Non Compet Clause_Employement Contract

8/13/2019 Non Compet Clause_Employement Contract

1/33

MANU/SC/0364/1967

Equivalent Citation: AIR1967SC1098, 1967(69)BOMLR535, [1967(14)FLR337], (1967)ILLJ740SC,

1967MhLJ606, 1967MhLJ606, [1967]2SCR378

IN THE SUPREME COURT OF INDIA

Decided On: 17.01.1967

Appellants: Niranjan Shankar Golikari Vs.

Respondent: The Century Spinning and Mfg. Co. Ltd.

Hon'ble Judges/Coram:

J. M. Shelat and R. S. Bachawat , JJ.Subject: Media and Communication

Subject: Service Catch Words Mentioned IN Acts/Rules/Orders:Indian Contract Act - Section 27Authorities Referred:Halsbury's Laws of England (3rd edition), Volume 38Citing Reference:

Discussed

10Mentioned

12

Case Note:

Contract - breach - Section 27 of Indian Contract Act,1872 appellant accepted by therespondents to post of shift supervisor signed standard form contract of five yearsappellant received training for nine months some difficulty between respondent andappellant appellant absented himself from work and then handed over his resignationletter which was not accepted appellant informed respondent that he had joined anothercompany for a higher pay Trial Court issued injunction appellant restrained fromemployment pursuant to Clause 9 of contract for four years and not to divulge secrets as in

Clause 17 High Court held that Clauses 9 and 17 not blanket restrictions restriction only oninformation gathered during working in particular department could seek employment inother areas High Court confirmed injunction appellant moves Supreme Court - negativecovenants operative during period of contract do not fall under Section 27 Clause 17 ofcontract does not amount to restraint in trade held, injunction not too wide orunreasonable or unnecessary for protection of interests of respondent company.

JUDGMENT

Shelat, J.

1. This appeal by Special Leave is against the judgment and order of the High Court of Maharashtra
http://fncitation%28%27manu/SC/0364/1967');http://fncitation%28%27manu/SC/0364/1967');http://fnopenjudges%28%27211%27%29/http://fnopenjudges%28%27211%27%29/http://fnopenjudges%28%27162%27%29/http://fnopenjudges%28%27162%27%29/http://fnopenjudges%28%27162%27%29/http://fnopencatch%28%27manu/SC/0364/1967')http://fnopencatch%28%27manu/SC/0364/1967')http://fnmentionedin%28%27manu/SC/0364/1967');http://fnmentionedin%28%27manu/SC/0364/1967');http://fnopencr%28%27manu/SC/0364/1967','2');http://fnopencr%28%27manu/SC/0364/1967','2');http://fnopencr%28%27manu/SC/0364/1967','1');http://fnopencr%28%27manu/SC/0364/1967','1');http://suggestcitationaddbtn%28%27manu/SC/0364/1967',%221%22)http://fnsavedoc%28%29/http://fnnewemail%28%29/http://showprint%28%29/http://suggestcitationaddbtn%28%27manu/SC/0364/1967',%221%22)http://fnsavedoc%28%29/http://fnnewemail%28%29/http://showprint%28%29/http://suggestcitationaddbtn%28%27manu/SC/0364/1967',%221%22)http://fnsavedoc%28%29/http://fnnewemail%28%29/http://showprint%28%29/http://suggestcitationaddbtn%28%27manu/SC/0364/1967',%221%22)http://fnsavedoc%28%29/http://fnnewemail%28%29/http://showprint%28%29/http://fnopencr%28%27manu/SC/0364/1967','1');http://fnopencr%28%27manu/SC/0364/1967','2');http://fnmentionedin%28%27manu/SC/0364/1967');http://fnopencatch%28%27manu/SC/0364/1967')http://fnopenjudges%28%27162%27%29/http://fnopenjudges%28%27211%27%29/http://fncitation%28%27manu/SC/0364/1967');


2/33

confirming an order of injunction against the appellant.

2. The respondent company manufactures amongst other things tyre cord yarn at its plant at Kalyanknown as the Century Reyon. Under an agreement dated January 19, 1961 Algemene Kunstzijde Unieof Holland (hereinafter referred to as AKU) and Vereinigte Clanzstoff Fabrikan AG of West Germany(hereinafter referred to as VCF) agreed to transfer their technical know-how to the respondentcompany to be used exclusively for the respondent company's tyre cord yarn plant at Kalyan inconsideration of 1,40,000 Deutsche Marks payable to them by the respondent company. Clause 4 of

that agreement provided that the Century Rayon should keep secret until the termination of theagreement and during three years thereafter all technical information, knowledge, know-how,experience, data and documents passed on by the said AKU and VCF and the Century Rayon shouldundertake to enter into corresponding secrecy arrangements with its employees. The respondentcompany thereafter invited applications for appointments in its said plant including appointments asShift Supervisors. On December 3, 1962 the appellant sent his application stating therein hisqualifications. By its letter dated March 1, 1963 the respondent company offered the appellant thepost of a Shift Supervisor in the said tyre cord division stating that if the appellant were to accept thesaid offer he would be required to sign a contract in standard form for a term of five years. On March5, 1963 the appellant accepted the said offer agreeing to execute the said standard contract. OnMarch 16, 1963 he joined the respondent company and executed on that day the said contract Exhibit28.

3. Clause 6 of the agreement provided :-

"The employee shall during the period of his employment and any renewal thereof,honestly, faithfully, diligently and efficiently to the utmost of his power and skill

(a) ...............................................

(b) devote the whole of his time and energy exclusively to the business and affairs ofthe company and shall not engage directly or indirectly in any business or servewhether as principal, agent, partner or employee or in any other capacity either fulltime or part time in any business whatsoever other than that of the company."

4. Clause 9 provided that during the continuance of his employment as well as thereafter theemployee shall keep confidential and prevent divulgence of any and all information, instruments,documents, etc., of the company that might come to his knowledge. Clause 14 provided that if thecompany were to close its business or curtail its activities due to circumstances beyond its control andif it found that it was no longer possible to employ the employee any further it should have option toterminate his services by giving him three months' notice or three months' salary in lieu thereof.Clause 17 provided as follows :-

"In the event of the employee leaving, abandoning or resigning the service of the company inbreach of the terms of the agreement before the expiry of the said period of five years heshall not directly or indirectly engage in or carry on of his own accord or in partnership with

others the business at present being carried on by the company and he shall not serve in anycapacity, whatsoever or be associated with any person, firm or company carrying on suchbusiness for the remainder of the said period and in addition pay to the company as liquidateddamages an amount equal to the salaries the employee would have received during the periodof six months thereafter and shall further reimburse to the company any amount that thecompany may have spent on the employee's training."

5. The appellant received training from March to December 1963 and acquired during that training,knowledge of the technique, processes and the machinery evolved by the said collaborators as also ofcertain documents supplied by them to the respondent company which as aforesaid were to be keptsecret and in respect of which the respondent company had undertaken to obtain secrecy


3/33

undertakings from its employees. According to the evidence, the appellant as a Shift Supervisor wasresponsible for the running of shift work, control of labour and in particular with the specificationsgiven by the said AKU.

6. No difficulty arose between the appellant and the respondent company until about September,1964. The appellant thereafter remained absent from the 6th to the 9th October, 1964 withoutobtaining leave therefore. On the 10th October, he took casual leave. On October 12, he applied for28 days' privilege leave form October 14, 1964. Before that was granted he absented himself from

the 14th to the 31st October, 1964. On October 31, he was offered salary for 9 days that he hadworked during that month. On November 7, 1964, he informed the respondent-company that he hadresigned from October 31, 1964. The respondent-company by its letter of November 23, 1964, askedhim to resume work stating that his said resignation had not been accepted. On November 28, 1964the appellant replied that he had already obtained another employment.

7. It is clear from the evidence that in October he was negotiating with Rajasthan Rayon Company atKotah which was also manufacturing tyre cord yarn and got himself employed there at a higher salaryof Rs. 560/- per month than what he was getting from the respondent company. The respondentcompany thereupon filed a suit in the Court at Kalyan claiming inter alia an injunction restraining theappellant from serving in any capacity whatsoever or being associated with any person, firm orcompany including the said Rajasthan Rayon till March 15, 1968. The Company also claimed Rs.2410/- as damages being the salary for six months under Clause 17 of the said agreement and aperpetual injunction restraining him from divulging any or all information, instruments, documentsreports, trade secrets, manufacturing process, know-how, etc., which may have come to hisknowledge. The appellant, while admitting that he was employed as a Shift Supervisor, denied that hewas a specialist or a technical personnel asserting that his only duty was to supervise and controllabour and to report deviations of temperature etc. He also alleged that the said agreement wasunconscionable, oppressive and executed under coercion and challenged its validity on the groundthat it was opposed to public policy. He challenged in particular clauses 9 and 17 of the saidagreement on the ground that whereas clause 9 was too wide as it was operative not for a fixedperiod but for life time and included not only trade secrets but each and every aspect of information,clause 17 precluded him from serving elsewhere in any capacity whatsoever which meant a restrainton his right to trade to carry on business, profession or vocation and that such a term was necessaryfor the protection of the respondent company's interests as an employer.

