Saturday 24 May 2014

Whether employees can compete with their employer after they quit their job?

Contract Act, 1872 - Section 29 - Confidentiality Agreement - Within three months of leaving employment, the Defendant joined competitor - Restraint on trade - Right of the employees to seek employment - Right of livelihood must prevail - Agreement sought to restrain employment with an employer dealing in competitive business for a period of two years - Application cannot be allowed - Injunction only to restrains Defendant from approaching the plaintiff's suppliers and customers for soliciting business granted - Interim application disposed of.
I.A. No.5455/2008, I.A. No.5454/2008 & I.A. No.5453/2008 in
CS(OS) No.337/2008

Judgment pronounced on :
14th July, 2009

Citation;(2009) 112 DRJ 14,MANU/DE/1215/2009

the ex-parte order dated February 20, 2008 and under Section 8 of theBy this order, I shall dispose of three applications being I.A No.
5453/2008, I.A No. 5454/2008 and I.A No. 5455/2008 in CS (OS) No.
337/2008. I.A No. 5453/2008 and I.A No. 5454/2008 have been filed by
Defendant No. 1 under Order 39 Rule 4 of the CPC, 1908 for setting aside
Arbitration and Conciliation Act, 1996 for reference of the dispute between
parties to arbitration respectively, and I.A No. 5455/2008 has been filed by
Defendant No. 2 under Order I Rule 13 of CPC, 1908 for its deletion from
the array of parties.

Briefly, the facts of the suit filed by the plaintiff are the following.
Both the plaintiff and Defendant No. 2 deal in the sale and marketing of
similar products i.e. evaporative cooling components, products and systems.
The plaintiff submits that Defendant No. 1 joined M/s Artic India Sales as
Area Sales Manager in 1998. The said company was a proprietary concern
of Mr. Deepak Pahwa. In 2000, Defendant No. 1 was transferred to Arctic
India Engineering Pvt. Ltd. with length of service counted from 1998. This
company is one of the group companies owned by Mr. Deepak Pahwa and
his family. In 2006, Arctic India Engineering Pvt. Ltd.‟s name was changed
to Desiccant Rotors International Pvt. Ltd. Meanwhile, Arctic India Sales
was merged with Bry Air (Asia) (P) Ltd. in 2004, which is also a group
company held by Mr. Deepak Pahwa.
The Defendant No. 1 on his transfer to the Plaintiff Company entered
into a Confidentiality Agreement with the latter on December 22, 2000
wherein he acknowledged that he was dealing with certain confidential
material of the Plaintiff such as know how, technology, trade secrets,
methods and processes, markets, sales, list of customers, accounting
methods, competitive data, financial plans etc and stated that he would not
divulge the same to third parties. On July 18, 2007 defendant no. 1 resigned
from the plaintiff company and signed an Obligation Agreement on June 12,
2007 which basically provided that (i) for two years after termination of
employment, he would not compete with the plaintiff‟s business and would
not advise, consult, serve or assist any party whose business competes with
that of the plaintiff and its group companies; (ii) for two years he would not
interfere with the relationship of the plaintiff with its customers, suppliers
and employees; that he would not disclose the confidential information to

which he was privy as employee of plaintiff to any third party; (iii) that he
would deliver back all properties (tapes, notes, discs, manuals, advertising
material etc) of the plaintiff which were in his possession and (iv) he would
not retain copies of the above-mentioned properties of the plaintiff. In
addition to the Obligation Agreement, Defendant No. 1 signed two
declarations on the same day declaring that if he failed to adhere to the
declarations it would amount to breach of trust and that he would take full
liability and responsibility of the same.
The plaintiff alleges that within three months of leaving it, Defendant
No. 1 joined Defendant No. 2 as its Country Manager and became in charge
of marketing its products. As mentioned earlier, Defendant No. 2 deals with
HumiCool products, which is in direct competition with the plaintiff‟s
EcoCool pads in the market. In view of this, the plaintiff has made
allegations of breach of trust against the Defendant No. 1 who has, as per the
plaintiff, violated the declaration as well as the Obligation Agreement and
the terms of confidentiality and non-compete.
The Plaintiff also alleges that Defendant No. 1 had made a backup of
the entire data contained in his laptop, taking the said backup with him when
he left the plaintiff. The information therein is averred to be confidential as it
is said to include trade secrets, supplier and customer lists, business plans,
strategies of trade and marketing etc. It is alleged that Defendant No. 1 has
even contacted the suppliers and customers of the plaintiff on behalf of his
new employer Defendant No. 2.
The plaintiff further submits that the above-mentioned acts of both the
defendants are causing it irreparable harm as the disclosing of confidential
information by its prior employee to a direct competitor is an illegal and

