SUPERINTENDENCE COMPANY OF INDIA (P) LTD. v. KRISHAN MURGAI

Citation: [1980] 3 S.C.R. 1278

Court: Supreme Court of India

Bench: N.L. UNTWALIA, V.D. TULZAPURKAR, A.P. SEN

Case summary

A Single Judge of the Delhi High Court/adopting the test cf /D reasonableness, held that under sectian 27 of the Cantract Act to determine whether the agreement is void, one has to see whether the restraint is reaSO'nable;...

Judgment text

12:78 SlJPERJNTENDENCE COMPANY OF INDIA (P) LTD. v. KRJSHAN MURGAI May 9, 1980 [N. L. UNTWALIA, V. D. TuLZAPURKAR AND AP.. SEN, JJ. ] Covenant in restruiflf of trade-Contract Act, 1872, Section 27, scope of- f- Wlzetht:r a post-service restrictive cpvenant. in restraint of. trade in service t1greement b~tween the parties is void-Even if it be valid, whether it could be enfiorceable. as enjoined by ittustrations (c) and (d) ,to Section 57 of th• Specific Relief Act, 1963. y The- appellant company carries on busine$ as valuers and surveyor! undertaking inspection of quality, weighment analysis, sampling of merchandise and commodities, cargoes, industrial products, machinery, textiles etc. It has established a reputation and gocxlwill in its business by developing its own techniques for quality testing and control and possess trade secrets in the form of these techniques and clientele.

It has its headoffice at Calcutta and a branch at New Delhi and employs various persons as managers and in other c~cities in Calcutta; New Delhi and other pla. ces~ 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 Q. is own in similar line as that of the appellant company for two Y"'l"' at tho place of his last posting. On November 24, 1978, the appellant company terminated the respondent's semces with effect from December 27, 1978. Thereafter, respondent started his own business under the name and style of "Superintendence and Surveillence Inspectorate of India" at E.

-22 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 HighJ Court on its original side, claiming Rs. 55,000/- as dama8"8 on account ofT the b~ch of negative covenant contained in clause (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 Imes similu to that of the appellant conipany or associating or representing any competitors of the appellant company 'before the expiry of two ye;m from December 27, 1978. After filing the suit the appellant company sought an ad interim injuncilon by way of enforcing the aforesaid negative covenant a1*i a Single Judge of the Delhi High O>uft initially granted an ad interim injunction on April 29, 1979 which was confirmed by him on May 25, 1979 after hearing the respondent.

On appeal by the respondent, the Division Bench" of the High Court reversed the interim ord~r and hence the appeal by certificate. Dimlissing the appoal, the Court SUPERINTl! NDBNGB COMPANY V. KRISHAN MURGA! 127 9 HELD: (Per Tulzapurkar l. , on behalf of Untwali~ l. and himself). !. Assuming that the negative covenant contained in clause (10) of the service agreement is valid and not hit by section 27 of the Indian Contract i ... Act, it is not enforceable against the respondent at the instance of the appellant company. The appellant company should have taken care to uae appropriate language, while incorporating such reStrictive covenant so as to 1 ' T include every case of cessation of employment arising from any reason whatsoever and not llsed the expression "leave", which normally is synony- I I ,, pious to the expression "quit" and indicates voluntary act on the part of the employee.

[1285 F, 1287 A, B-C] ~ (2) The word "leave" has various shades of meaning depending upon the context or intent with which it is used. According to the plain grammaticel meaning that word in relation to an employee would normally be '\j'coostrued a& meaning voluntary leaving of the service by him and would ~ not iI}. clude a case 'where he is discharged or dismissed or his services are terminated by his employer. Ordinarily, the word connotes voluntary action. [1286-D] (3) In the instant case, having regard to the context in which the expression leave occurs in clause (10) of tho service agreement and reading it alongwith all the other terms of agreement, it is clear that the word •ieave• was. intended by the parties to ·refer to a case where the employee voluntarily left the services of his own. [1286 G-H, 1287 A] Murray v. Close, 32 Law Times Old series p. 89; held inapplicable to Indian Law. Muesling v. International Rly. Co. , 147 N. Y. S.

177,' 178 85 Misc 309; y quoted with approval. Per, Sen 1. : 1. Agreements of service, containing a negative covenant preven. ting the employee from working elsewhere 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 being that the doctrine of restraint of trade never applies during the continuance of a contract of employment and applies only when the contract comes to an end. While during the pet:iod of employ- \. ment the Courts undoubtedly would not grant any specific performance of i a contract of personal service, nevertheless Section 57 of the Specific Relief Act clearly provides for the grant of an injunction to restxain the breach of such a covenant, as it is not in restraint of, but in furtherance of trade. [1289 C-EJ \ 2.

