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Agreement in restraint of trade after termination is void or not?

- Pankaj Jain
Restraints whether general or partial may be good if they are reasonable. A restraint upon
freedom of contract must be shown to be reasonably necessary for the purposes of
freedom of trade. A restraint reasonably necessary for the protection of the covenant must
prevail unless some specific ground of public policy can be clearly established against it.
However, to what extent a particular restraint ought to be in persistence is a matter of
controversy which needs to be discussed.
The courts in India have interpreted the issue of restraint of trade which is apparent to be
appropriate in its view at various intervals. The inception of the present issue transpired
from since the year 1967 when the Supreme Court for the first time discussed the same in
Niranjan Golikaris case. In this case i.e. Niranjan S. Golikari v. Century Spinning Co.,
[1] Respondent had employed the Appellant in its manufacturing business under an
agreement. Clause 17 of the said agreement provided that In the event of the employee
leaving abandoning or resigning the service of the company in breach of the terms of the
agreement before the expiry of the said period of five years he shall not directly or
indirectly engage in or carry on of his own accord or in partnership with others the
business at present being carried on by the company and he shall not serve in any
capacity, whatsoever or be associated with any person, firm or company carrying on such
business for the remainder of the said period and in addition pay to the company as
liquidated damages an amount equal to the salaries the employee would have received
during the period of six months thereafter and shall further reimburse to the company any
amount that the company may have spent on the employees training. The Supreme Court
has held that the negative covenant in the present case is 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 companys interests and not such as the court would
refuse to enforce. There is therefore no validity on the contention that the negative
covenant contained in clause 17 amounted to a restraint of trade and therefore against
public policy. The Court has further held that the apprehension of the respondent
company that information regarding the special processes and the special machinery
imparted to and acquired by the appellant during the period of training and thereafter
might be divulged was justified that the information and knowledge disclosed to him
during this period was different from the general knowledge and experience that he might
have gained while in the service of the respondent company and that it was against his
disclosing the former to the rival company which required protection. The Court held that
the injunction issued against him is restricted as to time the nature of employment and as
to area and cannot therefore be said to be too wide or unreasonable or unnecessary for the
protection of the interests of the respondent company.

Though the issue was set forth that it was reasonable to restrain the appellant during the
term of the contract after the termination of the employment, the Court kept it open on
the issue whether after the termination of employment and also after determination of the
period of contract, the covenant can be enforced on such other person.
In Superetendence Co. of India v. Krishan Murgai,[2] the aforesaid issue was discussed.
However, in this particular case, the respondent was employed by the appellant company
as branch manager under letter of appointment. Clause 10 of the letter of appointment
provided that he will not be permitted to join any firm of appellant competitors or run a
business of his own in similar lines directly and / or indirectly, for a period of two years
at the place of his last posting after he leave the company. Thereafter the respondent
started its own business on lines identical with or substantially similar to that of the
appellant company after its termination of contract. In this case, Justice A. P. Sen has
observed that the decision in Niranjan Golikaris case is of little assistance to the
appellant. It is not seeking to enforce the negative covenant during the term of the
employment of the respondent but after the termination of his services. The Court held
that the restraint 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. It has been
further held that the question whether an agreement is void under section 27 must be
decided upon the wording of that section. There 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 matter of partial restriction has effect
only when the facts fall within the exception to the section.
A 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. From the aforesaid
case, it has been made explicitly clear that any contract which provides restraint after the
termination of the term of the contract is void and to which there is no need of entering
into its reasonability.
In Taprogge Gesellschaft MBH v. IAEC India Ltd.,[3] the defendant entered into an
agreement of agency with Plaintiff. Under Clause 13.1 of the said agreement it was
provided that, the agent must not recommend, offer, sell or represent products in
competition with the covered products. The same applies to the introduction of own
products and/or other industrial activities of the agent as well as to indirect or direct
participation in third enterprises or companies inside or outside of the agency territory.
The Plaintiff sought to enforce the above negative covenant clause which the Defendant
claims to be void. The Bombay High Court has taken into consideration the facts and
principles of both the above cases and have come to a final conclusion that agreement in
restraint of trade after its termination is void. The Court was of the opinion that the
distinction between the restraints imposed by a Contract, operative during the subsistence
of the contract and those operative after the lifetime of the contract is of a fundamental
character. Clause 10 of the Contract of employment placed the employee Krishan Murgai
under post-service restraint that he shall not serve in any other competing firm for two