mala fide breach of its intellectual property rights and is harmful to its
goodwill and reputation. In lieu of this, the plaintiff has prayed for
mandatory injunction and for delivery up and rendition of accounts.
Defendant No. 1 has filed I.A No. 5453/2008 for setting aside the ex-
parte order passed on February 20, 2008 restraining the Defendant No. 1
from approaching the plaintiff‟s suppliers and customers for soliciting
business which is in direct competition with the business of the plaintiff.
Defendant No. 1 submits that the said order virtually grants a monopoly to
the plaintiff in its area of work and the restriction imposed on the former is
contrary to Section 27 of the Indian Contract Act, 1872 and therefore ought
to be set aside.
The Defendant No. 1 submits that he did not have any confidential
information during his employment with the plaintiff as he was only a sales
manager and had neither technical understanding nor capacity to appropriate
any confidential technical know-how. The Defendant No. 1 raises two points
as regards the two signed declarations dated June 12, 2006 on which the
plaintiff is relying, (i) that the said declarations were standard declarations
which were generic and not at all specific in stating what type of confidential
information the Defendant No. 1 had access to and (ii) that the Defendant
No. 1 signed the same at the time of his resignation as it was a precondition
to the release of his dues by the plaintiff. Further, he has submitted that the
agreements on which the plaintiff is relying can have no operation in light of
Section 27 of the Indian Contract Act, 1872.
The Defendant No. 1 has also submitted that the plaintiff has no prima
facie case, that the balance of convenience in fact is on the applicant‟s side
as the injunction order is restraining him from utilizing the skills he has

perfected in 8-9 years in this industry and if the same is not vacated,
irreparable injury shall be caused to him as he will remain jobless. In its
reply, the plaintiff has submitted that as Defendant No. 1 was employed with
it as an „Area Sales Manager‟ and has expertise in the area of marketing, he
can carry on his employment at companies which are not engaged in
competitive business with the plaintiff and thus he need not remain jobless.
The Defendant No. 1 has himself stated that he cannot get employment, as
per the plaintiff, belies the fact that he wants to work only in a place where
he can utilize the confidential agreement obtained by him. As regards the bar
on restraint of trade under Section 27, the plaintiff states that all that the
agreements it has relied upon seek to do is to protect its confidential and
proprietary information to which the Defendant No. 1 was privy.
Following judgments have been cited by Defendant No. 1 as regards
his contention that the two signed declarations were non-specific with regard
to the confidential information that he was allegedly privy to. The judgments
discuss the requirements of breach of confidence and what constitutes trade
secrets and confidential information:
Zee Telefilms Ltd. and Film and Shot & Anr. V. Sundial
Communications Pvt. Ltd. & Ors., 2003 (27) PTC 457
Reference was made herein to CMI Centres for
Medical Innovation GmbH & Anr. V. Phytopharm Plc
(1999) Fleet Street Reports 235 wherein it was held that to
prove breach of confidence, four things must be shown. (a) the
information relied upon must be clearly identified; (b) the
handing over of such information must have been in the
circumstance of confidence; (c) the said information must be of

a type which can be treated as confidential; (d) it must have
been used without license or there must be threat of the same. It
was held that it need not be proved at an interlocutory stage.
American Express Bank Ltd. v. Ms. Priya Malik, (2006)
IIILLJ 540 DEL : In this case it was held as under:
“Rights of an employee to seek and search for
better employment are not to be curbed by an
injunction even on the ground that she has
confidential data in the present facts and
circumstances. Such an injunction will facilitate
the plaintiff to create a situation such as „Once a
customer of American Express, always a customer
of American Express‟.
In the garb of
confidentiality the plaintiff can not be allowed to
perpetuate forced employment with American
Express. Freedom of changing employment for
improving service conditions is a vital and
important right of an employee which cannot be
restricted or curtailed on the ground that the
employee has employer‟s data and confidential
information of customers which is capable of
ascertainment on behalf of defendant or any one
else, by an independent canvass at a small expense
and in a very limited period of time. Such a
restriction will be hit by Section 27 of the Contract
Ambiance India Pvt. Ltd. v. Shri Naveen Jain, 122 (2005)
DLT 421. It was held as under :
It was recognized in this case that “a trade secret is
some protected and confidential information which
the employee has acquired in the course of his
employment and which should not reach others in
the interest of the employer. However, routine
day-to-day affairs of employer which are in the
knowledge of many and are commonly known to
others cannot be called trade secrets. A trade
secret can be a formulae, technical know-how or a
peculiar mode or method of business adopted by
an employer which is unknown to others.
In the present case, nothing has been
indicated even as to what trade secrets or technical
know-how was revealed to the defendant which