There is a clear 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. Mere existence of negative covenant in a service agreement does not make it void on the ground that it was in restraint of trade and contrary to the Contxact Act. The restriction contained in clause 10 of the agreement in this case is clearly in restraint of trade and therefore illegal under section 27 of the Cootract Act. It is not seeking to enforce the negative covenant during the term of employment of the respondent but after the tennination of his . serviceo. [1289 F-G, 1290 F-0, 1291 C-D] , Niranjan Shankar Golikari v, Century Spinning and Manufacturing Co. , Ltd. , [1967] 2 SCR 378, distinguished. 3.

\Vhen a rule of English law receives statutory recognition by the Indian Legislature, it is the language of the Act which determines the scope, un· influenced by the manner in which the anologous provision comes . to be construed narrowly or otherwise modified in order to bring the construc. tion within the scope and limitations of the rule governing the English doctrine of trade. [1291 H, 1292 A] Satyavrata Ghosh v. Kurmee Ram Bangor, [1954] SCR 310. followed. 4. A contract which has for its object a restraint of trade is, prima facie ~oid. The question whether an agreement is void under section 27 must be decided upon the wording of that section. There is nothing in the woro----v-ing 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 section.

Section 27 of the Contracts Act is general in terms, and declares aU agreements in restraint void pro tanto, except in the case specified in the application and unless a particular contract can be distinctly brought within Exception I there is no escape from the prohibition. Here the agreement in question is not a "good will of business", type of contract, and, therefore does not fall within the exception. If the agreement on the pa. rt of the respondent puts a restraint even though partial, it wa. o void, and, therefore, the contract must be treated as one which cannot be enforced. [1292 E. H, 1293 A, F-GJ Madhub Chander v. Rai Coomar Dass, (1874) Bom. L. R. 76 @ 85-86; approved. 5. A contract in restraint of trade is one by which a party restricts liis . future liberty to carry on his trade, business or profession in such maniier and with such persons as he choooes.

A contract of this class is prima facie void, but it becomes binding upon proof that the restriction is justifiable in the circumstances as being reasonable from the point of view of the parties themselves and also of the community. Under Section 27 of the Contract Act the onus is upon the covenanter. [1292 H, 1293 A. & 1294 D·E] { r 6. 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 could_ be no reason for the introduction of such a law at the present / times. Neither 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 I. Under Section 27 of the Contract Act, a service covenant extended bey00d' the termination of the service is void. [1299 AMC:/ Nor f agreements of this kind must be confined within a definite neighbourhood.

But the Anglo Indian law has stereotyped that doctrine ill a narrower form than even the old authodties would justify. " "Meanwhile the common law has, . on the contrary; been widening the old fixed rules as to limits of space have been broken down, and the court has only to consider in every case of a restrictive agreement whether the restriction is 'reasonable in reference to the interests of the parties con- . ,. cemed reasonable in reference to the interests of the public. " f Reverting to th~ judgment . of Sir Richard Couch in Madlmb ·Chunder v. Rajcoomar Doss, supra, we find that that eminent Judge held that section 27 of the Contract Act does away with the distinction observed in English cases following upon Mitchel v. Reynolds, supra, :between partial and total restraints of trade, and makes all contracts falling within the terms of section void, unless they fall within the exceptions. As already stated, that decision has always been followed. In Shaikh Kalu v.

Ram Saran Bhagat, [1908] 13 C. W. N. 388 :Mllkherjee and Camduff, JJ, referred to the history of the legislation (l Pollock & Milla's India Contrzct and Specific Relief Act, 9th Ed. , at pp, 271, 274 and 292. on the subject and observed that the framers of the Act deliberately reproduced Section, 833 of Field's Code with the. full knowledge that the effect would be to lay down a rule much narrower than what was. recognised at the time by the co=on law, while the rules of the , co=on law, on the other hand, had since been considerably widened and developed, on entirely new lines. They held that the wider construction put upon section 27 by Sir Richard Couch. in Madhub Chundur 1 v. Raj Coomar Doss, supra, is plainly justified by the language used, and that the selection had abolished the distinction between partial and' total restraints of trade and said : "The result is that the rule as embodied in sec.

