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High Polymer Labs. Pvt. Ltd. Vs. R.K. Mutreja and anr. - Court Judgment

LegalCrystal Citation
SubjectContract
CourtDelhi High Court
Decided On
Case NumberInterim Application No. 2415 of 1982 and Suit No. 890 of 1982
Judge
Reported inILR1983Delhi213
ActsIndian Contract Act, 1872 - Sections 27
AppellantHigh Polymer Labs. Pvt. Ltd.
RespondentR.K. Mutreja and anr.
Advocates: P.P. Malhotra,; A.K. Malhotra,; R.L. Tandon,;
Cases ReferredSuperintendance Company of India (P) Ltd. v. Krishan Murgi
Excerpt:
.....in restraint of trade is one by which a party restricts its future liberty to carry on his trade, business or profession in such manner and with such persons as he chooses. a contract, like in the present case, restriction the future liberty to carry on the same business of manufacture as carried on by the employer or to join employment of any manufacturer of such chemicals is in restraint of trade and hit by section 27. such a contract is not saved by the exception to section 27 of the contract act,; 2. section 27 of the contract act is applicable when there is a contract in restraint of trade after the cessation of employment whether by resignation or in any other manner and such a restrictive covenant is void and unenforceable. however, such a restrictive covenant is..........a trade is. such a contract is one by which a party restricts its future liberty to carry on his trade, business or profession in such manner and with such persons as he chooses. in the present case, the contract on which the plaintiff relies (although i have held above that prima fade such a contract ceased to exist on the resignation from service by defendant no. 1 ) obviously restricted the future liberty of defendant no. 1 to carry on the same business of manufacture as carried on by the plaintiff or to join employment of any manufacturer of such chemicals. it was, thereforee, in restraint of trade and was hit by section 27. there is no doubt that such a contract is not saved by the exception to section 27 of the contract act. (13) the learned counsel for the plaintiff, however,.....
Judgment:

G.B. Luthra, J.

(1) The present application under Order 39 Rules I and 2 read with Section 151 Civil Proce

(2) The aforesaid application is connected with a suit of the plaintiff for recovery of Rs. 1,00,5001- as damages and for issue of perpetual injunction mentioned hereinaer and for rendition of accounts.

(3) The plaintiff is a company incorporated under the Companies Act, 1956. Harcharan Singh is the managing director of the said Company. defendant no. 1 is a Chemical Engineer. He joined the plaintiff company on 12th December, 1980. He tendered resignation from his post. On 17th September, 1981 that resignation was accepted with effect from 21st September, 1981.

(4) According to the plaintiff, M|s. High Polymer Labge. developed a process of manufacture of a Chemical compound known an Azodicarbonamide and its derivatives and started marketing the same some time in the year 1968 under the trade name of Mikrofine-ADC and Mikrofine-ADC-EVA, commonly known as Adc and ADC-EVA in the business and trade circles. It is stated by the plaintiff that the said High Polymer Labs. was taken over by the plaintiff' company some time in April, 1977.

(5) The assertions of the plaintiff are that it was after lot of research work and expenditure of huge amounts that the know-how and techniques for the manufacture of the aforesaid Chemicals were developed and that the special process for the manufacture of those Chemicals, namely, Azodicarbonamide and its derivatives was found out. The case of the plaintiff further is that it was a condition of employment of defendant no. 1 that he will not divulge any secrets of the plaintiff company and the process of manufacture of the aforesaid Chemicals and that if he does. so, he would be liable to pay the minimum damages of Rs. 59,0001-. It is further alleged by the plaintiff that defendant no. 1 agreed to serve the plaintiff for a period of 4 years and that in case he left the employment before the expiry of the said period, he would be liable to pay damages amounting to Rs. 50,000[- but that when his resignation was accepted, he was released from the bonds of the period of employment According to the plaintiff when resignation of the dependant No. 1 was accepted, he gave clear assurance that he would not leak oat the secrets of the business of the plaintiff company but he had committed breach of that assurance by way of starting his own business of manufacture of the same Chemicals and selling the same under the name Adc and ADC-EJA. The plaintiff, thereforee, claims a sum of Rs. 1,00,5001-on account of damages for breach of service agreement by way of using the business secrets of the plaintiff for manufacturing the same Chemicals under the business name of defendant No. 2. The plaintiff also has prayed lor a decree for perpetual injunction restraining the defendants from manufacturing, sell or marketing -the aforesaid Chemicals. The plaintiff also prays for rendition of ^counts of the business carried on by the defendants in relation to manufacture and sale of the aforesaid Chemicals.

