Article (November-2018)

Articles

Ex-Employee can join the competitor & do rival business

H.L. Kumar

Designation : -   Advocate, Supreme Court

Organization : -  New Delhi

01-Nov-2018

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In the matters relating to employment, the employee and employer both enjoy certain rights but they can never be used against the detriment of any one. The employee cannot be forced to remain fastened with the loyalty to the employer if that is not properly enumerated in consonance with the existing acts. No employee can be compelled or forced to remain in employment at the cost of his/her betterment or progress. If the employee starts his own business or gets the opportunity of better employment he/she cannot be prevented from leaving the job on the pretext that it would amount to huge benefit to the rival organization at the cost of the company where the employee got the training and confidential information.
Freedom of starting his own business or changing employment for improving his/her career is vital and important right of an employee which cannot be restricted or curtailed. This important ruling had come from the Delhi High Court in an interlocutory order on 24th May, 2006 in American Express Bank Ltd. vs. Ms. Priya Puri, 2006 LLR 682 (Del. HC). The negative covenant clause in the service and employment contracts cannot be used against an employee. No restraint can be imposed on any employee that after he has left the job or he has been terminated as it goes against the very grains of section 27 of the Contract Act, 1872. Such contracts are unenforceable, void and against the public policy. In fact, what is prohibited by law cannot be permitted by courts. The American Express Bank Ltd. was seeking a restraint against one of its former employees from using or disclosing any trade secret, soliciting or inducing its customers and breaching the confidentiality as per its service terms. In brief, the conspectus of the case is that an employee, Ms. Priya Puri was the head of the Northern India Wealth Management of the Bank. Her services were terminated on the ground that during the course of employment, she disclosed confidential information and trade secrets to competitor for her own benefits and thereby violated the customer privacy policy of the bank. The contention of the bank was that being the head of wealth management, she was in the unique position having access to highly confidential information. The services of the employee were terminated on the ground of breach of trust.
Section 27 of Indian Contract Act, 1872 reads as under :
"Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.
Exception 1: 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."
In Pepsi Foods Ltd. & Ors. vs. Bharat Coca-Cola Holdings Pvt. Ltd. & Ors., 1999 LLR 1027, the Delhi High Court has held that admittedly in the service and employment contracts of the plaintiffs, there is a negative covenant clause, retraining an employee from engaging or undertaking employment for 12 months after he has left the plaintiffs' service. Notwithstanding that it is well settled that such post termination restraint, under Indian Law, is in violation of section 27 of the Indian Contract Act, 1872. Such contracts are unenforceable, void and against the public policy as such what is prohibited by law cannot be permitted by Court's injunction.
In Star India (Private) Ltd. vs. Laxmiraj Seetharam Nayak and Another (suit No. 3452 of 2002 decided on 10.1.2003) the Bombay High Court has held that an employer has a 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. If employee finds a better employment with better remuneration and other service conditions he cannot be tied down not to leave his job or to start his own venture.
In R. Babu and Another vs. TTK LIG Ltd., formerly London Rubber Company (I) Ltd. [represented by its President (Operation), Chennai], 2006 LLR 71, the Division Bench of Madras High Court has set aside the order of the learned Single Judge restraining an employee from taking up employment as Manager (Production) because by an agreement dated 1st May, 1990, as entered between the employer and the employee wherein it was stipulated that the employee shall not furnish any data and information relating to the formulation for manufacture of condoms and other items and he would also not seek any employment in any establishment elsewhere of similar nature for a period of five years after he ceases to be an employee of the employer.
In VFS Global Service Private Limited vs. Suprit Roy, 2008 LLR 771 the Bombay High Court has held that an agreement between employer and employee whereby the latter is restrained from accepting any employment with the competitor during the period of three months of cessation of employment will be in restraint of trade as defined by section 27 of the Contract Act, 1872. It was further held that in a contract of employment, an employee can be prohibited during the tenure of employment to disclose commercial or trade secrets but such a clause will not be valid when the employee ceases to be in the employment.
In Navigators Logistics Ltd. vs. Kashif Qureshi & Ors. as decided on 17.9.2018 by Delhi High Court, the plaintiff company has got very stringent legal documents which it got signed form all its employees at the time of joining. Amongst other clauses 18 & 19 of the appointment letter provided as under :
18. You will not be allowed to go to direct competition of any kind of business etc. with Navigators Logistics Pvt. Ltd. or any of its Group Companies. If found in such a situation, you will be liable for legal action in the court and law.
19. In the event of your leaving/termination of your services from the Company, this agreement binds and forbids you from setting up a company (proprietorship, private limited or otherwise) which is in direct competition with the services offered by Navigators Logistics Private Limited or any of its associate companies for a minimum period of one year.