27 of the Indian Contract Act presents an almost startling dissimilarity to the most modern phase of the English rifle on the. subject. They went on to observe: "As observed, however, by Sir Richard Couch in the case to which we have referred, we have nothing to do with the policy of the law, specially as the Legislature has deliberately left the provision in sec. 21; in its original form, though other provisions of the Contract Act have from time to time been amended. The interference would be almost irresistible under these circumstances, that the Courts have rightly ascertained the intention of the legislature. The silence of the Legislature in a case of this description is almost as emphatic as an express recognition of the construction which . has been judicially put upon the statute during many years past. In this view of the matter, if we adopt the construction of sec.

27 of the Indian Contract Act as first suggested by Sir Richard Couch and subsequently affirmed in the cases to which we have referred, a construction which is consistent with the plain language of the section, the agreement in this case must be pronounced to be void. " (Emphasis supplied) The Law Commission, in its Thirteenth Report, has recommended that Section 27 of the Act should be suitably. amended to allow such f 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 linguage. The question for consideration is whether, assuming that the \vider construction placed by Sir Richard Couch in Madlu1b Clmndur v. SUPERL'HENDENCE COMPANY V. KRISHAN MURGA! 129~ (Sen, J. ) .

- Raj Coomar Doss, supra, to have been the law, at the time of enact- . ment, it has since become obsolete. A law does not cease to be operative becaus~ 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 time. Neither 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 Bar. Under Section 27 of the Contract Act, a service covenant extended beyond the termination of the service is void. Not a single Indian Decision tas been brought to our notice where an injunction has been granted against an employee after the termination of his employment.

There remains the question whether the w01:_d 'leav()' in clause 10 of the agreement is wide enough to make the negative covenant operative on I. he termination of employment. We may for convenience of reference, reproduce that covenant below :- "10. that you shall not be permitted to join any firm of our competitors or run business of your own in similarity as directly and/or indirectly for a period of 2 years at the place of your last posting af! er you leave the Company. " ;r- On 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 l~ave the services but is dismissed from service. Wrongful dismissal is a repudiation of contract of service which relieved the employee of the restrictive covenant General Bil/posting v. Atkinson L. R. [1909] AC. 116.

• It 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 Stroud's Judicial Dictionary, 4th Edn. , Vol. If, Pr. 13 p. 1503. There is reference to Mars v. Close, 32 L. T. 0. S. 89. Ari agreement restricting competition with an employer "after leaving his service" was held to be operative on the termination, however, accomplished, of th-e service, e. g. by ~ dismissal without notice. The 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 emplgyee, should be construed to mean where he "voluntarily" leav~s 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 ~eaning in consonance with justice and fair play. It is also the ordinary plain meaning of the word 'leave'. ln shorter Oxford English Dictionary, 3rd Ed. Vo1. X, page 1192, th,e following meaning is given- "to depart from; quit; relinquish, to quit the service of a person. " The drafting of a negative covenant in a contract of employment is ·C 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's duty 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 is· too widely worded, the Court may, refuse to enforce it. ,)<; It is well settled that employees covenants should be carefully scrutinised because there is inequality of bargaining power between the parties; indeed no bargafuing 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 :F "tempt improvident persons, for the sake of present gain, to deprive themselves of the power to make future acquisitions, and expose them to iinpositiOn and oppression.

" ( TI1ere 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, G . 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 p11rchaser is entitled to protect himself against competition on the patt 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 . H affect the employee's 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- business. f, SUPERINTENDENCE COMPANY V, KRISHAN MURGA!

1301 The distinction rests upon a substantial basis, since, in the f0rmer class of contracts we deal with the sale of commodities, and in the latter class with the performance of personal service-altogether different in substance; and the social and economic implications ! Ire va~tly different. The Courts, therefore, vi~ with disfavour a restrictive covenant by an employee not to engage in a business similar to or competitive with that of Jhe 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 c· 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 wider. In Mills v. Dunham, L. R. (1891] 1 Ch. 576, Kay, Ll.

observed: "If there is any ambiguity in a stipulation between em- It ployer and employee imposing a restriction on the latter, it ought to receive the narrower construction rather than the wider-the employed ought to have the benefit of the doubt. It would not be following out that principle correctly to give the stipulation a wide construction so as to make it illegal and thus set the employed free from all restraint. It is also a E' settled canon of construction that where a clause is ambiguous a construction which will make it valid is to be preferred to one which will make it void. " The 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 of the 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. In the result, the appeal must fail and is dismissed but there·shall be no order as to costs. B S. R. Appeal dismissed. I '