8. The Trial Court on a consideration of the evidence led by the parities held : (1) that the respondentcompany had established that the appellant had availed himself of the training imparted by the saidAKU in relation to the manufacture of tyre cord yarn, the operation of the spinning machines and thathe was made familiar with their know-how, secrets, techniques and information; (2) that his dutieswere not merely to supervise labour or to report deviations of temperature as alleged by him; (3) thatthe said agreement was not void or unenforceable; (4) that he committed breach of the saidagreement; (5) that as a result of the said breach the respondent company suffered loss andinconvenience and was entitled to damages under clause 17 and lastly that the company was entitledto an injunction. On these findings the Trial Court passed the following order :

"(1) The injunction is granted against the defendant and he is restrained from gettingin the employ of or being engaged or connected as a Shift Supervisor in theManufacture of tyre cord yarn or as an employee under any title dischargingsubstantially the same duties as a Shift Supervisor in Rajasthan Rayon, Kotah or anyother company or firm or individual in any part of India for the term ending 15thMarch, 1968.

(2) The defendant is further restrained during the said period and, thereafter, fromdivulging any of the secrets, processes or information relating to the manufacture oftyre cord yarn by continuous spinning process obtained by him in the course of and asa result of his employment with the plaintiffs."


4/33

9. It is clear that the injunction restrained the appellant only from serving as a Shift Supervisor and ina concern manufacturing tyre cord yarn by continuous spinning process or as an employee under anydesignation substantially discharging duties of a Shift Supervisor. It was also confined to the period ofthe agreement and in any concern in India manufacturing tyre cord yarn.

10. In the appeal filed by him in the High Court, the plea taken by him as to undue influence andcoercion was given up. The High Court, agreeing with the Trial Court, found that the evidence of Dr.Chalishhazar, Mehta and John Jacob established that the appellant had been imparted training for

about nine months during the course of which information regarding the special processes and detailsof the machinery evolved by the said collaborators had been divulged to him. It also found that as aresult of his getting himself employed in the said rival company, not only the benefit of training givento him at the cost of the respondent company would be lost to it but that the knowledge acquired byhim in regard to the said continuous spinning process intended for the exclusive use of therespondent company was likely to be made available to the rival company which also was interestedin the continuous spinning process of tyre cord. The High Court further found that though themachinery employed by the said Rajasthan Rayon might not be the same as that in the respondentcompany's plant the know-how which the appellant acquired could be used for ensuring continuousspinning yarn. The High Court further found that Rajasthan Rayon started production of tyre cordyarn from January, 1965, that is, two or three months after the appellant joined them along with twoother employees of the respondent company, that the cumulative effect of the evidence was that theappellant had gained enough knowledge and experience in the specialised continuous spinning

process in the tyre cord yarn division of the respondent company and that it was evident that he leftthe respondent company's employment only because the said Rajasthan Rayon promised him a morelucrative employment. The High Court concluded that it was not difficult to imagine why theappellant's services were considered useful by his new employers and that the apprehension of therespondent company that his employment with the rival company was fraught with considerabledamage to their interest was well-founded and justified its prayer for an injunction restraining himfrom undertaking an employment with the said rival manufactures.

11. As regards the challenge to the validity of clauses 9 and 17, the High Court held that though thesaid agreement was with the respondent company and the company carried on other businesses aswell, the employment was in the business of Century Rayon. The appellant was employed as a ShiftSupervisor in that business only, the training give to him was exclusively for the spinning department

of the tyre cord division and his letter of acceptance was also in relation to the post of a ShiftSupervisor in that department. The High Court therefore concluded that Clauses 9 and 17 related onlyto the business in the tyre cord division and therefore restraints contained in those clauses meantprohibition against divulging information received by the appellant while working in that Division andthat clause 17 also meant a restraint in relation to the work carried on in the said spinningdepartment. Therefore the inhibitions contained in those clauses were not blanket restrictions asalleged by the appellant, and that the prohibition in clause 17 operated only in the event of theappellant leaving, abandoning or resigning his service during the term of and in breach of the saidagreement. On this reasoning it held that clause 17, besides not being general, was a reasonablerestriction to protect the interests of the respondent company particularly as the company had spentconsiderable amount in training, secrets of know-how of specialised processes were divulged to himand the foreign collaborators had agreed to disclose their specialised processes only on therespondent company's undertaking to obtain corresponding secrecy clauses form its employees andon the guarantee that those processes would be exclusively used for the business of the respondentcompany. Furthermore, Clause 17 did not prohibit the appellant even form seeking similaremployment from any other manufacturer after the contractual period was over. The High Court lastlyfound that there was no indication at all that if the appellant was prevented from being employed in asimilar capacity elsewhere he would be forced to idleness or that such a restraint would compel theappellant to go back to the company which would indirectly result in specific performance of thecontract of personal service.

12. Counsel for the appellant raised the following three contentions : (1) that the said agreementconstituted a restraint on trade and was therefore opposed to public policy, (2) that in order to bevalid and enforceable the covenant in question should be reasonable in space and time and to theextent necessary to protect the employers' right of property, and (3) that the injunction to enforce a


5/33

negative stipulation can only be granted for the legitimate purpose of safeguarding the trade secretsof the employer. He argued that these conditions where lacking in the present case and therefore therespondent company was not entitled to the enforcement of the said stipulation.

13. As to what constitutes restraint of trade is summarised in Halsbury's Laws of England (3rdedition), Volume 38, at page 15 and onwards. It is a general principle of the Common Law that aperson is entitled to exercise his lawful trade or calling as and when he wills and the law has alwaysregarded jealously any interference with trade, even at the risk of interference with freedom of

contract as it is public policy to oppose all restraints upon liberty of individual action which areinjurious to the interests of the State. This principle is not confined to restraint of trade in theordinary meaning of the word "trade" and includes restraints on the right of being employed. TheCourt takes a far stricter view of covenants between master and servant than it does of similarcovenants between vendor and purchaser or in partnership agreements. An employer, for instance, isnot entitled to protect himself against competition on the part of an employee after the employmenthas ceased but a purchaser of a business is entitled to protect himself against competition per se onthe part of the vendor. This principle is based on the footing that an employer has no legitimateinterest in preventing an employee after he leaves his service from entering the service of acompetitor merely on the ground that he is a competitor. (Kores Manufacturing Co., Ltd. v. KolakManufacturing Co., Ltd. [1959] Ch. 108. The attitude of the Courts as regards public policy howeverhas not been inflexible. Decisions on public policy have been subject to change and development withthe change in trade and in economic thought and the general principle once applicable to agreements

in restraints of trade have been considerably modified by later decisions. The rule now is thatrestraints whether general or partial may be good if they are reasonable. A restraint upon freedom ofcontract must be shown to be reasonably necessary for the purpose of freedom of trade. A restraintreasonably necessary for the protection of the covenantee must prevail unless some specific groundof public policy can be clearly established against it. (E. Underwood & Son, Ltd. v. Barker [1899] 1Ch. 300 C.A.. A person may be restrained from carrying on his trade by reason of an agreementvoluntarily entered into by him with that object. In such a case the general principle of freedom oftrade must be applied with due regard to the principle that public policy requires for men of full ageand understanding the utmost freedom of contract and that it is public policy to allow a trader todispose of his business to successor by whom it may be efficiently carried on and to afford to anemployer an unrestricted choice of able assistants and the opportunity to instruct them in his tradeand its secrets without fear of their becoming his competitors (Fitch v. Dewes) [1921] 2 A.C. 158.Where an agreement is challenged on the ground of its being a restraint on trade the onus is upon theparty supporting the contract to show that the restraint is reasonably necessary to protect hisinterests. Once, this onus is discharged, the onus of showing that the restraint is neverthelessinjurious to the public is upon the party attacking the contract. (See Cheshire's Law of Contract (6thedition) 328, Mason v. Provident Clothing and Supply Co. Ltd., [1913] A.C. 724 and A. G. ofCommonwealth of Australia v. Adelaide Steamship Co., Ltd. (1913) A.C. 781.

14. The Courts however have drawn a distinction between restraints applicable during the term of thecontract of employment and those that apply after its cessation. (Halsbury's Laws of England (3rdedition), Volume 38, page 31). But in W. H. Milsted & Son, Ltd. v. Hamp [1927] W.N. 233, where thecontract of service was terminable only by notice by the employer, Eve J., held it to be bad as beingwholly one-sided. But where the contract is not assailable on any such ground, a stipulation thereinthat the employee shall devote his whole time to the employer, and shall not during the term of thecontract serve any other employer would generally be enforceable. In Gaumont Corporation v.Alexander [1936] 2 All. E.R. 1686, clause 8 of the agreement provided that :-

"the engagement is an exclusive engagement by the corporation of the entire service of theartiste for the period mentioned in clause 2 and accordingly the artiste agrees with thecorporation that from the date hereof until the expiration of her said engagement the artisteshall not without receiving the previous consent of the corporation do any work or perform orrender any services whatsoever to any person firm or company other than the corporation andits sub-lessees."

