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High Court of Judicature at Madras
THE HONOURABLE MR. JUSTICE SRINIVASAN & THE HONOURABLE MR. JUSTICE S.S. SUBRAMANI
G.R.V. Rajan
Versus
Tube Investments of India Ltd. rep. by its Company Secretary, Madras
O.S.A. Nos. 313 to 316 of 1994
Decided On :Decided on : 02-02-1995
The court held that a post-service restrictive covenant in restraint of trade as contained in clause (10) of the service agreement between the parties is void under Section 27 of the Indian Contract Act. The court further held that the said restrictive covenant, assuming it to be valid, is not on its terms enforceable at the instance of the appellant company against the respondent.
Fact of the Case:
The respondent was employed by the appellant company as Shift Supervisor in Tyre cord division. The respondent executed the contract of service in the standard form for a term of five years. Clause 17 of the agreement provided that in the event of his leaving, abandoning or resigning the service in breach of the terms of the agreement of service before the expiry of five years, he shall not directly or indirectly engage in or carry on of his own accord or in partnership with others the business then being carried on by the company and he shall not serve in any capacity, whatsoever or be associated with any person, firm or company carrying on such business for the remainder of the said period and in addition pay to the company as liquidated damages an amount equal to the salaries the employee would have received during the period of six months thereafter and shall further reimburse to the company any amount that the company may have spent on his training. The respondent remained absent from 6th to 9th October, 1964 without obtaining leave therefor. On the 10th October, he took casual leave and on October 12, he applied for 28 days privilege leave from October 14, 1964. Before that was granted, he absented himself from October 14th to 31st. On October 31, he was offered salary for nine days that he had worked during that month. On November 7, he informed the respondent-company that he had resigned from October 31, 1964. The respondent company by its letter of November 23, 1964 asked him to resume work stating that his resignation had not been accepted. On November 28, 1964, he replied that he had already obtained another employment. Thereupon, the company filed a suit claiming inter alia an injunction restraining him from serving in any capacity whatsoever or being associated with any person, firm or company including the concern which he had joined. The company also claimed damages as per Clause 17 of the agreement and a perpetual, injunction restraining him from divulging any or all information, instruments, documents, reports, trade secrets, manufacturing process, know-how etc. which may have come to his knowledge.
Finding of the Court:
The court held that a post-service restrictive covenant in restraint of trade as contained in clause (10) of the service agreement between the parties is void under Section 27 of the Indian Contract Act. The court further held that the said restrictive covenant, assuming it to be valid, is not on its terms enforceable at the instance of the appellant company against the respondent.
Issues: Whether a post-service restrictive covenant in restraint of trade is void under Section 27 of the Indian Contract Act.
Ratio Decidendi: The court held that a post-service restrictive covenant in restraint of trade as contained in clause (10) of the service agreement between the parties is void under Section 27 of the Indian Contract Act. The court further held that the said restrictive covenant, assuming it to be valid, is not on its terms enforceable at the instance of the appellant company against the respondent. The court relied on the following principles: * Section 27 of the Indian Contract Act 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. * The only exception to the rule is 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, 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. * A post-service restrictive covenant in restraint of trade is void under Section 27 of the Indian Contract Act, unless it falls within the exception.
Final Decision: The appeals are allowed. The judgment of the learned single Judge is hereby set aside. The orders of injunction passed in O.A. Nos. 882 to 885 of 1994 are vacated. Those applications are dismissed. The appellant will have his costs from the respondent - one set. Counsels fee Rs. 5,000/-
SRINIVASAN, J.
1. These four appeals arise out of orders passed on interlocutory applications pending the suit C.S. No. 1280 of 1994 filed by the respondent on the Original Side of this Court. It will be convenient to refer to the parties by their rank in the suit. The appellant will be referred to as the defendant and the respondent will be referred to as the plaintiff.
2. The case as set out in the plaint is as follows:— The plaintiff is a Public Limited Company of All India repute. Its sales turnover for the year ending 31-3-1994 was Rs. 417.15 crones. The exports made by the plaintiff and the foreign exchange earned were Rs. 67.13 crores in the said year. The plaintiff is having about 18,350 shareholders and 6,300 employees. It is engaged in manufacturing among other products bicycles, components and accessories of bicycles for more than 40 years through its manufactu ring unit, namely, TI Cycles of India and the present capacity is 25,00,000 cycles per annum. It is known for its efficiency and quality products. It has various manufacturing units in various places in and around Madras City, two factories at Hyderabad and one factory at Tarapur, Bombay. The plaintiff has marketing network throughout India and exports its products to several foreign countries including U.S.A., U.K., Germany, France, Holland and Sri Lanka.
3. The defendant was employed by the plaintiff on 25-11-1982 in the management cadre. As per the order of appointment dated 25-11-1982, a copy of which was duly accepted and signed by the defendant on January 2, 1983, the defendant agreed to be governed by the terms and conditions of services as may be in force from time to time. A copy off general service conditions was given to the defendant and he initialled the same. Some of the relevant general service conditions to which the defendant agreed to abid e by are briefly as follows:—
“(a) That the defendant shall not engage in any other business or occupation whatsoever or be interested directly or indirectly in any business of undertaking having interest, opposed or competitive with the interest of the plaintiff or in any business or undertaking having transactions with the plaintiff except with the plaintiffs consent in writing.
(b) That the defendant, either during or after his employment, will not divulge or utilise any confidential information belonging to the plaintiff or any of its associate Companies including confidential information as to formulae, processes and manufacturing methods and confidential information as to the business and affairs of the Company which may have come to his knowledge during his employment.
(c) Except so far as may be necessary for the purpose of his duties, the defendant shall not without the consent of the plaintiff retain or make originals or copies of any drawings, calculations, specifications, formulae or other documents of whatever nature belonging to the plaintiff which may come into the possession of the defendant by reason of his employment. If on the termination of the defendants employment, he is in possession of any originals or copies of any of the aforesaid documents, he shall deliver the same to the plaintiff.”
4. In November 1983, the defendant was promoted as Regional Sales Officer, Western Region and transferred to the Chains and Lamps Division with effect from 1-12-1983. In or about June, 1984, TI & M. Limited, which earlier employed the defendant, ceased to require the services of the defendant, who became an employee of the plaintiff. The defendant accepted the said arrangement and agreed to be retained as an employee of the plaintiff. He was promoted as Regional Sales Manager, Western Region, with effect from 1-3-1985. From 31-1-1986 the defendant was transferred to Cycle Division in the same capacity. On 12th December, 1986 he was promoted as Manager (West). In November 1987 he was posted as Manager (Production Engineering). In October, 1988 he took charge as Works Manager, responsible for
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