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Negative Covenants And Agreement In Restraint Of Trade-an Insight Into Indian Laws

by Durai on April 14, 2009

The article analyses whether negative covenant restraining the employee from taking up employment with the third party after he ceases to be an employee are “agreement in restraint of trade” which is against the Indian Contract Act.

Introduction

An attempt has been made in this article to visualize how far negative covenants can be stretched and skillfully drafted vis-à-vis “agreement in restraint of trade” enshrined under the Indian Contract Act. The focus of this article would be more towards delving upon “non-disclosure agreement”, “non-compete agreement”, “non-solicitation agreements” and “garden leave clause”. The negative clauses always had an unpleasant time with freedom of contract and were prone to be easily charged as agreement in restraint of trade which is generally considered to be valid during the time of employment and the Courts have been less willing to enforce agreements relating to post-employment restraints on the employee.

Non-compete Clause and its Fortification

If there is a negative covenant restricting the employee from taking any other employment, and the employee leaves the service, the negative covenant can be enforced to the extent that the unexpired part of the term of service would be essential for the fulfillment of the contract.1 In Gujarat Bottling2 case the Supreme Court said any non-disclosure clause shall be applicable only during the period of service and any restraint beyond the service is violative of Section 27 of the Indian 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 manner or whom he would perform similar or substantially similar duties, it is not therefore, a restraint of trade unless the contract as aforesaid is unconscionable or excessively harsh or unreasonable or one sided.3

A contract which is in restraint of trade cannot be enforced unless (a) it is reasonable as between parties and (b) it is consistent with the interest of the public.4

In BLB Institute case5, the Court reiterated 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) as held by this Court in Gujarat Bottling v. Coca-Cola this doctrine is not confined only to contracts of employment, but is also applicable to all other contracts.

Therefore, it may be said that a negative covenant which restricts a person post-employment period may be struck down as violative of agreement in restraint of trade as it is pronounced by the Supreme Court in Percept D’Mark case6 a covenant is a restrictive covenant when it restricts the other person from his future liberty to deal with the persons he chooses for his endorsements, promotions, advertising or other affiliation and such a type of restriction extending beyond the tenure of the contract is clearly hit by Section 27 of the Contract Act and is void.

Non-solicitation Agreement

Non-solicitation agreements are those agreements which the employee promises not to solicit the employer’s clients or employees for a given period after terminating the employment. Generally, negative covenant during the period of the agreement is considered not to be hit by law but there are certain non-solicitation agreement which is prima facie negative in nature but still stand as an exception and are enforceable even after the conclusion of the employment are held by the Courts to be valid in law. The Delhi High Court in Wipro case7 held “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 void”.

But in Pepsi Co8 case, which was an earlier case, the Court, prohibiting non solicitation agreement, held that where an attempt by one company to induce the employees of Competitor Company to join the employment of inducing company in contrast to the contract of employment, is not permissible and that the non-solicitation clause is hit by the provisions of Section 27 of the Indian Contract Act, 1872.

Non-disclosure agreement

Even though India has an obligation to comply with TRIPs Agreement, unlike the US and other developed countries, India has no legislation dealing with trade secrets. In India, protection of trade secrets is a common law based.9 Generally, an agreement which restraints a person after the period of employment are considered to be unreasonable restraint of trade and are struck down but “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 Gujarat Bottling case10 the Supreme Court asked a relevant question that how Pepsi may ask Coca Cola to part with its trade secrets to its business rival by supplying the syrup, etc. for which Coca Cola holds the trade marks to GBC which is under effective control of Pepsi. The recent Delhi High Court decision in Diljeeth Titus11 case also further vouches for the fact that confidential information of the employer can be protected post employment period.

In Escorts case12, the Delhi High Court restrained from manufacturing, selling or offering for sale of the Pick-N-Carry Mobile Cranes that are substantial imitation or reproduction of the industrial drawings of the Plaintiffs or from using in any other manner whatsoever, the technical know-how. In Burlington13 case the Delhi High Court again restrained carrying on any business including mail Order business by utilising the list of clientele/customers included in the database of the petitioner.