15. On a contention that this clause was a restraint of trade, Porter J., held that restrictions placed


6/33

upon an employee under a contract of service could take effect during the period of contract and arenot in general against public policy. But the learned Judge at page 1692 observed that a contractwould be thought to be contrary to public policy if there were a restraint, such as a restraint of trade,which would be unjustifiable for the business of the claimants in the case. He however added that hedid not know of any case, although it was possible, there might be one, where circumstances mightarise in which it would be held that a restraint during the progress of the contract itself was an unduerestraint. He also observed that though for the most part, those who contract with persons and enterinto contracts which one might for this purpose described as contracts of service, have generallyimposed upon them the position that they should occupy themselves solely in the business of thesewhom they serve but that it would be a question largely of evidence how far the protection of clausesof that kind would extend, at any rate during the existence of the contract of service. Therefore,though as a general rule restraints placed upon an employee are not against public policy, theremight, according to the learned Judge, be cases where a covenant might exceed the requirement ofprotection of the employer and the Court might in such cases refuse to enforce such a covenant byinjunction. In William Robinson & Co. Ltd. v. Heuer [1898] 2 Ch. 451, the contract provided thatHeuer would not during this engagement without the previous consent in writing of William Robinson& Co., "carry on or be engaged directly or indirectly, as principal, agent, servant or otherwise, in anytrade, business or calling, either relating to goods of any description sold or manufactured by the saidW. Robinson & Co., Ltd.,...... or in any other business whatsoever." Lindley, M. R. there observed thatthere was no authority whatsoever to show that the said agreement was illegal, that is to say, that itwas unreasonable or went further than was reasonably necessary for the protection of the plaintiffs. It

was confined to the period of the engagement, and meant simply that, "so long as you are in ouremploy you shall not work for anybody else or engage in any other business." There was, therefore,according to him, nothing unreasonable in such an agreement. Applying these observations Branson,J., in Warner Brothers Pictures v. Nelson [1937] 1 K.B. 209, held a covenant of a similar nature not tobe void. The defendant, a film artist, entered into a contract with the plaintiffs, film producers, forfifty-two weeks, renewable for a further period of fifty-two weeks at the option of the plaintiffs,whereby she agreed to render her exclusive service as such artist to the plaintiffs, and by way ofnegative stipulation not to render, during the period of the contract, such services to any otherperson. In breach of the agreement she entered into a contract to perform as a film artist for a thirdperson. It was held that in such a case an injunction would issue through it might be limited to aperiod and in terms which the Court in its discretion thought reasonable.

16. A similar distinction has also been drawn by Courts in India and a restraint by which a personbinds himself during the term of his agreement directly or indirectly not to take service with any otheremployer or be engaged by a third party has been held not to be void and not against section 27 ofthe Contract Act. In Brahmaputra Tea Co., Ltd. v. Scarth I.L.R. 11 Cal. 545, the condition under whichthe covenantee was partially restrained from competing after the term of his engagement was overwith his former employer was held to be bad but the condition by which he bound himself during theterm of his agreement, not, directly or indirectly, to compete with his employer was held good. Atpage 550 of the report the Court observed that an agreement of service by which a person bindshimself during the term of the agreement not to take service with any one else, or directly orindirectly take part in, promote or aid any business in direct competition with that of his employerwas not hit by section 27 . The Court observed :

"An agreement to serve a person exclusively for a definite term is a lawful agreement, and itis difficult to see how that can be unlawful which is essential to its fulfilment, and to the dueprotection of the interests of the employer, while the agreement is in force."

17. (See also Pragji v. Pranjiwan 5 Bom L.R. 872 and Lalbhai Dalpathbhai & Co. v. ChittaranjanChandulal Pandva MANU/GJ/0051/1966 : AIR1966Guj189 ). In Deshpande v. Arbind Mills Co., 48Bom. L.R. 90 an agreement of service contained both a positive covenant, viz., that the employeeshall devote his whole-time attention to the service of the employers and also a negative covenantpreventing the employee from working elsewhere during the term of the agreement. Relying on Pragjiv. Pranjiwan; 5 L.R. 872 Charlesworth v. MacDonald I.L.R. 23 Bom. 103, Madras Railway Company v.Rust, I.L.R. 14 Mad. 18 Subba Naidu v. Haji Badsha Sahib I.L.R. 26 Mad. 168 and Burn & Co. v.MacDonald I.L.R. 36 Cal. 354, as instances where such a negative covenant was enforced, the learned
http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/citation/crosscitations.asp','MANU/GJ/0051/1966','1');http://fnopenglobalpopup%28%27/citation/crosscitations.asp','MANU/GJ/0051/1966','1');http://fnopenglobalpopup%28%27/citation/crosscitations.asp','MANU/GJ/0051/1966','1');http://fnopenglobalpopup%28%27/citation/crosscitations.asp','MANU/GJ/0051/1966','1');http://fnopenglobalpopup%28%27/citation/crosscitations.asp','MANU/GJ/0051/1966','1');http://fnopenglobalpopup%28%27/citation/crosscitations.asp','MANU/GJ/0051/1966','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');


7/33

Judges observed that Illustrations (c) and (d) to section 57 of the Specific Relief Act in termsrecognised such contracts and the existence of negative covenants therein and that therefore thecontention that the existence of such a negative covenant in a service agreement made theagreement void on the ground that it was in restraint of trade and contrary to section 27 of theContract Act had no validity.

18. Counsel for the appellant, however, relied on Ehrman v. Bartholomew [1898] 1 Ch. 571, as anillustration where the negative stipulation in the contract was held to be unreasonable and therefore

unenforceable. Clause 3 of the agreement there provided that the employee shall devote the whole ofhis time during the usual business hours in the transaction of the business of the firm and shall not inany manner directly or indirectly engage or employ himself in any other business, or transact anybusiness with or for any person or persons other than the firm during the continuance of thisagreement. Clause 13 of the agreement further provided that after the termination of theemployment by any means, the employee should not, either on his sole account or jointly with anyother person, directly or indirectly supply any of the then or past customers of the firm with wines,etc., or solicit for orders any such customers and should not be employed in any capacity whatsoeveror be concerned, engaged or employed in any business or a wine or spirit merchant in which anyformer partner of the firm was engaged. Romer, J., held these clauses to be unreasonable on theground that clause 3 was to operate for a period of 10 years or for so much of that period as theemployer chose and that the word "business" therein mentioned could not be held limited by thecontext to a wine merchant's business or in any similar way. So that the Court, while unable to order

the defendant to work for the plaintiffs, is asked indirectly to make him do so by otherwise compellinghim to abstain wholly from business, at any rate during all usual business hours. The other decisionrelied on by him was Mason v. Provident Clothing and Supply Co., Ltd. [1913] A.C. 724 This was acase of a negative covenant not to serve elsewhere for three years after the termination of thecontract. In this case the Court applied the test of what was reasonable for the protection of theplaintiffs' interest. It was also not a case of the employee possessing any special talent but that of amere canvasser. This decision, however, cannot assist us as the negative covenant therein was tooperate after the termination of the contract. Herbert Morris v. Saxelby [1916] A.C. 688 and Attwoodv. Lamont [1920] 3 K. B. 571, are also cases where the restrictive covenants were to apply after thetermination of the employment. In Commercial Plastics Ltd. v. Vincent 3 All. E.R. 546, also thenegative covenant was to operate for a year after the employee left the employment and the Courtheld that the restriction was void inasmuch as it went beyond what was reasonably necessary for theprotection of the employer's legitimate interests.

19. These decisions do not fall within the class of cases where the negative covenant operated duringand for the period of employment as in Gaumont Corporation's case [1936] 2 All E.R. 1686 andWarner Brothers v. Nelson [1937] 1 K.B. 209 where the covenant was held not to be a restraint oftrade or against public policy unless the agreement was wholly one-sided and thereforeunconscionable as in W. H. Milsted & Son, Ltd. v. Hamp [1927] W.N. 233 or where the negativecovenant was such that an injunction to enforce it would indirectly compel the employee either toidleness or to serve the employer, a thing which the Court would not order, as in Ehrman v.Bartholomew [1898] 1 Ch. 671. There is, however, the decision of a Single Judge of the Calcutta HighCourt in Gopal Paper Mills v. Malhotra A.I.R. 1262 Cal. 61, a case of breach of a negative covenantduring the period of employment. This decision, in our view, was rightly distinguished by the HighCourt as the period of contract there was as much as 20 years and the contract gave the employer anarbitrary power to terminate the service without notice if the employer decided not to retain theemployee during the three years of apprenticeship or thereafter if the employee failed to perform hisduties to the satisfaction of the employer who had absolute discretion to decide whether the employeedid so and the employer's certificate that he did not, was to be conclusive as between the parties.Such a contract would clearly fall in the class of contracts held void as being one-sided as in W. H.Milsted & Son, Ltd. v. Hamp[1927] W.N. 233. The decision in Gopal Paper Mills v. Malhotra A.I.R.1262 Cal. 61, therefore cannot further the appellant's case.

