Bombay High Court Declares Non-Compete Clause Invalid Post-Termination

The Bombay High Court recently set aside an injunction and allowed an appeal under Section 37 of the Arbitration and Conciliation Act, ruling that non-compete clauses are invalid post-contract termination under Section 27 of the Indian Contract Act, which prohibits restraint of trade.

Case Background

The case involved a Master Supply Agreement (MSA) between Indus Powertech Inc. and Echjay Industries Pvt. Ltd. The MSA included a non-compete clause that restricted both parties from engaging with certain entities for 24 months after the agreement’s termination. When the contract ended, a dispute arose regarding the enforceability of this clause, leading to an injunction that restricted Indus Powertech’s activities based on the post-termination agreement. Indus Powertech then challenged the injunction, seeking relief under the Arbitration and Conciliation Act.

Court's Key Findings

The court scrutinized the validity of the non-compete clause in light of Section 27 of the Indian Contract Act, which states that any agreement that restrains a party from engaging in a lawful profession, trade, or business is void. The court found that while non-compete clauses may be valid during the term of an agreement, they become unenforceable once the contract is terminated. This is because such clauses, after termination, restrict a party's ability to conduct business, constituting a restraint of trade prohibited by law. The court thus ruled that the non-compete clause in the MSA was invalid after the contract ended.

Reversal of Injunction

As a result, the court set aside the injunction, allowing Indus Powertech to operate without the contractual restraints imposed by the non-compete clause. The court emphasized that such clauses cannot bind parties indefinitely after an agreement has ended, as it conflicts with the principles of free trade and competition.

Appeal Under Section 37

Indus Powertech had filed an appeal under Section 37 of the Arbitration and Conciliation Act, which allows parties to challenge orders passed under Section 17 regarding interim measures. The court allowed the appeal, reinforcing the principle that restraints on trade are impermissible under Indian law.

Impact and Conclusion

The decision reaffirms the stance that while non-compete clauses during the tenure of an agreement are enforceable, any attempt to extend these restrictions post-termination is likely to be struck down by courts as violating the fundamental right to engage in trade or business. This ruling has broader implications for contracts across industries where non-compete clauses are common, signaling that such provisions must be carefully drafted to avoid conflicts with Indian legal principles.

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