Protection of Confidential Information under Indian IPR laws

The issue of Copyright protection to confidential information was discussed by the Delhi High court in Diljeeth Titus14 case and the Court held that “thus the real test was the degree of employment control to determine whether it was a contract of service. There may not be employment in the strict sense of employment of a workman or a labourer but the degree of control would determine the obligations of the parties”, by pronouncing this the Court upheld the Copyright in database which was considered as confidential information. ‘The employee shall not, during his employment nor at any time afterwards, divulge nor communicate to any person corporation or firm, any information which he may receive or obtain in relation to the company’s affairs and customers and, all instructions drawing notes and memoranda made by the employee or which may come into his possession while engaged as aforesaid shall be the exclusive property of the company.’15

In Zee Tele film case16, the Bombay High Court approved triple test that where a Plaintiff sues, relying upon breach of confidence, he must establish three elements. These are- (1) that the information was of a confidential nature; (2) that the information was communicated in circumstances importing an obligation of confidence and (3) that there has been an unauthorised use of the information to the detriment of the person communicating it.

Where, it was undertaken by the parties “not to publish or cause to be published any work on the same subject at or about the price of sale which might reasonably be regarded as conflicting or likely to conflict with the sale of copyrighted works” this kind of confidentiality clause protecting copyright was held not to be violative of Section 27 of the Indian Contract Act.17

Remedies for Protection of Confidentiality under the Indian Law

Injunction preventing the third party from using trade secrets, return of confidential information and Compensation for damages are the common remedies which are available under the Indian Jurisdiction.

Section 72 of the Information Technology Act, 2000 deals with breach of confidentiality and privacy and any breach will attract imprisonment upto 2years, fine upto Rs. 1 lac.

The Bombay High Court in Urmi Juvekar 18 held that an action for breach of confidence succeeds only if the Plaintiff could identify clearly, what was the information he was relying on and has to be shown that it was handed over in the circumstances of confidence and could be treated as confidential.

“Garden leave” Clause-Is it the Solution?

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.19

However, when “garden leave” clause came for consideration before the Bombay High Court it was argued that “The Garden Leave Clause is therefore, prima facie in restraint of trade and is hit by Section 27 of the Contract Act. The effect of the clause is to prohibit the employee from taking up any employment during the period of three months on the cessation of the employment”. The Court accepting the argument held “to obstruct an employee who has left service from obtaining gainful employment elsewhere is not fair or proper”.20

“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.

Conclusion-

Negative covenant which restricts the employee beyond the period of employment are considered to be unreasonable. The exception being extended to confidential information and non-solicitation agreement to a reasonable period of time are valid and clauses like “garden leave” does not seem to protect the employer when it comes to Court of law; as they are considered to be agreement in restraint of trade and does not serve the purpose for which it was intended. Therefore, it requires the mind of an artist to draft a negative clause and the foresight of a prophet to view the consequences of such a clause which has now become absolutely imperative considering the decisions made by the India Courts.

_____________________________

* The author is a IInd Year LL.M student at National law School of India University. Bangalore. He can be contacted at E-mail- durai@nls.ac.in

1. Niranjan Shankar Golikari v Century Spg and Mfg Co Ltd [1967] 2 SCR 397

2. Gujarat Bottling Company Limited (GBC) vs. Coca Cola Company MANU/SC/0472/1995: AIR1995SC2372, (1995)5SCC545

3. Niranjan Shankar v. Century Spg. Mfg. Co Ltd. MANU/SC/0364/1967: AIR 1967 SC 1098

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

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

6. Percept D’Mark (India) Pvt. Ltd. V. Zaheer Khan and Anr. MANU/SC/1412/2006: AIR 2006 SC 3426, (2006) 4 SCC 227

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

8. Pepsi Foods Ltd. v. Bharat Coca-cola Holdings Pvt. Ltd MANU/DE/0740/1999: 81(1999)DLT122

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

10. Gujarat Bottling Company Limited (GBC) V. Coca Cola Company MANU/SC/0472/1995 : AIR1995SC2372, (1995)5SCC545

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

12. Escorts Const. Equipment Ltd v. Action Const. Equipment P. Ltd S.No. 533/98 Decided On: 16.10.1998 MANU/DE/0185/1999

13. Burlington Home Shopping Pvt. Ltd.v. Rajnish Chibber MANU/DE/0718/1995: 61(1995)DLT6

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

15. Herbert Morris Ltd v Saxelby 1916 1 AC 688

16. Zee Telefilms Ltd. V. Sundial Communications Pvt. Ltd MANU/MH/0243/2003: 2003(3)MhLj695, 2003(27)PTC457(Bom)

17. The Chancellor Masters and Scholars of the University of Oxford v. Orient Longman Private Limited MANU/DE/2021/2002: 103(2003)DLT139

18. Urmi Juvekar Chiang v. Global Broadcast News Limited MANU/MH/0315/2007: 2008(2)BomCR400

19. Evening Standard Co. Ltd. v. Henderson [1987] I.R.L.R. 64. (This case is credited with giving rise to the concept of garden leave. The court found that Henderson “ought not, pending trial, to be allowed to do the very thing which his contract was intended to stop him doing, namely working for somebody else during the period of his contract.”

