1. The main question for consideration in this appeal is whether Rule 15 of the Managerial Staff Gratuity Fund Rules of the Defendant-company constitutes a restraint of trade within the meaning of S. 27 of the Contract Act (Act 9 of 1872) and if so is it valid.
2. The defendant is the appellant. The sole respondent-plaintiff filed a suit for recovery of Rs. 25,000/- the sum due towards gratuity from the defendant-company wherein he worked as a manager till he resigned on 4th October, 1976. The plaintiff avers that on 4th October, 1976, he submitted his resignation and the same was accepted by the defendant on 3rd December, 1976, but when he demanded payment of the gratuity, the defendant instead that he should give an undertaking or confirmation in terms of Rule 15 of the company's gratuity scheme, which is wholly unnecessary, and the defendant failed to pay the gratuity due to him though he has not engaged himself or has not done any act prejudicial to the interests of the company and hence the suit. The defence is that no gratuity would be payable if any member acted prejudicially against the interests of the company either during the service of the company or engaged himself without prior consent for such an activity within a period of three years from his retirement and that the technical know how was important for the successful running of the defendant-company and the plaintiff was sent abroad and given training in sophisticated companies and plaintiff should not part with his knowledge to competitors without their prior sanction and hence they insisted that the plaintiff should give an undertaking not to act prejudicially to its interest and consequently the withholding of the gratuity is justified when the plaintiff refused to give such undertaking.
3. On this controversy the trial Court found that on a true construction of Rule 15 of the above rules the defendant cannot insist that the plaintiff should give an undertaking, and there is no evidence that the plaintiff has contravened Rule 15 and that the defendant has no right to restrain the plaintiff from carrying on a competitive business in view of S. 27 of the Contract Act and consequently decreed the suit. Against the said judgment and decree, the above appeal is filed.
4. There is no dispute about the quantum of the amount payable. The only question is about the right to receive the said amount in view of the noncompliance of Rule 15 of the Managerial staff Gratuity Fund Rules.
5. Sri K. Srinivasa Murthy, the learned counsel for the appellant raised the following contentions :-
(1) Irrespective of the nature of the restrictions imposed by Rule 15 of the said rules, noncompliance of the conditions imposed in the said rule entitles the defendant to withhold the payment of gratuity.
(2) Once the employee has to comply with the conditions imposed in the said rule, the insistence of the undertaking not to violate the said rule is well-founded.
(3) The rule imposes a reasonable restriction in the interests of the trade of the defendant company and not him by S. 27 of the Contract Act and hence valid even if it operates as restraint of trade after the cessation of service.
(4) The evidence in the case establishes that there is violation of rule.
6. Before construing the Rule and examining its validity, it is necessary to note briefly the events that took place with reference to the correspondence between the parties.
7. On 4th October, 1976 the plaintiff resigned and he requested the defendant-company to relieve him by 3rd January, 1977 (Ex. B-2). The resignation was accepted under Ex. A. 1 on 3rd December 1976. It was stated in that letter :
'In accordance with the terms of employment, we are sure that you will not divulge any confidential and proprietary information that you have acquired during your association with us.'