20. The result of the above discussion is that considerations against restrictive covenants are differentin cases where the restriction is to apply during the period after the termination of the contract thanthose in cases where it is to operate during the period of the contract. Negative covenants operativeduring the period of the contract of employment when the employee is bound to serve his employer
http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');


8/33

exclusively are generally not regarded as restraint of trade and therefore do not fall undersection 27 of the Contract Act. A negative covenant that the employee would not engage himself in atrade or business or would not get himself employed by any other master for whom he would performsimilar or substantially similar duties is not therefore a restraint of trade unless the contract asaforesaid is unconscionable or excessively harsh or unreasonable or one-sided as in the case of W. H.Milsted & Son, Ltd. [1927] W.N. 233. Both the Trial Court and the High Court have found, and in ourview, rightly, that the negative covenant in the present case restricted as it is to the period ofemployment and to work similar or substantially similar to the one carried on by the appellant whenhe was in the employ of the respondent company was reasonable and necessary for the protection ofthe company's interests and not such as the Court would refuse to enforce. There is therefore novalidity in the contention that the negative covenant contained in clause 17 amounted to a restraint oftrade and therefore against public policy.

21. The next question is whether the injunction in the terms in which it is framed should have beengranted. There is no doubt that the Courts have a wide discretion to enforce by injunction a negativecovenant. Both the Courts below have concurrently found that the apprehension of the respondentcompany that information regarding the special processes and the special machinery imparted to andacquired by the appellant during the period of training and thereafter might be divulged was justified;that the information and knowledge disclosed to him during this period was different from the generalknowledge and experience that he might have gained while in the service of the respondent companyand that it was against his disclosing the former to the rival company which required protection. It

was argued however that the terms of clause were too wide and that the court cannot sever the goodfrom the bad and issue an injunction to the extent that was good. But the rule against severanceapplies to cases where the covenant is bad in law and it is in such cases that the court is precludedfrom severing the good from the bad. But there is nothing to prevent the court from granting alimited injunction to the extent that is necessary to protect the employer's interests where thenegative stipulation is not void. There is also nothing to show that if the negative covenant is enforcedthe appellant would be driven to idleness or would be compelled to go back to the respondentcompany. It may be that if he is not permitted to get himself employed in another similaremployment he might perhaps get a lesser remuneration than the one agreed to by Rajasthan Rayon.But that is no consideration against enforcing the covenant. The evidence is clear that the appellanthas torn the agreement to pieces only because he was offered a higher remuneration. Obviously hecannot be heard to say that no injunction should be granted against him to enforce the negativecovenant which is not opposed to public policy. The injunction issued against him is restricted as totime, the nature of employment and as to area and cannot therefore be said to be too wide orunreasonable or unnecessary for the protection of the interests of the respondent company.

22. As regards Clause 9 the injunction is to restrain him from divulging any and all information,instruments, documents, reports, etc., which may have come to his knowledge while he was servingthe respondent company. No serious objection was taken by Mr. Sen against this injunction andtherefore we need say no more about it.

23. The appeal fails and is dismissed with costs.

24. Appeal dismissed.

Manupatra Information Solutions Pvt. Ltd.
http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');


9/33

MANU/TN/7910/2007

Equivalent Citation: AIR2007Mad237IN THE HIGH COURT OF MADRAS

O.A. No. 272 of 2007Decided On: 27.04.2007

Appellants: Sanmar Speciality Chemicals Ltd. Vs.

Respondent: Dr. Biswajit Roy Hon'ble Judges/Coram: S. Rajeswaran , J.Counsels:For Appellant/Petitioner/Plaintiff: P.S. Raman , Sr. Counsel for K. Harishankar, Adv.For Respondents/Defendant: Krishna Ravindran , Adv.Subject: Arbitration Subject: Service Catch Words Mentioned IN Acts/Rules/Orders:Arbitration and Conciliation Act, 1996 - Section 9; Indian Contract Act, 1872 - Section 27Cases Referred:American Express Bank Limited v. Priya Puri 2006 Ind Law Del 362; G.R.V. Rajan v. Tube Investmentsof India Ltd. and Anr. 1995 (1) LW 274; Percept D'Mark (India) (P) Ltd. v. Zaheer Khan 2006 (4) SCC227 : AIR 2006 SC 3426; Polaris Software Lab. Ltd. v. Suren Khiwadkar 2004 (I) LLJ 323; R. Babu andAnr. v. K LIG Ltd. (2005) 124 Comp Cas 109; V.V. Sivaram and Ors. v. Foseco India Limited 2006(133) Comp Cas 160 (Kar) : AIR 2006 Kar 143; Zaheer Khan v. Percept D'Mark (India) Pvt. Ltd. AIR2004 Bom 362Citing Reference:

Mentioned

6

Case Note:Contract - Injunction - Appellant sought direction to restrain Respondent from in anymanner disclosing or using confidential information of Appellant though matter was pendingbefore conciliation officer - Hence, this Application - Held, a duty was cast upon Applicant toprima facie prove that information being used by Respondent were exclusive and were not

available in public domain - However, Applicant had failed to establish same by producingvalid and legally acceptable evidence - Therefore, they were not entitled to an order ofinjunction insofar as using information by Respondent obtained by him - Applicationdismissed. Ratio Decidendi:"If an employee tried to make profit out of secret information of company then legal action

shall be initiated against him." Disposition:Petition dismissed

ORDER S. Rajeswaran, J. 1. This Original Application has been filed for an order of interim injunction restraining the respondent
http://fncitation%28%27manu/TN/7910/2007');http://fncitation%28%27manu/TN/7910/2007');http://fnopenjudges%28%2712939%27%29/http://fnopenjudges%28%2712939%27%29/http://fnopencounsel%28%27109503%27%29/http://fnopencounsel%28%27109503%27%29/http://fnopencounsel%28%27109503%27%29/http://fnopencounsel%28%27123225%27%29/http://fnopencounsel%28%27123225%27%29/http://fnopencounsel%28%27123225%27%29/http://fnopencatch%28%27manu/TN/7910/2007')http://fnopencatch%28%27manu/TN/7910/2007')http://fnmentionedin%28%27manu/TN/7910/2007');http://fnmentionedin%28%27manu/TN/7910/2007');http://fnopencr%28%27manu/TN/7910/2007','1');http://fnopencr%28%27manu/TN/7910/2007','1');http://suggestcitationaddbtn%28%27manu/TN/7910/2007',%221%22)http://fnsavedoc%28%29/http://fnnewemail%28%29/http://showprint%28%29/http://suggestcitationaddbtn%28%27manu/TN/7910/2007',%221%22)http://fnsavedoc%28%29/http://fnnewemail%28%29/http://showprint%28%29/http://suggestcitationaddbtn%28%27manu/TN/7910/2007',%221%22)http://fnsavedoc%28%29/http://fnnewemail%28%29/http://showprint%28%29/http://suggestcitationaddbtn%28%27manu/TN/7910/2007',%221%22)http://fnsavedoc%28%29/http://fnnewemail%28%29/http://showprint%28%29/http://fnopencr%28%27manu/TN/7910/2007','1');http://fnmentionedin%28%27manu/TN/7910/2007');http://fnopencatch%28%27manu/TN/7910/2007')http://fnopencounsel%28%27123225%27%29/http://fnopencounsel%28%27109503%27%29/http://fnopenjudges%28%2712939%27%29/http://fncitation%28%27manu/TN/7910/2007');


10/33

from in any manner disclosing or using the confidential information of the applicant by carrying ondirectly, or indirectly any business which is of competing nature, contacting the applicant's customersor employees and thereby interfering with the applicant's business, pending arbitration of the disputesbetween the parties.

2. The brief facts as culled out from the affidavit are as under:

3. The applicant Company is engaged in a very specialized field of business involving unique know-howand technical data and these are peculiar to them. The respondent joined the company as a Scientific

Officer in January 2001. Over the years he became an integral part of the senior management teamand he was given access to information which are vital for the operations of the applicant's BangaloreGenie Division namely, product and process know-how, R&D processes, procedures, raw materialssources, quality control etc. On 20-6-2005, respondent entered into a Confidentiality and Non-Compete Agreement with the applicant. At the time of entering into an agreement the respondent wasworking as Assistant General ManagerResearch and Development. Under the Confidentiality and Non-Compete Agreement, the respondent shall not disclose the confidential information to any person aftercessation of employment with the applicant. Similarly the respondent shall not take up anyemployment or involve himself with any other person or body corporate in the similar field of activitywhich is competitive in nature with the business of the applicant for a period of 3 years after cessationof employment with the applicant.

4. The respondent submitted his resignation on 17-7-2006. Even though the respondent indicated that

his resignation is personal and with a drive to change area of activity, to the shock of the applicant, therespondent is carrying on business which is similar to the business of the applicant by using theconfidential information furnished to him by the applicant. The respondent is also soliciting theapplicant's employees and is contacting the applicant's customers by using the information obtainedfrom the applicant. The applicant sought reference of the dispute to the arbitration and by letter dated12-3-2007 sought for appointment of arbitrator in terms of the agreement dated 20-6-2005. Pendinginitiation of arbitral proceedings the above application has been filed under Section 9 of the Arbitrationand Conciliation Act, 1996, hereinafter called 'the Act', for an order of interim injunction.5. This Court by order dated 15-3-2007 granted an order of interim injunction restraining therespondent from making use of any confidential information that he acquired from the applicant'scompany and from using the customer's base of the applicant's company.