20. VFS Global Services Private Limited v. Mr. Suprit Roy MANU/MH/1043/2007: 2008(2) Bom CR 446, 2008 (3) MhLj 266.

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Sympathy is uncalled and mercy is misplaced – Judicial dicta.

by Durai on March 26, 2009

Introduction-

Two decades ago the Supreme Court came with the “sexual harassment in working place” code of conduct in the lines of CEDAW, which came as a blessing in disguise for the working women folk, still we are in the process of coming out with a Central Act exclusively dealing with “Sexual harassment at the work place” to fill the vacuum. However, there is a “Sexual Harassment of Women at their Work Place (Prevention) Bill, 2006[1]” which is pending for enactment in the Parliament but some State legislature in the nation like Tamil nadu[2] and Karnataka[3] have come out with an exclusive legislation dealing with sexual harassment in the workplace. Apart from these exclusive legislations and precedents there are Service rules[4] which provide that sexual harassment at the work place is misconduct.

An endeavor has been made in this article to go into the judicial inroads after the land mark Vishaka case which has been followed by catena of judgments by the Court’s in India without loosing focus on the scope and implementation of the code with an insight as to the possibility of a dress code in working place.

Implementation of the Code of conduct-

Looking after this landmark judgment many women who were being sexually harassed started breaking their silence and started demanding action from the employers[5]. With the implementation of Vishaka being sparse and challenging, several efforts have been made in the last few years to strengthen its implementation and ensure accountability. One such effort was the Apparel Export Promotion Council case[6], and the other was the Draft Bill of 2006 on Sexual Harassment.

The Apex court mandates it shall be the duty of the employer or other responsible persons in work places or other institutions to prevent or deter the commission of acts of sexual harassment and the code of conduct should provide the procedures for the resolution, settlement or prosecution of acts of sexual harassment by taking all steps required[7]. Express prohibition of sexual harassment at the work place should be notified, published and circulated in appropriate ways. As regards the private employees steps should be taken to include the prohibition in the Standing orders under the Industrial Employment (Standing Orders) Act, 1946[8].

Enforceability and disciplinary actions-

Code of conduct is certainly enforceable by the Company and the employer has the legal obligation to fulfil the mandate of the Supreme Court judgment. The Supreme Court in the Vishaka case said “these directions would be binding and enforceable in law until suitable legislation is enacted to occupy the field”. There are now many cases wherein the Code of conduct provided by the Vishaka has been implemented successfully by the Companies and / or the employee.

The Company has got the power to take actions against the employee in the event of violation of code and in fact, turning a blind eye would cause serious problem to the management. There are cases where the protector has himself turned into a predator and accordingly punished for sexual harassment and the Court pronounced “protection in terms of the judgment of the Supreme Court and the guidelines issued in the case of Vishaka is to be given to harassed women at workplaces, to prevent exploitation and to provide safeguard to susceptible persons[9]”.

The employee who has committed the offence under the code can be charged for “misconduct” and disciplinary action can be initiated against him. In Apparel case the Supreme Court held that “any lenient action in such a case is bound to have demoralizing effect on working women. Sympathy in such cases is uncalled for and mercy is misplaced[10]”. In Narendra Kumar Khare[11] case the Court justified the action taken by the Company on its employee for the sexual harassment which happened outside Indian in its branch office in Japan. Disciplinary action for “misconduct” is possible. In Apparel case the employee was removed from the service by the Disciplinary Committee of the Company which was upheld by the Supreme Court. The Central government can initiate action against the employee for “unbecoming of a Government servant[12]” when he indulges in sexual harassment in work place.

