Delhi District Court
Pci Ltd vs Harsh Khurana on 12 September, 2008
1
IN THE COURT OF DR.SUDHIR KUMAR JAIN, ADDITIONAL DISTRICT JUDGE,
DELHI.
Suit No:100/2006
Date of Institution: 02.06.2006
Date of Decision : 12.09.2008
PCI Ltd.,
having its registered office at
19, Rajendra Park,
New Delhi
through its Senior Personal Officer,
and Authorized Signatory
Abhijeet Prakash
... Plaintiff
Versus
Harsh Khurana,
S/o P.P.Khurana,
R/o H.No.501, Sector-19,
Faridabad (Haryana).
... Defendant
APPEARANCES:
For Plaintiff : Sh.Rajesh Bhatnagar, Advocate.
2
JUDGMENT
This judgment shall decide a suit for recovery of damages of Rs.4,00,000/- alongwith interest filed by PCI Limited (hereinafter referred to as "Plaintiff") against Harsh Khurana (hereinafter referred to as "defendant").
2. Briefly stated the relevant facts as pleaded by the plaintiff are that the plaintiff, a company registered under the Company Act, 1950 has appointed defendant on the post of Product Engineer vide appointment letter dated 20.07.1995 and the defendant was bound by the rules and regulations of the plaintiff in terms of letter dated 20.07.1995; the job assigned to the defendant involved active marketing and sale of products particularly the UPS systems imported and promoted by the plaintiff to its customers and clients and involved greater responsibility; the defendant was promoted to the post of Manager (Marketing) vide letter dated 07.07.2001; the plaintiff received resignation letter dated 11.01.2003 from the defendant on the ground of personal reasons on 20.03.2003 and the defendant has not attended the 3 office since 11.01.2003; the defendant had joined a company, which was in competition with the plaintiff, against the policy, rules and regulations; the defendant was constantly getting confidential as well as secret information from the representative of the plaintiff on false assurances and as such caused heavy losses and damage to the plaintiff; the defendant has also revealed secret and confidential information to the competitors of the plaintiff as reflected from the letter dated 26.03.2003 given by one of the employee of the competitor company of the plaintiff; the plaintiff sent a legal notice to the defendant dated 06.06.2003; the defendant is liable to pay Rs.4,00,000/- as damages and Rs.1,00,000/- towards breach of agreement and cost of the litigation. The plaintiff has filed the suit for recovery of damages and made the following prayers:--
a) Pass a decree for Rs.4,00,000/- alongwith interest pendente-lite and future at the prevailing bank rate in favour of the plaintiff and against the defendant from the date of filing of the present suit till realization;
b) Pass a decree of Rs.1,00,000/- towards breach of agreement and cost of the suit in favour of the plaintiff and against the defendant; and
c) Pass any such other order/s which this Hon'ble Court may deem fit and proper under the facts and circumstances of the case may be passed in favour of the plaintiff and against the 4 defendant in the interest of justice, equity and fair trial.
3. The defendant was served by way of publication but did not appear, hence, proceeded exparte vide order dated 15.05.2007.
4. The plaintiff has examined its Sh.Abhijeet Prakash, Senior Personal Officer as PW1 who tendered his affidavit which is ExP1. The plaintiff evidence was closed vide order dated 15.11.2007.
5. Sh.Rajesh Bhatnagar, Advocate for the plaintiff heard. Record perused.
6. The plaintiff has pleaded that the defendant was appointed as Product Engineer vide appointment letter dated 20.07.1995 Ex.PW1/A1 and subsequently promoted to the post of Manager (Marketing) vide letter dated 07.07.2001. The defendant without assigning any reason vide letter dated 11.01.2003 has tendered the resignation which was not in accordance with the terms of appointment in pursuance of letter dated 20.07.1995 Ex.PW1/A1. The plaintiff further pleaded that during the course of employment, the defendant came to know about the secrets of the plaintiff and after resignation also, the defendant procured the confidential and secret information about the tenders of the plaintiff 5 from its representatives as such caused heavy losses. The defendant has also joined a company which is in competition with the plaintiff. The plaintiff being aggrieved has raised a claim of Rs.4,00,000/- for the losses suffered by the plaintiff and Rs.1,00,000/- as damages for the alleged breach of terms of agreement by the defendant. The plaintiff in support of its claim has examined its Senior Personal Officer as PW1, who tendered his affidavit which is ExP1. The PW1 in affidavit Ex.P1 deposed in consonance with the contents of the plaint.