6. The respondent entered appearance after notice and filed a counter affidavit. The respondent denied

all the allegations and it is his specific case that the agreement dated 20-6-2005 is in violation ofSection 27 of the Contract Act and the same is unenforceable.7. Heard Mr. P.S. Raman, learned Senior Counsel appearing for the applicant and the learned Counselfor the respondent. I have also perused the documents filed and the judgments referred to by them insupport of their submissions.

8. The learned Senior counsel for the applicant submitted that having signed an agreement willinglycontaining a non-compete clause, it is not open for the respondent to violate the same and contendthat the same is unenforceable. Further, he submitted that the restrictive covenant contained in theagreement is only for a limited period of 3 years and therefore the same is not hit by Section 27 of theContract Act. The learned Senior Counsel further submitted that having agreed to desist from divulgingor disclosing the confidential information, he is dishonestly using the same for the purpose of hisbusiness which is in the same field of business of the applicant.9. The learned Senior Counsel relied on the decision reported in 2006 (133) Comp Cas 160 (Kar) : AIR2006 Kar 143 : MANU/KA/0520/2005 V.V. Sivaram and Ors. v. Foseco India Limited in support of hissubmissions.10. Per contra, the learned Counsel for the respondent submitted that the agreement dated 20-6-2005is unenforceable as it is blatantly in violation of Section 27 of the Contract Act. He further urged thatthe respondent is not using any of the confidential information acquired from the applicant as allegedby the applicant. He further pointed out that even otherwise the confidential information referred to bythe applicant are easily available in the internet and therefore there is no confidentially at all in theinformation sought to be portrayed as confidential information.11. The learned Counsel for the respondent relied on the following decisions to contend that theagreement dated 20-6-2005 is unenforceable as the same is in direct violation of Section 27 of theContract Act. MANU/MH/1576/2003 : AIR2004Bom362 Zaheer Khan v. Percept D'Mark (India) Pvt.
http://fnopenglobalpopup%28%27/ba/disp.asp','290','1');http://fnopenglobalpopup%28%27/ba/disp.asp','290','1');http://fnopenglobalpopup%28%27/ba/disp.asp','290','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/citation/crosscitations.asp','MANU/KA/0520/2005','1');http://fnopenglobalpopup%28%27/citation/crosscitations.asp','MANU/KA/0520/2005','1');http://fnopenglobalpopup%28%27/citation/crosscitations.asp','MANU/KA/0520/2005','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/citation/crosscitations.asp','MANU/MH/1576/2003','1');http://fnopenglobalpopup%28%27/citation/crosscitations.asp','MANU/MH/1576/2003','1');http://fnopenglobalpopup%28%27/citation/crosscitations.asp','MANU/MH/1576/2003','1');http://fnopenglobalpopup%28%27/citation/crosscitations.asp','MANU/MH/1576/2003','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/citation/crosscitations.asp','MANU/KA/0520/2005','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','290','1');


11/33

Ltd.; 2006 Ind Law Del 362 American Express Bank Limited v. Priya Puri; MANU/SC/1412/2006 :AIR2006SC3426 6 Percept D'Mark (India) (P) Ltd. v. Zaheer Khan; and 2004 (I) LLJ 323: MANU/TN/1903/2003 Polaris Software Lab. Ltd. v. Suren Khiwadkar.12. I have considered the rival submissions carefully with regard to facts and citations.

13. The only point that arises for consideration is whether the applicant is entitled to an order ofinjunction on the basis of confidentiality and non-compete agreement dated 20-6-2005.

14. The following clauses in the abovesaid agreement dated 20-6-2005 are relevant for the purpose of

deciding the issue:3. The Employee agrees that he/she shall, during his/her employment with theCompany, maintain the secrecy of the Confidential Information and shall not disclose ordivulge the Confidential Information to any person or persons except in the propercourse of his/her duties. The Employee further undertakes that after cessation, for anyreason whatsoever, of his/her employment with the Company, he/she shall not discloseor divulge the Confidential Information to any person or persons.

6. In consideration of his/her employment with the Company, the receipt of salary andother employment benefits from the Company and other good and valuableconsideration and for the reasons set out in clause 5 hereinabove, the Employee, duringhis/her employment with the Company and for a period of three years after he/sheceases to be an employee of the Company for any reason whatsoever, shall not,

(i) take up employment with any other person, firm, company, body corporate ororganization of any other kind whatsoever, engaged in or proposed to be engagedin any activity.

(ii) involve himself/herself directly or indirectly, alone or in association with others,whether as principal officer, sole proprietor, director, agent, partner, joint ventureinvestor, lender, lessor, consultant, advisor or otherwise or have an interest, in anybusiness,

(iii) carry on either by himself/herself or in association with any other person any

business or be associated in any manner with any business, which in the opinion ofthe Company, is similar to or competitive with that carried by the Company. Suchopinion of the Company shall be final conclusive and binding on the Employee.

15. In the event a dispute arises between the parties hereto during the subsistence ofthis Agreement or thereafter in connection with the validity, interpretation,implementation or alleged breach of any provision of this Agreement, the parties shallattempt in the first instance to resolve such dispute through friendly consultations. If thedispute is not resolved through friendly consultations, then either party may refer thedispute for resolution by binding arbitration to a Director in charge of the affairs of theCompany. The Arbitration referred to hereinabove shall be by a Sole Arbitrator.

15.1. On receipt of a request to refer the disputes to arbitration from the Company orthe Employee, the said Director shall within 7 days propose three names for acting asArbitrator and from and out of the said 3 persons the Employee shall nominate oneperson to be the Sole Arbitrator. In the event of the Employee not choosing ones amongthe three persons within a period of 7 days of their nomination, then the said Directorshall nominate one among the three persons to act as Sole Arbitrator to adjudicate thedisputes. The Arbitration shall be held in Chennai and the Courts in the City of Chennaialone shall have jurisdiction over the subject-matter of this Agreement.

15.2. The award of the Arbitrator so appointed will be final, conclusive and binding onthe parties to this Agreement and the provisions of the Arbitration and Conciliation Act,1996 or any statutory modification or re-enactment thereof and the Rules made
http://fnopenglobalpopup%28%27/citation/crosscitations.asp','MANU/SC/1412/2006','1');http://fnopenglobalpopup%28%27/citation/crosscitations.asp','MANU/SC/1412/2006','1');http://fnopenglobalpopup%28%27/citation/crosscitations.asp','MANU/SC/1412/2006','1');http://fnopenglobalpopup%28%27/citation/crosscitations.asp','MANU/TN/1903/2003','1');http://fnopenglobalpopup%28%27/citation/crosscitations.asp','MANU/TN/1903/2003','1');http://fnopenglobalpopup%28%27/citation/crosscitations.asp','MANU/TN/1903/2003','1');http://fnopenglobalpopup%28%27/citation/crosscitations.asp','MANU/TN/1903/2003','1');http://fnopenglobalpopup%28%27/citation/crosscitations.asp','MANU/SC/1412/2006','1');


12/33

thereunder and for the time being in force shall apply to the arbitration proceedingsunder this clause.

15.3. The award shall be made in writing and published by the Arbitrator within sixmonths after entering upon the reference or within such extended time not exceedingfour months as the sole arbitrator shall by a writing under his own hands fix. Thearbitrator shall have power to order and direct either of the parties to abide by, observeand perform all such directions as the arbitrator may think fit having regard to the

matter in difference i.e., dispute before him.15. The case of the applicant is that the respondent is violating Clause 3 and Clause 6 of theagreement and therefore an order of interim injunction is to be granted against the respondent. Eventhough it is prayed by the applicant that the respondent shall be restrained from disclosing theconfidential information by carrying on any business which is of competing nature, contacting theapplicant's customers or employees and thereby interfering with the applicant's business, this Court on15-3-2007 made it very clear that the respondent is not injuncted in making use of any other suchinformation which was simultaneously obtained by him from some other means.

16. It is the respondent's specific contention that he is not using any of the confidential informationthat he acquired from the applicant's company and all the information he is making use of are easilyavailable in the public domain. In such circumstances, a duty is cast upon the applicant to prima facie

prove that the information being used by the respondent are exclusive and arc not available in thepublic domain. But the applicant has failed to establish the same by producing valid and legallyacceptable evidence. Therefore as the applicant has failed to establish a prima facie case, they are notentitled to an order of injunction insofar as using the information by the respondent obtained by himfrom the applicant's company. Further, it is for the applicant to establish and substantiate thisallegation before the arbitrator by letting in evidence. Further, clause IJ of the agreement deals with somany remedies available to the applicant which includes payment of compensation and indemnificationby the respondent and in such circumstances it cannot be said that the applicant would be put toirreparable damage if the order of injunction is not granted.

