India: Contract Of Service And Restrictive Covenants

Last Updated: 26 February 2014
Article by Vatsala Singh

INTRODUCTION

Contract of service can easily be termed as ' when one person has agreed to employ another person as an employee, and the other person has agreed to the terms of employment and of an employee, then the party have said to be entered in Contract of Service'. Contract of service is also known as Apprenticeship Contract. The employer without the consent of the employee cannot alter the terms of contract.

A contract is an instrument which is legally enforceable and also for protecting the rights of the contracting parties, be it an employer or an employee. There are restrictive provisions in a service contract. It is basically being incorporated for the protection of confidential information and protection of Intellectual property of the employer. The employer should be clear on the terms of confidential information in the contract of service. Hon'ble Supreme Court of India has given its observation and has upheld the validity of section 27 of the contract Act in landmark judgments Niranjan Shankar Golikari V/s Century Spinning and Manufacturing1, Superintendence Co. Vs. Krishna Murgai2 and also in the most recent judgment of 2006 Hon'ble Supreme Court of India has upheld its validity in Percept D' Mark Vs. Zaheer Khan3.

CONTRACT OF SERVICE ON TERMINATION

There are so many factors which lead to termination of service. However, to put it simple, they can be classified as Voluntary termination and Involuntary termination.

VOLUNTARY TERMINATION

Voluntary termination can be of following types:-

a. Retirement of an employee

b. Resignation of an employee

c. Failure to return from leave

d. Failure to report to work without notice, for three consecutives days without notice.

INVOLUNTARY TERMINATION

Involuntary termination can easily be understood when in a certain situation an employer decides to terminate an employee, it could be done on immediate basis or it's in the discretion of the employer to give a notice to the employee of certain period before the employment could be terminated.

Involuntary termination can be in form of:-

a. Lay offs

b. Disciplinary actions

c. Recession

d. Unsatisfactory work of an employee

In addition to the above, an employer can also terminate an employee on the principle of Termination Simpliciter. In a very recent Judgment of Hon'ble Delhi High Court in Satpal Yadav Vs Cambata Aviation4, High Court has observed that "If the termination is in the terms of contract, then the termination remains to be as termination simpliciter".

On the contrary if the Dismissal of the employee is on the terms of Disciplinary actions, then an employer is under an obligation to carry out domestic inquiry in respect of the same. The Hon'ble Supreme court of India in its numerous judgments has held the same. In Punjab national bank ltd vs. its workmen5, it was held that 'there shall be proper enquiry which has to be held in accordance to the provisions of the standing orders'. In Ritz theatre Pvt Ltd vs. Its workmen6 it was categorically held that 'Employer serve the relevant charge or charges on his employee and holds a proper and fair enquiry, it would be open to him to act upon the report submitted to him to act upon the report submitted to him by the enquiry officer and dismiss the employee concerned'. There were certain principles laid down in The workmen of Firestone Tyre And Rubber Co. Of India (Pvt) Ltd. Vs The Management And Ors7.

The above was the law as laid down by the Hon'ble Supreme Court of India is applicable to all industrial adjudication arising out of orders of dismissal or discharge. Industrial Employment (Standing Orders) Act, 1946 applies only to those industrial establishments which are covered by Section 1(3). But the field of operation of the Act is much wider and it applies to employers who may have no standing orders at all.

CONTRACTS ON RESTRICTIVE COVENANTS

Restrictive covenants may sound contrary to Section 27 of the Indian Contract Act, but such covenants shall be drafted in a manner which protects the confidentiality of the firm and also does not restrict the Employee to work in his desired profession. Companies have certain trade secrets which are supposed to be protected, so there is a need to incorporate the restrictive clause in the service contracts so that the trade secrets of the firm are well protected.

Section 27 of Indian contract Act, 1972 states that,

"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 1.- Saving of agreement not to carry on business of which goodwill is sold.-One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein, provided that such limits appear to the Court reasonable, regard being had to the nature of the business."

