Full Judgment Text
2007:BHC-OS:18053
1
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORIDINARY ORIGINAL CIVIL JURISDICTION
NOTICE OF MOTION NO. 4388 OF 2007
IN
SUIT NO. 3171 OF 2007
VFS Global Services Private Limited. ... Plaintiff.
V/s.
Mr. Suprit Roy. ... Defendant.
.....
Mr. C.U. Singh, Senior Counsel with Mr. Ashish Kamath i/b. M/s.
V. Deshpande & Co. for the Plaintiff.
Mr. Sandeep Parikh with Mr. H.N. Jain i/b. Gordhandas & Fozdar
for the Defendant.
.....
CORAM : DR. D.Y. CHANDRACHUD, J.
10TH DECEMBER 2007.
ORAL JUDGMENT :
. The Notice of Motion has been taken out by the Plaintiff in
the present case for enforcing a negative covenant contained in a
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contract of employment. The Defendant was employed by the
th
Plaintiff on 12 July 1999 in the grade of Senior General Manager.
nd
On 2 July 2001, he was transferred to the Visa Facilitation Services
(VFS) Division and designated as General Manager. The terms and
conditions of employment as originally envisaged continued to remain
the same save and except as modified. Under the original contract of
employment, the services of the Defendant could be brought to an
end by either side with one month's notice or salary in lieu thereof.
th
On 11 July 2003, additional terms and conditions were imposed by
the employer. Among them was a condition that the Defendant shall
not participate with any other company carrying on similar business
and shall not commence similar business during the period of
employment or for a period of two years thereafter.
2. A Memorandum of Understanding was thereafter entered
th
into between the parties on 10 December 2003. Clauses 3 and 4 of
the agreement provided for a covenant on confidentiality to the
following effect :-
“ The Employee shall undertake that he will not make use
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of disseminate or in any way disclose any confidential
information of the company whether during the period of
employment or after, to any person, firm or business except
to the extent of necessary negotiation, discussion and
consultation with personnel or authorized representatives of
the Company and for any purpose that the Company may
hereinafter authorize in writing.
The Employee shall treat all confidential information of
the company with the same degree and care as it accords
to its own confidential information and also represent that he
will exercise reasonable care to protect the confidential
information provided by the company.”
Under clause 6 it was provided that in the event that the Defendant
left service or was terminated from service, he shall not enter into
service with any other employer who has a conflict of interest with the
business of the Plaintiff for a period of one year without the
th
permission of the Management. On 26 July 2006 the Plaintiff, upon
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a review of the conditions governing employment introduced a
condition styled as a Garden Leave Clause to the following effect :-
“ The Company reserves the right to require you to remain
away from work/employment for a period of 3 (three)
months after termination or resignation of your services
with the company. You shall agree to comply with all
conditions that may be laid down by the Company at the
time of such resignation or termination. The Garden Leave
period shall commence after you have served the notice
period and have ceased to be on the rolls on the Company.
You shall be bound and undertake that you will not directly
or indirectly, whether through partnership or as a
shareholder, joint venture partner, collaborator, employee,
consultant or agent or in any other manner whatsoever,
whether for profit or otherwise carry on any business, which
competes directly or indirectly with the whole or any part of the
business of visa processing services or having/conducting
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business similar to the business conducted by the company
for a period of 3(three) months after serving the notice
period and ceasing to be an employee of the Company.
You shall also be bound to comply with the conditions of
Non Compete and Non Solicitation as set out in the terms
and conditions. The Company shall pay you compensation
which shall be equal to 3 (three) month's remuneration last
drawn by you at the time of your termination or resignation.
Please note that the company shall apply this clause at its
sole discretion and you shall not claim it as a right.”
th
3. On 8 October 2007, the Defendant tendered his
resignation from service and stated that while under the letter of
appointment he was required to give a notice of 30 days, the
activities with which he was currently involved with the Plaintiff would
be completed, so as to enable him to depart by the last week of
November.
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st
4. The suit has been instituted on 31 October 2007 seeking
damages in the amount of Rs.5 crores and for enforcing the negative
covenant contained in the contract of employment. In prayer (a) of
the Motion for interim relief, the Plaintiff has sought enforcement of
the Garden Leave Clause with a view to prevent the Defendant from
joining any other Company or Organization in the “Visa processing
business” or travel related services or conducting business similar to
that of the company contrary to the accepted terms of contract for a
period of three months from the resignation. Prayer clause (b) of the
Notice of Motion is for an injunction against from the disclosure of
confidential information. Prayer clause (c) is for an injunction against
the Defendant soliciting customers or employees. On the request of
the learned Counsel and with their consent, this Motion has been
taken up for final hearing and disposal.