(6) The defendants contested the suit. They admitted that defendant no. 1 served the plaintiff as Chemical Engineer for the period from 12th December, 1980 to 21st September, 1981. It is, however, denied that he was under a service bond of not using the manufacturing process of the aforesaid Chemicals. They stated that a perusal of the letter dated 17th September, 1981 vide which the plaintiff accepted the resignation of defendant no. 1 would show that it was specifically recorded therein that defendant no. 1 was being re'leved of the service bond on the assurance in writing that neither he would join service of any person manufacturing similar type of product like that of the plaintiff nor he would leak out any process details to anybody which meant that he was not debarred from using the said process for manufacturing Chemicals. According to him, thus, by way of manufacturing the Chemicals he had not committed any breach of the condition. His further plea is that even if there was an agreement between him and the plaintiff debarring him from manufacturing the aforesaid Chemicals, the said agreement is void in view of the provisions of Section 27 of the Contract Act which makes a contract providing restraint of a trade or business as void.

(7) The defendants also denied that M|s. High Polymer Labs. invented any special process for the manufacture of the aforesaid Chemicals. The case of the defendants is that the aforesaid Chemicals are being manufactured by many concerns and the method of their manufacture is given in many books as well as Encyclopedia of Chemical Technology.

(8) I have heard the learned counsel for the parties. The first question for determination is as to whether there is a prima facie case to the effect that defendant no. 1 was under a: service bond to refrain from manufacturing the Chemicals in question. The second question is that in case such a service bond did exist, is the same valid under Section 27 of the Contract Act.

(9) It is common ground between the parties that it was on account of acceptance of resignation of defendant no. 1 that the said defendant left the services of the plaintiff. According to the plaintiff, defendant no. 1 was thus released from the bond of service for four years but he was still under obligation on account of a separate agreement in writing to refrain from divulging the secrets of process of manufacture of the aforesaid Chemicals or using the said secrets for manufacturing the siad products or selling the same in the market.

(10) Without prejudice to the decision of the case on merits, I however do not agree with the plaintiff in that respect. The agreement which defendant no. 1 entered into with the plaintiff in connection with the employment ceased to exist as soon as he was allowed to resign. It is only the assurance which defendant no. 1 gave at the time of resignation which matters. The plaintiff has not placed on record any assurance in writing given by defendant No. 1. Defendant No, I, has however placed on record a photostat copy of letter dated 17th September, 1981 which he has marked as Annexure D|4. It was vide that letter that the resignation of defendant no. 1 was accepted by the plaintiff. The following concluding words of that letter are important :

'FURTHER,regarding Service Bond, you are being relieved from the same on the explicit assurance given by you in writing that neither you will join the service of any person manufacturing similar type of product like ours nor you will leak out any process details to anybody.'

It is clear from the same that the assurance that was given by defendant no. 1 was that he would neither join service of any person manufacturing the same type of products nor he would leak out any process details to anybody. thereforee, there was no assurance that the defendant will not use the said process in the manufacture of these Chemicals. Under these circumstances, prima facie, it cannot be said that the defendants are under any obligation or an agreement not to carry on the business of manufacturing Chemicals in question. It may, however, be mentioned here that the defendants denied that they are using any of the processes.. employed by the plaintiff in the manufacture of the Chemicals. According to defendants they are using simpler processes which are being used by huge number of manufacturers of such products.

(11) Now we have to see the effect of Section 27 of the Contract Act which reads as under :

'27.Every agreement by which any one 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 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.'

(12) There is no difficulty as to what contract in restraint of a trade is. Such a contract is one by which a party restricts its future liberty to carry on his trade, business or profession in such manner and with such persons as he chooses. In the present case, the contract on which the plaintiff relies (although I have held above that prima fade such a contract ceased to exist on the resignation from service by defendant no. 1 ) obviously restricted the future liberty of defendant no. 1 to carry on the same business of manufacture as carried on by the plaintiff or to join employment of any manufacturer of such Chemicals. It was, thereforee, in restraint of trade and was hit by Section 27. There is no doubt that such a contract is not saved by the exception to Section 27 of the Contract Act.