17. Insofar as the non-compete clause contained in Clause 6 of the agreement is concerned, I am ofthe opinion that the negative covenant contained thereon is unenforceable in law and the same iscontrary to the provisions of Section 27 of the Indian Contract Act. Even assuming the same is

enforceable, it is inappropriate to grant an order of injunction to enforce it at the interim stage itself.When a similar clause arises for consideration in O.A. No. 493/2006 and Application No. 3847/2006, byorder dated 6-12-2006,1 have held that such a negative clause is unenforceable and is contrary toSection 27 of the Indian Contract Act. I have come to such conclusion after following the decision ofthe Division Bench reported in 1995 (1) LW 274 G.R.V. Rajan v. Tube Investments of India Ltd. andAnr. decision of a Division Bench of this Court reported in (2005) 124 Comp Cas 109 R. Babu and Anr.v. K LIG Ltd.18. It is now represented by the learned Senior Counsel that an Advocate of this Court has alreadybeen appointed as an Arbitrator who has seized of the entire matter and award is likely to be passed ina matter of three to four months. That being so, the balance of convenience is also not in favour of theapplicant as the entire matter could be very well agitated before the arbitrator.

19. In the result, I find no merits in the injunction application and the same is therefore dismissed. No

costs.20. It Is needless to mention that the views expressed by me for the purpose of disposing of the aboveapplication are tentative and prima facie conclusion which will not affect the applicant's case before thearbitrator. The arbitrator can very well decide the issue on his own uninfluenced by any of theobservations/findings made by me in this order.

Manupatra Information Solutions Pvt. Ltd.

Go to top
http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');http://fnopenglobalpopup%28%27/ba/disp.asp','15355','1');


13/33

MANU/TN/1163/1995

Equivalent Citation: IN THE HIGH COURT OF MADRAS O.S.A. Nos. 313 to 316 of 1994

Decided On: 02.02.1995

Appellants: G.R.V. Rajan Vs.

Respondent: Tube Investments of India Ltd. rep. by its Company Secretary, Madras- 1 Hon'ble Judges/Coram: Srinivasan and S.S. Subramani , JJ.Counsels: For Appellant/Petitioner/Plaintiff: Mr. S. Govind Swaminathan , Senior Advocate for M/s. SriramPanchu , N.L. Rajan & Ms. Aparna Mukerjee For Respondents/Defendant: Mr. P.S. Surana for M/s. Surana & Surana for RespondentSubject: Company Catch Words Mentioned IN Acts/Rules/Orders:Code Of Civil Procedure, 1908 - Section 80; Constitution Of India - Article 141, Constitution Of India -Article 145(5); Indian Contract Act, 1872 - Section 27, Indian Contract Act, 1872 - Section 28,IndianContract Act, 1872 - Section 57, Indian Contract Act, 1872 - Section 74; Specific Relief Act 1963 -Section 38, Specific Relief Act 1963 - Section 42

ORDER Srinivasan, J. 1. These four appeals arise out of orders passed on interlocutory applications pending the suit C.S. No.

1280 of 1994 filed by the respondent on the Original Side of this Court. It will be convenient to refer tothe parties by their rank in the suit. The appellant will be referred to as the defendant and therespondent will be referred to as the plaintiff. The case as set out in the plaint is as follows:- Theplaintiff is a Public Limited Company of All India repute. Its sales turnover for the year ending 31-3-1994 was Rs. 417.15 Crores. The exports made by the plaintiff and the foreign exchange earned wereRs. 67.13 Crores in the said year. The plaintiff is having about 18,350 shareholders and 6,300employees. It is engaged in manufacturing among other products bicycles, components andaccessories of bicycles for more than 40 years through its manufacturing unit, namely, TI Cycles ofIndia and the present capacity is 25,00,000 cycles per annum. It is known for its efficiency and qualityproducts. It has various manufacturing units in various places in and around Madras City, two factoriesat Hyderabad and one factory at Tarapur, Bombay. The plaintiff has marketing network throughoutIndia and exports its products to several foreign countries including U.S.A., U.K., Germany, Prance,Holland and Sri Lanka.

2. The defendant was employed by the plaintiff on 25-11-1982 in the management cadre. As per theorder of appointment dated 25-11-1982, a copy of which was duly accepted and signed by thedefendant on January 2, 1983, the defendant agreed to be governed by the terms and conditions ofservices as may be in force from time to time. A copy off general service conditions was given to thedefendant and he initialled the same. Some of the relevant general service conditions to which thedefendant agreed to abide by are briefly as follows:-

"(a) That the defendant shall not engage in any other business or occupationwhatsoever or be interested directly or indirectly in any business or undertaking havinginterest, opposed or competitive with the interest of the plaintiff or in any business orundertaking having transactions with the plaintiff except with the plaintiffs consent in
http://fncitation%28%27manu/TN/1163/1995');http://fncitation%28%27manu/TN/1163/1995');http://fnopenjudges%28%2711992%27%29/http://fnopenjudges%28%2711992%27%29/http://fnopenjudges%28%2712498%27%29/http://fnopenjudges%28%2712498%27%29/http://fnopenjudges%28%2712498%27%29/http://fnopencounsel%28%27108248%27%29/http://fnopencounsel%28%27108248%27%29/http://fnopencounsel%28%27108248%27%29/http://fnopencounsel%28%27111380%27%29/http://fnopencounsel%28%27111380%27%29/http://fnopencounsel%28%27111380%27%29/http://fnopencounsel%28%27111380%27%29/http://fnopencounsel%28%27434275%27%29/http://fnopencounsel%28%27434275%27%29/http://fnopencounsel%28%27434275%27%29/http://fnopencounsel%28%27434276%27%29/http://fnopencounsel%28%27434276%27%29/http://fnopencounsel%28%27434276%27%29/http://fnopencounsel%28%27111431%27%29/http://fnopencounsel%28%27111431%27%29/http://fnopencounsel%28%27111431%27%29/http://fnopencatch%28%27manu/TN/1163/1995')http://fnopencatch%28%27manu/TN/1163/1995')http://fnmentionedin%28%27manu/TN/1163/1995');http://fnmentionedin%28%27manu/TN/1163/1995');http://suggestcitation%28%27manu/TN/1163/1995')http://fnsavedoc%28%29/http://fnnewemail%28%29/http://showprint%28%29/http://suggestcitation%28%27manu/TN/1163/1995')http://fnsavedoc%28%29/http://fnnewemail%28%29/http://showprint%28%29/http://suggestcitation%28%27manu/TN/1163/1995')http://fnsavedoc%28%29/http://fnnewemail%28%29/http://showprint%28%29/http://suggestcitation%28%27manu/TN/1163/1995')http://fnsavedoc%28%29/http://fnnewemail%28%29/http://showprint%28%29/http://fnmentionedin%28%27manu/TN/1163/1995');http://fnopencatch%28%27manu/TN/1163/1995')http://fnopencounsel%28%27111431%27%29/http://fnopencounsel%28%27434276%27%29/http://fnopencounsel%28%27434275%27%29/http://fnopencounsel%28%27111380%27%29/http://fnopencounsel%28%27111380%27%29/http://fnopencounsel%28%27108248%27%29/http://fnopenjudges%28%2712498%27%29/http://fnopenjudges%28%2711992%27%29/http://fncitation%28%27manu/TN/1163/1995');


14/33

writing.

(b) That the defendant, either during or after his employment, will not divulge or utiliseany confidential information belonging to the plaintiff or any of its associate Companiesincluding confidential information as to formulae, processes and manufacturing methodsand confidential information as to the business and affairs of the Company which mayhave come to his knowledge during his employment.

(c) Except so tar as may be necessary for the purpose of his duties, the defendant shallnot without the consent of the plaintiff retain or make originals or copies of anydrawings, calculations, specifications, formulae or other documents of whatever naturebelonging to the plaintiff which may come into the possession of the defendant byreason of his employment. If on the termination of the defendant's employment, he is inpossession of any originals or copies of any of the aforesaid documents, he shall deliverthe same to the plaintiff."

3. In November 1983, the defendant was promoted as Regional Sales Officer, Western Region andtransferred to the Chains and Lamps Division with effect from 1-12-1983. In or about June, 1984, TI &M. Limited, which earlier employed the defendant, ceased to require the services of the defendant, whobecame an employee of the plaintiff. The defendant accepted the said arrangement and agreed to beretained as an employee of the plaintiff. He was promoted as Regional Sales Manager, Western Region,with effect from 1-3-1985. From 31-1-1986 the defendant was transferred to Cycle Division in thesame capacity. On 12th December, 1986 he was promoted as Manager (West). In November 1987 hewas posted as Manager (Production Engineering). In October, 1988 he took charge as Works Manager,responsible for the operation of A, B and C Factories, export production and Central Warehouse of TICycles of India. From 4th June, 1990 he took over as Works Manager, TI Miller and Satellite Units,which are manufacturing components of bicycles. In October 1990 he was again promoted asManufacturing Manager of the Bicycles Components Group. On 30th June 1992 he was promoted asGeneral Manager, Operations. The terms and conditions of service remained unaltered and in particularthe general service conditions detailed earlier. During his employment, he was sent abroad by theplaintiff at a huge cost. The purposes of the foreign trips were for learning the working of variousbicycle factories in the world, for attending various international meetings on such manufacturing andfor export promotion of the products of the plaintiff. During those trips, the defendant had come into

possession of confidential information about the manufacturing process and the customers of theplaintiff, technical informations and drawings which, as per the general service conditions, thedefendant should not divulge to anybody or use for his own benefit except for the benefit of theplaintiff. On account of his employment in the various units in various capacities, he has come to knowthe total and entire manufacturing process, inland and foreign customers of the plaintiff and all theconfidential information and documents of the plaintiff, including its crucial information of pricingpolicy.