should not be divulged to others. In a business
house, the employees discharging their duties
come across so many matters, but all these matters
are not trade secrets or confidential matters or
formulae, the divulgence of which may be
injurious to the employer. If the defendant on
account of his employment with the plaintiff has
learnt some business acumen or ways of dealing
with the customers or clients, the same do not
informations, the divulgence or use of which
should be prohibited.”
It seems to me that as an Area Sales Manager of the plaintiff,
Defendant No. 1 could not have been privy to trade secrets and other
confidential information of the plaintiff company as alleged. However, being
in the position that he was, that Defendant No. 1 could have had knowledge
about the customers of the plaintiff is more plausible as his job profile would
entail managing sales as regards the aforesaid customers.
As regards Defendant No. 1‟s contention that the order dated February
20, 2008 is hit by Section 27 of the Indian Contract Act, 1872, the leading
judgments on this aspect are the following:
Niranjan Golikar v. Century Spinning & Manufacturing
Co. Ltd. 1967 (2) SC 1098 :
“13. what constitutes restraint of trade is
summarised in Halsbury's Laws of England (3rd
edition), Volume 38, at page 15 and onwards. It is
a general principle of the Common Law that a
person is entitled to exercise his lawful trade or
calling as and when he wills and the law has
always regarded jealously any interference with
trade, even at the risk of interference with freedom
of contract as it is public policy to oppose all
restraints upon liberty of individual action which
are injurious to the interests of the State. The Court
takes a far stricter view of covenants between
master and servant than it does of similar
covenants between vendor and purchaser or in
partnership agreements. An employer, for instance,
is not entitled to protect himself against

competition on the part of an employee after the
employment has ceased but a purchaser of a
business is entitled to protect himself against
competition per se on the part of the vendor. This
principle is based on the footing that an employer
has no legitimate interest in preventing an
employee after he leaves his service from entering
the service of a competitor merely on the ground
that he is a competitor. (Kores Manufacturing Co.,
Ltd. v. Kolak Manufacturing Co., Ltd. [1959] Ch.
20. 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.”
Superintendence Co. of India (P) Ltd. v. Krishan Murgai
(1981) 2 SC 246 :
“28. 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. We have nothing to do with the policy
of such a law. All we have to do is to take the
words of the Contract Act and put upon the
meaning which they appear plainly to bear. This
view of the Section was expressed by Sir Richard
Couch C.J. in celebrated judgment in Madkub
Chunder v. Rajcoomar Doss [1874] Beng L.R. 76
laying down that whether the restraint was general
or partial, unqualified or qualified, if it was in the
nature of a restraint of trade, it was void.
34. A contract in restraint of trade is one by which
a party restricts his future liberty to carry on his
trade, business or profession in such manner and
with such persons as he chooses. A contract of this
class is prima facie void, but is 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
61. The Courts, therefore, view with disfavour a
restrictive covenant by an employee not to engage
in a business similar to or competitive with that of
the employer after the termination of his contract
of employment.”
Percept D’ Mark (India) (P) Ltd. v. Zaheer Khan & Anr.
(2006) 4 SCC 227 :
“31. the interpretation of restraint of trade during
the post-contractual period, which interpretation
has been uniform, consistent and unchanged for
the past several years since the judgment of Sir
RichardCouch, C.J. in Madhup Chunder v.
Rajcoomar Doss (1874) 14 Beng. L.R. 76. The
interpretation of Section 27 of the Contract Act
which found prima facie favour with the Division
Bench is one which has been uniformly and
consistently followed Page 1430 from 1874 till
2006 by all High Courts in India, and which has
expressly been approved by this Court in Niranjan
Shankar Golikari (supra), Superintendence
Company of India (supra) and Gujarat Bottling
(supra). Even if there were a case for
reconsideration of this 132-year old interpretation,
though none is made out by the appellant, such an
exercise ought not to be undertaken in the present
interlocutory proceedings.
37. 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. This, the High Court has rightly held is
impermissible as such a clause which is sought to
be enforced after the term of the contract is prima
facie void under Section 27 of the Contract Act.
Page 1432 It was contended by learned senior
counsel for the appellant that Clause 31(b) is not
prima facie void as (i) it allegedly does not travel
beyond the term because it is an independent
contract; (ii) the term of agreement was itself
extendable and never came to an end; (iii) the
words "initial term" denote that Clause 31(b) itself
resulted in an automatic extension of the term; and