5. The principal issue which arises before the Court relates to
the enforceability of the Garden Leave Clause. Now, a perusal of the
clause as it stands would make it prima-facie evident that the clause
is intended to operate after the cessation of employment of the
Defendant either upon termination or resignation from service. In fact,
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the Garden Leave period is to commence after the employee has
“served the notice period and have ceased to be on the rolls of the
Company”. Under the clause the employee is prohibited, from
carrying on any business which competes directly or indirectly with
the whole or any part of the Visa processing services or a business
similar to the business of the employer for a period of three months
after serving the notice period and ceasing to be an employee of the
company.
6. The fact that the Garden Leave Clause operates after the
employee has ceased to be in service is not disputed on behalf of the
Plaintiff by the learned Counsel. The submission before the Court
however is that a clause of this nature is valid and is enforceable. In
order to support this submission, reliance has been placed on the
circumstance that under the clause the employer has agreed to pay
compensation equal to three months' remuneration last drawn by the
employee at the time of termination or resignation. On the other
hand, it has been submitted by Counsel appearing on behalf of the
Defendant that such a clause which operates after the term of
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employment has come to an end would be in restraint of trade and
therefore invalid under Section 27 of the Contract Act. Reliance has
been placed on the Judgments of the Supreme Court in
Superintendence Company of India (P) Ltd.V/s. Krishan Murgai
(AIR 1980 S.C. 1717), M/s. Gujarat Bottling Co. Ltd. V/s. Coca
Cola Company (AIR 1995 S.C. 2372), and Percept D'Mark (India)
Pvt.Ltd. V/s. Zaheer Khan (AIR 2006 S.C.3426 ). The learned
Counsel also adverted to the Judgment of the Division Bench of this
Court in Zaheer Khan V/s. Percept D'Mark (India) Pvt. Ltd. (AIR
2004 Bombay 362) and the Judgment of a learned Single Judge in
Taprogge Gesellschaft MBH V/s. IAEC India Ltd.
(AIR 1988 Bombay
157).
7. Section 27 of the Indian Contract Act, 1872 provides that
every agreement by which anyone is restrained from exercising a
lawful profession, trade or business of any kind is to that extent void.
An exception is carved out in Section 27 by which a person 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 carries on a like business, provided that such limits appear
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to the Court reasonably having regard to the nature of the business.
The only exception which is provided to the doctrine that an
agreement in restraint of the exercise of a lawful profession, trade or
business is void is where the goodwill of a business is being sold.
8. Since the Judgment of the Supreme Court in Niranjan
Shankar Golikari V/s. Century Spinning & Mfg. Co. Ltd. (1967) 2
SCR 378 (AIR 1967 SC 1098 para 15), a distinction has been drawn
in Indian law between a restrictive condition in a contract of
employment which is operative during the period of employment and
one which is to operate after the termination of the employment. A
restriction during the term of employment is regarded as valid and not
in restraint of trade. A condition which operates after the term of
employment ceases is in restraint of trade. This distinction was
adverted into in the Judgment of Mr. Justice A.P. Sen in
Superintendence Co. of India V/s. Krishan Murgai
(AIR 1980
S.C.1717 ) Mr. Justice V.D. Tulzapurkar who delivered the Judgment
for His Lordship and Mr. Justice N.L. Untwalia held that it was not
necessary for the decision of the case to decide whether such a
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negative covenant was in restraint of trade. Mr. Justice A.P. Sen held
thus :-
“ There is nothing in the wording of Section 27 to suggest
that the principle stated therein does not apply when the
restraint is for a limited period only or is confined to a
particular area. Such matters of partial restriction have
effect only when the facts fall within the exception to the
section.
A contract, which has for its object a restraint of trade is
prima facie, void. Section 27 of the Contract Act is general
in terms and unless a particular contract can be distinctly
brought within Exception 1 there is no escape from the
prohibition. We have 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.”
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9. In Gujarat Bottling Company Limited V/s. Coca Cola
Company
(AIR 1995 S.C.2372 ), the Supreme Court adverted to
Section 42 of the Specific Relief Act, 1963, under which, it has been
provided that notwithstanding anything contained in clause (e) of
Section 41, where a contract comprises an agreement to do a certain
act, coupled with a negative agreement, expressed or implied, not to
do a certain act, the circumstance that the Court is unable to compel
specific performance of the affirmative agreement shall not preclude it
from granting an injunction to perform the negative agreement. The
Supreme Court held that the Court is however, not bound to grant an
injunction in every case and an injunction to enforce a negative
covenant would be refused if it would indirectly compel the employee
either to idleness or to serve the employer (para 45 at page 2388). In
Percept D'Mark (India) Pvt. Ltd. V/s. Zaheer Khan
( AIR 2006
S.C.3426 ) the Supreme Court upheld the Judgment of a Division
Bench of this Court which had taken the view that the right of first
refusal conferred by an agreement for the promotion of the services of
a sportsman operated beyond the term of the agreement and was
therefore an unlawful restraint of trade. The Supreme Court held thus
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:-
“On the pleadings contained in the Arbitration Petition, there
can be no escape from the conclusion that what the appellant sought
to enforce was a negative covenant which, according to the appellant,
survived the expiry of the agreement. This, the High Court has rightly
held is impermissible as such a clause which is sought to be enforced
after the term of the contract is prima facie void under Section 27 of
the Contract Act.”
