Problems based on Contract and the solution -1

Indian Contract Act, 1872

TANMOY MUKHERJEE INSTITUTE OF JURIDICAL SCIENCE

Dr. Tanmoy Mukherjee

Advocate

 

Problems based on Contract and the solution -1

 

Tanmoy Mukherjee

Advocate

Problem-

Mr. A was employed by BCD (P) Ltd as the Branch Manager of its Kolkata office on terms and conditions contained in the letter of appointment issued to him on August 27, 2012. The term is contained in clause 10 of the agreement which read: "That you will not be permitted to join any firm of our competitors or run a business of your own in similarity as directly and/or indirectly, for a period of two years at the place of your last posting after you leave the Company". Mr. A joined BCD (P) Ltd on September 01, 2012.

BCD (P) Ltd terminated the services of Mr. A by its letter dated December 27, 2012. Can Mr. A be restrained from starting a business thereafter of his own under the name and style, of "Superintendence and Surveillance Inspectorate of India" at 9B Park Lane, Kolkata 700 027 on lines identical with and substantially similar to that of the BCD (P) Ltd? Discuss.

 

Fact-

 Mr. A was employed by BCD (P) Ltd. as Branch Manager.

His appointment letter (dated 27.08.2012) contained clause 10 which prohibited him:

-Joining any competitor, or

-Running his own similar business,

-For two years after leaving the company,

-At his last place of posting.

Mr. A joined in September 01, 2012.

The company terminated him on 27th December 2012. After termination, Mr. A started company named "Superintendence and Surveillance Inspectorate of India" at AB Park Lane, Kolkata doing similar business.

Issue-

 The issue is whether BCD (P) Ltd can legally restrain him from starting this business?

OR

whether a post-employment restraint clause preventing an employee from engaging in a competing business for two years is valid and enforceable u/s 27 of Indian Contract Act, 1872?

Legal Provision-

According to section 27 of the Indian Contract Act 1872, "Any agreement that restrains any person from exercising any lawful profession, trade or business is void, except in limited circumstances (for example: Sale of good will)".

Reference Cases-

1. Niranjan Shankar Golikari v. Century Spinning (1967) –

-Negative covenants during the course of employment are valid.

-But post-employment restrictions are generally void.

2.Superintendence Co. of India v. Krishan Murgai (1981)-

 -Post-service restraint is void u/s 27 of ICA-1872.

3.Gujarat Bottling Co. Ltd v. Coco Cola Co. (1995) –

-Distinction between "during employment" and "after employment".

Courts repeatedly held that post termination non-compete clauses are void in India for protecting trade secrets during employment.

Application-

-In this case, Clause 10 restricts Mr. A from taking up any similar job or business for two years after he leaves the employment.

-This is a post-employment restriction.

-Section 27, ICA, 1872 makes such restriction void because-

i) It restrains Mr. A's right to carry on a lawful business.

ii) It does not fall under the sale of goodwill.

iii) The employer itself terminated Mr. A so restricting him afterwards is even more unreasonable.

The business Mr. A started even if identical and similar to BCD (P) Ltd, cannot be prevented by enforcing a clause that itself is void.

Conclusion-

No, Mr. A cannot be legally restrained from starting his business after termination.

-The restrictive covenant in clause 10 is void under Sec 27 of the Indian Contract Act, 1872.

-Post employment non-compete clauses is not enforceable in India.

Therefore, BCD (P) Ltd. cannot prevent Mr. A from running 'Superintendence and Surveillance Inspectorate of India' even if it is similar to their own business.