(iv) the "full term" contemplated was beyond the
"initial term" of 3 years.”
Defendant No. 1 has submitted two judgments besides those that are
above-mentioned. These are as follows :
Pepsi Foods Ltd. & Ors. V. Bharat Coca-Cola Holdings Pvt.
Ltd. & Ors. 81 (1991) DLT 122 wherein it has been held that
post termination restraint on an employee is in violation of
Section 27 of the Indian Contract Act, 1872. A contract
containing such a clause is unenforceable, void and against
public policy and since it is prohibited by law it cannot be
allowed by the Court‟s injunction. If such injunction was to be
granted, it would directly curtail the freedom of employees for
improving their future prospects by changing their employment
and such a right cannot be restricted by an injunction. It would
almost be a situation of „economic terrorism‟ creating a
situation alike to that of bonded labour.
Wipro Ltd. v. Beckman Coulter International S.A 2006 (3)
ARBLR 118 (Delhi) wherein it has been held that negative
covenants between employer and employee contracts pertaining
to the period post termination and restricting an employee‟s
right to seek employment and/or to do business in the same
field as the employer would be a restraint of trade and therefore,
a stipulation to this effect in the contract would be void. No
employee can be confronted with a situation where he has to
either work for the present employer or be forced to idleness.
Also, in such a contract the employer has advantage over the

employee and it is quite often the case that employees have to
sign standard form contracts or not be employed at all.
The stance of Indian courts on the question of restraint on trade is
unmistakably clear. There are no two ways about the fact that the approach
towards a negative covenant subsisting during the course of employment is
completely different from the approach which would be taken towards the
applicability of a negative covenant post-employment duration. The
Obligation Agreement dated June 12, 2007, amongst other things, provides
that (i) for two years after termination of employment, Defendant No. 1
would not compete with the plaintiff‟s business and would not advise,
consult, serve or assist any party whose business competes with that of the
plaintiff and its group companies; (ii) for two years he would not interfere
with the relationship of the plaintiff and its customers, suppliers and
employees; that he would not disclose the confidential information to which
he was privy as employee of plaintiff to any third party. The plaintiff has
stated that the agreements it has relied upon (including the above-mentioned
obligation agreement) are not in the form of restraint on trade but are only
instruments through which it attempting to protect its confidential and
proprietary information to which the Defendant No. 1 was privy. The
plaintiff at present is unable to produce any cogent evidence to prove its
allegations against Defendant No. 1. Rather the said defendant had, prior to
the filing of the suit, sent a letter to the plaintiff asking it to remit his dues
towards his employment.
I have no doubt that such was the intention of the plaintiff, but with
equal conviction I believe that such is the intention of all employers who
rely on like negative covenants in employment contracts with their

employees. It is this attempt to protect themselves from competition which
clashes with the right of the employees to seek employment where so ever
they choose and in a clash like this, it is clear that the right of livelihood of
the latter must prevail. Clearly, in part at least, the Obligation Agreement
sought to restrain Defendant No. 1 from seeking employment with an
employer dealing in competitive business with the plaintiff after he had
ceased to be an employee of the plaintiff, and that too for a period of two
years. Such an act cannot be allowed in view of the crystal clear law laid on
this issue. However, in the impugned order dated February 20, 2008 the
injunction restraining Defendant No. 1 is limited in scope, in the sense that it
does not restrain the Defendant No. 1 from working with Defendant No. 2 or
any other person/company, thereby steering clear of impinging the former‟s
freedom to choose his own work place. The injunction only restrains
Defendant No. 1 from approaching the plaintiff‟s suppliers and customers
for soliciting business which is in direct competition with the business of the
plaintiff. Hence, the injunction which has already been granted by order
dated February 20, 2008 is made absolute. The interim application is
disposed of accordingly.
Defendant No. 1 has filed I.A No. 5454/2008 for reference of the
parties‟ dispute to arbitration based on the Confidentiality Agreement dated
October 22, 2000 which contains an arbitration clause that reads, “in case of
any dispute, the matter will be settled under the Indian Arbitration Act.” In
keeping with the said arbitration clause, Defendant No. 1 prays that the
dispute between the parties be referred to arbitration for settlement.
The plaintiff has referred the following judgments in support of its
contention which can be seen vis-à-vis the following :

