India: Hon'ble Madras High Court Elucidates The Difference Between Compensatory Damages And Restitutionary Damages

BRIEF FACTS OF THE DISPUTE:

In the recent case of 'E-merge Tech Global Services Pvt. Ltd. v. M.R. Vindhyasagar & Anr., the Hon'ble High Court of Madras ('Madras HC') has explained the circumstances under which an aggrieved party is entitled to ascertain compensatory damages and restitutionary damages, respectively.

In the instant case, E-merge Tech Global Services Pvt. Ltd.. i.e., the Plaintiff company ("Plaintiff") filed a Civil Suit against its former employee, i.e., M.R. Vindhyasagar ("Defendant") for violation of certain non-disclosure, non-compete and non-solicitation agreements, primarily by soliciting one of the major clients of the Plaintiff. Plaintiff consequently sought relief by way of damages to the tune of Rs.2,00,00,000 (Rupees Two Crore only) and for permanent injunction restraining the Defendants from divulging or exploiting the copyrighted material belonging to the Plaintiff and also restraining the Defendant from soliciting the clients of the Plaintiff.

In the background, Defendant left Plaintiff's company in the year 2017 and floated his own company by the name of Datasolve Analytics Pvt. Ltd. in 2019 (Defendant No.2 in the Civil Suit). Consequentially, it was established via records that Plaintiff suffered losses in the financial year 2019-2020. when the turnover dropped from Rs.1,17, 44,656/- (Rupees One Crore Seventeen Lakh FortyFour Thousand Six Hundred and Fifty Six only) to Rs.20,93,425/- (Rupees Two Lakhs Ninety Three Thousand Four Hundred and Twenty Five only). because the Defendant diverted the revenue from one of the Plaintiff's major clients towards his own company causing a loss to the tune of Rs.96,51,264/- (Rupees Ninety Six Lakh Fifty One Thousand Two Hundred and Sixty Four only) to Plaintiff.

The Madras HC while relying on the judgment of 'FL Smidth (P) Ltd. v. Secan Invescast (India) (P) Ltd.¹ observed that under Section 27 of the Indian Contract Act, 1872, post-employment non-compete covenants are void and hence, the claims of the Plaintiff can only be considered with respect to non-solicitation and non-disclosure clauses.

Furthermore, the Madras HC noted that Defendant was bound by the non-solicit clause for a period of 3 (three) years post-employment with Plaintiff and was bound by the confidentiality clause during the term of his employment and thereafter.

HON'BLE MADRAS HIGH COURT'S FINDINGS ON DAMAGES:

The Madras HC delved into the concept of compensatory and restitutionary damages and observed that the former is awarded to redress the loss suffered by an aggrieved party. Whereas the latter is more in the nature of directing the Defendants to disgorge the benefit accrued in its favour due to unjust enrichment at the expense of the Plaintiff. Furthermore, relying on the United Kingdom's Supreme Court judgment of "One Step (Support) Limited v. Morris-Garner', the Madras HC concluded that where the pecuniary loss can be identified by the normal and conventional methods, compensatory damages must be awarded. The Madras HC observed that in the present case, since there was a legitimate nexus to arrive at the amount of damages claimed by the Plaintiff, there was nothing exceptional in the case and hence, there was no need to award restitutionary damages.

The Madras HC while imposing a cost of Rs. 2,50,000/- (Rupees Two Lakh Fifty Thousand only) directed the Defendants to disclose vide an affidavit, all the confidential information pertaining to the operation of the Plaintiff. Specifically, information in the possession of the Defendants belonging to Plaintiff and to return all such confidential information that are stored by the Defendants, back to Plaintiff. Consequently, Madras HC granted the Plaintiff: (i) a sum of Rs.96,51,264/ towards damages along with interest at the rate of 9% per annum from the date of presentation of the Plaint till the date of realization; and (ii) the relief of perpetual injunction against the Defendants from divulging Plaintiff's confidential information and soliciting business from Plaintiff's major clients.

CONCLUSION

The Hon'ble Madras HC while emphasizing the concept of compensatory damages and restitutionary damages, reiterated the principles of law that post-employment non-compete covenants are void and only claims for non-solicitation and non-disclosure can be considered. This judgment acts as a reminder to carefully consider the drafting of employment contracts. Pertinently, the restrictive covenants impose the duty on the employee even after the termination of the contract bind the employee by certain terms. The clarity provided by the Madras HC is that where the damages can be ascertained in the normal way, there is no need to award restitutionary damages. Further, restitution by way of an account of profits and compensatory damages are inconsistent with each other, while at the same time, the alternative to each other is a welcome step for the relief seekers who have suffered the loss.

Footnotes

1 2013 (1) CTC 886

2 2018 WLR 1353

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