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Non-Competition Clauses in Bangladesh: Legal Effect and Enforceability

Introduction

In Bangladesh, a clause that stops a person from competing after a contract ends is, as a rule, void. Section 27 of the Contract Act, 1872 strikes down every agreement that restrains anyone from exercising a lawful profession, trade or business, and it does not ask whether the restraint is reasonable. The real question for an employer or business is therefore not "is my clause reasonable?" but "does my clause fall within one of the narrow situations where the law allows a restraint at all?"

Non-compete clauses are now routine in appointment letters for senior staff, in shareholder and share purchase agreements, in joint venture documents and in distribution and franchise deals. Many are copied from English, Singaporean or US templates, where courts enforce "reasonable" restraints. Imported into a Bangladeshi contract, the same words often give far less protection than the parties assume. This article explains where such clauses bind, where they fail, and how to protect a business by other, enforceable means.

The statutory framework

Five statutes decide whether a non-compete binds in Bangladesh. Section 27 of the Contract Act sets the rule; the others create exceptions, remedies or a separate regulatory risk.

The Bangladesh Labour Act, 2006 is silent on non-competes. It regulates termination, resignation and benefits for "workers", but neither authorises nor prohibits restrictive covenants, so the Contract Act governs.

Two features of section 27 matter most. First, unlike English common law, it contains no reasonableness test outside the goodwill exception: a partial restraint, limited in time and area, is still void. Calcutta High Court decisions from before 1947, such as Madhub Chunder v Rajcoomar Doss (1874) and Shaikh Kalu v Ram Saran Bhagat (1909), settled this and remain part of the law Bangladeshi courts apply. Second, the words "to that extent" mean only the offending restraint is void; the rest of the contract survives.

Employment contracts

The dividing line in employment is the end of the employment. A restraint that operates while the employee is still employed is generally valid; one that operates after it ends is generally void.

During employment: enforceable

An employee may validly promise to serve the employer exclusively and not to work for, or set up, a competitor while the contract subsists. Courts treat this as part of the service bargain, not a restraint of trade; if it were otherwise, every fixed-term service contract would be void. The leading authority, followed across the subcontinent, is the Indian Supreme Court's decision in Niranjan Shankar Golikari v Century Spinning (1967), which upheld a negative covenant confined to the contract term unless it is unconscionable, excessively harsh or one-sided. Gujarat Bottling v Coca-Cola (1995) confirmed that a restriction operating only while the agreement subsists does not attract section 27.

This covers moonlighting bans, exclusivity clauses, and notice periods during which the employee remains on payroll.

After employment: void

A covenant that stops a former employee from joining a competitor or starting a rival business after leaving is void under section 27, however short or local. In Superintendence Company of India v Krishan Murgai (AIR 1980 SC 1717) the Indian Supreme Court held a post-termination restraint void even though it was limited in time and area, because section 27 admits no test of reasonableness. Indian courts have applied this consistently since, including to "garden leave" arrangements that pay the employee to stay out of the market after the relationship ends (VFS Global v Suprit Roy, Bombay High Court, 2008). Bangladeshi courts treat these decisions on an identical provision as highly persuasive, and practitioner commentary in Bangladesh reflects the same view.

The Karnataka High Court applied the same rule in Mu Sigma Business Solutions v Sagar Balan (2019). It read a clause barring "conflicting services anywhere in the United States or India" as operating only during employment, and refused to restrain former senior employees who had set up a rival analytics firm.

The practical consequence: an employer cannot obtain an injunction stopping a departing manager from joining a competitor, and a damages claim for the move will fail.

What survives after employment

Three post-employment obligations are treated differently because they protect a legitimate interest without stopping the person from working:

Confidentiality. A duty not to use or disclose trade secrets, client data, pricing or other confidential information is not a restraint of trade and can be enforced during and after employment, by contract and in equity.

Non-solicitation of clients. A clause barring a former employee from soliciting the employer's existing clients is generally upheld, since the person remains free to work and to serve others who approach them. Courts read these narrowly.

Non-poaching of staff. A promise not to induce former colleagues to leave is usually upheld on the same reasoning.

The test in each case is whether the clause protects information or relationships, or simply removes a competitor. Drafted as the latter, it fails.

Commercial contracts

Commercial non-competes have more room than employment ones, but only where they fit a recognised exception or operate during the life of the relationship. Outside those, section 27 applies with full force, and the Competition Act adds a second, regulatory layer.

The goodwill exception

The exception exists because a buyer who pays for goodwill would get nothing if the seller could open next door the following day. Courts therefore look for a real transfer of goodwill, a business the buyer actually carries on, and limits on area and duration that match the business sold. A nationwide, ten-year restraint on the seller of a single Dhaka outlet risks being struck down; a restraint covering the outlet's trading area for a few years is far safer. Indian courts have applied the same reasoning to non-competes in share purchase agreements where the sale carried goodwill with it.