It is well-settled that a contract which is in restraint of trade cannot be enforced unless it is reasonable as between parties and it is consistent with the interest of the public. These two principles are the sine qua non for a contract which is in restraint of trade.

The situation with regard to the application of section 27 was further clarified in BLB Institute case . It was held that under Section 27 of the Contract Act-(a) a restrictive covenant extending beyond the term of the contract is void and not enforceable, (b) the doctrine of restraint of trade does not apply during the continuance of the contract for employment and it applies only when the contract comes to an end, (c) this doctrine is not confined only to contracts of employment, but is also applicable to all other contracts.

RESTRICTIVE COVENANTS CAN BE OF THE FOLLOWING TYPES

a. Non- Compete Covenant

b. Non- Solicitation Covenant

c. Non- Poaching Covenant

d. Confidentiality covenant

The non-solicitation clause does not amount to a restraint of trade, business or profession and would not be hit by Section 27 of the Indian Contract Act, 1872 as being void11. Hence, there are certain non-solicitation agreements which are prima facie negative in nature but still stand as an exception and are enforceable.

India has an obligation to shape its law in accordance with Trips, but till now there is no specific legislation which deals with trade secret. The law on this issue is common based.12 In accordance with common law "non-disclosure" agreement also stand as an exception to this general rule and the Courts have upheld the validity of such clauses post-employment period.

In this connection, it is also pertinent to point out that for Copyright protection to confidential information the degree of control would determine the obligations of the parties.13 Hence, copyright in data base is also allowed.

However, the judicial decision does not follow a set pattern. Hence, The uncertainty of the judicial decision's over the non-competitive clauses made the Corporate guru's to develop a concept called "garden leave," in which employees are paid their full salary during the period in which they are restrained from competing, this had its genesis in England.14 However, "Garden leave" clauses have not received much appreciation as they are considered to be as unreasonable restraint of trade which goes deep into the root of freedom of contract which is a fundamental postulate of right to contract.

REMEDIES FOR PROTECTION OF CONFIDENTIALITY

Under Indian Law, some remedies are provided in case of infringement upon confidentiality. These are:

a. Injunction preventing the third party from using trade secrets,

b. return of confidential information and

c. Compensation for damages

In addition to this, Section 72 of the Information Technology Act, 2000 any breach of confidentiality and privacy is also penalized.

CONCLUSION AND SUGGESTION

The constitution of India in article 19(1) (g) provides an individual to practice any profession, vocation or trade of his own choice. The legal position with regard to the post- contractual covenants is well settled in India. As a general rule, negative covenant restricting the employee beyond the period of employment are considered to be unreasonable but there are some exception to it. The exceptions include confidential information and non-solicitation agreements (to a reasonable period of time).

Hence, it is suggested that while drafting negative clause all the possible consequences of such clause should be pondered upon. Decisions of High Courts and Supreme Courts serve as a guiding law in this regard.

Footnote

1. AIR 1967 SC 1098

2. AIR 1980 SC 1717

3. AIR 2006 SC 3426

4. MANU/DE/2024/2013

5. 1959(IILJ) 666 SC

6. 1962 (IILJ498b) SC

7. AIR 1973 SC 1227

8. Vancouver Malt and Sake Brewing Co. v. Vancouver Breweries Ltd., 1934 PC 101

9. BLB Institute of Financial Markets Ltd v. MR. Ramakar Jha MANU/DE/1359/2008: 154(2008)DLT121

10. Ibid.

11. Wipro Limited v. Beckman Coulter International S.A. MANU/DE/2671/2006 : 131(2006) DLT 681

12. Gaurav Wahie, Evaluating Trade Secrets under the IPR Paradigm. CLJ 03 (01), 2005; 17-23.

13. Mr. Diljeet Titus, Advocate v. Mr. Alfred A. Adebare and Ors. MANU/DE/1875/2006: 130 (2006) DLT 330, 2006 (32)PTC 609 (Del)

14. Evening Standard Co. Ltd. v. Henderson [1987] I.R.L.R. 64.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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