7. Sh.Bhatnagar, advocate, counsel for the plaintiff has argued that the defendant has breached the terms and conditions of the appointment letter dated 20.07.1995 Ex.PW1/A1 and also changed the company which is in competition with the plaintiff as such the defendant is liable to pay the damages as claimed in the present suit. Sh.Bhatnagar relied upon Niranjan Shankar Golikari V Century Spinning & Manufacturing Co.Ltd., 1967 (2) SCR 378.
8. In order to appreciate the claim of the plaintiff, it is necessary to reproduce the appointment letter Ex.PW1/A1 which is stated to have governed the terms and conditions of the appointment of the defendant:- 6
With reference to your application dated nil and subsequent interview, we are pleased to appoint you as Product Engineer in our Company on total Monthly emoluments of Rs.4000/- (Basis Salary Rs.1800/-, H.R. Allowance Rs.1100/-, Other Allowance Rs.1100/- on the following terms and conditions:--
1. Your appointment will take effect from the date of your joining the duty i.e. with effect from 01.06.1995.
2. You will be on probation for a period of six months from the date of your joining. If found necessary, probation period may be extended.
Unless confirmed in writing, you will be deemed as probationer after the expiry of the probation period or the extended period of probation.
3. During the period of initial probation or extended period of probation, if your services are not considered satisfactory or upto the mark, or are not required for any reason whatsoever, the same shall be liable to be terminated without any notice or without payment of any compensation in lieu thereof and in such an event you will be paid only for the days you have actually worked.
4. On successful competition of probation, or extended period of probation, you will be put on regular basis and a letter of confirmation of the regular appointment will be issued to you.
5. In case of temporary exigencies at any of the existing or proposed offices of the company anywhere in India or abroad, you can be temporarily transferred there till alternative 7 arrangement is made at such a place.
6. Your place of posting will at present be at Gurgaon/Delhi but you are liable to be transferred to another department, post or place, whether in existence or may come into existence herein after at the place of posting, or at any such other place where the company may establish/open its branch office later on.
7. You will be entitled to leave, travelling allowance and other benefits as per the Policies and Rules of the Company.
8. Your increment will be based on per-formance of duty if found satisfactory during the past years of service in terms of efficiency, punctuality, regularity and discipline and the same may be withheld if the performance is found unsatisfactory, or accelerated in case of exceptionally good performance.
9. After confirmation, your services are liable to termination at one month's notice or payment in lieu thereof. You shall also give a similar notice of resignation or forfeit one month's salary in lieu thereof.
10.You will be bound by Rules and Regulations enforced by the Company from time to time in relation to conduct, discipline leave and matters relating to service conditions which will be deemed as service rules and regulations and form a part of the terms of your employment.
You are requested to sign the duplicate copy of this letter as confirmation and acceptance of the above stated terms and conditions of your appointment.
8
9. The perusal of appointment letter dated 20.07.1995 Ex.PW1/A1 reflects that the defendant was appointed in the services of the plaintiff w.e.f. 01.06.1995 initially for a period of six months of probation. As per the clause 9, the services of the defendant was liable to be terminated by the plaintiff after giving one month notice or payment in lieu thereof. It was also stipulated that in case defendant preferred to resign from the services of the plaintiff then the defendant was also required to give one month notice or to pay one month salary in lieu of the notice. The appointment letter dated 20.07.1995 has not been provided any particular period of minimum service which the defendant was required to render with the plaintiff. The appointment letter dated 20.07.1995 Ex.PW1/A1 only provides that the defendant was appointed for a period of six months on probation from the date of joining. It is not the case of the plaintiff that the defendant has resigned within the period of six months. The defendant before tendering his resignation vide letter dated 07.07.2001 has rendered services of about seven years to the plaintiff.
10. Section 27 of the Contract Act, 1872 provides that agreement in 9 restraint of trade are void. It reads as under:--
Section 27. Agreement in restraint of trade void--Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.
Saving of agreement not to carry on business of which goodwill is sold.
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.
11. An agreement restraining a person from carrying on a lawful profession, trade or business is void to that extent. Restraint covenants are often found in agreements between employers and employees, whereby the latter covenant not to set up business on their own account on leaving the employer, or to enter into a rival firm. Employees also covenant not to carry on any other trade or business or occupation except that with the employer.
