Niranjan Shankar Golikari vs Century Spinning & Manufacturing Case deals with Section 27 of Indian Contract Act. A non-compete covenant is a contract, or a clause in a contract, to restrict a party from competing with the business or trade of the other party. Mostly such covenants come into existence between employers and their respective employees, or between companies during an exchange involving transfer of business or goodwill.
Hon’ble Justice SHELAT, J.M, Hon’ble Justice BACHAWAT, R.S.
The trial Court on the basis of the evidence presented by the parties observed:
- that the respondent company had laid down that the appellant had utilised himself of the training conveyed by the said AKU in relation to the manufacture of tyre coed yarn, the operation of the spinning machines and that he was familiarised with their known-how, secrets, techniques and information;
- that his duties were not confined to supervise labour or to outline variations of temperature as claimed by him;
- that the said agreement wasn’t void or unenforceable;
- that he violated the agreement;
- that because of the violation of the agreement the respondent company suffered deprivation and inconvenience and was entitled to vandalization under clause 17 and lastly that it entitled the company to an injunction.
The primary concern on this landmark matter was to discuss the Legal Status of Non-Compete Covenants. In India Section 27 of the Indian Contract Act, 1872 (“ICA”) provides the test for establishing the legality of Non-Compete Covenants. Section 27 states that “every agreement by which anyone is abstained from practicing a lawful profession, trade of any type, is to that extent void.” The only legitimate exception to this is an agreement not to carry on business, of which goodwill is sold.
An agreement in restraint of trade has been recognized as one in which a party admits with any other party to limit his liberty in the upcoming future to practice trade, or profession, with any other person who isn’t parties to the contract in such a way as he chooses. Non-Compete clauses have hence, repeatedly, been recognized by courts in India, as restrictive clauses which conflict with a party’s freedom to get indulged in trade. A precise explanation of Section 27 refutes all Non-Compete Covenants, regardless of their fairness, or consideration paid for such Covenants. With employment, however, such clauses are usually validated during the employment period, but void post-termination.
This appeal by special leave is against the judgment and order of the High Court of Maharashtra establishing an order of injunction against the appellant. The respondent company manufacturers, amongst other tyre cord yarn at its plant at Kalyan, known as the Century Rayon.
As far as post-termination employment restraints are concerned, it has been repeated time and again, that in order to abstain an employee from joining as a competitor, the burden would be on the employer to prove that there is actual theft of confidential and proprietary information, and that losing trade secrets, the revelation of the trade secrets to the competitor has caused or is likely to cause damage/loss to the employer. Even in this case, it is possible that courts would only abstain the employee from disclosing any confidential/proprietary information to the competitor, but may not prohibit him from joining the competing organisation. The burden of proof in such cases is on the employer and is very high.
DECISION – In the case of Niranjan Shankar Golikari v. Century Spinning & Mfg. Co., the Supreme Court held that restrains that are to be operative only while the employee is bounded contractually to serve his employer and never regarded as being in restraint of trade, at common law, or under Section 27 of Indian Contract Act, 1872. Therefore, where a clause imposes a partial restraint, disallowing the employee from performing services in the same area of business as that of the employer during the termed period of the agreement, such restraint would not violate Section 27.
RELEVANCE – The Court drew a clear difference between a restriction in a contract of employment, which is validated during the period of employment, and the other one, which is to operate post employment. After referring to certain English cases where such distinction had been drawn, the Court observed:
“A similar distinction has also been drawn by the Courts in India and a prevention by which a person binds himself during the term of his agreement directly or indirectly not to take service with any other employer or be engaged by a third party has been held not to be void and not against Section 27 of the Contract Act.”.