The legal position was summarised as follows :-
“ The legal position with regard to post-contractual
covenants or restrictions has been consistent, unchanging
and completely settled in our country. The legal position
clearly crystallised in our country is that while construing
the provisions of Section 27 of the Contract Act, neither the
test of reasonableness nor the principle of restrain being
partial is applicable, unless it falls within express exception
engrafted in Section 27.”
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The judgment of the Supreme Court in Zaheer Khan arose out of a
petition under Section 9 of the Arbitration and conciliation Act, 1996.
Parties were therefore permitted to espouse their rights and
contentions before the Arbitral Tribunal. The judgment of the
Supreme Court follows a line of precedent of the Court. The
same view, it may be noted has been taken in the judgment of a
learned Single Judge of this Court in Taprogge Gesellschaft MBH
V/s. IAEC India Ltd. (AIR 1988 Bombay 157).
10. In the present case, the Garden Leave Clause is intended
to operate after the contract of employment stands terminated, either
as a result of resignation or upon the employee ceasing to remain in
service upon termination. The submission of Counsel appearing on
behalf of the Plaintiff that the payment of three months compensation
by the employer would amount to an extension of the contract is
contrary to the plain terms of the clause. The clause defines the
period of three months to commence after the employee has served
the period of notice and upon his having ceased to be on the rolls of
the Company. The measure of compensation is three months of last
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drawn wages. The payment of this compensation however, does not
renew the contract of employment which has come to an end. 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. As the
Judgment of Mr. Justice A.P. Sen in Krishan Murgai's case (Supra)
holds there is nothing in Section 27 to suggest that the principle in
Section 27 will not apply when the restraint is for a limited period. As
held by the Supreme Court in Gujarat Bottling Co. Ltd. (Supra) a
negative covenant of this nature cannot be enforced if it would
indirectly compel the employee either to remain idle or to serve the
employer. Finally, as held by the Supreme Court in Zaheer Khan's
case (Supra), neither the test of reasonableness nor the principle of
the restraint being partial would be applicable unless it falls in the
exception carved out in Section 27. The exception which relates to
the sale of the goodwill of a business is not applicable.
Reliance has been placed on an order passed by a learned
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th th
Single Judge of this Court on 8 and 11 June 2007 in Suit (Lodging)
No. 1605 of 2007. The learned Single Judge granted ad-interim relief
based on the Garden Leave Clause pending the hearing and final
disposal of a Notice of Motion. The facts on the basis of which the
injunctive relief in that case was granted are referred to in paragraph
5 of the Judgment which reads thus :-
th
“ It cannot be disputed that the period till 30 June is a
crucial period for tour and travel business. If the Defendant were to
join some other competing organization, he would be able to divert
the prospective and even regular client(s) of the plaintiff with whom
negotiations were inconclusive. Indeed, all this is a matter of guess
work. But to obviate any such loss being caused to the Plaintiff, the
Plaintiff is entitled to invoke the restrictions provided by the garden
leave clause for the specified period on payment. Thus understood, I
find no substance in the objection taken on behalf of the Defendant
for continuing the ad-interim relief which was granted on 6.6.2007,
which was obviously ex-parte in nature, though the Defendant was
represented by the Advocate on that date of hearing.”
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The distinguishing features of that case relating to the period –
namely the month of June which was crucial for travel business – are
absent here. In any event, in the present case the Motion has now
been taken up for final disposal by consent of Counsel and it has
been held that a clause of the nature involved in the case is in
restraint of trade and hit by Section 27 of the Contract Act.
