Non-compete clauses between hospitals and doctors unlawful: Madras High Court

The Madras High Court recently termed a hospital's attempt to enforce a non-compete clause against a doctor a “witch-hunt,” adding that such clauses are unlawful as they violate provisions of the Indian Contract Act that prohibit agreements in restraint of trade and those against public policy [MIOT Hospitals v. Dr Balaram Palaniappan].

Justice N Anand Venkatesh made the observation while dismissing a plea MIOT Hospitals to appoint an arbitrator in a dispute between it and a cardio-thoracic surgeon who resigned and joined another hospital.

"An agreement entered into by a doctor with a hospital, which contains a non-solicitation and/or non-compete clause, is certainly opposed to public policy and such an agreement is squarely hit by Section 23 of the Indian Contract Act, 1872. Consequently, it must be held to be unlawful, unenforceable and void ab initio to that extent ... the respondent – doctor had, in fact, given three months’ notice in compliance with Clause 10.2 of the agreement. In such an event, there is no further dispute to be resolved before the Arbitral Tribunal. For all the above reasons, this Court holds that the above petition is devoid of merits and it has been filed to witch-hunt a doctor, whom the petitioner hospital expected to dance to their tunes for ever," the judgment said

The Court also imposed costs of ₹1 lakh on the hospital while dismissing its petition filed under Section 11 of the Arbitration and Conciliation Act, 1996.

MIOT Hospitals had engaged the doctor as a Consultant Cardio Thoracic Surgeon, including overseas secondment assignments. After about two years and seven months, the doctor expressed his intention to resign. The hospital claimed he had violated the agreement by failing to serve the notice period and by joining Apollo Speciality Hospital in breach of non-compete and non-solicitation clauses.

It sought ₹42 lakh as liquidated damages and initiated arbitration proceedings.

The doctor denied the claims and opposed the arbitration plea, arguing that the restrictive covenants violated Section 27 (any contract in restraint of trade is treated as void) of the Indian Contract Act and rendered the dispute non-arbitrable.

In an earlier hearing of the matter, Justice Venkatesh had orally questioned the hospital whether it was more focused on running a business or a hospital.

"Are you running a business? Are you running a hospital? What are you doing? Is this some commercial establishment?”

The Court made similar strong observations in its final verdict as well while commenting on the inclusion of non-compete and non-solicitation clauses in agreements prepared by hospitals while appointing medical professionals.

“It is quite unfortunate that a hospital has incorporated such a clause in an agreement entered into with a doctor. Either the above clause is as a result of cut, copy and paste syndrome from an agreement, which is regularly entered into between technology companies with their employees or the petitioner hospital has forgotten the fact that they are running a hospital to serve the patients and that they are indirectly admitting that the organization is nothing short of a profit making entity like any other business entity," it said.

The Court emphasised that doctors are independent professionals and cannot be treated like regular employees. The judgment stressed that hospitals rely on doctors’ services to function.

The Court also rejected the idea of rivalry between hospitals.

“A rivalry between hospitals is a misnomer considering the nature of services rendered and a term that is normally used in commercial business parlance pertaining to trade business, cannot be imported to a hospital, which, by the very nature of service rendered, should not project itself as a business venture even though the reality is otherwise," it held.

The Court drew an analogy between the medical and legal professions, and noted that an advocate leaving a law firm cannot be barred from independent practice or from joining another firm. The Court held that the same principle applies to doctors.

The judgment emphasised that healthcare cannot be equated with trade or business rivalry.

“A term used in commercial trade cannot be imported into hospitals, which exist to serve patients and society," it reads.

The Court added that doctors routinely work across hospitals and their independence cannot be curtailed by contractual restrictions.

"It will not be out of context to state that doctors do visit various hospitals, which engage their services and their independence can never be curtailed by binding them with the terms of a contract like the case in hand," it stated.

The Court also emphasised the central role of patient choice and trust in healthcare.

“Ultimately, whether it is a patient or a client, he will engage a firm/ hospital or an advocate/doctor, with whom, he has confidence. This is in view of the very nature of duty that is performed by a professional like a doctor or an advocate.”

The Court stressed that patients cannot be treated as part of a hospital’s commercial assets.

“A doctor is an independent professional, who cannot be stopped from rendering his services wherever he wants to and also cannot be stopped from attending to patients just because those patients were earlier taking treatment in the petitioner hospital," it held.

The Court concluded that non-compete and non-solicitation clauses in agreements between hospitals and doctors are opposed to public policy and violate Sections 23 and 27 of the Contract Act.

“Such an agreement is unlawful, unenforceable and void ab initio," it ruled.

The Court added that an arbitration clause cannot survive when the underlying agreement itself is unlawful. The request for the appointment of an arbitrator in this case was, therefore, rejected.

The Court also found that the doctor, in this case, had submitted a resignation letter in January 2024 giving three months’ notice and had continued working thereafter at the hospital’s request.

The Court took critical note that the hospital ignored the earlier resignation and continued to pursue arbitration proceedings.

The Court further recorded that the doctor was willing to settle by paying one month’s professional fee, but the hospital still insisted on arbitration.

It concluded that the hospital's plea was a 'witch hunt', and that no arbitrable dispute remained, before dismissing the plea by MIOT Hospitals with costs.

The hospital was ordered to pay the ₹1 lakh costs imposed on it to the doctor.

MIOT Hospital was represented by Advocate PS Suman.

The doctor was represented by Advocate S Balamurugan.

[Read Judgment]