4. In September 1993 the defendant submitted a report to the plaintiff, called "critical factors, 1993-94", which would show that the defendant had become familiar with each and every aspect of themanufacturing, sale and export of the products of the plaintiff because of the employment of thedefendant with the plaintiff. On 17th February 1994, the defendant resigned his job and requested thathe be relieved. By letter dated 18-2-1994, the plaintiff accepted the resignation and allowed the

defendant to be relieved by 30-4-1994.5. When the plaintiff started its industry with U.K. collaboration, all the machineries for themanufacture of bicycle components were imported machineries. They were imported at heavy cost. Indue course of time, the plaintiff started the process of indigenisation. The plaintiff has a wing calledTechnical Research Quality Development Wing, wherein highly efficient technical persons areemployed, whose work is to do research in development by focusing its attention on development ofnew products, improvement in production, design engineering, automation, cost reduction and importsubstitution. The efforts of the Research and Development Wing resulted in development of newproducts like hexagonal tubes for textile industries, front fork tubes for two wheelers, specially CDWtubes for the export market and import substitution products like Polyurethane Saddles and BrakeLevers for certain MTB Models. The plaintiff has also introduced three new Models. A wide variety ofnew welded frames were designed and developed using computer aided design. In the said process,


15/33

the plaintiff has developed a set of sub-contractors for manufacturing and supplying exclusively to theplaintiff certain machineries and tools, especially manufactured as per the drawing supplied by theexperts of the plaintiff from the Research and Development Section. One such machine is calledswaging machine. The drawings for the said machine were made after thoroughly studying the earlierimported machine. Hundreds of working hours were spent by the senior Engineers and Draftsmen formaking the drawing ready for the said machine. Lakhs of rupees were spent by the plaintiff for makingthe final drawings and a sample machine. The plaintiff has been supplying copies of those drawings toits sub-contractors who agreed not to divulge the secret drawings to anybody else, not to use thosesecret drawings supplied by the plaintiff for anybody except for the plaintiffs units and not tomanufacture and/or supply the said machine to anybody else under any circumstance. Anothermachine is called Dooming Machine and the third machine is called Fork Blade Bending Machine. Theyare manufactured by the sub-contractors of the plaintiff exclusively for the use of the plaintiff.

6. When the defendant was General Manager (Operations), he was having the absolute control andauthority over the total manufacturing operations of bicycles and components and custody and controlof all the confidential and secret drawings, designs, trade secrets,' specifications ,of certain exclusivemachines and tools used for the production of cycles and components including the aforesaid threemachines. The defendant was in constant touch with the heads of Departments and Units of theplaintiff company and also the sub-contractors exclusively employed for the manufacture and supply ofthe machines referred to above. He made use of his official capacity and authority and collecteddrawings of aforesaid swaging machine from Mr. S. K. Subramaniam, Manager (Design and

Development) of the plaintiff and made use of the same for his personal use. While in employment, thedefendant misused the trust and faith placed in him and secretly contacted a sub-contractor and gavehim a copy of the drawings and design of the swaging machine and told him that he must manufacturea swaging machine and supply to a firm called Frames Specialized and that the said firm is one of theassociates of the plaintiff company. As the defendant was the General Manager of the plaintiff, thesubcontractor believed him and as per the instructions given by the defendant manufactured a swagingmachine as per the copy of the drawings and designs supplied by the defendant. The order was placedby the defendant on 22-2-1994 by making such false and misguiding representation to the sub-contractor while the defendant was still in the employment of the plaintiff till 30-4-1994. Thedefendant had himself signed the delivery note of the machine and taken delivery of the machine fromthe said sub-contractor. The defendant similar committed breach of trust, misused his office as theGeneral Manager and clandestinely used the drawings and specifications, toolings, data, dealings of theplaintiff and placed orders on the respective sub-contractors by making false and misguiding

representations and took delivery of Dooming Machine (one number) and Fork Bending Machines (twonumbers). In fact, the sub-contractor for Fork Blade Bending Machine after manufacturing the samecame to know that the defendant had misrepresented that the machine was required by an associatecompany of the plaintiff and refused to supply the same to the defendant. The defendant went to thefactory of the said sub-contractor with his men and forcibly took away all the parts so manufacturedand kept ready there and had himself assembled those parts. The defendant has committedmisappropriation and criminal breach of trust and made fraudulent misrepresentation and therebymade the sub-contractors of the plaintiff to believe his fraudulent misrepresentation that the machineswere required for the associate units of the plaintiff and illegally obtained the machines.

7. The defendant is misusing the confidential information which he has acquired by virtue of hisposition as General Manager and the knowledge of the customers of the plaintiff to the detriment ofthe plaintiff. The plaintiff reserves its right to claim damages as and when necessary and ascertained.The plaintiff apprehends that the defendant would contact the customers and suppliers of the plaintiffand make misrepresentations and false representations both in India and abroad and would get ordersfrom the customers and suppliers as he has done successfully with the sub-contractors formachineries.

8. The plaintiff, therefore, prays for a judgment and decree (a) directing the defendant to deliver to theplaintiff (i) the swaging machine, (ii) the dooming machine and (iii) the fork blade bending machinenow lying at the place of business of the defendant, (b) for a permanent injunction restraining thedefendant from in any manner using or working on the said machines, (c) appointing a Receiver orCommissioner to take charge of the said machines and keep them in his custody at a place to beprovided by the plaintiff at its own cost, (d) granting a permanent injunction restraining the defendantfrom in any manner contacting directly or indirectly the customers/suppliers/buyers of the plaintiff


16/33


17/33

services of the company to set up a SSI Unit to manufacture and export TIG welded framesand forks. They agreed to the same. The company accepted the defendant's resignation on 17-2-1994 and named his successor by Office Order. The plaintiff agreed to purchase a large partof the defendant's goods and discussed with him the possibility of his supplying TIG weldedframes and forks to the plaintiff exclusively for their own manufacturing and export. Based onthe assurances from his superiors in the plaintiff company, in March 1994, the defendantproceeded to set up M/s. Frames Specialized, based on the assurance from his superiors in theplaintiff company and slopped attending office from February 1994 though he was officiallyrelieved only on 30th April, 1994. The defendant had ordered machines from the plaintiffs sub-contractors who are engaged in manufacturing general purpose machines including those forthe plaintiff company's use. The plaintiff did not object to the order at that time. All the threemachines mentioned in the plaint are freely available in the market and the plaintiff does nothave any exclusive right to the design or drawing.

11. As the plaintiff was intending to support the defendant, it allowed the use of the company car TN-04-A-8213 by the defendant till 15th July 1994. The plaintiff also paid the petrol and maintenance billsincurred by the defendant for the months of March and April, though he had ceased to attend office.The company phone bearing No. 2344462 was allowed to be retained by the defendant at his residencetill he got alternate phone connection, which he got in fact by the end of July 1994. Though thedefendant did not attend the office from February end, the plaintiff did not adjust the two months'

leave (March and April 1994) against his leave eligibility and further allowed encashment of the entireleave of 120 days to his credit. The company also paid LFA of Rs. 14,000/- for the year 1994-95 inspite of his having resigned from the services. Besides, the gratuity amount due to him bad also beenpaid on 15th July, 1994. The above facts show that the plaintiff, in spite of being aware of the activitiesof the defendant, had not thought it to be against its interest till July 15th, by which time, the swagingmachine had been taken delivery by the defendant. Having realised that there is a tremendouspotential for TIG welded frames and forks and the market for conventional brazed frames and forks ison a rapid decline and also that the export of MIG welded cycles is likely to substantially come down inthe near future, the plaintiff wants to enter manufacturing of TIG welded frames and forks on its own.It has therefore, with malicious intent framed fictitious charges against the defendant to ensure thathis time and energy are spent in fighting the plaintiff and he would be ultimately discouraged fromgoing through with the venture.

12. The suit has to fail on the legal grounds that there is no contract of service between the plaintiffand the defendant as set out in paragraph 6 of the plaint and the plaintiff has deliberately misled theCourt by projecting that there were terms and conditions stipulated by the plaintiff. Secondly, whenthe plaintiff appointed the defendant, the order of appointment did not have any terms and conditionsattached and there is no valid and binding contract. Thirdly, in any event, the cond itions are illegal andvoid on account of being unreasonable contract in restraint of trade and being against public policyand, therefore, unenforceable.