11. Apart from the aforesaid reasons, there is an additional
factor which must weigh against the grant of an injunction to enforce
the negative covenant in this case. Even according to the Plaintiff,
the negative covenant is to remain in operation during the Garden
Leave Period, and in fact that was the submission of learned Counsel
before the Court. In paragraph 40 of the affidavit in reply, the
Defendant has stated that he was reliably informed that the Chief
Executive Officer (CEO) and the Chief Operating Officer (COO) of the
Plaintiff had requested U.K. Visas to write to CSC (the prospective
employer of the Defendant) calling upon CSC not to employ the
Defendant. This statement in paragraph 40 of the reply has not been
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denied in paragraph 23 of the Rejoinder. It is a well settled principle
of law that the grant of an interlocutory injunction is equitable in
nature and that the conduct of the party seeking interlocutory relief
(Gujarat Bottling Co.)
should be fair and honest (Supra) para 50 at
page 2389. In the present case, the conduct of the Plaintiff cannot be
regarded as meeting that description. To obstruct on employee who
has left service from obtaining gainful employment elsewhere is not
fair or proper.
12. On behalf of the Plaintiff it has been urged that by his E-
st th
mails dated 31 October 2007 and 15 November 2007, the
Defendant had accepted that he would be bound by the Garden
Leave Clause and consequently, the Defendant cannot be heard to
assert that the clause is not enforceable. There is no merit in the
st
submission. In his E-mail dated 31 October 2007, the Defendant
referred to the discussions which had been held with the Plaintiff and
stated that he shall honour the provisions of the Garden Leave Clause
“after contesting its propriety”. When the application for ad-interim
st
relief came up on 1 November 2007 (and was adjourned with a view
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to enable parties to exchange their pleadings), the Court recorded the
statement of the Defendant that he would be willing to observe the
negative covenant till the next date of hearing. Consequently, in the
th
statement made in the Defendant's E-mail dated 15 November 2007,
a reference was made to the statement made before this Court which
clearly was until the next date of hearing. Similarly, there is no merit
in the submission that the Defendant has breached his statement
because during the course of the hearing, the Defendant has stated
through his Counsel that even as of date, no final agreement has
been entered into by the Defendant with the third party employer.
The Defendant has stated that one of the career opportunities that
has come to him is from a Company by the name of Computer
Science Corporation (CSC) which is a leading Global Information
Technology Services Company. The Defendant has stated that
though he has taken a decision to accept the offer of CSC, he has
neither entered into any contract with the employer as of date nor has
he joined the services of that employer.
13. The next aspect of the claim for relief that has been urged
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19
on behalf of the Plaintiff is in regard to the agreement for
th
confidentiality. The M.O.U . dated 10 December 2003 recognizes
that the Defendant shall not make use of disseminate or disclose
confidential information of the Plaintiff during the period of
employment to any person, firm or business except for negotiation or
consultation with personnel or representatives of the Company. A
clause prohibiting an employee from disclosing commercial or trade
secrets is not in restraint of trade. The effect of such a clause is not
to restrain the employee from exercising a lawful profession, trade or
business within the meaning of Section 27 of the Contract Act. The
submission of Counsel for the Defendant however, is that the relief
which has been sought in prayer clause (b) of the Notice of Motion is
extremely vague and cannot be regarded as something which would
confine itself to the non disclosure of confidential information alone.
The plaint does not contain any specific description of the nature of
the confidential information in respect of which an injunction against
disclosure is sought. In paragraph 20 of the affidavit in rejoinder the
Plaintiff has itemised the trade secrets or confidential information
that are available with the Defendant consequent upon his
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engagement by the Plaintiff. The case of the Plaintiff is that the work
of outsourcing Visa applications was obtained interalia from the U.K.
In connection with this work, the Defendant was engaged in the VFS
Division. The contention of the Defendant on the other hand is that
the trade secrets that are sought to be itemised in paragraph 20 to the
reply are no secrets at all and that the entire information falls in the
public domain or, as the case may be, of industry practice. Be that is
it may, it has been stated on behalf of the Defendant that the
Defendant shall not part with any confidential information received in
respect of the items listed out in paragraph 20 of the affidavit in
rejoinder of the Plaintiff subject to such information not being in the
public domain. This is accepted on behalf of the Plaintiff by learned
Counsel. The assurance given on the part of the Defendant is duly
accepted in the aforesaid terms.
14. In the circumstances, the relief as sought in terms of prayer
clause (a) of the Notice of Motion cannot be for the reasons already
recorded be granted. The relief in terms of prayer clause (b) has
already been dealt with in terms of the statement of the Defendant as
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recorded herein above which has been accepted. In so far as prayer
clauses (c ), (d) and (e) are concerned, the prayer therein which
seeks an injunction from soliciting customers and employees and
from interacting with UK Visas or from using any contact made by the
Defendant with embassies and consulates cannot be granted. The
relief as claimed is vague and shall accordingly stand refused. The
Defendant has agreed to complete all formalities for handover of
duties.
