TMI Blog1980 (5) TMI 117X X X X Extracts X X X X X X X X Extracts X X X X ..... of the hearing and it was stated that our reasons will follow. We now proceed to give our reasons for the dismissal. 3. Briefly stated the facts are these. The appellant company carries on business as valuers and surveyors, undertaking inspection of quality, weightment, analysis, sampling of merchandise and commodities, cargoes, industrial products, machinery, textiles, etc. It has established a reputation and goodwill in its business by developing its own techniques for quality testing and control and possesses trade secrets in the form of these techniques and clientele. It has its head office at Calcutta and a branch at New Delhi and employs various persons as managers and in other capacities in Calcutta, New Delhi and other places. On March 27, 1971 the respondent was employed by the appellant company as the Branch Manager of its New Delhi office on terms and conditions contained in the letter of appointment issued to him on the same date. Clause (10) of the terms and conditions of employment placed the respondent under a post-service restraint that he shall not serve any other competitive firm nor carry on business on his own in similar line as that of the appellant company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermination in this appeal. 5. Since in our view the appeal is capable of being disposed of on the second point we think it unnecessary to decide or express our opinion on the first question which was hotly and ably debated at the bar by counsel on either side but we will indicate briefly the rival lines on which the arguments proceeded. On the one hand counsel for the respondent tried to support the view of the Division Bench by pointing out that in India the law on the subject was codified by statute which was exhaustive and on the topic of agreements in restraint of trade and exceptions in that behalf the Indian Courts cannot invoke or derive assistance from the English Common Law and the exceptions) developed thereto by English decisions from time to time, that Section 27 of the Indian Contract Act was absolute in terms in that it did not make any distinction between partial or general restraints and that unless a case was covered by the Exception provided thereunder every restraint of trade, whether partial or general would be void under that Section. In this behalf reliance was placed on a number of decisions of various High Courts commencing from the celebrated decision, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost-service restrictions, if reasonable, even after applying the rigorous tests may be valid as not falling Under Section 27 of the Act, it was, therefore, not correct to say that all post-service restrictions were void. His precise contention was that even a post-service restrictive covenant, if it was reasonable, qualified or limited in operation both in point of time and area, as was the case here, does not amount to any restraint of trade at all within the meaning of Section 27 and such restrictive covenant could be justified as being necessary and essential to protect the employer's interests, his trade secrets and his trade connections and, therefore, valid. As regards the argument based on codified exception, counsel pointed out, that even the case of a restrictive covenant operative during the period of employment between master and servant had not been provided for as an exception below Section 27 but even so such restrictive covenant was never regarded us amounting to restraint of trade Under Section 27 mainly because it was always regarded as reasonable and necessary to protect the employer's interests, which shows that the statutory exceptions were not exhaustiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n our view, the word leave has various shades of meaning depending upon the context or intent with which it is used. According to the plain grammatical meaning that word in relation to an employee, would normally be construed as meaning voluntary leaving of the service by him and would not include a case where he is discharged or dismissed or his services are terminated by his employer. Ordinarily the word leave appears to connote voluntary action. In Words Phrases Permanent Edition 24 pag 499 the following statement of law based on an American decision occurs: An application for the employment of a street car conductor provided that in the event of his leaving the services for any reasons whatever within six months, the money paid to him for work under instruction while on trial should be deducted from such moneys as should be due from the company on the date of his, leaving . Held, that the word leaving meant to quit or depart, implying volition on the part of the person leaving, and limited the forfeiture of the instruction wages to a case where plaintiff left defendant's employ of his own volition, nor was such instruction effected by the words, for any reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inery, textiles, etc. It has its head office at Calcutta with a branch at New Delhi. On or about March 27,1971, the respondent who is a surveyor and valuer was employed by the appellant as the Branch Manager of its New Delhi office. One of the terms and conditions of the employment was that the respondent would not serve elsewhere or enter into any business for a period of 2 years after leaving the service. The term is contained in Clause 10 of the agreement which reads : 10. That you will not be permitted to join any firm of our competitors or run a business of your own in similarity as directly and/or indirectly, for a period of two years at the place of your last posting after you leave the Company. 