Consequences of Non-implementation-

The attitude that non-implementation of the code of conduct will not attract any consequences atleast in theory does not seem to exist looking at the various judicial decisions. The employee or her relative can approach the National or State Commission for Women for non-implementation of the code of conduct or seeking suitable relief. The guidelines and directions in Vishaka’s case are to be complied with by the Co-operative Society. The Co-operative Society shall carry out the obligations under this judgment and form the Complaint Committee and Complaint Mechanism[13].

The employees or any public spirited individual can approach the Supreme Court or the High Court for violation of the “gender equality right” enshrined in Article 14 and 21[14] of the Indian Constitution.  The Bombay High Court recently in Arati Durgaram[15] case said that “every employer in the territory of India is bound to abide by the judgment of the Supreme Court which is law under Article 141 of the Constitution. Appointing an Advocate as an Enquiry Officer does not constitute valid or adequate compliance with the judgment of the Supreme Court. The mandate of the law laid down by the Supreme Court is that an employer at the work place must constitute a complaints mechanism to deal with complaints of victims”.

Companies drawing their own Code of conduct- Is it permissible?

Companies can certainly draw up their own code for the implementation of the “code of conduct” incorporating all the principles which are provided in the Vishaka’s case and without conflict with the Service rules and judgments of the Court. In Arati Durgaram[16] case the Company instead of constituting a “Complaint Committee” appointed an advocate the Court held that the company has negated the true spirit of the judgment by not constituting the Committee as envisaged by the Supreme Court in Vishaka’s case.

Therefore, every employer is duty bound to abide by the letter and spirit of the orders of the Supreme Court in Vishaka, the failure of which will land the employer into serious litigations.

The Vishaka judgment says that “employees should be allowed to raise issues of sexual harassment at workers’ meeting and in other appropriate forum and it should be affirmatively discussed in Employer-Employee Meetings”. And also says “Awareness of the rights of female employees in this regard should be created in particular by prominently notifying the guidelines in a suitable manner”. The Section 14 (b)[17] Bill of 2006 provides that the work place should “undertake workshops and training programmes at regular intervals for sensitizing the members”. Therefore in the light of the Supreme Court decision and the Bill of 2006 it may be safely said that conducting training programmes and repeating the training programmes at frequent intervals would become mandatory for the employer.

Relationships at work

Moving into a more interesting question is how romantic relationships between employees are considered and whether it is possible for an employer to forbid employees to have a romantic relationship with another employee?

It is pertinent to note that romantic relationships between the employees in the work place may attract misconduct proceedings. It may also attract “conduct unbecoming of a government servant” attracting Rule 3 (1) (iii) of the Central Civil Services (Conduct) Rules, 1964. The term “work place” as interpreted by the Court goes beyond the office place and covers even the Mess were the employees have food and also use for temporary staying purposes[18]. The societal practise does not support any such kind of activities. Nevertheless, things happen and proceedings for misconduct and disciplinary proceedings are initiated against them under the Service rules.

The code of conduct pronounced in Vishaka and other Supreme Court judgments are silent about having a romantic relationship with a fellow employee. However, these acts may attract the India Penal Code which declares adultery and obscenity as a crime which has criminal consequences under the Indian Penal laws.

Dress code in working place-

Employers are now looking for a dress code in the work place and there are very interesting questions as to how far appearances such as tattoos, piercing, hair style can be regulated, also what about the religious attire in the working place?

As there is no law governing employee dress codes in India. Employers may set decent dress guidelines as they wish, so long as they do not discriminate on the basis of gender, caste, race, religion, disability, or any other legally protected status. Nonetheless to remind that employees may go to court about them as a breach of their fundamental rights to “free speech and expression” and “right to equality” enshrined in the Indian Constitution. However decency of the dress is yet another issue which requires some consideration.

Indian citizen have the fundamental right to carry with them their religious symbols, marks as a mark of their religious manifestation which is been guaranteed by the Indian Constitution[19].  The Supreme Court held “When persons following a particular religion carry Trishul, Conch or Skull in a procession, they merely practice which is part of their religion which they wanted to propagate by carrying symbols of their religions such as Trishul, Conch etc., if the conscience of a particular community has treated a particular practice as an integral or essential part of religion, the same is protected by Articles 25 and 26 of the Constitution of India”[20]. Denying the employee the right to wear any religious attire which is the manifestation of their beliefs would lead to unnecessary litigation.

Conclusion-

The Vishaka judgement was a blessing for women workers and a check on the disobedient men in the workplace. However, there are certain lacunae. The Complaint committee is formed only after the Complaint has been made which is a violation of the code of conduct. The committee must already be formed when a woman makes a complaint and thus eliminating bias or delay fulfilling the mandate of Vishaka.

