Case: Superintendence Company of India Ltd Vs. Sh. Krishan Murgai

Briefly stated the facts are these. The appellant company carries on business as valuers and surveyors, undertaking inspection of quality, weighment, analysis, sampling of merchandise and commodities, cargoes, industrial products, machinery, textiles, etc. It has established a reputation and goodwill in its business by developing its own techniques for quality testing and control and possesses trade secrets in the form of these techniques and clientele. It has its head office at Calcutta and a branch at New Delhi and employs various persons as managers and in other capacities in Calcutta, New Delhi and other places. On March 27, 1971 the respondent was employed by the appellant company as the Branch Manager of its New Delhi office on terms and conditions contained in the letter of appointment issued to him on the same date. Clause (10) of the terms and conditions of employment placed the respondent under a post service restraint that he shall not serve any other competitive firm nor carry on business on his own in similar line as that of the appellant company for two years at the place of his last posting. Since it is vital we set out the said clause which ran thus:"10. That you will not be permitted to join any firm of our competitors or run a business of your own in similar lines directly and/or indirectly, for a period of two years at the place of your last posting after you leave the company."On November 24, 1978 the appellant company terminated the respondents services with effect from December 27, 1978. Thereafter the respondent started his own business under the name and style of "Superintendence and Surveillance Inspectorate of India" at, South Extension, New Delhi on lines identical with or substantially similar to that of the appellant company. On April 19, 1979 the appellant company brought a suit in the Delhi High Court on its Original Side claiming Rs. 55, 000/as damages on account of the breach of the aforesaid negative covenant contained in cl. (10) and for permanent injunction restraining the respondent by himself, his servants, agents or otherwise, from carrying on the said business or any other business on lines similar to that of the appellant company or associating or representing any competitors of the appellant company before the expiry of two years from December 27, 1978. After filing the suit the appellant company sought an interim injunction by way of enforcing the aforesaid negative covenant and a Single Judge of the Delhi High Court initially granted an ad interim injunction on April 29, 1979 which was confirmed by him on May 25, 1979 after hearing the respondent. The learned Single Judge took the view that the negative covenant, being in partial restraint of trade, was reasonable inasmuch as it was limited both in point of time (two years) as well as the area of operation (New Delhi which was his last posting) and, therefore, was not hit by s. 27 of the Contract Act. He also took the view that the negative covenant was enforceable as the expression "leave" in cl. (10) was not confined to voluntarily leaving of the service by the respondent but was wide enough to include termination of his services by the appellant company. On appeal by the respondent, a Division Bench of the High Court reversed the order of the learned Single Judge on both the points and that is how the two questions indicated at the commencement of this judgment arise for our determination in this appealThis appeal on certificate from a judgment of the Delhi High court, relates to a covenant in restraint of trade contained in an agreement between the appellant company and the respondent in circumstances which we will explain. The appellant company carries on the business of valuer, surveyor, inspection of quality, weighment, analysis, sampling of merchandise and commodities, cargoes, industrial products, machinery, textiles, etc. It has its head office at Calcutta with a branch at New Delhi. On or about March 27, 1971, the respondent who is a surveyor and valuer was employed by the appellant as the Branch Manager of its New Delhi office. One of the terms and conditions of the employment was that the respondent would not serve elsewhere or enter into any business for a period of 2 years after leaving the service. The term is contained in clause 10 of the agreement which reads:10. That you will not be permitted to join any firm of our competitors or run a business of your own insimilarity as directly and/or indirectly, for a period of two years at the place of your last posting after you leave the CompanyThe appellant terminated the services of the respondent by its letter dated December 27, 1978. Thereafter the respondent started a business of his own under the name and style of "Superintendence and Surveillance Inspectorate of India" at, South Extension, New Delhi on lines identical with and substantially similar to that of the appellant. On April 19, 1979, the appellant commenced a suit in the Delhi High Court in its original side claiming Rs. 55, 000/as damages on