Superintendence Company of India Ltd, Petitioner
Krishan Murgai, Respondent
1980 AIR 1717
The petitioners’ company operated as valuers and surveyors, doing quality inspections, weighing, and a sample of items and commodities. It had established a name and goodwill in its industry by establishing its quality testing and control procedures. And it had trade secrets in the form of techniques and clients.
On March 27, 1971, the respondent was hired as the Branch Manager of the petitioner company’s New Delhi office. . Clause (10) of the terms and conditions of employment required the respondent to serve no other competing firm or carry on his own business in a similar line to that of the appellant company for two years at the location of his previous posting. Because it was critical, the aforementioned clause was outlined.
The petitioner company suspended the respondent’s services on November 24, 1978, with effect from December 27, 1978. Following that, the respondent established his own firm at B-22, South Extension, New Delhi, under the name and style of “Superintendence and Surveillance Inspectorate of India,” on lines similar to or essentially similar to those of the appellant company.
On April 19, 1979, the appellant business filed an action in the Delhi High Court on its Original Side, seeking Rs. 55,000/- in damages for breach of the aforementioned negative covenant stated in cl. (10) and a perpetual injunction restricting the respondent by himself, his servants, agents, or otherwise, from engaging on the said business or any other business along similar lines to that of the appellant company, or associating with or representing any competitors of the appellant company, before the expiration of two years from December 27, 1978.
After the filing of the suit, the appellant company sought an interim injunction to enforce the aforementioned negative contract, and a Single Judge of the Delhi High Court initially. On April 29, 1979, he issued an ad interim injunction, which he confirmed on May 25, 1979, after hearing the reply. The learned Single Judge held that the negative covenant, which was in partial restraint of trade, was fair. It was restricted in duration (two years) as well as scope of operation and so was not subject to Section 27 of the Contract Act.
The learned Single Judge, he claimed, had applied the standard of reasonableness incorrectly. He emphasized that, in addition to recognizing the interpretation given on Section 27 by High Courts, the Law Commission has proposed a modification in that through appropriate legislation.
1. Whether a post-service restrictive covenant in restriction of trade in a service agreement between the parties is void—even if legal.
2. Whether it is enforceable, as enjoined by Illustrations (c) and (d) to Section 57 of the Specific Relief Act of 1963.
Rule of Law
Section 27 of the Indian Contract Act Agreement in restraint of trade void-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: A seller of a business’s goodwill may agree with the buyer to refrain from carrying on a similar business within specified local limits, so long as the buyer or any other person deriving title to the goodwill from him carries on a similar business therein, provided such limits appear to the Court reasonable, having regard to the nature of the business.”
Adopting the test of reasonableness, a single judge of the Delhi High Court held that under section 27 of the Contract Act, to ascertain whether the agreement is void, one must first determine whether the restraint is plausible; and if so, the negative covenant can be imposed as mandated by illustrations (c) and (d) to section 57 of the Specific Relief Act, 1963.
He determined that Clause 10 of the agreement is not unreasonable since the region of constraint is limited to New Delhi. And is not infinite, being limited to two years from the day he left the service. He went on to add that a negative covenant in an employment contract is always enforced if it is in the best interests of the employer. He cited Niranjan Shankar Golikari v. Century Spinning and Mfg. Co. Ltd.  2 S.C.R. p. 378.
He further ruled that the negative covenant was in effect since the phrase “leave” in clause 10 was broad enough to cover termination of employment. He rendered the previous ex parte ad interim injunction given by him on April 24, 1979, absolute by order dated May 25, 1979, but, limited its effect to New Delhi and for the period ending December 27, 1980, or until the resolution of the matter, whichever was sooner.
On appeal by the respondent, a Division Bench of the High Court overturned the learned Single Judge’s judgment, stating that a negative covenant that extended beyond the time of employment was in restriction of commerce and hence unlawful under section 27 of the Contract Act. The court remarked that the nature of the interest sought to be safeguarded differs in the case of an employee and a customer, and so, as a positive rule of law, the amount of constraint permitted in the two types of cases differs.
The key distinction is that the consumer has the right to defend himself against competition from his vendor, but the employer does not have the right to protect himself against simple competition from his worker. Furthermore, a restrictive covenant supplementary to an employment contract is more likely to harm the employee’s means of obtaining a living for himself and his family than those of a seller, who generally receive fair compensation for the sale of his business’s goodwill.
As a result, the Courts viewed a restrictive covenant by an employee not to participate in a business comparable to or competitive with that of the employer after the termination of his employment contract with disfavor.
The appeal was dismissed with no compensation provided.