13. The appellant terminated the services of the respondent by its letter dated December 27, 1978. Thereafter the respondent started a business of his own under the name and style of Superintendence and Surveillance Inspectorate of India at E-22, South Extension, New Delhi on lines identical with and substantially similar to that of the appellant. On April 19, 1979, the, appellant commenced a suit in the Delhi High Court in its original side claiming ₹ 55,000/- as damag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... despite Section 27 of the Contract Act, 1872 ? 3. Whether, and to what extent, the provisions of Section 27 of the Contract Act are subject to the common law doctrine of restraint of trade ? 4. Whether the word leave in Clause 10 of the agreement between the parties makes the negative covenant operative only when a servant voluntarily leaves his employment, or, applies even in a case of termination of his services by an order of dismissal or termination of his services? 17. Agreements of service, containing a negative covenant preventing the employee from working elsewhere during the term covered by the agreement, are not void Under Section 27 of the Contract Act, on the ground that they are in restraint of trade. Such agreements are enforceable. The reason is obvious. The doctrine of restraint of trade never applies during the continuance of a contract of employment; it applies only when the contract comes to an end. While during the period of employment, the Courts undoubtedly would not grant any specific performance of a contract of personal service, nevertheless; Section 57 of the Specific Relief Act clearly provides for the grant of an injunction to restrain the breach of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive covenants therein, and stated that the contention that the existence of such a negative covenant in a service agreement made the agreement void on the ground that it was in restraint of trade and contrary to Section 27 of the Contract Act had no validity. 21. In conclusion, the Court observed: The result of the above discussion is that considerations against restrictive covenants are different in cases where the restriction is to apply during the period after the termination of the contract than those in cases where it is to operate during the period of the contract. 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. A negative covenant that the employee would not engage himself in a trade or business or would not get himself employed by any other master for whom he would perform similar or substantially similar duties is not therefore a restraint of trade unless the contract as aforesaid is unconscionable or excessively harsh or unreasonable or one sided. (Emphasis sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oper meaning uninfluenced by any consideration derived from the previous state of the law or the English law upon which it may be founded. In Satyavrata Ghosh v. Kurmee Ram Bangor [1954] S.C.R. 310 Mukherjee J. while dealing with the doctrine of frustration of contract observed that the Courts in India are to be strictly governed by the provisions of Section 56 of the Contract Act and not to be influenced by the prevailing concepts of the English Law, as it has passed through various stages of development since the enactment of the Contract Act and the principles enunciated in the various decided cases are not easy to reconcile. What he says of the doctrine of frustration Under Section 56 of the Contract Act is equally true of the doctrine of restraint of trade Under Section 27 of the Act. 26. Now, so far as the present case is concerned, the law is to be found; in Section 27 of the Contract Act 1872, which reads: 27. Agreement in restraint of trade void-Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind is to that extent void. Exception : One who sells the goodwill of a business may agree with the buyer to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e nothing to do with the policy of such a law. All we have to do is to take the words of the Contract Act, and put upon them the meaning which they appear plainly to bear. 30. The test laid down by Sir Richard Couch, C.J. in Madhub Chunder v. Rajcoomar Doss , supra, has stood the test of time and has invariably been followed by all the High Courts in India. 31. The agreement in question is not a 'goodwill of business' type of contract and, therefore, does not fall within the exception. If the agreement on the part of the respondent puts at restraint even though partial, it was void, and, therefore, the contract must be treated as one which cannot be enforced. 32. It is, however, argued that the test of the validity of a restraint, whether general or partial, is dependent on its reasonableness. It is pointed out that the distinction drawn by Lord Macclesfield in Mitchel v. Reynolds (1711) 1 PMas 161 between general and partial restraint, was removed by the House of Lords in Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. (supra). According to the judgment of Lord Macnaghten in Nordenfelts case, the validity in either case was reasonableness with reference to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of the Court of B.R. (King's Bench) in the case of Mitchel v. Reynolds which has been the leading case on the subject from that time to the present, that little more remains than to apply the principle of that case to the present. Now the rule laid down by the court in that case is 'that voluntary restraints, by agreement between the parties, if they amount to a general restraint of trading by either party, are void, whether with or without