All these code of conducts are basically meant to protect women from sexual harassment in their work place and they are to a certain extent gender biased. We cannot rule out the misuse of such a provision in order take revenge against a male employee or to misuse it for some other purpose. Much thinking has to go into making this Code of conduct a gender neutral one in order avoid the misuse of the provisions or atleast provide some checks on the complaint process. This may prevent back firing which may happen in employing women in their organisations.

© II LL.M Student at National law School of India University, Bangalore. E-mail-durai@nls.ac.in

[2] Sexual Harassment of Women at their Work Place (Prevention) Act, 2000

[3] Working Women (Prevention of Sexual Harassment at Workplaces) Act, 2006.

[4] The Tamil Nadu Government Servants Conduct Rules, 1973. Rule 20-B. which says “Prohibition of sexual harassment of working women” and See also Central Civil Services (Conduct) Rules, 1964.

[6] Apparel Export Promotion Council v. A.K. Chopra., AIR 1999 SC 625, (1999) 1 SCC 759. (Wherein the Supreme  Court went ahead to pronounce that “There is no gainsaying that each incident of sexual harassment, at the place of work, results in violation of the Fundamental Right to Gender Equality and the Right to Life and Liberty – the two most precious Fundamental Rights guaranteed by the Constitution of India”

[7] Vishaka and others v. State of Rajasthan. AIR 1997 SC 3011, (1997) 6 SCC 241.

[8] Ibid.

[9] S. Srikanth Joshi , Aladangady Vyavasa Seva Sahakari Bank v. Board of Management of Aladangady Vyavasa Seva Sahakari Bank 2007(5) Kar LJ 484

[10] Apparel Export Promotion Council v. A.K. Chopra., AIR 1999 SC 625, (1999) 1 SCC 759.

[11] Narendra Kumar Khare v. S. Gopalakrishnan and Ors [2000 (87) FLR 989], (2001) ILLJ 487 Bom.

[12] Rule 3 (1) (iii) of the Central Civil Services (Conduct) Rules, 1964. (This is a Government of India decision keeping in mind the law laid down by the Hon’ble Supreme Court in Vishaka case.)

[13] Puthuppan P.K. Vs. K.S. Girija and Ors. 2008 (3 )KLJ 416, 2008 (4 ) KLT 189. The High Court of Kerala confirmed the order passed by the Kerala State Women’s Commission.

[14] Article 21 of the Indian Constitution 1950 provides for right to life which is a fundamental right and Article 14 provides for right to equality.

[15] Arati Durgaram Gavandi vs. Managing Director, Tata Metaliks Limited and Ors. 2008 (6) Bom CR 1, (2008) 110 BOM LR 3625.

[16] Ibid. The Supreme Court again had an occasion to speak about the “sexual harassment in work place” and implemented the Vishaka’s ratio in Apparel Export Promotion Council v. A.K. ChopraAIR 1999 SC 625. Wherein the Court said, against the growing social menace of sexual harassment of women at the work place the Supreme Court has passed the decision of Vishaka.

[17] Section 14 of The Sexual Harassment of Women at Work Place (Prevention, Prohibition and Redressal) Bill, 2006 speaks of “General duties of a Workplace”. Although it is not yet law the intention of the legislature is very evident that they want to make in mandatory on the part of the employer conduct training.

[18] 151(2008)DLT261 Saurabh Kumar Mallick v. The Comptroller and Auditor General of India and Anr. (The Court said “a narrow and pedantic approach cannot be taken in defining the term ‘workplace’ by confining the meaning to the commonly understood expression “office” that is a place where any person of the public could have access”.

[19] Article 25 guarantees “right to freedom of religion” and Article 26 guarantees “freedom to manage religious affairs” under the Indian Constitution of 1950.

[20] Commissioner of Police and Ors v. Acharya Jagadishwarananda Avadhuta and Anr(2004) 12 SCC 770, (2004) 3 MLJ 28 (SC). In B.G. Sunanda Rao v. Khemani Distilleries Pvt.Ltd., Mumbai 1999(3) ALD 647, 1999 (3) ALT 650 the Andra Pradesh High Court held, protection under Article 25 extends also to rituals, observances, ceremonies, modes of worship, regarded as integral part of any religion including even food and dress.

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