The Hindu Business Line : Freedom of contract must yield to freedom of occupation

Any employee has a vital right to change employment for self-growth, which can neither be restricted nor curtailed by anyone, even the employer. — MR H. L. KUMAR, SUPREME COURT ADVOCATE AND CHIEF EDITOR, LABOUR LAW REPORTER

The recent Infosys move to curb employee exits by forcing them to sign non-compete agreements has no legal validity, according to Mr H. L. Kumar, Supreme Court Advocate and Chief Editor, Labour Law Reporter.

In an e-mail interview to Business Line on the legal implications of the company's move, Mr Kumar said: "Such contracts are unenforceable, void and against the public policy. In fact, what is prohibited by law cannot be permitted by courts."

He added: "Any employee has a vital right to change employment for self-growth, which can neither be restricted nor curtailed by anyone, even the employer."

No Restraint Possible

According to him, the Delhi High Court has reiterated that the negative covenant clause in the service and employment contracts cannot be used against an employee. "No restraint can be imposed on any employee after he has left the job or has been terminated, as it goes against the very grain of Section 27 of the Indian Contract Act, 1872."

(The Infosys non-compete clause reportedly states that even after the employee quits the company, he/she cannot work for any of its top competitors — TCS, Accenture, IBM, CTS and Wipro. The clause also disallows employees from taking up jobs with Infosys customers up to six months after quitting.)

The legal expert said that many employers stipulate in the appointment letters or employment agreements that after leaving the job, the employee will not join a competitor or carry on similar business. "No employee can be forced to remain fastened with the loyalty to the employer if it is not properly enumerated in consonance with the existing Acts," he pointed out.

"If an employee gets a chance of better employment, he/she cannot be prevented from leaving the job on the pretext that it would amount to huge benefit to a rival organisation at the cost of the company where the employee got training and access to confidential information."

Mr Kumar agrees that the employer may have bona fide intention to protect goodwill much more than the confidential information and trade secrets. "Admittedly, both employee and employer enjoy certain rights, but they can never be used against the detriment of any one."

Exhaustive Law

According to him, the Indian Contract Act is quite exhaustive "even if it may not be a complete code dealing with all eventualities pertaining to contracts. Under Section 27 of the Act, a service covenant extended beyond the termination of the service is void." The Section reads: "Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void."

Mr Kumar said that not a single Indian decision has been brought to the notice of the court where an injunction has been granted against an employee after the termination of employment. In the garb of confidentiality, an employer cannot be allowed to perpetuate forced employment, as it is hit by Section 27.

"The laws and judicial interpretations of other countries will hardly have any effect on Indian courts if the statutory laws of this country are unambiguous."

Mr Kumar said that Section 27 is general in terms and unless a particular contract can be distinctly brought within Exception 1, there is no escape from the prohibition. (Exception 1 states that 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, as 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 reasonable to the court, with regard to the nature of the business.)

No time, area issues

"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."

He cited the case of Superintendence Company of India vs Krishan Murgai, wherein the Supreme Court held that a contract, which had for its object a restraint of trade, was prima facie void. The company, with head office at Kolkata and a branch in New Delhi, carried on business as valuers and surveyors. It had established a reputation and goodwill in its business by developing its own techniques for quality testing and control and possessed trade secrets in the form of these techniques and clientele.

Mr Murgai was manager of the New Delhi office. Clause (10) of the terms and conditions of employment placed him under a post-service restraint that he would neither serve any other competitive firm nor carry on business on his own in similar line for two years at the place of his last posting; and the restriction would come into operation after he left the company.

When he was terminated from service, the employee started a business on similar lines. When the matter came for appeal, the Supreme Court held that under Section 27, a service covenant extended beyond the termination of the service was void.

According to Mr Kumar, in view of a greater number of MNCs setting up shop in India, the provision may need a relook. "But so long as it is not done, the big companies will have to endure with it, regardless of the stiff competition they might have to face."

The expert also cited various instances where the court has upheld the employee's right to work after termination. In a case that involved Pepsi and Coca-Cola, the Delhi High Court held that though the service and employment contracts of the plaintiffs contained a negative covenant clause restraining an employee from engaging or undertaking employment for 12 months after leaving service, it was well settled that such post-termination restraint is in violation of Section 27.

"Such contracts are unenforceable, void and against the public policy as what is prohibited by law cannot be permitted by the Court's injunction."

Consolidated Ruling

In the case of Lalbhai Dalpatbhai and Company vs Chitranjan Chandulal Pandya, a Division Bench of the Gujarat High Court consolidated all the fundamental principles concerning the negative stipulation in the contract of service during and after the service period.

Mr Kumar said: "The Bench dealt with the problem with utmost clarity and great vision. In fact, this should be a guiding judgment on the point. While considering the freedom of contract and the freedom of occupation, they laid down the fundamental principle that the freedom of contract must yield to the freedom of occupation in public interest."

The Bench said that it must be seen whether the enforcement of the negative stipulation is "reasonably necessary for the protection of the legitimate interests of the employer.

If it is not going to benefit the employer in any legitimate manner, the court would not injunct the employee from exercising his skill, training and knowledge merely because the employee has agreed to it."

In the case of Star India vs Laxmiraj Seetharam Nayak, the Bombay High Court held that an employer has right to terminate the contract of employment on the ground of misconduct; hence, it cannot be said that the employee had absolutely no right to resign from the employment on account of better prospects or other personal reasons.

It was observed by the court that merely because for some time the employer might face some inconvenience, the employee concerned cannot be forced to come back for the pleasure of the employer or to satisfy the ego of the higher-ups of the contemplated competition in the market.

In the case of Sandhva Organic Chemicals vs United Phosphorous, the Gujarat High Court held that a service covenant extended beyond the termination of the service is void. It was held that an employee could not be restrained for all times to come to use his knowledge and experience which he gained during the course of employment either with the employer or with any other employer. It was also held that the principles laid down by the English Courts on common law and equity will not be applicable in view of Section 27 of the Indian Contract Act.

In the case of R. Babu vs TTK LIG, formerly London Rubber Company, the Division Bench of the Madras High Court set aside the order of a single judge restraining an employee from taking up employment as Manager (Production) as a result of an agreement entered into between the employer and the employee.

The agreement stipulated that the employee shall not furnish any data and information relating to the formulation for manufacture of condoms and other items and that he would also not seek any employment in any establishment elsewhere of similar nature for a period of five years after he ceased to be an employee of the employer.

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