12. In Niranjan Shankar Golikari V Century Spinning & Manufacturing Co.Ltd., 1967 (2) SCR 378, the respondent company 10 entered into collaboration with a German company which agreed, for a consideration, to transfer their technical know-how to be used exclusively for the company'styre cord yarn plant at Kalyan. The agreement provided that the company would keep secret during the period of agreement. Three years after this, all technical information, knowledge, know-how experience, data and documents would be passed by the German Company to the respondent company. The covenanter was appointed as Shift Supervisor on the condition that he would have to sign a contract in the standard form for the term of five years which was accepted by the covenanter, the covenant being that the covenanter would devote wholly all his time and energy to the business and affairs of the respondent company and shall not engage directly or indirectly in any business or serve in any capacity in any business whatsoever other than that of the company. It was also provided that in the event of the covenanter leaving the service of the covenantee before the expiry of the period, he shall not engage himself in or carry on the business being carried on by the company nor shall he serve in any capacity any person for the remainder of the period of 11 service. In addition, he was to pay liquidated damages amounting to the amount spent by the company on the covenantor's training. The covenanter, after receiving training, resigned and took a similar employment with another company. The injunction sought by the company was granted. The circumstances taken into consideration were that the covenant was restricted to the period of service, to the work similar or substantially similar to the one carried by the covenantor and it was necessary and reasonable for the protection of the employer's interest. Then there was nothing to show that the enforcement of the covenant would lead either to the idleness or of his being compelled to go back to the employer.
13. The Golikari judgment has clearly laid down the distinction between the restrictive covenants 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. It was observed that 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, 12 do not fall under section 27 of the Contract Act, 1872. 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 is unconscionable or excessively harsh or unreasonable on one side. The ratio of Golikari is not applicable when the employer put a negative covenant which is to be applied during the period after termination of the contract. The relevant portion of judgment reads as under:--
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 on one sided as in the case of W.H.Milsted and Son Ltd., (1927) W.N.233.
Both the trial court and the High Court have found, and in 13 our view, rightly, that the negative covenant in the present case restricted as it is to the period of employment and to work similar or substantially similar to the one carried on by the appellant when he was in the employ of the respondent company was reasonable and necessary for the protection of the company'sinterests and not such as the court would refuse to enforce. There is therefore no validity in the contention that the negative covenant contained in clause 17 amounted to a restraint of trade and was therefore against public policy.
( Page 389)
14. In VN Deshpande V Arvind Mills Co Ltd., (1946) Bom 89, an employee contracted to serve as a weaving master for three years, and agreed not to serve anyone else in India during that period. He left the service after one year, and joined another mill as a weaving master. In terms the prohibition in the agreement was not restricted to serving anyone else as weaving master, but was absolute. The court, however, in the light of the intention of the parties, construed the prohibition as confined to the profession of weaving master, held the agreement reasonable, and issued an injunction against the employee.
15. The ratio in Golikari case itself distinguishes between restrictive covenants which are to apply during the period after the termination of the contract and covenants which are to operate during 14 the period of the contract. The negative covenants which are to operate after termination of service/contract are hit by section 27 of the Contract Act, 1872. In the present case, clauses 4 and 5 of the agreement dated 24.09.2002 Ex.PW1/5 are to operate after termination/resignation of service of the defendant. The ratio of the Golikari case does not provide any help to the case of the plaintiff although the counsel for the plaintiff placed much reliance upon the ratio of Golikari.
16. Even the restraints which operate only during currency of employment may be subject to the doctrine of restraint of trade, if the restraints are such that one of the parties is so unilaterally fettered that the contract loses its character of a contract for the regulation and promotion of trade and acquires the predominant character of a contract in restraint of trade. In the Indian law, a service covenant extending beyond the term of service is void, where in similar cases, the English law would allow restraint which is reasonable. The negative covenant in a contract of employment placing a restraint on the employee that he shall not serve in any other competitor'sfirm for two years at the place of his last posting after the employee left the company, would be void. But 15 a term restricting an employee from disclosing trade secrets and confidential information after ceasing employment, can be enforced. (See, Superintendence Company of India(P.) Ltd. V Krishan Murgai, AIR 1980 SC 1717). The courts take a stricter view of covenants between master and servant than of commercial contracts. The principle is based on the policy that an employer has no legitimate interest in preventing an employee after he leaves, service of a competitor merely because of his being a competitor. The reason for upholding restraint against an employee is to protect the proprietary rights of the employer if it is reasonably necessary in the case of trade connections or trade secrets, but it is not available if directed to prevent competition or against the use of personal skill and knowledge acquired by the employee in his employer's business.