account of breach of the covenant and for permanent injunction to restrain the respondent by himself, his servants or agents or otherwise from carrying on the said business or any other business on lines similar to that of the appellant or associating or representing any Competitors of the appellant before the expiry of two years from December 27, 1978A Single Judge of the Delhi High Court adopting the test of reasonableness, held that under section 27 of the Contract Act to determine whether the agreement is void, one has to see whether the restraint is reason able; and if so the negative covenant can be enforced as enjoined by illustrations (c) and (d) to section 57 ofthe specific Relief Act, 1963. He held that Clause 10 of the agreement is not unreasonable, because the area of restraint is restricted to New Delhi, the place of last posting of the respondent and is not unlimited, being limited to a period of two years from the date he left the service. He went on to say that negative covenant in a contract of employment has always been enforced, if it is in the protection of the employer, and referred to Niranjan Shankar Golikari v. Century Spinning and Mfg. Co. Ltd. [1967] 2 S.C.R. p. 378. He further held that the negative covenant was operative as the word "leave" in clause 10 was wide enough to include termination of service. He, accordingly, by his order dated May 25, 1979, made the earlier ex parte ad interim injunction granted by him on April 24, 1979 absolute but restricted its operation to New Delhi and for the period ending 27th December, 1980 or till the decision of suit, whichever is earlierOn appeal by the respondent, a Division Bench of the High Court reversed the order of the learned Single Judge holding that negative covenant operating beyond the period of employment was in restraint of trade and, therefore, void under section 27 of the Contract Act.

Court's reasoning:
We have already quoted the restrictive covenant contained in cl. (10). In terms the clause provides that the restriction contained therein will come into operation "after you (respondent) leave the company". Admittedly in the instant case the respondent had not on his own left the company but his services were terminated by the appellant company by a notice dated November 24, 1978 with effect from December 27, 1978. The question is whether the phrase "after you leave the company" means the leaving of service by the respondent voluntarily o r would include even the case of termination of his services by the appellant company. The Division Bench of the High Court has taken the view that the word "leave" does not include termination of service by the employerIn our view, the word "leave" has various shade s of meaning depending upon the context or intent with which it is used. According to the plain grammatical meaning that word in relation to an employee would normally be construed as meaning voluntary leaving of the service by him and would not include a case where he is discharged or dismissed or his services are terminated by his employer. Ordinarily the word "leave" appears to connote voluntary actionIn our view having regard to the context in which the expression "leave" occurs in cl. (10) of the service agreement and reading it alongwith all the other terms of employment it seems to us clear that in the instant case the word "leave" was intended by the parties to refer only to a case where the employee has voluntarily left the services of the appellant company of his own, and since here the respondents services were terminated by the appellant company the restrictive covenant contained in cl. (10) would be inapplicable and, therefore, not enforceable against the respondent at the instance of the appellant companyAll that we can say is that the appellant company should have taken care to use appropriate language while incorporating such restrictive covenant so as to include every case of cessation of employment arising from any reason whatsoever and not used the expression "leave, " which normally is synonymous to the expression "quit" and indicates voluntary act on the part of the employeeAgreements of service, containing a negative covenant preventing the employee from working elsewhere during the term covered by the agreement , are not void under section 27 of the Contract Act, on the ground that they are in restraint of trade. Such agreements are enforceable. The reason is obvious. The doctrine of restraint of trade never applies during the continuance of a contract of employment; it applies only when the contract comes to an end. While during the period of employment, the Courts undoubtedly would not grant any specific performance of a contract of personal service, nevertheless; Section 57 of the Specific Relief Act clearly provides for the grant of an injunction to restrain the breach of such a covenant as it is not in restraint of, but in furtherance of tradeThe decision in Niranjan Shankar Golikaris case supra is therefore of little assistance to the appellant. It is not seeking to enforce the negative covenant during the term of employment