15. The Notice of Motion shall accordingly stand disposed of.
------
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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORIDINARY ORIGINAL CIVIL JURISDICTION
NOTICE OF MOTION NO. 4388 OF 2007
IN
SUIT NO. 3171 OF 2007
VFS Global Services Private Limited. ... Plaintiff.
V/s.
Mr. Suprit Roy. ... Defendant.
.....
Mr. C.U. Singh, Senior Counsel with Mr. Ashish Kamath i/b. M/s.
V. Deshpande & Co. for the Plaintiff.
Mr. Sandeep Parikh with Mr. H.N. Jain i/b. Gordhandas & Fozdar
for the Defendant.
.....
CORAM : DR. D.Y. CHANDRACHUD, J.
10TH DECEMBER 2007.
ORAL JUDGMENT :
. The Notice of Motion has been taken out by the Plaintiff in
the present case for enforcing a negative covenant contained in a
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2
contract of employment. The Defendant was employed by the
th
Plaintiff on 12 July 1999 in the grade of Senior General Manager.
nd
On 2 July 2001, he was transferred to the Visa Facilitation Services
(VFS) Division and designated as General Manager. The terms and
conditions of employment as originally envisaged continued to remain
the same save and except as modified. Under the original contract of
employment, the services of the Defendant could be brought to an
end by either side with one month's notice or salary in lieu thereof.
th
On 11 July 2003, additional terms and conditions were imposed by
the employer. Among them was a condition that the Defendant shall
not participate with any other company carrying on similar business
and shall not commence similar business during the period of
employment or for a period of two years thereafter.
2. A Memorandum of Understanding was thereafter entered
th
into between the parties on 10 December 2003. Clauses 3 and 4 of
the agreement provided for a covenant on confidentiality to the
following effect :-
“ The Employee shall undertake that he will not make use
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3
of disseminate or in any way disclose any confidential
information of the company whether during the period of
employment or after, to any person, firm or business except
to the extent of necessary negotiation, discussion and
consultation with personnel or authorized representatives of
the Company and for any purpose that the Company may
hereinafter authorize in writing.
The Employee shall treat all confidential information of
the company with the same degree and care as it accords
to its own confidential information and also represent that he
will exercise reasonable care to protect the confidential
information provided by the company.”
Under clause 6 it was provided that in the event that the Defendant
left service or was terminated from service, he shall not enter into
service with any other employer who has a conflict of interest with the
business of the Plaintiff for a period of one year without the
th
permission of the Management. On 26 July 2006 the Plaintiff, upon
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4
a review of the conditions governing employment introduced a
condition styled as a Garden Leave Clause to the following effect :-
“ The Company reserves the right to require you to remain
away from work/employment for a period of 3 (three)
months after termination or resignation of your services
with the company. You shall agree to comply with all
conditions that may be laid down by the Company at the
time of such resignation or termination. The Garden Leave
period shall commence after you have served the notice
period and have ceased to be on the rolls on the Company.
You shall be bound and undertake that you will not directly
or indirectly, whether through partnership or as a
shareholder, joint venture partner, collaborator, employee,
consultant or agent or in any other manner whatsoever,
whether for profit or otherwise carry on any business, which
competes directly or indirectly with the whole or any part of the
business of visa processing services or having/conducting
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5
business similar to the business conducted by the company
for a period of 3(three) months after serving the notice
period and ceasing to be an employee of the Company.
You shall also be bound to comply with the conditions of
Non Compete and Non Solicitation as set out in the terms
and conditions. The Company shall pay you compensation
which shall be equal to 3 (three) month's remuneration last
drawn by you at the time of your termination or resignation.
Please note that the company shall apply this clause at its
sole discretion and you shall not claim it as a right.”
th
3. On 8 October 2007, the Defendant tendered his
resignation from service and stated that while under the letter of
appointment he was required to give a notice of 30 days, the
activities with which he was currently involved with the Plaintiff would
be completed, so as to enable him to depart by the last week of
November.
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6
st
4. The suit has been instituted on 31 October 2007 seeking
damages in the amount of Rs.5 crores and for enforcing the negative
covenant contained in the contract of employment. In prayer (a) of
the Motion for interim relief, the Plaintiff has sought enforcement of
the Garden Leave Clause with a view to prevent the Defendant from
joining any other Company or Organization in the “Visa processing
business” or travel related services or conducting business similar to
that of the company contrary to the accepted terms of contract for a
period of three months from the resignation. Prayer clause (b) of the
Notice of Motion is for an injunction against from the disclosure of
confidential information. Prayer clause (c) is for an injunction against
the Defendant soliciting customers or employees. On the request of
the learned Counsel and with their consent, this Motion has been
taken up for final hearing and disposal.