On 23rd December, 1976, the plaintiff requested the Board of Trustees of the Gratuity fund to pay the gratuity amount in lumpsum (Ex. A. 2). Under Ex. A. 3 dated 14th March, 1977 a reply was given stating that the Board Trustees are willing to pay the amount in lumpsum, but they wanted to obtain confirmation in terms of Rule 15 of the Company's Gratuity Scheme that the plaintiff will not engage himself in any competitive activity or any other activity prejudicial to the interests of the company without the prior consent in writing from the company within a period of three years from the date of leaving the company. To that the plaintiff replied under Ex. A. 4, dated 23rd March, 1977 stating that the amount need not be paid in lumpsum and his request to pay the same in lumpsum may be disregarded. To that a reply was issued by the company under Ex. A. 5 on 29th March, 1977 stating that the confirmation as indicated in their previous letter is necessary before they can decide whether any gratuity is due to him. To this the plaintiff replied on 9th April, 1977 stating that Rule 15 of the Gratuity scheme is already there and there is no question or occasion for confirmation in terms of the said rule. Hence he requested for payment of the gratuity at the earliest. As per Ex. A. 6, the company replied stating that unless the confirmation is received is indicated, his claim for settlement of the gratuity cannot be considered. To that the plaintiff replied on 8th June 1977 that he is not bound to give any such undertaking and giving of such undertaking is not contemplated by the said rule and consequently the plaintiff made a demand to pay the gratuity within a week. Ex. A. 7 was received by the plaintiff stating that the matter was already concluded by the previous correspondence and nothing more to be added in this regard. Finally Ex. B. 5, dated 27th December, 1977 was issued by the plaintiff demanding payment of the gratuity and also claiming that Rule 15 of the Managerial Staff Gratuity Fund Rules violates S. 27 of the Contract Act. The same was refused by the company under Ex. A. 8, dated 23rd January, 1978. The present suit was filed by the plaintiff claiming the amount of gratuity.
8. Though no issue was framed about the validity of the rule, the same was argued before the trial Court had before me. Hence we have to examine the same.
9. It is necessary to notice Rule 15 which is in the following terms :-
'15. Notwithstanding anything contained in these rules, no gratuity will be payable on the termination of service due to misconduct or on resignation in order to avoid such termination or if any member acts prejudicially against the interest of the company either during service with the Company or engages himself without prior consent in writing from the company in any such activity within a period of three years from retirement or retrenchment or termination of employment with the company on any ground.'
10. A perusal of the rule contemplates the grounds on which an employer can withhold the payment of gratuity. Broadly stated, three grounds were enumerated. (1) Termination of service for misconduct (2) resignation in order to avoid termination and (3) acting prejudicially against the interests of the company. The third ground covers both during the service and also after the cessation of service. The trial Court took the view in para 13 of the judgment that the case of the plaintiff is not one of resignation in order to avoid termination and hence the same is not covered either by the first or second part of the rule I do not agree with that conclusion. The third ground mentioned in the rule clearly contemplates withholding the gratuity if any member acts prejudicially against the interests of the company after cessation of service. The cessation may be either by retirement or by retrenchment or termination of employment. Hence it is clear that though the resignation is not to avoid termination coming within the first part of the rule, it is enough if termination took place. The termination may take place even by resignation. Hence I am of the view that the learned counsel for the appellant is correct on the first submission that the non-compliance of the terms of Rule 15 disentitles the employee for the gratuity.
11. However on the second contention, I am not persuaded to accept that the defendant is entitled to insist upon giving an undertaking. The Court below found that the defendants has evolved a procedure for implementing the rule and issued a circular requiring an undertaking from outgoing employees. It also found that when previous employees Wairs Baigh and Chenoy retire no such undertaking was proved to have been taken. However, on a true construction of the rule, I am of the opinion that no undertaking is contemplated to be given in writing by the employee after the cessation of service. Whatever be the true effect of the rule, it operates by its force. I do not find any justification for holding that the company is right in insisting upon an undertaking within the terms of the rule. It is also argued by the learned counsel that the very fact that the plaintiff is unwilling to give the undertaking would clearly establish his motive and when he is not even willing to give the promise not to violate, the obligation to pay the gratuity does not arise. Further the insistence of the undertaking is just and proper and the Court should give effect to it, failing which the defendant-company will have to file suits against the employees as and when they violate the rule and instead of that a simple undertaking on their part would safeguard the interests of both the parties. Promises are not secured by further promises. A further promise or undertaking, unless shown to be part of the terms of employment, cannot be insisted upon, and would not in any way secure the due performance of the promise. Hence I am of the opinion that the defendant-company can show that the rule in question was violated and justify withholding the gratuity but cannot withhold the gratuity on the failure to give undertaking. Hence I do not see any force in the contention of the learned counsel that on a true construction of the rule the company is justified in insisting upon the undertaking to be given by the plaintiff.