13. The various averments in the affidavit filed on behalf of the plaintiff are specifically denied by thedefendant. It is stated that the defendant was not sent to any foreign country at any point of time tolearn anything new but only to protect and promote the interests of the company abroad. In paragraph26 of the affidavit, the defendant has stated that he had no doubt come to learn about themanufacturing process of the cycles and in his capacity as an employee of the company had been in

touch with the foreign customers of the plaintiff, but that does not vest any right with the plaintiffempowering it to stop his using the said experience for ever. In paragraph 28 it is stated that there isno wing called Technical Research Quality Development Centre with the plaintiff. But, there is aResearch and Development Department of Tube Products of India, which is another division of theplaintiff company and the plaintiff has no development wing as claimed by it. There was no secret orconfidential information about the three machines set out in the plaint. Actually, the swaging machineis available all over India and there are at least two companies in Madras alone who are selling thosemachines. The defendant could have easily purchased the same from them and only because theplaintiff had encouraged the defendant openly to start a unit, the defendant purchased the same fromone of the sub-contractors of the plaintiff. The plaintiff cannot claim any originality as the drawings areonly copied by studying the imported machines and handed over to the manufacturers. Similarly, the


18/33

drawings of other machines are also on a study of the imported machines.

14. The averment that the defendant had taken the drawings from one S.K. Subramanian, Manager, isfalse. The averments in paragraph 16 of the plaint are contrary to the averments in paragraph 17.That itself would show the false nature thereof. The averments in para 18 are contrary to theaverments in para 15 of the plaint. The allegation that the defendant had misrepresented the facts tothe sub-contractors is absolutely false. The defendant had used only the letter-head of M/s. FramesSpecialized and there were no representations that the machines were required for an associatecompany of the plaintiff. The sub-contractors are fully aware that the orders were not placed by thedefendant on behalf of the plaintiff company. The allegation that the defendant forcibly took possessionof the dooming machine and fork blade bending machine from the sub-contractor is absolutely false.They had been delivered to the defendant under delivery challan. The averments in the plaint are onlypart of a concocted story. The plaintiff cannot get any relief on the basis of vague and ambiguousaverments contained in the plaint. The plaintiff has no right to claim damage. The plaint does notdisclose whether the plaintiff had suffered any damage. All the customers and other dealers of theplaintiff are fully aware that the defendant has quit the company and started on his own. The balanceof convenience is entirely in favour of the defendant. He has already borrowed on a high rate ofinterest and spent a sum of nearly Rs. 40 lakhs for establishing the concern. It was started only withthe blessings of the plaintiff company and just because the plaintiff wants to enter the said business, itis trying to check the defendant's efforts. The defendant has employed 30 workmen whom he has toretain without any job on account of the interim injunction. On the other hand, if the plaintiff succeeds

in the suit, it can claim damages. On account of the injunction, the defendant is put to severemonetary loss and hardship which are irreparable.

15. A common counter affidavit was filed on behalf of the plaintiff in the applications filed by thedefendant. The averments contained therein are only in reiteration of what was stated earlier in theplaint and the affidavit filed in support of the applications. It is stated therein that the defendant was inservice of the plaintiff till 30th April, 1994 and he was relieved only on the close of the working hourson that date, though his resignation was accepted in principle earlier. From 18-2-1994 to 30-4-1994the defendant was in the service of the plaintiff handing over charge to his successor Mr. T.R.Venkatesh, G.M. (Marketing), who got himself acquainted with the work of G.M. (O) from thedefendant. It is also stated that the swaging and other machines were imported by the plaintiff at ahuge cost and dismantled part by part. The entire team of the plaintiff in the T.I. Cycle Unit, Designand Development Department, consisting of several bright Engineers worked for several months on the

machine and produced the drawings and specifications of the machine to suit the manufacturingprocess of the plaintiff. This involved complete team work of the whole Design and DevelopmentDepartment with the assistance and guidance of various senior executives of other departments of theplaintiff. Thus, the drawings and the specifications created by the team of the plaintiff and engineers ofthe plaintiff regarding the machines, exclusively belong to the plaintiff. These machines are not freelyavailable in the market and the drawings and specifications of the machines are secret and confidentialand exclusive to the plaintiff. It is further stated that the averment that the plaintiff does notmanufacture TIG welded frames and forks is false. The plaintiff company is already in the advancedstage and process of the manufacture, sale and export of TIG welded frames. Even when thedefendant was in service, the plaintiff purchased certain machineries for the purpose of manufacturingTIG welded frames and forks and the defendant was well aware of the affairs. The plaintiff sent severalskilled workers to BHEL, Trichy and Engineers abroad for training in 110 welding process when thedefendant was in service. In fact, the plaintiff has already manufactured and exported TIG weldedframes and forks. The manufacture started from March 1994. The defendant was sent abroad while inservice to deal with the customers on behalf of the plaintiff and he is now trying to exploit what hegained at that time. It is illegal and against the contract. The plaintiff has strong business dealings withthose customers. The balance of convenience is in favour of the plaintiff. It will be against the publicinterest if the plaintiff suffers loss of reputation which it has maintained on international standard forover forty years. If the interest of the plaintiff is affected adversely, 6300 employees of the plaintiffand 18.350 shareholders will also be adversely affected. If by chance the defendant succeeds in thesuit, the plaintiff is prepared to compensate him for all the loss and damage that he might suffer.

16. The learned Judge rejected the contentions of the defendant and made the interim injunctionalready granted absolute. Thus, he allowed O.A. Nos. 882 to 885 of 1994 filed by the plaintiff anddismissed Application Nos. 5866 to 5869 of 1994 filed by the defendant. The learned Judge has mainly


19/33

relied upon the report of the Advocate-Commissioner who had inspected the defendant's premises.According to the said report, the defendant had started establishing the factory. But, the Commissionerdid not find any activity and any workman There were only security men and the fixing of machineryand electrical fittings was going on Secondly, the learned Judge held that the Supreme Court laid downthe entire law on the subject of restraint of trade in Niranjan Shankar Golikari v. Century Spinning andManufacturing Co. Ltd. ( MANU/SC/0364/1967 : AIR 1967 SC 1098) and mat the restraint on trade isreasonable and necessary to protect the interests of the plaintiff and, therefore, not violative ofSection 27 of the Contract Act. After referring to the judgment in Superintendence Co. of India (P) Ltd.v. Krishan Murgai ( MANU/SC/0457/1980 : AIR 1980 SC 1717), the learned Judge said that the viewexpressed by A.P. Sen, J. ran counter to the rule laid down in the earlier case and, therefore, theearlier decision would prevail over the later and the earlier rule is applicable to the present case. Asregards the three machines claimed by the plaintiff, and the secret or confidential information relatingto the same, the learned Judge held that he was of the prima facie view that the allegations of thedefendant were not true and that the plaintiff had a legal right to make the claim. The learned Judgealso held that the balance of convenience was in favour of the plaintiff.17. Normally, in an appeal against an interlocutory order, the appellate Bench will be slow to interferewith the discretion exercised by the learned single judge of the High Court. The question of grantingtemporary injunction is within the judicial discretion of the trial judge and if it had been reasonablyexercised, the appellate Court will not interfere. But, in a case where it appears that the fundamentalcondition for the grant of injunction viz., a prima facie case is not fulfilled and if the appreciation of thefacts of the case made by the learned special judge is based on an erroneous view of the law, the

appellate Court has necessarily to correct the same. In this case, the learned judge has started with anerroneous premise that the rulings of the Supreme Court in "Niranjan Shankar Golikari"( MANU/SC/0364/1967 : AIR 1967 SC 1098) and "Superintendence Company of India (P) Ltd."( MANU/SC/0457/1980 : AIR 1980 SC 1717 : 91 L.W.17(S.C.)(S.N.)) are contradictory to each otherand that the earlier judgment having been rendered by two learned Judges while in the later

judgment, though rendered by three learned Judges, the relevant question has been considered onlyby one of them and the other two not having expressed any opinion, the earlier ruling will prevail.Secondly, the learned judge has not referred to any relevant material excepting the report of theAdvocate-Commissioner on the basis of which he has expressed his prima facie view on the question offact. In all the relevant paragraphs of his judgment, he has only referred to the arguments of counselon both sides and at the end expressed his prima facie view. The learned judge has also overlookedthat the relevant issues between the parties are highly contentious and it would require volume ofevidence, both oral and documentary, for the parties to establish their respective cases and that it isnot a matter which can be decided merely on the averments in the plaint or the affidavits. Hence, wefind it necessary to consider all the materials available on record and give our own findings.18. Before discussing the facts of the case in detail, we would like to briefly state the law on thesubject. Section 27 of the Contract Act provides that "every agreement by which any one is restrainedfrom exercising a lawful profession, trade or business of any kind, is to that extent void". The Sectionis absolute in its terms and admits of only one exception as at present, though when it was enactedthere were three exceptions. The only exception now continuing on the statute book is that "one whosells the goodwill of a business may agree with the buyer to refrain from carrying on a similarbusiness, within specified local limits, so long as the buyer, or any person deriving title to the goodwillfrom him, carries on a like business therein, provided that such limits appear to the

Documents

Non Compet Clause_Employement Contract