India: Key Features Of Employment Contracts – An Indian Perspective

INTRODUCTION

Perspective Similar to any other valid contract, and employment contract is also based on an offer, acceptance, consideration, competent parties, legal object and free consent. An employment contract is a bilateral agreement for an agreed duration for the exchange of service and remuneration.

The statutes applicable to employer-employee relationship run in numbers and are complex. The statutory regime exists both at the national and state level. Employment contract related contentious issues include protection of confidential information, nondisclosure, non-competition and non-solicitation.

As a matter of practice, an employer and the proposed employee sign a letter of appointment prior to signing of a formal employment contract. A prelude to a formal employment contract, a letter of appointment is generally signed to cover the period of probation unless a person employed is confirmed by the employer.

Below is a list of most relevant terms that should form a part of an employment agreement:

  • appointment (acceptance of employment, office / location of employer, reporting senior)
  • term
  • primary responsibility and job description
  • remuneration (base salary, incentives, bonus, provident fund, gratuity)
  • payment terms
  • deductions
  • termination (termination without cause, resignation, termination for cause)
  • death and disability
  • hours of work
  • confidentiality
  • return of employers property
  • intellectual property
  • indemnification
  • notices
  • non compete
  • non-solicitation
  • governing law, jurisdiction and arbitration

DISPUTES RELATING TO EMPLOYMENT CONTRACTS RELATE TO FOLLOWING STAGES:

Pre-hire stage

During employment

Termination stage

Post termination

There are so many factors which lead to termination of service, namely (i) Voluntary termination (retirement of an employee, resignation of an employee, failure to return from leave, failure to report to work without notice), (ii) Involuntary termination (lay offs, disciplinary actions, unsatisfactory work of an employee).

NON - DISCLOSURE OBLIGATIONS

In the matter titled Diljeet Titus v. Mr. Alfred A. Adebare and Others (2006 (32) PTC 609 (Del)), the defendant, an advocate, was working at the plaintiff's law firm. On termination of employment, the defendant took away important confidential business data, such as client lists and proprietary drafts, belonging to the plaintiff. The defendants contended that, they were the owners of the copyright work as it was done by them during their employment since the relation between parties was not that of an employer and employee. The Delhi High Court rejected this contention and ruled that the plaintiff had a clear right in the material taken away by the defendant. Accordingly, the Delhi High Court restrained the defendant from using the information taken away illegally. It should be noted that the Delhi High Court did not prohibit the defendants from carrying on a similar service. The defendants were only restrained from using the information they took, as this was necessary to protect the interests of the plaintiff.

Additionally, provisions of the Indian Penal Code ("IPC") and Information Technology Act, 2000 are also applicable in cases of breach of confidentiality and disclosure provisions. Criminal prosecution and imprisonment or fine (or both) as adjudicated have been provided under the IT Act to deal with acts such as hacking (Section 66); causing damage to computer system (Section 43); tampering with computer source document (Section 65); punishment for violation of privacy policy (Section 66E); etc. On case to case basis such actions could also be available to employer as remedies against the employee in case of breach of confidentiality and disclosure provisions.

However, the information has to be first understood whether the same is a trade secret (exclusively available to a particular business and not available in the public domain) or general information which could be available in public domain. In Polymer Papers Limited v. Gurmit Singh & Ors.1, the Delhi High Court considered a case wherein Plaintiff sought to restrain an employee from disclosing certain trade secrets on the basis of rights claimed under intellectual property law even though there was no agreement between the parties. The Defendant had earlier worked with the Plaintiff company and later joined a competing venture. The Plaintiff had alleged that the Defendant was revealing trade secrets and other confidential information related to certain products in respect of which Plaintiff had exclusive rights and Defendant had thus committed breach. However, as per the facts as substantiated before the Delhi High Court, there was no agreement between Plaintiff and Defendant and further, Plaintiff had not made disclosure of material facts and had also not concealed information relating to the relation between Plaintiff and the competing company that Defendant had joined. Consequently, the Delhi High Court held that in any event, Plaintiff was not entitled to discretionary relief of injunction. The Delhi High Court further held that Plaintiff did not possess any exclusive intellectual property rights in respect of the products in dispute and hence there was no ground on which Plaintiff was entitled to injunction.

NON - COMPETE CLAUSES

A non-compete clause or covenant not to compete is a term used in contract law under which one party agrees not to enter into or start a similar trade or profession in competition against another party.

The above definition of non-compete clauses could seem to be very simple and straightforward; however, such non-compete clauses have a far reaching effect. The Indian Contract Act, 1872 (the "Act"), deals with the legality of such non-compete covenants. Under section 272 of the Indian Contract Act, 1872 agreements in restraint of trade are void.

An agreement in restraint of trade could be defined as the one in which a party agrees with the other party to restrict his right to carry on a specific trade or profession with third parties or on its own without the express permission of the latter party.