years at the place of his last posting. Clause 10 was operative for a period of two years
after he left the company. The service of the employee was terminated by the employer.
The single Judge of the Delhi High Court held that the restraint of two years after the
service was reasonable. Mr. Justice A.P. Sen in para 18 of his judgment concluded that
the negative covenant against working during the term of the contract is not in restraint of
trade and that the doctrine of restraint of trade never applies during the continuance of the
contract. In Para 19 and 20, his Lordship considered Niranjan Golikaris case and finally
in Para 23, held that Niranjan Golikaris case was not applicable. The Court held that in
the result the restrictive covenant which the plaintiff seeks to enforce in this suit clearly
falls within the prohibition of section 27 of the Act. The Court followed the judgment of
the Supreme Court in Krishan Murgai as its ratio applies to this case. Having regard to
the rule laid down in Krishan Murgai (Para 17 of this Judgment), the negative covenant
embodied in Clause 13.1 of the contract is void.
In M/s. Gujarat Bottling Co. Ltd. v. Coca Cola Company.,[4] the appellant were
restrained by the Respondent and Court was in favour of invoking the negative covenant
clause against the appellant. The Court held that the negative stipulation operates only
during the period the agreement is in operation because of the express use of the words
during the subsistence of this agreement including the period of one year as
contemplated in paragraph 21, in paragraph 14. Except in cases where the contract is
wholly one sided, normally the doctrine of restraint of trade is not attracted in cases
where the restriction is to operate during the period the contract is subsisting and it
applies in respect of a restriction which operates after the termination of the contract.
Thus we find that in Gujarat Bottlings case, the present issue i.e. restrain after the
termination of the contract did not arise and hence had not been discussed.
In Jet Airways (I) Ltd v. r. Jan Peter Ravi Karnik.,[5] the Defendant was employed by the
Plaintiff aircraft company as a pilot. The Plaintiff had organized a necessary training for
the Defendant and other pilots. In consideration, the Defendant agreed and undertook that
during a period of 7 years from the date of completion of training in India and abroad and
on resuming actual services with the Plaintiff as First Officer, he would not accept
employment, similar in nature, either in full time or part time with any other employer.
The Defendant resigned from the services for which Plaintiff had invoked the negative
covenant clause along with other stipulated remedies under the agreement. The Court
was of the view that the ratio and judgment in Niranjan Golikaris case is not applicable
to the present case. The Supreme Court in Niranjan Golikaris case held that negative
covenant during the period of contract of employment when the employee is bound to
serve his employer exclusively are generally not regarded as in restraint of trade and
therefore do not fall under section 27 of the Contract Act. It was held that the Plaintiff
was entitled to be protected in regard. Whether or not the contract is in restraint of trade
would depend upon whether the contract was unreasonable, unfair or unconscionable. A
contract imposing a general restraint would, in all probability, be void. Partial restraint
would prima facie be valid and, therefore, enforceable. However, in present case, it is
nobodys case that this training is a well-guarded secret of the Plaintiffs and thus came to
the conclusion that Defendant cannot be restrained under the negative covenant clause.

In Zaheer Khan v. Percept DMark India Pvt Ltd.,[6] the Court considered a short
question whether the covenant contained in clause 31(b) of the agreement dated
1/11/2003, after the completion of the contract, is in restraint of trade and therefore void
under section 27 of the Contract Act 1872. Clause 31(b) of the agreement provided that
the legal position that appears to be fairly crystalised in India is that while construing the
provisions of section 27 of the Contract Act, neither the test of reasonableness nor the
principle of restraint being partial is applicable unless it falls within the Exception
appended to section 27. The reasonableness of the restraint is not envisaged by section
27. Under section 27 of the Contract Act restrictive covenant extending beyond the terms
of the contract is void and not enforceable. That the doctrine of restraint of trade does not
apply during the continuance of the contract of employment and it applies only when the
contract comes to an end, is not confined to a contract for employment, but is also
applicable to other contracts. In other words the doctrine of restraint of trade is the same
for the contracts for employment as well as the other contracts and the restrictive
covenant in the agreement to operate beyond the contract period is void and hit by
section 27 of the Contract Act. Restrictive covenant is to apply during the period of
contract but shall fall under section 27 of the Contract Act where it is to operate after the
contract has ended. The Court further held that the submission of the learned Advocate
General cannot be accepted for the reasons we have already indicated above as we find
that the so called obligation in clause 31(b) is nothing but a restriction on the future right
of Zaheer Khan to deal with the affairs concerning his endorsement, promotion,
advertising or other affiliation in the manner he likes and the person he chooses. After the
completion of the contract, one party to the contract, cannot bind or tie the other party to
do a particular thing or not to do a particular thing even concerning the transaction under
the agreement. Once the contract comes to an end either by efflux of time or otherwise on
lawful termination, the restrictive covenant in the nature of restraint of trade cannot
operate; and the party seeking its enforcement shall not be entitled to injunction.
A conclusion can be derived that the courts have given a stricter view by making it
comprehensible that every agreement in restraint of trade after its termination is void.
However, there should be some exceptions to this rule when the Plaintiff possesses some
confidential information or trade secret, which needs to be secured for a long term in the
interest of economic development. The courts ought to provide flexibility to the rule
depending upon the facts and circumstances of a particular case.