12. The next question debated before me is that the rule so far as it restricts the right of the defendant to carry on the trade after the cessation of the service in hit by S. 27 of the Contract Act. It is necessary to notice the terms of S. 27 of the Contract Act which is in the following terms :
'27. Every agreement by which anyone is restrained from exercising a lawful profession trade or business of any kind, is to that extent void.'
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 good will 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.'
12. In Niranjan Shanker Golikari v. Century Spinning and Manufacturing Co., [1967-I L.L.J. 740] the Supreme Court held construing the said section :-
'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 there for do not fall under S. 27 of the Contract Act.'
13. The restrictive covenant complained in that case was during the period of employment. In Superintendence Co. of India v. Krishna Murgai [1981-I L.L.J. 121] where the validity of the post service restrictive covenant was challenged, the majority of Judges did not express any opinion. But A. P. Sen, J., held that under S. 27 a service covenant extended beyond the termination of the service is void. Hence it is contended by the learned counsel for the appellant the judgment of Justice Sen is obiter as the question is not decided by majority of Judges. It can be seen from the judgment of Sen, J., that the construction of the restrictive covenant and the validity A.P. of the said covenant are two independent grounds and he gave decision on both the grounds. It is fairly settled that if a Judge states two grounds for his judgment and bases his decision upon both, neither of those grounds is a dictum, but it must be regarded as a ratio decidendi Vide Jodobs v. London Country Council (1950(1) All ER 737). But the difficulty arises as Lord Simonds remarks when a judgment of the appellate Court consists of more than one Judge and some of them have not expressed opinion on the alternative grounds. It is no doubt true that majority of Judges hold that they do not propose to discuss or decide the question of the validity of the covenant on the question whether the covenant offends S. 27 of the Contract Act. However, it cannot be argued that the judgment of Sen. J., is not binding on this Court as this Court is bound by the judgment of the Supreme Court when there is a clear declaration of law even if it is obiter. This Court is bound by the opinion expressed by minority of the Judges eventhough majority of Judges of the Supreme Court expressly chose not to examine the said issue. Vide Prem Prakash v. Union of India : AIR1977All482 and Union of India v. Messrs. C. L. Vareed Company (I.L.R. 1969(2) Kerala 163). Further it is also not possible for the learned counsel for the appellant to argue that in view of the fact that minority of judges expressly chosen not to express an opinion, the question is res-integra. In fact what was argued before the Supreme Court was that the view of the several High Courts expressing that the post service restrictive covenant is void requires reconsideration and the Supreme Court had not so far considered this question when the law commission also recommended change of law by amending S. 27 and the time is ripe to consider the question. The judgment of Sir Richard Couch, C.J., in Madhub Chunder v. Raj-Commar Doss (1874-14 Bengal Law Reports 76) which was described by the majority of Judges also as celebrated decision clearly laid down that post service restrictive covenant offends S. 27 of the Contract Act. The judgment was followed by all High Courts in India and as observed by Sen, J., it has stood the test of time and no contrary authority was shown. Thus it is clear the refusal to reopen the question and consider the validity of these ancient authorities cannot be construed that these decisions are shaken in any way by the judgment in Superintendence Co., of India v. Krishna Murgai (supra). Hence I have no hesitation to hold that a restrictive covenant extended beyond the termination of service is hit by S. 27 of the Act.
14. It is for the Court to consider in every case whether a covenant impeached is in restraint of trade. It is very difficult to draw a line between those contracts which are restraint of trade and those which merely regulate normal commercial relations between the parties. In this regard the definition of restraint of trade given in Petrofina (Great Britain) Ltd. v. Martin (1966) 1 Ch. 146 at 180, may be usefully quoted :
'A contract in restraint of trade is one in which a party agree with any other party to restrict his liberty in the future to carry on trade with other persons not parties to the contract in such manner as he chooses.'
15. Even in England in these cases where the test of reasonableness is applied while judging the validity of a covenant relating to restraint of trade different standards are applied for post service covenants and covenants during employment.