of the respondent but after the termination of his services. The restriction contained in Clause 10 of the agreement is obviously in restraint of trade and, therefore, illegal and unenforceable under section 27 of the Contract Actthe Contract Act, 1872, does not profess to be a complete code dealing wit h the law relating to contracts, we emphasise that to the extent the Act deals with a particular subject, it is exhaustive upon the same and it is not permissible to import the principles of English Law de hors the statutory provision, unless the statute is such that it cannot be understood without the aid of the English LawThe section is general in terms, and declares all agreements in restraint void pro tanto, except in the case specified in the exceptionT here 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 fact fall within the exception to the sectionA contract, which has for its object a restraint of trade, is prima facie, void. Section 27 of the Contract Act is general in terms and unless a particular contract can be distinctly brought within Exception 1 there is no escape from the prohibition. We have nothing to do with the policy of such a law. All we have to do is to take the words of the Contract Act and put upon the meaning which they appear plainly to bear. This view of the section was expressed by Sir Richard Couch C.J. in celebrated judgment in Madhub Chunder v. Rajcoomar Doss [1874] Beng L. R. 76 at pp.6 laying down that whether the restraint was general or partial, unqualified or qualified, if it w as in the nature of a restraint of trade, it was voidThe agreement in question is not a goodwill of business type of contract and, therefore, does not fall within the exception. If the agreement on the part of the respondent puts a restraint even though partial, it was void, and, therefore, the contract must be treated as one which cannot be enforcedA contract in restraint of trade is one by which a party restricts his future liberty to carry on his trade, business or profession in such manner and with such persons as he chooses. A contract of this class is prima facie void, but is becomes binding upon proof that the restriction is justifiable in t he circumstances as being reasonable from the point of view of the parties themselves and also of the communityAccording to the test laid down by Parker, C.J. (later Earl of Macclesfield) in Mitchel v. Reynolds, supra, the general restraint was one which covered an indefinite area, and was, as a rule held bad while a partial restraint was valid if reasonable, the onus being upon the covenanter to show it to be unreasonableThere is no higher authority upon this subject than Tindal, C.J., who had to do much with moulding of the law on this subject and bringing it into harmony with the needs of the changing timesBy decrees, the common law doctrine of restraint of trade, has been progressively expanded and the legal principles applied and developed so as to suit the exigencies of the times, with the growth of trade and commerce, rapid industrialisation and improved means of communicationWhat is a reasonable restraint with reference to a particular case ? Thereby he denied that general and partial restraints fall into distinct categories. A partial restraint in his opinion was not prima facie valid. It was on the same footing as a general restraint i.e. prima facie void, but valid, if reasonableThe test of reasonableness evolved in common law after the decision of Lord Macnaghton, in Nordenfelts case, supra, andd by the two decisions in Mason v. Provident Clothing &Supply Co. Ltd. and Herbert Morris Ltd. v. Sexelby, supra, is that such covenants are prima facie, void and the onus rests upon the covenante to prove that the restraint is reasonable. In Nordenfelts case, Lord Macnaghton also adverted to the distinction between covenant entered by the seller of the business on the one hand and the covenant by the employee on the otherIt must be remembered that the test of reasonableness comes from the judgment of Lord Macnaghten in Nordenfelts case in the House of Lords in 1894. In 1862, however, when the Field provision was drafted, it was not easy to foresee that the common law would shortly discard the distinction drawn by Lord Macclesfield in Mitchel v. Reynolds in 1711, between general and partial restraints. A general restraint was one which covered an indefinite area, and was, as a rule, held bad, while a partial restraint was valid, if reasonable. the onus being upon the covenantor to show it to be unreasonable. This was a mere rule of thumb, but was stubbornly adhered to by as great a common lawyer as Bowen, L.J., as late as 1893, when the Nordenfelts case was in the Court of Appeals: L.R. [1893] 1 Ch. D. 630The Law Commission, in its Thirteenth Report, has recommended that Section 27 of the Act should be suitably amended to allow such restrictions and all contracts in restraint of trade, general or partial, as were reasonable, in the interest of the parties as well as of the public. That, however involves a question of policy and that is a matter for Parliament to