5. The principal issue which arises before the Court relates to
the enforceability of the Garden Leave Clause. Now, a perusal of the
clause as it stands would make it prima-facie evident that the clause
is intended to operate after the cessation of employment of the
Defendant either upon termination or resignation from service. In fact,
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the Garden Leave period is to commence after the employee has
“served the notice period and have ceased to be on the rolls of the
Company”. Under the clause the employee is prohibited, from
carrying on any business which competes directly or indirectly with
the whole or any part of the Visa processing services or a business
similar to the business of the employer for a period of three months
after serving the notice period and ceasing to be an employee of the
company.
6. The fact that the Garden Leave Clause operates after the
employee has ceased to be in service is not disputed on behalf of the
Plaintiff by the learned Counsel. The submission before the Court
however is that a clause of this nature is valid and is enforceable. In
order to support this submission, reliance has been placed on the
circumstance that under the clause the employer has agreed to pay
compensation equal to three months' remuneration last drawn by the
employee at the time of termination or resignation. On the other
hand, it has been submitted by Counsel appearing on behalf of the
Defendant that such a clause which operates after the term of
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8
employment has come to an end would be in restraint of trade and
therefore invalid under Section 27 of the Contract Act. Reliance has
been placed on the Judgments of the Supreme Court in
Superintendence Company of India (P) Ltd.V/s. Krishan Murgai
(AIR 1980 S.C. 1717), M/s. Gujarat Bottling Co. Ltd. V/s. Coca
Cola Company (AIR 1995 S.C. 2372), and Percept D'Mark (India)
Pvt.Ltd. V/s. Zaheer Khan (AIR 2006 S.C.3426 ). The learned
Counsel also adverted to the Judgment of the Division Bench of this
Court in Zaheer Khan V/s. Percept D'Mark (India) Pvt. Ltd. (AIR
2004 Bombay 362) and the Judgment of a learned Single Judge in
Taprogge Gesellschaft MBH V/s. IAEC India Ltd.
(AIR 1988 Bombay
157).
7. Section 27 of the Indian Contract Act, 1872 provides that
every agreement by which anyone is restrained from exercising a
lawful profession, trade or business of any kind is to that extent void.
An exception is carved out in Section 27 by which a person 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 carries on a like business, provided that such limits appear
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9
to the Court reasonably having regard to the nature of the business.
The only exception which is provided to the doctrine that an
agreement in restraint of the exercise of a lawful profession, trade or
business is void is where the goodwill of a business is being sold.
8. Since the Judgment of the Supreme Court in Niranjan
Shankar Golikari V/s. Century Spinning & Mfg. Co. Ltd. (1967) 2
SCR 378 (AIR 1967 SC 1098 para 15), a distinction has been drawn
in Indian law between a restrictive condition in a contract of
employment which is operative during the period of employment and
one which is to operate after the termination of the employment. A
restriction during the term of employment is regarded as valid and not
in restraint of trade. A condition which operates after the term of
employment ceases is in restraint of trade. This distinction was
adverted into in the Judgment of Mr. Justice A.P. Sen in
Superintendence Co. of India V/s. Krishan Murgai
(AIR 1980
S.C.1717 ) Mr. Justice V.D. Tulzapurkar who delivered the Judgment
for His Lordship and Mr. Justice N.L. Untwalia held that it was not
necessary for the decision of the case to decide whether such a
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10
negative covenant was in restraint of trade. Mr. Justice A.P. Sen held
thus :-
“ There is nothing in the wording of Section 27 to suggest
that the principle stated therein does not apply when the
restraint is for a limited period only or is confined to a
particular area. Such matters of partial restriction have
effect only when the facts fall within the exception to the
section.
A contract, which has for its object a restraint of trade is
prima facie, void. Section 27 of the Contract Act is general
in terms and unless a particular contract can be distinctly
brought within Exception 1 there is no escape from the
prohibition. We have 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.”
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11
9. In Gujarat Bottling Company Limited V/s. Coca Cola
Company
(AIR 1995 S.C.2372 ), the Supreme Court adverted to
Section 42 of the Specific Relief Act, 1963, under which, it has been
provided that notwithstanding anything contained in clause (e) of
Section 41, where a contract comprises an agreement to do a certain
act, coupled with a negative agreement, expressed or implied, not to
do a certain act, the circumstance that the Court is unable to compel
specific performance of the affirmative agreement shall not preclude it
from granting an injunction to perform the negative agreement. The
Supreme Court held that the Court is however, not bound to grant an
injunction in every case and an injunction to enforce a negative
covenant would be refused if it would indirectly compel the employee
either to idleness or to serve the employer (para 45 at page 2388). In
Percept D'Mark (India) Pvt. Ltd. V/s. Zaheer Khan
( AIR 2006
S.C.3426 ) the Supreme Court upheld the Judgment of a Division
Bench of this Court which had taken the view that the right of first
refusal conferred by an agreement for the promotion of the services of
a sportsman operated beyond the term of the agreement and was
therefore an unlawful restraint of trade. The Supreme Court held thus
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12
:-
“On the pleadings contained in the Arbitration Petition, there
can be no escape from the conclusion that what the appellant sought
to enforce was a negative covenant which, according to the appellant,
survived the expiry of the agreement. This, the High Court has rightly
held is impermissible as such a clause which is sought to be enforced
after the term of the contract is prima facie void under Section 27 of
the Contract Act.”