16. Halsbury's Laws of England, Fourth Edition, Vol. 47, para 36 states :
'The doctrine of restraint of trade has normally no application to restrictions which operate during the period of employment but where the restrictions may have the effect of sterilising rather than absorbing a man's capacity for work the contracts may be subject to examination. With that qualification, an employer may secure the whole time of his employee during the period of service, which may last for the employee's lifetime. However, a restraint, although it is reasonable if applied during the period of service, may be unreasonably wide if applied after the termination of that period, and where a covenantor during the period, left his service without having been dismissed, the restraint was only enforced by injunction for the residue of the period.'
17. However, in view of the statutory provision on S. 27 of the Contract Act the only escape from the provisions of S. 27 is to plead and prove that the covenant in question is not a covenant relating to the restraint of trade. The contract of sale of goodwill is the only exception made to this rule.
18. A covenant during the period of contract of employment was held not to offend S. 27 of the Contract Act as the employee is bound to serve his employer exclusively and such covenants were construed to be outside the purview of S. 27 unless shown to be unconscionable, or excessively harsh or unreasonable.
19. Thus, the legal position on this aspect can be stated as follows :
(1) When a contract or a covenant is impeached it is the duty of the Court to construe the same and ascertain to what extent it constitutes a restraint of trade.
(2) A contract or covenant which has for its object a restraint of trade is prima facie void under S. 27 of the Contract Act.
(3) Negative covenants operating during the period of contract of employment do not fall under S. 27 of the Contract Act.
(4) The restrictive covenants applicable during the employment can only be questioned on the ground they are unconscionable or excessively harsh or unreasonable.
(5) Any restrictive covenants extended beyond the termination of service is void under S. 27 of the Contract Act.
(6) The test of reasonableness or the principle whether the restraint is total or partial has no applicability in case of post service covenants.
20. Applying the above tests I am clearly of the opinion that Rule 15 so far it covers the post service period offends S. 27 of the Contract Act and is void.
21. Now the last question that remains is whether in fact the rule is violated. The operative portion of the said rule is 'acting prejudicially in the interest of the company'. To my mind the rule is vague. It is not clear whether it is intended to protect technical knowhow or a confidential or proprietary information. In fact the covenants must not be vague so that the Courts should be able to enforce them strictly. It is useful to note one passage in Halsbury's Laws of England vol. 47, Fourth Edition para 52. The agreement must not be too vague, and the parties cannot leave it to the Court to frame their agreement to meet a particular breach'. The covenant restricting the right of an employee must be more specific in securing the interests of trade secrets, or technical knowledge of the company. It may be necessary to read the rule with Ex. A. 1 wherein the company while accepting the resignation of the plaintiff stated : 'You will not divulge any confidential and proprietary information that you have acquired during your association with us'. Let us examine the violation of this rule. The Court below found that there is no evidence that the plaintiff has contravened Rule 15. It is averred clearly in the plaint that the plaintiff has not engaged himself or done an act prejudicial to the interest of the company by taking consultative service after the resignation. The Court below in support of its finding relied on the evidence of D.W. 1 who stated thus 'I cannot say whether out production or sales have received a set back. I have not received any information if the plaintiff divulged any trade secrets'. Hence it is clear that there is no proof of violation of the rules.
22. The learned counsel for the appellant contends that the plaintiff himself admitted that he opened the consultancy service and that it is a clear proof of violation of rule. However, when the plaintiff raised the plea that he has not done any act prejudicial to the interests of the company by conducting consultative service no evidence is forthcoming to prove the same. I am not persuaded to accept that the consultancy service of the plaintiff to third parties has in fact resulted in prejudice to the defendant. Hence I am of the opinion that the defendant failed to establish that the activity of the plaintiff has resulted in prejudice to the defendant company within the meaning of Rule 15.
23. In the result, the appeal fails and is dismissed with costs.
24. As per the order of this Court dated 13th April, 1983 the respondent will be entitled to the interest on the balance of the decretal amount at the rate of 15% per annum till the date of payment.