decide. The duty of the Court is to interpret the section according to its plain languageThe question for consideration is whether, assuming that the wider construction placed by Sir Richard Couch in Madhub Chundur v. Raj Coomar Doss, supra, to have been the law, at the time of enactment, it has since become obsolete. A law does not cease to be operative because it is an anachronism or because it is antiquated or because the reason why it originally became the law, would be no reason for the introduction of such a law at the present timeNeither the test of reasonableness nor the principle of that the restraint being partial was reasonable are applicable to a case governed by Section 27 of the Contract Act, unless it falls within Exception 1. We, therefore, feel that no useful purpose will be served in discussing the several English Decisions cited at the BarUnder Section 27 of the Contract Act, a service covenant extended beyond the termination of the service is void. Not a single Indian Decision has been brought to our notice where an injunction has been granted against an employee after the termination of his employmentThere remains the question whether the word leave in clause 10 o f the agreement is wide enough to make the negative covenant operative on the termination of employmentOn a true construction of clause 10 of the agreement, the negative covenant not to serve elsewhere or enter into a competitive business does not, in my view, arise when the employee does not leave the services but is dismissed from service. Wrongful dismissal is repudiation of contract of service which relieved the employee of the restrictive covenantIt is, however, urged that the word leave must, in the context in which it appears, be construed to mean as operative on the termination of employment. Our attention is drawn to Strouds Judicial Dictionary, 4th Edn., Vol. II, Pr. 13 p. 1503. There is reference to Mars v. Close, 32 L.T.O.S. 89. An agreement restricting competition with an employer "after leaving his service" was held to be operative on the termination, however, accomplished, of the service, e.g. by a dismissal without noticeThe word leave has various shades of meaning depending upon the context or intent with which it is used. According to the plain meaning, the word leave in relation to an employee, should be construed to mean where he "voluntarily" leaves i.e. of his own volition and does not include a case of dismissal. The word leave appears to connect voluntary action, and is synonymous with the word quit. It does not refer to the expulsion of an employee by the act of his employer without his consent and against his remonstrance. That is a meaning in consonance with justice and fair pl ayThere exists a difference in the nature of the interest sought to be protected in the case of an employee and of a purchaser and , therefore, as a positive rule of law, the extent of restraint permissible in the two types of case is different. The essential line of distinction is that the purchaser is entitled to protect himself against competition on the part of his vendor, while the employer is not entitled to protection against mere competition on the part of his servant. In addition thereto, a restrictive covenant ancillary to a contract of employment is likely to affect the employees means or procuring a livelihood for himself and his family to a greater degree than that of a seller, who usually receive ample consideration for the sale of the goodwill of his businessThe distinction rests upon a substantial basis, since, in the former class of contracts we deal with the sale of commodities, and in the latter class with the performance of personalr different in substance; and the social and economic implications are vastly differentThe Courts, therefore, view with disfavour a restrictive covenant by an employee not to engage in a business similar to or competitive with that of the employer after the termination of his contract of employment.The true rule of construction is that when a covenant or agreement is impeached on the ground that it is in restraint of trade, the duty of the Court is, first to interpret the covenant or agreement itself, and to ascertain according to the ordinary rules of construction what is the fair meaning of the parties. If there is an ambiguity it must receive a narrower construction than the widerThe restraint may not be greater than necessary to protect the employer, nor unduly harsh and oppressive to the employee. I would, therefore, for my part, even if the word leave contained in clause 10 of the agreement is susceptible of another construction as being operative on termination, however, accomplished of the service e.g. by dismissal without notice, would, having regard to the provisions of Section 27 ofthe Contract Act, 1872, try to preserve the covenant in clause 10 by giving to it a restrictive meaning, as implying volition i.e. where the employee resigns or voluntarily leaves the services. The restriction being too wide, and violative of section 27 of the Contract Act, must be subjected to a narrower construction.