 have yet again brought to light the debate around Rule 40, which has for long been swept under the carpet, particularly in the Indian context. Rule 40 of the Olympic Charter essentially puts a caveat that the participants need to comply with Olympic Charter.[1] However, the core issue lies with Bye Law 3 of rule 40, which stipulates that without the permission of the International Olympic Committee (IOC) or the National Olympic Committee (NOC), no competitor, official or any other personnel associated with the Olympics should allow his person, name, picture or sports performances to be used for advertising purposes during the Olympic Games.[2] The rule aims at ensuring maximum visibility for official sponsors during the Olympics, and thereby prevents athletes from using their personal sponsors during the blackout period, i.e. nine days prior to the opening ceremony and three days after the closing ceremony.[3]

The structure of Rule 40 has been carved in the form of a non-compete clause, an aspect on which the Indian law is quite ambiguous. With Edelweiss Group being named as the principal sponsor for the Indian contingent to the Olympics,[4] it becomes important to understand the position of non-compete clauses in India and the restraining powers associated with such clauses.

VALIDITY IN INDIA: ANALYZING THE RESTRAINING POWER

Section 27 of the Indian Contract Act, 1872 (ICA) talks about restraint of trade and stipulates that if an agreement restrains someone from exercising lawful profession, trade or business of any kind, then such an agreement is void. An exception regarding carrying on a business whose goodwill is sold is provided, thereby preventing the seller from carrying out similar business within specified local limits. Non-compete agreements fall within the broad ambit of restraint of trade, as stipulated by section 27 of the ICA. The general principle that ensues on the reading of the section is that all restraints on trade, profession or business are void, be it partial or total.[5] However, most of the jurisprudence around non-compete clauses has developed through case laws in India.

The general consensus amongst courts over the years has been that non-compete agreements which cover only the period or tenure of employment, thereby not extending beyond the period of engagement, are valid in law. The starting point for this principle can be traced to the case of Abdul Karim v. Sk. Dubar.[6] It was held in this particular case that agreements operating during the term of employment are valid in law if they encourage the exercise of business, and therefore promote trade. The case of Superintendence Co of India Pvt. Ltd. v. Krishan Murgai[7] also becomes important in this light. The Supreme Court, while dealing with a contract of employment that had a restraint which was operational for a period of two years after the completion of tenure, categorically stated that the doctrine of restraint was only applicable for the employment period. The court, however added, that a restrictive covenant extending beyond the term of employment would be invalid.[8]

We then have the oft-cited case of Gujarat Bottling Company Ltd v. Coca Cola Company.[9] While dealing with a franchise agreement, the court summarized the earlier rulings on non-compete clauses in India and held that restraints, which were confined to the subsistence of the agreement and did not extend beyond termination, would not fall under the ambit of section 27 of ICA and therefore would be valid. The division bench of the Supreme Court in 2006 added yet another ruling to bring finality to the legal position of post-termination non-compete clauses. The Supreme Court, in the case of Percept D’Marx (India) Pvt. Ltd. v. Zaheer Khan & Anr.[10], while dealing with Zaheer Khan’s contract with a management company, specifically stipulated that non-compete clauses would only be valid if they exist for the period of the contract. However, if they are enforced after the contract has been terminated, then such restraints are violative of section 27 of the ICA.[11]

The above cases make it clear that while non-compete clauses subsisting for the period of employment are valid in law, the one’s that extend beyond the tenure would violate section 27 of ICA and therefore be invalid.

‘REASONABILITY’ OF RESTRAINTS: ASSESSING THE ‘IN-TERM’ NON-COMPETE CLAUSES

 ‘Reasonability’ of non-compete clauses has traditionally been a concept of English Law. In England, a non-compete, whether ‘in-term’ or ‘post-termination’ would be valid if the same is reasonable, something that has been stipulated by House of Lords in the famous case of Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co.[12] The reasonability would have to be seen in reference to the interests of the parties, along with the interest of the general public. The oft-cited case of Esso Petroleum Co Ltd v. Harper’s Garage (Stourport) Ltd.[13] also becomes important in this context. A twenty-one year period of exclusive dealing was held to be invalid and unreasonably long in this particular case. Hence, non-compete clauses cannot be excessively harsh or unfair.

The Indian law differs in terms of the fact that it invalidates all post-termination non-compete clauses. However, when in comes to ‘in-term’ non-compete clauses, reasonability has to be seen to assess the validity of the clause. One of the earliest cases in this regard is the case of Shaikh Kalu v. Ram Saran Bhagat[14]. The court in this case invalidated a non-compete clause that extended for the entire lifetime of the person, terming it harsh and contrary to the promotion of trade. The case of Niranjan Shankar Golikari v. Century Spg & Mfg Co Ltd[15] is another such case wherein the court deliberated on reasonability and stipulated that an employment injunction of 5 years that was restricted to the tenure of employment could not be termed unreasonable, thereby clearly validating the test of ‘reasonability’ for ‘in-term’ non-compete clauses. The case of Gujarat Bottling Co Ltd[16] also stipulated on reasonability for ‘in-term’ non-compete clauses and stated that if the restraint is for the promotion of trade, the same should be considered reasonable.

The above cases clearly establish that ‘reasonability’ would have to be seen for non-compete clauses that are operational for the period of employment, and hence unduly harsh and excessive restraints would be invalid.

ASSESSING INDIAN LAW VIS-À-VIS RULE 40

[1]Rule 50, The Olympic Charter, p. 79,available at https://stillmed.olympic.org/Documents/olympic_charter_en.pdf

[2] Ibid, See also “Guidelines on usage of a participant’s image for advertising purposes during the Rio 2016 Olympic Games”, February 2015,available at https://stillmed.olympic.org/Documents/Athletes_Information/Rule_40-Rio_2016-QA_for_Athletes.pdf

[3] Alessandro Oliverio, “Olympic Charter Rule 40: The Olympic Advertising Dispute”, OLF Legal, p.3, available at https://www.olflegal.com/wp-content/uploads/2016/02/advertising-dispute.pdf

[4] Shan Kohli, “The Olympic Blackout Period, Use of Athlete Attributes and IPRs – Part II, Spicy IP, available at https://spicyip.com/2016/07/the-olympics-blackout-period-use-of-athlete-attributes-and-iprs-part-ii.html

[5] Avtar Singh, LAW OF CONTRACT AND SPECIFIC RELIEF, 11th ed. 2013, p. 283.

[6] AIR 1937 Oudh 445

[7] AIR 1980 SC 1717

[8] Ibid

[9] AIR 1995 SC 2372

[10] (2006) 4 SCC 227

[11] Ibid

[12] 1894 AC 535

[13] 1968 AC 269

[14] (1908-09) 13 CWN 388

[15] AIR 1967 SC 1098

[16] Ibid

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