The legal position was summarised as follows :-
“ The legal position with regard to post-contractual
covenants or restrictions has been consistent, unchanging
and completely settled in our country. The legal position
clearly crystallised in our country is that while construing
the provisions of Section 27 of the Contract Act, neither the
test of reasonableness nor the principle of restrain being
partial is applicable, unless it falls within express exception
engrafted in Section 27.”
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13
The judgment of the Supreme Court in Zaheer Khan arose out of a
petition under Section 9 of the Arbitration and conciliation Act, 1996.
Parties were therefore permitted to espouse their rights and
contentions before the Arbitral Tribunal. The judgment of the
Supreme Court follows a line of precedent of the Court. The
same view, it may be noted has been taken in the judgment of a
learned Single Judge of this Court in Taprogge Gesellschaft MBH
V/s. IAEC India Ltd. (AIR 1988 Bombay 157).
10. In the present case, the Garden Leave Clause is intended
to operate after the contract of employment stands terminated, either
as a result of resignation or upon the employee ceasing to remain in
service upon termination. The submission of Counsel appearing on
behalf of the Plaintiff that the payment of three months compensation
by the employer would amount to an extension of the contract is
contrary to the plain terms of the clause. The clause defines the
period of three months to commence after the employee has served
the period of notice and upon his having ceased to be on the rolls of
the Company. The measure of compensation is three months of last
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14
drawn wages. The payment of this compensation however, does not
renew the contract of employment which has come to an end. 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. As the
Judgment of Mr. Justice A.P. Sen in Krishan Murgai's case (Supra)
holds there is nothing in Section 27 to suggest that the principle in
Section 27 will not apply when the restraint is for a limited period. As
held by the Supreme Court in Gujarat Bottling Co. Ltd. (Supra) a
negative covenant of this nature cannot be enforced if it would
indirectly compel the employee either to remain idle or to serve the
employer. Finally, as held by the Supreme Court in Zaheer Khan's
case (Supra), neither the test of reasonableness nor the principle of
the restraint being partial would be applicable unless it falls in the
exception carved out in Section 27. The exception which relates to
the sale of the goodwill of a business is not applicable.
Reliance has been placed on an order passed by a learned
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15
th th
Single Judge of this Court on 8 and 11 June 2007 in Suit (Lodging)
No. 1605 of 2007. The learned Single Judge granted ad-interim relief
based on the Garden Leave Clause pending the hearing and final
disposal of a Notice of Motion. The facts on the basis of which the
injunctive relief in that case was granted are referred to in paragraph
5 of the Judgment which reads thus :-
th
“ It cannot be disputed that the period till 30 June is a
crucial period for tour and travel business. If the Defendant were to
join some other competing organization, he would be able to divert
the prospective and even regular client(s) of the plaintiff with whom
negotiations were inconclusive. Indeed, all this is a matter of guess
work. But to obviate any such loss being caused to the Plaintiff, the
Plaintiff is entitled to invoke the restrictions provided by the garden
leave clause for the specified period on payment. Thus understood, I
find no substance in the objection taken on behalf of the Defendant
for continuing the ad-interim relief which was granted on 6.6.2007,
which was obviously ex-parte in nature, though the Defendant was
represented by the Advocate on that date of hearing.”
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16
The distinguishing features of that case relating to the period –
namely the month of June which was crucial for travel business – are
absent here. In any event, in the present case the Motion has now
been taken up for final disposal by consent of Counsel and it has
been held that a clause of the nature involved in the case is in
restraint of trade and hit by Section 27 of the Contract Act.