The competition law overlay

Even a restraint valid under contract law can be unlawful under the Competition Act, 2012. Section 15 prohibits agreements that have, or are likely to have, an adverse effect on competition, and expressly lists exclusive supply and exclusive distribution agreements. Section 16 prohibits abuse of a dominant position. The Commission can impose penalties of up to 10% of average turnover over the preceding three years. Market-sharing non-competes between competitors and exclusivity imposed by a dominant supplier carry the greatest risk. Enforcement is still developing, but the exposure is real and will grow.

Key judicial decisions

The case law follows one pattern. Courts enforce restraints while the relationship lasts, refuse them after employment ends, and protect confidential information and purchased goodwill by narrower means. The decisions below come from Indian courts and tribunals applying section 27 in its identical Indian form. They do not bind Bangladeshi courts, but they are highly persuasive, because no reported decision of our Supreme Court has yet addressed post-employment non-competes directly.

Employment: what the courts will protect

Mu Sigma is the clearest modern statement of the employment position, and it sets out three tiers:

During employment, a negative covenant against competing or soliciting is enforced firmly.

Trade secrets (formulae, technical know-how, a distinctive method of doing business) remain protected after employment ends, and an ex-employee can be restrained from disclosing or using them.

Other confidential information, such as client lists and customer data, is protected after exit only if the employer proves three things. The restriction must be limited in time and area. The information must be exclusive and shared in confidence. And the restraint must not stop the employee using his own skill and experience.

The case also shows how claims fail in practice. The employer described its "proprietary information" only in general terms, so the court could not identify what it was being asked to protect. It relied on former staff joining the rival and the rival's bid for a client's work, and the court held these facts alone did not prove solicitation. The court also weighed the harm an injunction would do to the defendants' livelihoods. The decision is interlocutory, but its reasoning is the reasoning a Bangladeshi court is likely to apply.

Hi-Tech Systems is often cited as a sign of change. The Calcutta High Court did question whether section 27 still suits a modern economy, but that observation is not a ruling, and later courts, including in Mu Sigma, continued to apply the strict rule.

Commercial: how courts read non-compete payments

The three tribunal decisions concern Indian income tax, but they show how courts characterise non-compete covenants in commercial deals.

Substance over labels. In Alfa Laval the payment was called "goodwill" in the agreement and the accounts. The tribunal looked at the operative clause, which paid the money in return for not competing with the JV, and treated it as a non-compete fee. The seller kept its other business and even retained a carve-out for turnkey projects, which confirmed that no business or goodwill had passed.

Allocate the price expressly. In Dinesh Platechem the agreement stated one composite price. The revenue authorities rejected the seller's later split as an afterthought. The seller succeeded only because a chartered accountant's report, dated a month before signing, valued the five-year restraint at about Rs 40 lakh on a discounted-profit basis. Stating the allocation in the agreement itself would have avoided the dispute.

Non-compete breaches hold up money. In Calchennai the buyer withheld roughly Rs 3.12 crore of the agreed price, alleging the seller had breached its non-compete. Sellers should expect a buyer to use the covenant as a lever over deferred consideration, and both sides should provide for it in escrow or holdback terms.

The tax outcomes in these cases turn on Indian provisions, including section 28(va) of the Income-tax Act, 1961, which taxes non-compete receipts as business income from assessment year 2003-04. Bangladesh's position under the Income Tax Act, 2023 differs materially and is set out in the next section.

Taxation under the Income Tax Act, 2023

In Bangladesh, a payment for agreeing not to compete is likely to be taxed as ordinary income of the recipient, not as a tax-free capital receipt. The Indian decisions above, which treated such payments as capital receipts, turned on Indian provisions. The Income Tax Act, 2023 is drafted more widely. We have found no reported Bangladeshi decision on point, so what follows is our reading of the statute as amended up to the Finance Act, 2026.

Why the Indian "capital receipt" argument is weak here

Three provisions close the gap that Indian taxpayers relied on:

Section 2(13)(a) defines "income" to include any income, receipts, profits or gains, from whatever source derived. The word "receipts" reaches payments that are not profits in the ordinary sense.

Section 66(e) taxes, as income from other sources, income from any source not classified under any other head. There is no residual category of untaxed receipts.

Section 67(5) treats as income from other sources any fee, commission, compensation or goodwill money, by whatever name, received for cancelling or revoking a contract or for changing or modifying any of its terms. Its predecessor, section 19(10) of the Income Tax Ordinance, 1984, covered only cancellation or termination. The 2023 wording also catches payments for varying a contract, such as a fee for accepting a new exclusivity or non-compete term.

How each payment is likely to be taxed

The payer's side

Deduction. A non-compete payment made to acquire a business is capital expenditure, and section 55(p) bars its deduction. A recurring fee paid during an ongoing relationship, such as an exclusivity fee to a distributor, may be revenue expenditure deductible under section 49(v) if it passes the commercial reasonableness test in section 54(2). Whether a purchased non-compete right qualifies for amortisation under the Third Schedule is unsettled and should be checked for each transaction.