(13) The learned counsel for the plaintiff, however, contended that Section 27 does not affect the restrictive covenants contained in employment contracts. In Niranjaa Shankar Golikari v. Century Spinning and ., : (1967)ILLJ740SC (which was relied upon by both the counsel for the parties), it was observed as follows in para 15 of the judgment :

'15.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 employees is bound to serve his employer exclusively are generally not regarded as restraint of trade and thereforee 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 thereforee a restraint of trade unless the contract as aforesaid is unconscionable or excessively harsh or unreasonable or one-sided as in the case of W. H. Milsted & Son Ltd., 1927 Wn 233 (supra). Both the Trial Court and the High Court have found, and in 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's interests and not such as the court would refuse to enforce. There is thereforee no validity in the contention that the negative covenant contained in clause 17 amounted to a restraint of trade and thereforee against public policy.'

According to the. learned counsel for the plaintiff, the true interpretation of the aforesaid observations of the Supreme Court is that in case of an employee who is still serving, any negative covenant in restraint of trade is binding but after the conclusion of the period of service only such negative covenants are binding which are neither unconscionable nor excessively harsh nor unreasonable or onesided. Learned counsel, thereforee, argued that in the present case the covenants which made it obligatory on the part of defendant No. 1 not to carry on any competing business or to divulge secrets of the business of the plaintiffs, was neither unreasonable nor unconscionable nor excessively harsh nor one-sided and that, thereforee, the same is binding.

(14) However, do not agree with the learned counsel for the plaintiff. To my mind, the law laid down by the Supreme Court clearly is that any contract in restraint of trade after the period of employment of service is void as vocative of Section 27 of the Contract Act but that such restrictive covenant during the period of employment is binding unless it is unconscionable, unreasonable, excessively harsh or one-sided. The Supreme Court was dealing with a case of a person who was under negative covenant during the period of his employment. It was held that the same was binding. In fact a covenant prescribing restrictions in respect of carrying on competing business or serving with a person carrying on competing business in respect of whole time employee, is obviously not in restraint of trade but forms the conditions of service of such an employee. thereforee, when such a negative covenant is sought to be enforced, in effect the conditions of service including the negative covenants aforesaid is attempted to be enforced and there is no question of enforcing any restraint intrade.

(15) The aforesaid matter came up for consideration before the Supreme Court again in Superintendance Company of India (P) Ltd. v. Krishan Murgi, : (1981)ILLJ121SC which was in an appeal from a judgment of Delhi High Court : AIR1979Delhi232 . The Bench of the Supreme Court who heard the matter consisted of three Judges. Two Judges did not express any opinion and decided the matter on the facts of that particular case. Hon'ble Mr. Justice A. P. Sen, however, expressed his opinion on the basis of interpretation of : (1967)ILLJ740SC . With great clarity, the opinion expressed by Hon'ble Mr. Justice A. P. Sen was that any contract in restraint of trade after the cessation of employment is not binding and is void as vocative of Section 27 of the Contract Act. It was further held that such a negative covenant in restraint of trade during the continuance of employment is enforceable as it is not a restraint in trade and doss not violate Section 27 of the Contract Act.

(16) I am, thereforee, of the view that Section 27 of the Contract Act is applicable when there is a' contract in rest traint of trade after the cessation of employment whether by resignation or in any other manner and such a restrictive covenant is void and unenforceable. However, such a restrictive covenant is enforceable and is not hit by Section 27 of the Contract Act if the same is during the continuance of servce of a whole-time employee provided that such a. covenant or contract is neither unreasonable nor unconscionable nor excessively harsh nor one-sided.

(17) The aforesaid being the position of law, obviously the contract on which the plaintiff relies is void as vocative of Section 27 of the Contract Act and that being so, no injunction for enforcing the same can be issued.

(18) It may be mentioned that the aforesaid view has been expressed only with a view to decide the present application for temporary injunction and will not prejudice the decision on merits.

(19) I, in view of the foregoing discussion, dismiss the application for issue of injunction with consolidated costs of Rs. 500.


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