A non-disparagement clause contained in a contract is aimed at preventing a party to the contract from disparaging the other party. The word “disparage” is a broad term and generally includes, within its ambit, any statement whether oral or written that casts any criticism on individuals or their respective businesses, products or services. While the term may appear to be akin to defamation, there is a difference between the two.
The scope of the term “disparagement” is much broader and can mean any expression of facts that detracts or discredits. Defamation, on the other hand, pertains to false allegations or misrepresentations made against another. To establish ‘disparagement’, it would suffice to demonstrate the existence of the statements or representations, whereas with defamation, the burden lies in proving the falsity of such statements or representations, coupled with the intention to inflict harm.
Unlike defamation, which if proved, is considered as a criminal offence under the Indian Penal Code, disparagement lacks recognition under any Indian laws. It is therefore, typically, imposed as a contractual obligation, a breach of which is then dealt with in accordance with the terms of the contract.
Depending on the nature of relationship between the parties to a contract, non-disparagement clauses could be agreed as mutual obligations of the parties (such as in case of joint venture arrangements) or could be binding on either of the party only (such as in case of an employer-employee relationship). With the rapid growth of social media and its potential to damage the stature of a company with even a single disparaging comment, companies have extensively started using non-disparagement clauses in employment and severance contracts. The obligation of an employee as regards non-disparagement typically tends to subsist till they are in employment and survive thereafter for a specified period.
While the recent trends indicate that non-disparagement clauses are being adopted by companies in their employment and severance contracts, it is yet to be tested judicially whether a breach of such a provision would hold good in a court of law. This is because non-disparagement clauses tend to, in some way, conflict with the provisions regarding protection of whistle-blowers under the Companies Act, 2013 (Act) and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI LODR Regulations). The Act requires all listed companies to establish an audit committee to investigate the allegations made by whistleblowers. Further, all unlisted companies are required to establish a vigil mechanism to safeguard the whistleblowers. Listed companies are also required to maintain a whistle blower policy in terms of the SEBI LODR Regulations. On one hand, the aforesaid provisions mandate the protection of a whistle blower and on the other hand, a non-disparagement clause entitles a company to claim breach of contract for the act of disparagement. It is thus imperative that a non-disparagement clause has necessary carve-outs to resolve this anomaly. This will also ensure that the non-disparagement clauses are not considered illegal or against the law of the land and are thus enforceable in genuine circumstances. Equally, it is important that the spirit of the law regarding protection of whistle-blowers is retained intact without giving companies the opportunity to suppress any wrongdoings under the garb of contractual obligations.
Written by Nidhi Arora (Partner) and Manan Kapoor (Associate)
