Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. Ltd.
Supreme Court of India · 17 January 1967 · 2 judges · 1967 AIR 1098; 1967 SCR (2) 378
A negative covenant barring an employee from similar work elsewhere during the term of employment is not a restraint of trade under Section 27, Contract Act, unless the contract is one-sided or unconscionable; it may be enforced by limited injunction.
Facts
The respondent company obtained secret technical know-how for its tyre cord yarn plant at Kalyan from foreign collaborators, on an undertaking to take secrecy commitments from its employees. The appellant joined as a Shift Supervisor on a five-year standard contract. Clause 9 required confidentiality and clause 17 provided that if he left in breach before five years, he would not serve any business of the kind the company carried on for the rest of the period. After about nine months of training in the process, he absented himself, claimed to have resigned, and joined Rajasthan Rayon, a rival tyre cord yarn maker, at a higher salary. The company sued. The trial court restrained him until 15 March 1968 from working as a Shift Supervisor, or in substantially the same duties, in any tyre cord yarn concern in India, and from divulging secrets. The High Court affirmed.
Questions before the Court
- Is a negative covenant not to serve another employer during the term of a service contract a restraint of trade void under Section 27 of the Contract Act?
- Was the injunction enforcing clause 17, in the terms in which it was framed, rightly granted?
What the Court held
- The considerations against restrictive covenants differ according to whether the restriction operates after the contract ends or during its term. Negative covenants operating during the term of employment, when the employee must serve the employer exclusively, are generally not a restraint of trade and do not fall under Section 27 of the Contract Act.
- Such a covenant not to take similar or substantially similar work with another employer is a restraint of trade only if the contract is unconscionable, excessively harsh, unreasonable or one-sided.
- Clause 17, limited to the period of employment and to work similar to the appellant's, was reasonable and necessary to protect the company's interests in its secret processes and was not against public policy.
- The rule against severance applies only where a covenant is void; where the stipulation is valid, the court may grant a limited injunction to protect the employer. This injunction was limited in time, nature of work and area, and would not force the appellant into idleness or back to the company. The appeal was dismissed.
Why it matters
The judgment draws the distinction, for Section 27 of the Contract Act, between restraints that operate during the term of employment and those that operate after it ends. It holds that a negative covenant confined to the contract period is generally valid unless the contract is unconscionable or one-sided, and explains when courts may enforce such a covenant by an injunction limited in time, area and type of work.
In the Court's words
Copied from the official judgment; each passage links to its page.
“The result of the above discussion is that considerations against restrictive covenants are different in cases where the restriction is to apply during the period after the termination of the contract than those in cases where it is to operate during the period of the contract. Negative covenants operative during the period of the contract of employment when the employee is bound to serve his employer exclusively are generally not regarded as restraint of trade and therefore do not fall under section 27 of the Contract Act.”
“A negative covenant that the employee would not engage himself in a trade or business or would not get himself employed by any other master for whom he would perform similar or substantially similar duties is not therefore a restraint of trade unless the contract as aforesaid is unconscionable or excessively harsh or unreasonable or one sided”
“But the rule against severance applies to cases where the covenant is bad in law and it is in such cases that the court is precluded from severing the good from the bad. But there is nothing to prevent the court from granting a limited injunction to the extent that is necessary to protect the employer's interests where the negative stipulation is not void.”
Provisions interpreted
Related judgments
- Distinguished in Superintendence Company of India (P) Ltd. v. Krishan Murgai (1980)
Case and bench
- Parties
- Niranjan Shankar Golikari v. The Century Spinning and Mfg. Co. Ltd.
- Case
- Civil Appeal No. 2103 of 1966
- Decided
- 17 January 1967
- Bench
- J.M. Shelat, R.S. Bachawat
- Opinions
- Unanimous. The Judgment of the Court was delivered by Shelat, J.
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