17. The ratio laid down in Golikari case was again discussed with their Lordships in case of Superintendence Company of India(P.) Ltd. (Supra). In this case, there were two questions before the Apex Court for consideration i.e. (a) whether a post-service restrictive covenant in restraint of trade as contained in clause (10) of the service agreement 16 between the parties is void under section 27 of the Indian Contract Act? and (b) whether the said restrictive covenant, assuming it to be valid, is on its terms enforceable at the instance of the appellant company against the respondent? In the said case, the majority has not expressed his opinion on the first issue. The Hon'bleMr.Justice A.P.Sen was of the view that it is necessary to decide whether a negative covenant which restricts the right of the employee, after conclusion of termination of employment for other reasons, to engage in any business similar to or competitive with that of the employer is in restraint of trade and ,therefore, void under section 27 of the Contract Act, 1872. His Lordship observed as under:--
Agreements 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 17 clearly provides for the grant of an injunction to restrain the breach of such a covenant, as it is not in restraint of, but is furtherance of trade.
( Para 18) In Niranjan Shankar Golikari'scase (AIR 1967 Supreme Court of India 1098) (supra) this Court drew a distinction between a restriction in a contract of employment which is operative during the period of employment and one which is to operate after the termination of employment. After referring to certain English cases where such distinction had been drawn, the Court observed:
"A similar distinction has also been drawn by Courts in India and a restraint 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".
( Para 19) The decision in Niranjan Shankar Golikari'scase (AIR 1967 Supreme Court of India 1098) (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 Act.
( Para 23 ) Under Section 27 of the Contract Act, a service covenant extended beyond the termination of the 18 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 employment.
( Para 53) The drafting of a negative covenant in a contract of employment is often a matter of great difficulty. In the employment cases so far discussed, the issue has been as to the validity of the covenant operating after the end of the period of service. Restrictions on competition during that period are normally valid, and indeed may be implied by law by virtue of the servant'sduty of fidelity. In such cases the restriction is generally reasonable, having regard to the interest of the employer, and does not cause any undue hardship to the employee, who will receive a wage or salary for the period in question. But if the covenant is to operate after the termination of services, or it is too widely worded, the Court may refuse to enforce it.
( Para 58 ) It is well settled that employee covenants should be carefully scrutinized because there is inequality of bargaining power between the parties; in-deed no bargaining power may occur because the employee is presented with a standard form of contract to accept or reject. At the time of the agreement, the employee may have given little thought to the restriction because of his eagerness for a job; such contracts "tempt improvident persons, for the sake of present gain, to deprive themselves of the power to make future acquisitions, and expose them to imposition and 19 oppression."
( Para 59 )
18. In case of Pepsi Foods Ltd.& Ors. V Bharat Coca-Cola Holdings Pvt.Ltd.& Ors., 81(1999) DLT 122, it was also held that in the service and employment of the plaintiff negative covenant clause restrains employee from engaging or undertaking employment for 12 months after he has left the service of the plaintiff is void as per section 27 of the Contract Act and court cannot grant injunction which is prohibited by law.
19. In case of M/s.Gujarat Bottling Co.Ltd. and others V Coca Cola Company and others, AIR 1995 SC 2372, it was also observed that Doctrine of Restraint of Trade is not attracted in cases where the restriction is to operate during the period the contract is subsisting. It applies in respect of a restriction which operates after the termination of the contract. In this case, the court has also discussed the ratio of Golikari case. It was observed as under:--
The Court has to decide, as a matter of law, (i)whether a contract is or is not in restraint of trade, and (ii) whether, if in restraint of trade. It is reasonable. The Court takes a 20 far stricter and less favourable view of covenants entered into between employer and employee than it does of similar covenants'between vendor and purchaser or in partnership agreements, and accordingly a restraint may be unreasonable as between employer and employee which would be reasonable as between the vendor and purchaser of a business.
(Para 21) Similarly, in Superintendence Company (1980 (3) SCR 1278; AIR 1980 Supreme Court of India 1717) (supra) A.P.Sen J..in his concurring judgment, has said that "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."
