Analysis Of Section 27 Of Indian Contract Act 1872
All companies and organizations zealously guard their trade secrets and other
information which is of confidential nature. Employers and companies are always
entitled to protect their economic interests while employees also have the right
to advance their livelihood and increase their income.
Article 19(1)(g) of the Constitution of India guarantees that all citizens have
the right to freely practise their profession and trade, subject to reasonable
restrictions. This article will endeavour to elucidate as to how this right is
to be balanced with non-compete agreements, non-solicitation clauses and garden
leave clauses. Let us examine the same through the lens of Case-Law.
Niranjan Shanker Golikari v/s The Century Spinning And Manufacturing Company (Air 1967 Sc 1098):
In this case Mr. Golikari was employed as a shift supervisor with the Defendant
Company. The said Defendant Company had entered a contract with the Plaintiff
that if he left the service of the Company, he would not be allowed to disclose
the trade-secrets and confidential know-how of the Defendant Company.
Plaintiff sought to seek employment elsewhere, the Company sought to restrain
him. The Court opined that the Company cannot restrain an employee from working
anywhere, after his period of employment was over, however the Court held that
he could be restrained from disclosing the trade-secrets/know-how, that is not
barred under the Contract Act.
Superintendence Company v/s Krishna Murugai( 1980 Air 1717):
The Respondent was employed as a branch manager with the Plaintiff company. As
per the terms and conditions of his employment contract he was "he was not
allowed to be in the employment of any rival organization and that he will not
do any similar business for a period of 5 years after leaving the organization".
After leaving the organization he opened his own business of similar nature,
against which an injunction was sought. The Hon'ble Delhi High Court refused on
the ground that restraining him from doing his own business would operate as a
bar under Section 27 of Indian Contract Act, 1872.
Percept D' Mark v/s Zaheer Khan ( Appeal (Civil) 5573-5574 Of 2004):
Defendant has entered into a contract with the complainant company for the
management of its public relations on the grounds that the complainant would
have the right of first resort' in respect of any bid obtained by the defendant
for media affairs management services before and after the end of the first
negotiating period; so that the defendant does not consider any offer from third
parties to be witty.
However, following the termination of that contract, the defendant entered an
arrangement with a third party and the Plaintiff demanded a permanent
injunction. The Court said the agency contract is of a personal nature, as one
entered here between the parties, such that imposing the negative covenant would
imply forcing the defendant to deal with the claimant company's affairs even
after the initial agreement has not been broken and has been legally terminated;
this will restrict his right to trade with any entity in any way he wishes.
S.27 will be violative and therefore void and unenforceable if it is sought to
enforce the agreement while it is valid for the subsistence of the agreement,
but when it is sought to be enforced after the agreement has been terminated.
If we make a perusal of the above explained case-Laws Courts are reluctant to
enforce post-employment restrictive covenants as being violative of Section 28
of the Indian Contract Act, 1872. However, there are some instances where the
Courts will enforce restrictive covenants, let us now examine them in detail.
Kuoni India Travel Pvt Ltd v/s Ashish Kishore:
Plaintiff company sought to enforce a clause which prohibited the Defendant from
working in tourism and allied industries for a period till 30th June, and paid a
monthly fee for the same. They filed an application to restrain the Defendant
from the same. The Court rejected the objections of the Defendant that the
restrictive covenant is violative of Section 28 of Indian Contract Act 1872 on
the ground that "it was a reasonable apprehension that he would poach the
Plaintiff companies' clients and that the restriction was for a very short
Dr.Sudipta Banerjee v/s Ls.Davar And Company (Fmat 735 Of 2021):
The Appellants in the present instance were working with the Respondent Company
as scientists, and in that position had access to highly confidential
trade-secrets and technical know-how of the aforesaid Respondent Company. The
Appellant left the company and joined another rival company, and it was
apprehended by the Respondent Company that their trade-secrets and know-how
would be compromised.
They approached the Trial Court for an injunction to restrain the Appellants
from compromising with their know-how, the Trial Court granted an injunction for
the same. The Appellants went to the Calcutta High Court contending that such a
restriction was in contravention of Section 27 of the Indian Contract Act, 1872.
The Hon'ble High Court disagreed with the Appellants and held that the company
had a legitimate interest in protecting its know-how and other confidential
information, and accordingly declined to interfere with the injunction order.
Diljeet Titus vs Mr. Alfred A. Adebare and Ors( 130 (2006) DLT 330):The Respondents were working in the Plaintiff's Law firm. After resigning from
the same, one of them went to the firm after office hours and took away the
sample drafts, client list etc. The Plaintiff filed a Suit to restrain them from
sharing the same. The Hon'ble Delhi High Court said that the Defendant's were
not entitled to access confidential information of this nature, and accordingly
granted them injunction to prevent them from doing so.
We can thus see that the Indian Courts have maintained that if the employer is
seeking to restrain employee from working in the same industry after the said
employee has left the present job and is imposing other restrictions of similar
nature, the Indian Courts will not hesitate to bar the said restrictive
practises. However, if there is dissemination of confidential information and
other know-how the Courts can grant an injunction to restrain the same.
Law Article in India
You May Like
Legal Question & Answers