As defined by the dictionary the term reasonable means according to reason. Hence whatever a reasonable man would do, using commonsense and knowledge, under the given circumstances, will account as reasonable. Therefore the test of reasonability depends on the facts and circumstances of each case. A covenant for the period of contract of employment would not violate section 27 of the Act as the employee is bound to serve his employer exclusively. Hence, the legal position on this facet of section 27 can be briefly enumerated as under:

When a contract or a covenant is impeached it is the duty of the Court to construe the same and ascertain to what extent it constitutes a restraint of trade;

A contract or covenant which has for its object a restraint of trade is prima facie void under section 27 of the Act;

The restrictive covenants applicable during the employment can only be questioned on the ground that they are unreasonable or onerous;

Negative covenants operative during the period of contract of employment do not fail under section 27 of the Act;

Any restrictive covenant extended beyond the termination of service is void under section 27 of the Act.

When a covenant in restraint of trade or profession is challenged, the onus of justifying it is on the party which is seeking to uphold it. When a covenant or agreement is impeached on the ground that it is in restraint of trade, the duty of the Court is, first to interpret the covenant or agreement itself, and to ascertain according to the ordinary rules of construction what is the fair meaning of the parties. If there is an ambiguity it must receive a narrower construction than the wider.3

Judicial Trends : Although section 27 provides that agreements in restraint of any profession, trade or business are void, however as per various precedents reasonable restraints are permitted and the same do not render the contract void ab initio. As discussed above, reasonableness of restraint depends upon various factors, and the restraint such as to prevent disclosure of trade secrets or business related confidential information has to be reasonable in the interest of the parties to ensure adequate protection to the party enforcing such restriction. The courts have consistently refused to enforce post-termination noncompete clauses in employment contracts, viewing them as "restraint of trade" impermissible under Section 27 of the Act, and as void and against public policy because of their potential to deprive an individual of his or her fundamental right to earn a livelihood.

Hon'ble Supreme Court in Niranjan Shankar Golikari v. The Century Spinning and Manufacturing Company Ltd.4 observed that restraints or negative covenants in the appointment or contract may be valid if they are reasonable. A restraint upon freedom of contract must be shown to be reasonably necessary for the purpose of freedom of trade. The court held that a person may be restrained from carrying on his trade by reason of an agreement voluntarily entered into by him with that object. In such a case the general principle of freedom of trade must be applied with due regard to the principle that public policy requires the utmost freedom to the competent parties to enter into a contract and that it is public policy to allow a trader to dispose of his business and to afford to an employer an unrestricted choice of able assistance and the opportunity to instruct them in his trade and its secrets without fear of their becoming his competitors. Where an agreement is challenged on the ground of its being in restraint of trade, the onus is upon the party supporting the contract to show that the restraint is reasonably necessary to protect his interests. Once, this onus is discharged by him, the onus of showing that the restrain is nevertheless injurious to the public is upon the party attacking the contract.

The Hon'ble Delhi High Court in the matter titled Desiccant Rotors International Pvt. Ltd v Bappaditya Sarkar & Anr5 analyzed an arrangement involving a senior marketing manager at a manufacturer of evaporative cooling components, products and systems. As part of his employment agreement with Desiccant, the manager agreed that for two years following the termination of his employment, he would be bound by a covenant with Desiccant that would require him to keep Desiccant:s matters confidential, and that would prevent him from competing with Desiccant and soliciting Desiccant:s customers, suppliers and employees. Expressly embodied in the employment agreement was an acknowledgment by the manager that he was dealing with confidential material of Desiccant, including: know-how, technology trade secrets, methods and processes, market sales, and lists of customers. After a few years of employment, the manager resigned and-notwithstanding the terms of his old employment agreement-within three months of his resignation joined a direct competitor of Desiccant as country manager in charge of marketing and started contacting customers and suppliers of Desiccant. In injunctive proceedings against the manager by Desiccant, the High Court reiterated the principles embodied in Section 27 of the Act and the individual:s fundamental right to earn a living by practicing any trade or profession of his or her choice. Brushing aside any argument by Desiccant that the restrictive covenants were primarily designed to protect its confidential and proprietary information, the High Court ruled that in the clash between the attempt of employers to protect themselves from competition and the right of employees to seek employment wherever they choose, the right of livelihood of employees must prevail. However the High Court did allow an injunction against the manager prohibiting him from soliciting Desiccant:s customers and suppliers to stand in effect.

Article 21 of the Constitution of India guarantees the live to livelihood and since it is a fundamental right it is held to be sacrosanct. The validity of such restrictive covenants is tested on the standards of reasonability based on considerations of duration and space of the restriction in question. Considering this and the approach of the courts (as briefly discussed herein above), protection of rights of an employee seeking employment are given priority over protecting the interests of the employer seeking to protect itself from competition. The courts have generally held that the right to livelihood of the employees must prevail in spite of an existing agreement between the employer and the employee. Also, courts deject any form of restraint after conclusion of employment, as restraint is deemed as a mechanism to limit personal freedom of choice of work/livelihood of a person/employee. One could say that the rationale behind nullifying postemployment restraints is that is such restraints were permitted, the employee would be unreasonably restricted to work or unfairly restrained from using the skills and knowledge gained.

It is imperative to draft a balanced employment contract which is smoothly determinable and will stand the test of time upon when a dispute between the employer and an employee arises.

Footnotes

1 AIR 2002 Del 530

2 Section 27 (Agreement in restraint of trade, void) of the Indian Contract Act, 1872 provides that 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.

3 Superintendence Co. of India (P) Ltd. v. Krishna Murgai (AIR 1980 SC 1717)

4 1967 AIR 1098

5 CS(OS) No.337/2008 decided on July 14 20019

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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