(Para 35)
20. In case of Percept D'Mark(INdia) Pvt.Ltd. V Zaheer Khan and Anr., AIR 2006 SC 3426, the respondent no.1 who was then the best fast bowler in the Indian Cricket Team and a rising star in the international world of cricket, entered into a promotion Agreement, with the appellant whereunder the appellant was to act as the sole and exclusive agent to manage, market, render various consulting services, negotiate for, execute contracts on behalf of, render tax and other advice to, and generally manage diverse media affairs, endorsements, advertising and the like for respondent no.1, during the term of the 21 agreement. The term of the said agreement was for a period of three years commencing on October 30, 2000 and ending on October 29, 2003, unless extended by mutual consent of the appellant and respondent no.1. The term of the contract came to an end on October 29, 2003, as expressly stated by the appellant in the Arbitration Petition. Respondent no.1, thereafter, entered into an agreement dated November 22, 2003 with respondent no.2, whereby respondent no.2 became the agent for managing all media affairs of respondent no.1 with effect from December 1, 2003. The appellant filed a petition under S.9 of the Arbitration and Conciliation Act, 1996 for enforcement of the agreement after its expiry, and contended that such enforcement of the expired agreement should be granted pending commencement and conclusion of arbitration proceedings by the appellant. The cause of action for filing the petition was the concluded agreement between respondent Nos.1 and 2. An injunction was sought seeking to restrain respondent No.1 from entering into any agreement/arrangement or acting upon any agreement/contract with respondent No.2 or any third party without first performing and complying with clause 31(b) of the said 22 agreement. On the pleadings contained in the arbitration Petition, there can be no escape from the conclusion that what the appellant sought to enforce was a negative covenant which, according to the appellant, survived the expiry of the agreement. The High Court has held it as impermissible as such a clause which is sought to be enforced after the term of the contract is prima facie void under S.27 of the Contract Act. It was observed that if the negative covenant or obligation under clause 31(b) is sought to be enforced beyond the term, i.e., if it is enforced as against a contract entered into on 20.11.2003 which came into effect on 01.12.2003, then it constitutes an unlawful restriction on respondent Nos.1'sfreedom to enter into fiduciary relationships with persons of his choice, and a compulsion on him to forcibly enter into a fresh contract with the appellant even though he has fully performed the previous contract, and is, therefore, a restraint of trade which is void under S.27 of the Contract Act, 1872. Under S.27 of the Contract Act, (a) a restrictive covenant extending beyond the term of the contract is void and not enforceable; (b) The doctrine of restraint of trade does not apply during the continuance of the contract for employment and it applied only when 23 the contract comes to an end; (c) This doctrine is not confined only to contracts of employment, but is also applicable to all other contracts.
21. In the instant case as per the terms and conditions of the appointment letter dated 20.07.1995 Ex.PW1/A1 no minimum period was prescribed for the defendant for rendering the services with the plaintiff. Even the appointment letter dated 20.07.1995 Ex.PW1/A1 does not contain any negative clause regarding further employment of the defendant. The defendant was required only to give one month notice before resignation from the plaintiff as per clause 9 of the appointment letter dated 20.07.1995. The plaintiff, as such, is not entitled for the relief of claim of damages as prayed for in the plaint.
22. The counsel for the plaintiff has also argued that the defendant be directed to pay the amount at least equivalent to one month salary in terms of clause 9 of the letter of appointment dated 20.07.1995. The plaintiff has not proved the last drawn salary of the defendant. The said part of the claim is also not specifically mentioned in the plaint and the plaintiff has made only bald allegations regarding the breach of terms and conditions as contained in letter of appointment dated 20.07.1995. 24 The plaintiff has also not proved cogent evidence regarding its entitlement of one month salary.
23. In view of discussion, the suit is dismissed with no costs. Decree sheet be prepared accordingly. File be consigned to the record room.
Announced in the open court (Dr.Sudhir Kumar Jain) Dated: 12.09.2008 Additional District Judge, Delhi 25 S.100/06 12.09.2008 Present : Sh.Rajesh Bhatnagar, Advocate for the plaintiff.
Vide separate judgment the suit of the plaintiff is dismissed. No order as to costs. Decree sheet be prepared accordingly. File be consigned to the record room.
(Dr.Sudhir Kumar Jain) Additional District Judge, Delhi