Some employees quit the employment of the Company (hereinafter referred as plaintiff also) and started their own business. The company filed a suit against 12 defendants (employees) by praying that they should be restrained from carrying on their similar business and to pay damages of Rs. 1.50 crore for violation of the contract. The suit came up before the Court first on 3rd June, 2016 when, while issuing summons of the suit, vide ex-parte ad interim order the defendants were restrained from, in any manner, utilizing, exploiting, copying, transmitting, publishing or releasing any confidential information and trade secrets of the plaintiff to any entity for any purpose whatsoever. On application of the plaintiff, commissions were also issued to visit the premises of the defendants, to scan the computer systems and emails of the defendants and locate the documents which had originated from the plaintiff and to seize the computer systems if the same were found to contain confidential information or trade secrets of the defendants. The said order was partly modified on 10th June, 2016 on the asking of the plaintiffs.
The Learned Judge of the Delhi High Court observed that the defendant no. 12 Carex Cargo Express Pvt. Ltd. in its written statement, while denying/disputing the claim of plaintiff, pleaded that the suit is a counterblast to the complaint filed by said defendant against plaintiff, of cheating and criminal breach of trust for representing itself to be the agent of defendants no. 12 Carex Cargo Express Pvt. Ltd. and taking delivery of a shipment meant for defendants no. 12 Carex Cargo Express Pvt. Ltd. The defendant contended that the company, nowhere in the plaint, has disclosed any work in which it may have any copyright or any information which may be confidential and which may have been entrusted to any of the defendants and the Clause in the agreements, that the defendants 1 to 8, for a period of one year after leaving the employment of the plaintiff, cannot engage themselves in any competing activities, is violative of Section 27 of the Indian Contract Act, 1872. It is further stated that in any case the said period of one year is over. The parties were heard by the Court and both of them have supported their contention by judgments of Supreme Court and High Court.
While relying upon judgments of the Supreme Court in Superintendence Company of India (P) Ltd. vs. Krishan Murgai, AIR 1980 SC 1717, it has been held by Delhi High Court that a contract, which has for its object a restraint of trade, is prima facie, void. Section 27 of the Indian Contract Act, 1872 is general in terms and unless a particular contract can be distinctly brought within Exception 1, there is no escape from the prohibition. 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. The Learned Judge observed that "In fact today, trade/business directories are available of each trade/business and wherefrom names and addresses of all in a particular trade/business/industry can be known."
The facts of the above case were that the Company A having its head office at Calcutta and a branch at New Delhi carried on business as valuers and surveyors etc. etc. ‘A’ 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. On March 27, 1971, R was employed by A as the Branch Manager of its New Delhi office. Clause (10) of the terms and conditions of employment placed R under a post-service restraint that he shall neither serve any other competitive firm nor carry on business on his own in similar line as that of A for two years at the place of his last posting. The restriction contained therein would come into operation "after you (R) leave the company". On November 24, 1978 A terminated R's services with effect from December 27, 1978. Thereafter R started his own business under the new name on lines identical with or substantially similar to that of A. In A's suit for damages and permanent injunction against R, an ad interim was granted and confirmed by a single Judge. On letter patent appeal, the Division Bench reversed the order of the single Judge. On appeal to Supreme Court, the enforceability of the post-service negative covenant was at issue.  It was observed that the word "leave" was intended by the parties to refer only to a case where the employee had voluntarily left the services of A of his own and since R's services were terminated by A, the restrictive covenant contained in clause (10) would be inapplicable and, therefore, not enforceable against R at the instance of A.
With regard to clauses 18 and 19 in the Employment Contract of Navigators Logistics Ltd. as relied by the the (Company) plaintiff to the effect that defendants No.1 to 8, for a period of one year after ceasing to be the employee of the plaintiff, not to compete with the plaintiff the Court concluded that such a clause in the Employment Contract, as per the judgments aforesaid of the Supreme Court, is void under section 27 of the Contract Act, 1872. Once the clause is void, there can be no injunction or damages in lieu of injunction on the basis thereof. Hence while dismissing suit the Court held that the plaintiff is not entitled to relief of injunction order against the defendants for any damages as claimed.
A Caveat
In view of the opening up of floodgates for overseas multinational companies perhaps this provision will need re-look but so long that is not done, the big companies will have to endure with it, regardless of the stiff competition they might have to face. It has been said, the number without times, by the governments of different hues, that all outdated laws need to be either scrapped or re-drafted to make them in tune with the times, yet they still continue to be on the statute books. This has resulted in huge loss of the employment generation and trust between employees and employers. At a time when the multinational companies are frantically beseeched to open offices in India, obsolete employment laws are coming in their way of expansion. In most of the advanced countries the 'principle of sunset laws' is adopted when outworn laws automatically get abandoned but that is not so in India. Such laws remain in force unless they are made void by the Legislature. The Judiciary's hands also remain tied as it cannot afford to be overarching to overturn the antiquated laws and it has been witnessed in the catena of cases discussed in foregoing paragraphs of the article. Therefore, the need for the Parliament is to wake up to reality and bring about necessary changes as it will be too much to ask the companies to fall in line with more than hundred-year-old laws in the era of liberalisation.