consideration, but particular restraints of trading, if made upon a good and adequate consideration, so as to be a proper and useful contract, that is, so as it is a reasonable restraint only, are good. Later on he goes on to observe : Parker, C.J., says, : a restraint to carry on a trade throughout the kingdom must be void; a restraint to carry it on within a particular place is good, which are rather instances and examples than limits of the application of the rule, which can only be at least what is a reasonable restraint with reference to the particular cases. By decrees, the common law doctrine of restraint of trade has been progressively expanded and the legal principles applied and developed so as to suit the exigencie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en allowed by modern decisions to a very dangerous extent , and they proceeded to draft the provision with the deliberate intention of narrowing the law. The provision was never applied to New York, but found its way into the) Contract Act, 1872 as Section 27. Several sections of the Field's Code were enacted in the Act. The Code was anathema to Sir Frederick Pollock who in his preface to Pollock and Mulla's Indian Contract Act, p. 5, described the Code as the evil genius of the Act, the worst principles of codification ever produced, and advocated that 'whenever the Act was revised everything taken from the Code should be struck out'. 43. It must be remembered that the test of reasonableness comes from the judgment of Lord Macnaghten in Nordenfelt's case in the House of Lords in 1894. In 1862, however, when the Field provision was drafted, it was not easy to foresee that the common law would shortly discard the distinction drawn by Lord Macclesfield in Mitchel v. Reynolds in 1711, between general and partial restraints. A general restraint was one which covered an indefinite area, and was, as a rule, held bad, while a partial restraint was valid, if reasonab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le in reference to the interests of the public. 47. Reverting to the judgment of Sir Richard Couch in Madhub Chunder v. Rajcoomar Doss, supra, we find that that eminent Judge held that Section 27 of the Contract Act does away with the distinction observed in English cases following upon Mitchel v. Reynolds, supra, between partial and total restraints of trade, and makes all contracts falling within the terms of section, void, unless they fall within the exceptions. As already stated, that decision has always been followed. 48. In Shaikh Kalu v. Ram Saran Bhagat [1908] 13 C.W.N. 388 Mukherjee and Carnduff, JJ, referred to the history of the legislation on the subject and observed that the framers of the Act deliberately reproduced Section 833 of Field's Code with the full knowledge that the effect would be to lay down a rule much narrower than what was recognised at the time by the common law, while the rules of the common law, on the other hand, had since been considerably widened and developed, on entirely new lines. They held that the wider construction put upon Section 27 by Sir Richard Couch in Madhub Chundur v. Raj Coomar Doss , supra, is plainly justified by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble are applicable to a case governed by Section 27 of the Contract Act, unless it falls within Exception 1. We, therefore, feel that no useful purpose will be served in discussing the several English Decisions cited at the Bar. 52. Under Section 27 of the Contract Act, a service covenant extended beyond the termination of the service is void. Not a single Indian Decision has been brought to our notice where an injunction has been granted against an employee after the termination of his employment. 53. There remains the question whether the word 'leave' in Clause 10 of the agreement is wide enough to make the negative covenant operative on the termination of employment. We may for convenience of reference, reproduce that covenant below :- 10. that you shall not be permitted to join any firm of our competitors or run business of your own in similarity as directly and/or indirectly for a period of 2 years at the place of your last posting after you leave the Company. 54. On a true construction of Clause 10 of the agreement, the negative covenant not to serve elsewhere or enter into a competitive business does not, in my view, arise when the employee does not leave ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inised because there is inequality of bargaining power between the parties; indeed no bargaining power may occur because the employee is presented with a standard form of contract to accepts or reject. At the time of the agreement, the employee may have given little thought to the restriction because of his eagerness for a job; such contracts tempt improvident persons, for the sake of present gain, to deprive themselves of the power to make future acquisitions, and expose them to imposition and oppression. 59. There exists a difference in the nature of the interest sought to be protected in the case of an employee and of a purchaser and, therefore, as a positive rule of law, the extent of restraint permissible in the two types of case is different. The essential line of distinction is that the purchaser is entitled to protect himself against competition on the part of his vendor, while the employer is not entitled to protection against mere competition on the part of his servant. In addition thereto, a restrictive covenant ancillary to a contract of employment is likely to affect the employee's means or procuring a livelihood for himself and his family to a greater degree ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