11. Apart from the aforesaid reasons, there is an additional
factor which must weigh against the grant of an injunction to enforce
the negative covenant in this case. Even according to the Plaintiff,
the negative covenant is to remain in operation during the Garden
Leave Period, and in fact that was the submission of learned Counsel
before the Court. In paragraph 40 of the affidavit in reply, the
Defendant has stated that he was reliably informed that the Chief
Executive Officer (CEO) and the Chief Operating Officer (COO) of the
Plaintiff had requested U.K. Visas to write to CSC (the prospective
employer of the Defendant) calling upon CSC not to employ the
Defendant. This statement in paragraph 40 of the reply has not been
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17
denied in paragraph 23 of the Rejoinder. It is a well settled principle
of law that the grant of an interlocutory injunction is equitable in
nature and that the conduct of the party seeking interlocutory relief
(Gujarat Bottling Co.)
should be fair and honest (Supra) para 50 at
page 2389. In the present case, the conduct of the Plaintiff cannot be
regarded as meeting that description. To obstruct on employee who
has left service from obtaining gainful employment elsewhere is not
fair or proper.
12. On behalf of the Plaintiff it has been urged that by his E-
st th
mails dated 31 October 2007 and 15 November 2007, the
Defendant had accepted that he would be bound by the Garden
Leave Clause and consequently, the Defendant cannot be heard to
assert that the clause is not enforceable. There is no merit in the
st
submission. In his E-mail dated 31 October 2007, the Defendant
referred to the discussions which had been held with the Plaintiff and
stated that he shall honour the provisions of the Garden Leave Clause
“after contesting its propriety”. When the application for ad-interim
st
relief came up on 1 November 2007 (and was adjourned with a view
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18
to enable parties to exchange their pleadings), the Court recorded the
statement of the Defendant that he would be willing to observe the
negative covenant till the next date of hearing. Consequently, in the
th
statement made in the Defendant's E-mail dated 15 November 2007,
a reference was made to the statement made before this Court which
clearly was until the next date of hearing. Similarly, there is no merit
in the submission that the Defendant has breached his statement
because during the course of the hearing, the Defendant has stated
through his Counsel that even as of date, no final agreement has
been entered into by the Defendant with the third party employer.
The Defendant has stated that one of the career opportunities that
has come to him is from a Company by the name of Computer
Science Corporation (CSC) which is a leading Global Information
Technology Services Company. The Defendant has stated that
though he has taken a decision to accept the offer of CSC, he has
neither entered into any contract with the employer as of date nor has
he joined the services of that employer.
13. The next aspect of the claim for relief that has been urged
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19
on behalf of the Plaintiff is in regard to the agreement for
th
confidentiality. The M.O.U . dated 10 December 2003 recognizes
that the Defendant shall not make use of disseminate or disclose
confidential information of the Plaintiff during the period of
employment to any person, firm or business except for negotiation or
consultation with personnel or representatives of the Company. A
clause prohibiting an employee from disclosing commercial or trade
secrets is not in restraint of trade. The effect of such a clause is not
to restrain the employee from exercising a lawful profession, trade or
business within the meaning of Section 27 of the Contract Act. The
submission of Counsel for the Defendant however, is that the relief
which has been sought in prayer clause (b) of the Notice of Motion is
extremely vague and cannot be regarded as something which would
confine itself to the non disclosure of confidential information alone.
The plaint does not contain any specific description of the nature of
the confidential information in respect of which an injunction against
disclosure is sought. In paragraph 20 of the affidavit in rejoinder the
Plaintiff has itemised the trade secrets or confidential information
that are available with the Defendant consequent upon his
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20
engagement by the Plaintiff. The case of the Plaintiff is that the work
of outsourcing Visa applications was obtained interalia from the U.K.
In connection with this work, the Defendant was engaged in the VFS
Division. The contention of the Defendant on the other hand is that
the trade secrets that are sought to be itemised in paragraph 20 to the
reply are no secrets at all and that the entire information falls in the
public domain or, as the case may be, of industry practice. Be that is
it may, it has been stated on behalf of the Defendant that the
Defendant shall not part with any confidential information received in
respect of the items listed out in paragraph 20 of the affidavit in
rejoinder of the Plaintiff subject to such information not being in the
public domain. This is accepted on behalf of the Plaintiff by learned
Counsel. The assurance given on the part of the Defendant is duly
accepted in the aforesaid terms.
14. In the circumstances, the relief as sought in terms of prayer
clause (a) of the Notice of Motion cannot be for the reasons already
recorded be granted. The relief in terms of prayer clause (b) has
already been dealt with in terms of the statement of the Defendant as
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21
recorded herein above which has been accepted. In so far as prayer
clauses (c ), (d) and (e) are concerned, the prayer therein which
seeks an injunction from soliciting customers and employees and
from interacting with UK Visas or from using any contact made by the
Defendant with embassies and consulates cannot be granted. The
relief as claimed is vague and shall accordingly stand refused. The
Defendant has agreed to complete all formalities for handover of
duties.
15. The Notice of Motion shall accordingly stand disposed of.
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