Withholding. Under sections 55(a) and 60, a payment loses its deduction if tax was not deducted at source where required. For non-residents, failure to withhold under section 119 also exposes the payer to the unpaid tax and an additional amount.

What this means for drafting

The tax incentive runs the other way from India. Before 2003, Indian sellers wanted a large share of the price allocated to the non-compete, because that share was tax-free. In Bangladesh, a seller may do better if more of the price is allocated to the business and its goodwill, taxed as capital gains, and less to a separate non-compete fee taxed at the regular rate. A buyer's interest may differ, depending on what it can deduct or amortise.

Any allocation must reflect the substance of the deal. Alfa Laval shows that tax authorities look past labels, and sections 58 and 61 allow the Deputy Commissioner of Taxes to apply fair market value. Parties should:

State the allocation between assets, goodwill and the non-compete in the agreement itself.

Support it with a valuation prepared before signing, as in Dinesh Platechem.

Settle the withholding position before the first payment, especially where the recipient is non-resident.

Take tax advice on the specific transaction, since rates and provisions change each year through the Finance Act.

Enforcement and remedies

Where a restraint is valid, the main remedy is an injunction; where it is void, no remedy is available at all, and the clause cannot be rescued by calling it something else.

Injunction. Under section 21 of the Specific Relief Act a court will not order an employee to keep working. But section 57 allows an injunction to enforce a negative covenant forming part of a contract, such as an exclusivity promise during the term. Interim relief turns on the usual tests: a prima facie case, balance of convenience and irreparable loss. Courts are slow to grant one that would leave a person unable to earn a living.

Damages. Breach of a valid restraint gives a claim for losses that flow naturally from it. Proving the loss caused by a competitor's diverted business is often difficult.

Liquidated damages and bonds. A fixed sum payable on breach is limited by section 74 of the Contract Act to reasonable compensation, whatever figure the contract states. A sum payable for breaching a void post-termination non-compete is itself unenforceable. Training or service bonds that recover genuine training costs if an employee leaves early stand on firmer ground, because they compensate a real outlay rather than restrain work.

Severance of the bad part. Because section 27 voids an agreement only "to that extent", the rest of the contract stands. A court may strike out a void post-termination restraint and enforce the valid confidentiality and non-solicitation terms, if they are drafted as separate, self-contained clauses. Courts will not rewrite an over-broad clause into a narrower one that the parties never agreed.

Breach of confidence. Independent of any covenant, an employer can sue for misuse of confidential information and seek an injunction and an account of profits. This is often the strongest route against a departing employee who takes client lists or pricing data.

Foreign governing law. Choosing English or Singapore law does not reliably avoid section 27. Where the employee works in Bangladesh and enforcement is sought here, a Bangladeshi court is likely to treat section 27 as public policy and decline to enforce a restraint it would hold void.

Evidence decides most interim applications. In Mu Sigma the employer lost because it described its confidential information only in general terms and relied on staff moving to the rival as proof of solicitation. An employer seeking an injunction should identify the specific documents, data or methods taken, and show actual approaches to clients or staff, such as emails, messages or client statements.

Drafting guidance

A well-drafted Bangladeshi contract protects the business through clauses the courts will enforce, rather than relying on a post-exit non-compete that will fail.

Two further points arise from the commercial decisions:

Allocate the price. Where a sale or JV agreement pays for a non-compete, state the amount attributed to it in the agreement and keep a contemporaneous valuation, as the seller did in Dinesh Platechem. Do not rely on labels such as "goodwill"; Alfa Laval shows courts look at what the money is actually for.

Provide for disputes over deferred consideration. As Calchennai shows, a buyer may withhold part of the price over an alleged breach of the non-compete. Set out escrow or holdback terms, the evidence needed to release funds, and a dispute resolution route.

Above all, review template clauses taken from foreign precedents. Language that works in London or Singapore often gives a false sense of security in Dhaka.

Conclusion

In Bangladesh, a non-compete is enforceable during an employment or commercial relationship and on a genuine sale of goodwill or partnership exit, but almost never against a former employee. Section 27 of the Contract Act leaves no room for a "reasonable" post-employment restraint, and the Competition Act now adds regulatory risk to commercial exclusivity. Businesses that understand this protect themselves through exclusivity during the term, firm confidentiality, targeted non-solicitation and properly structured goodwill covenants.

The Justice Corner advises employers, investors and businesses on drafting, reviewing and enforcing restrictive covenants, and on resisting unenforceable ones. If you are preparing an employment contract, buying or selling a business, or facing a former employee or partner who has joined a competitor, contact our chamber in Dhaka for advice on your position.

This article is general information on Bangladeshi law as at the date shown and is not legal advice on any particular matter.