If the agreement of employment puts a restriction on employee to not to work anywhere else, is such agreement void or not under Section 27?

Niranjan Shankar Golikari vs The Century Spinning and Mfg. Co. Ltd.

Bench: Shelat, J.M. and Bachawat, R.S

Issue:

• Whether a contract binding the employee in a contract to, not, to be employed somewhere else is void under Section 27 of ICA, 1872 or not?
• Is a contract in restraint of trade against public policy?

Facts:

• The respondent company used to manufacture tyre cord yarn and other things
• The respondent entered into an agreement with Algemene Kunstzijde Unie (AKU) and Vereinigte Clanzstoff Fabrikan (VCF) to transfer their technical knonlwdge to therespondent to be used for production of tyre cord yarn for a consideration of 1,40,000 Deutsche Marks payable to VCF and AKU
• The agreement entered between them had a clause that the respondent shall keep secret all the information until the termination of the agreement and respondent to enter into a secrecy agreement with its employee.
• Afterwards the respondent invited applications. The appellant sent his application stating therein his qualifications in reply to the invitation.
• The respondent offered the appellant the post of a Shift Supervisor stating that he has to sign a contract in standard form of five years. The appellant accepted offerand executed the contract.
• Clause 9 of contract stated that the appellant will never disclose confidential information during his service or afterwards
• Clause 14 said that if due to certain circumstances the company is closed or the company is not able to employ the employee, the company shall have the option to terminate the appellant by giving him three months’ notice or three month’s salary.
• Clause 17 stated that if the employee leaves, abandon or resign the company in breach of contract before the expiry of five years he shall not open up his own business or work in partnership or work with anyone involved in same business for the remainingtime and pay the company as liquidated damages equal to salary of six months and any amount spent by company on the employee’s training.
• The appellant received training and acquired training, knowledge of the technique, processes and the machinery of above-mentioned collaborators and certain documents to be kept secret.
• The appellant as a Shift Supervisor was responsible for running of Shift work, control of labour and the work given by AKU.
• After some time, the appellant was absent for some days without any prior notice and later he informed the respondent that he had resigned. The respondent denied his resignation. The appellant replied that he has an employment somewhere else.
• The Appellant was negotiating with Rajasthan Rayon Company which was also manufacturing tyre cord yarn and was employed there at salary of Rs. 560/- per month.
• The respondent filed a suit in the court seeking an injunction restraining the appellant from working or being involved with Rajasthan Rayon for the remaining period of contract. The respondent claimed Rs. 2410/- as damages under Clause 17 of the agreement and an injunction from disclosing any information.
• The Trial Court held respondent has availed training imparted by AKU, and was familiar to their secrets, techniques and information; that the said agreement was not void or unenforceable; appellant committed breach of contract; respondent suffered loss and had right to claim damages under clause 17 and the company had a right to injunction. The Trial Court passed the order to grant injunction to cancel the employment of appellant in Rajasthan Mills and not to work in any company related to the work of respondent till the duration of the contract.
• The High Court upheld the decision of Trial Court.

Argument raised by Appellant:

• The contract was against public policy as the contract is a restraint on trade.
• That the contract in question should be reasonable to be valid and enforceable and valid to the extent that it is necessary to protect the employer’s right of property and
• That negative stipulation can only be granted for the purpose of safeguarding the secret of employer.

Argument raised by Respondent:

The respondent contended that the employment of appellant in Rajasthan Rayon Company was infringement of clause 9 and 17. The Rajasthan Rayon Company was paying the appellant higher salary also clears the fact that the appellant must have disclosed the confidential information with the Rajasthan Rayon Company.

Judgment:

The court held that appellant received training for about nine months and during that time period the information regarding the special processes and machinery of collaborators had been learned by him.Soon the Rajasthan Company started producing tyre cord yarn which means the information about collaborators technique was passed by the appellant. Clauses 9 and 17 meant work in the same trade and the appellant was employed in a competitor’s company. Therefore, the inhibitions contained in those clauses were not blanket restrictions

The court took observation from a case that: “An agreement to serve a person exclusively for a definite term is a lawful agreement, and it is difficult to see how that can be unlawful which is essential to its fulfilment, and to the due protection of the interests of the employer, while the agreement is in force[1].”

The court held that “Negative covenants operative during the period of the contract of employment when the employee is bound to serve his employer exclusively are generally not regarded as restraint of trade and therefore do not fall under section 27 of the Contract Act.”

The appeal was dismissed.