Evolution of law to meet the challenges of changing times could arguably be the fundamental principle of justice. When a piece of legislation is interpreted to mete out identical treatment to dissimilar fact-situations it loses touch with reality. One such provision is section 27 of the Indian Contract Act.
Section 27 states that every agreement by which anyone is retrained from exercising a lawful profession, trade or business, is to that extent void.
This section has been the basis for judicial pronouncements such as Gujarat Bottling Company v Coca Cola & others, Niranjan Shankar Golikari v The Century Spinning and Mfg. Co. Ltd, and Percept D’Mark (India) Pvt Ltd v Zaheer Khan, that have held that an employer cannot restrain an employee after termination of employment by imposing a non-compete obligation (though Nirajan Golikari does uphold the right of an employer to protect his trade secrets).
Employees are not the property of the employer. They have the right to earn and apply their skills and should not be restrained from doing so.
However, blanket application of this principle to all cases makes it very rigid. Unlike other jurisdictions like the UK, China, UAE and parts of US, Indian courts have failed to recognize that reasonable restraints may be imposed after termination of employment. They have consistently held that any kind of restraint after termination of employment would tantamount to undue restraint and are therefore contrary to public interest.
A direct outcome of this is that an employer who invests time, effort and money in providing specialized and high-end training to his employees, is helpless when the employees join his competitor on completion of the training; or an employer who discloses valuable trade secrets to his trusted employee languishes in court trying to prove that the employee has joined his competitor and unduly disclosed his trade secrets.
It appears that the Indian Contract Act does not protect the right to livelihood of the employer – as an employer cannot reasonably restrain a key employee after the period of employment, cannot enforce a fully-paid garden-leave clause, may not be able to successfully sue the new employer for tortious inducement of breach of contract, and lastly may not be able to protect his valuable trade secrets as it is not easy to prove undue disclosure and use of such intangible property.
Therefore, employers in India are a guarded set of people with high levels of distrust when it comes to investing in their employees or providing them access to confidential information and trade secrets. They also collude with each other and enter into non-poaching agreements to the disadvantage of the employees.
All this can change if the courts in India recognize that in certain circumstances, it may be reasonable to restrain an employee from joining a competitor in order to save the employer from injury or loss and protect the legitimate interests of his business.
Section 27 of the Indian Contract Act has been historically interpreted on the presumption that all employees are alike; they are all likely to be under duress at the time of entering into an arrangement with an employer and will not have the ability to injure the company when furthering their livelihood. This is not true. The law should make a distinction for those employees who are more than adequately compensated solely for the higher degrees of trust that an organization reposes in them. In other words, it should be recognized that in certain situations a reasonable restraint which is backed by adequate consideration may be justified and enforceable. This will align the law to changing times.
Courts in India have already interpreted section 27 to mean that a restraint during the period of employment is a reasonable restraint and is not void (Niranjan Golikari and Gujarat Bottling). It is only logical to extend this principle to permit enforcement of a reasonable restraint after termination of employment, especially with regard to key employees.
Until such time that the judiciary does a reality check as far as interpretation of section 27 is concerned, the only option available to employers is to enter into fixed term contracts with their key employees and include negative covenants prohibiting them from joining a competitor during the term of the contract. It has been held in Golikari’s case and in the case of BLB Institute of Financial Markets Ltd v Ramakar Jha, that though it may not be possible to restrict an employee from leaving an organization, it is possible to restrict him from joining a competitor provided the restraint is during the employment under a fixed term contract and the objective of the restraint is to safeguard the trade secrets and know-how of the company.
Akila Agrawal is a partner at Amarchand & Mangaldas & Suresh A Shroff Co. The views expressed are those of the author and do not reflect the official policy or position of Amarchand Mangaldas.
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