In Union of India v. Kishorilal Gupta and Bros. AIR
1959 Supreme Court 1362 it was held that “(1) An arbitration
clause is a collateral term of a contract as distinguished from its
substantive terms; but none the less it is an integral part of it; (2)
however comprehensive the terms of an arbitration clause may be,
the existence of the contract is a necessary condition for its
operation, it perishes with the contract; (3) the contract may be non
est in the sense that it never came legally into existence or it was
void ab initio; (4) though the contract was validly executed , the
parties may put an end to it as if it had never existed and substitute
a new contract for it solely governing their rights and liabilities
thereunder; (5) in the former case, if the contract had no legal
existence, the arbitration clause also cannot operate, for along with
the original contract, it is also void; in the latter case, as the original
contact is extinguished with the substituted one, the arbitration
clause of the original contract perishes with it; and (6) between the
two fall many categories of disputes in connection with a contract,
such as the question of repudiation, frustration, breach etc. In those
cases it is the performance of the contract that has to come to an
end, but the contract is still in existence for certain purposes in
respect of disputes arising under it or in connection with it. As the
contract subsists for certain purposes, the arbitration clause operates
in respect of these purposes.”
In Damodar Valley Corporation v. K.K Kar (1974) 1
Supreme Court Cases 141 it was held that “it may also be open to
parties to terminate the previous contract and substitute in its place

a new contract or alter the original contract in such a way that it
cannot subsist. In all these cases, since the contract is put an end to,
the arbitration clause, which is a part of it, also perished along with
it. Section 62 of the Contract Act incorporates this principle when it
provides that if the parties to a contract agree to substitute a new
contract or to rescind or alter it, the original contract need not be
The Plaintiff‟s contention is that the arbitration clause is not
applicable as the Confidentiality Agreement has been superseded by the
Employment Agreement as well as the Obligation Agreement, and both
these subsequent documents contain no arbitration clause. As per the
Plaintiff, due to these subsequent agreements the Confidentiality Agreement
was mutually terminated and hence the arbitration clause does not apply to
the parties thereto.
I accept the contentions of the plaintiff in view of settled law. The
arbitration clause in the present circumstances is not applicable as the
Confidentiality Agreement has been superseded by the Employment
Agreement and Obligation Agreement, both of which contain no arbitration
clause. Hence I.A. No. 5454/2008 is dismissed being not maintainable.
The third application is filed by Defendant No. 2 with regard to its
deletion from the array of parties. The applicant herein submits that it has no
legal or contractual relationship with the plaintiff. It also submits that it far
exceeds the enterprise and experience of the plaintiff in their similar line of
work, and therefore it has no requirement of any confidential information
which emits from the plaintiff or anyone else. It also iterates that it has
received no such confidential information as alleged.

Defendant No. 2 also submits that no cause of action has been
disclosed against it and avers that the true intent of the plaintiff is to restrain
Defendant No. 2 from entering the Indian market as Defendant No. 2 is a
global leader of these products and the plaintiff has a virtual monopoly over
the same in India. Defendant No. 2 further submits that it has been the
market leader in the industry and had launched the product that the plaintiff
distributes in India over 30 years back. Accordingly, there is no factual basis
for an apprehension that the Defendant No. 2 would be requiring and using
the technical know-how of the plaintiff. Irrespective of that, it is submitted
that the Defendant No. 2 has not received confidential information of any
nature from the plaintiff or Defendant No. 1 at any point in time and that the
plaintiff has only made vague allegations as to the same without placing
anything on record to support its allegations.
In its reply, the plaintiff has stated that Defendant No. 2 is a necessary
party as it is in possession of confidential information of the plaintiff which
it has obtained from Defendant No. 1 with mala fide intention. In fact, the
plaintiff submits that the Defendant No. 1 has been engaged in its services
by Defendant No. 2 with mala fide intention. The Defendant No. 2 is
allegedly using the said information for illegal gains in the market. The
plaintiff submits that it has valid grievances and claims against Defendant
No. 2 and if the latter is deleted from the array of parties, effective
adjudication of the dispute will not be possible. Also, Defendant No. 1 has
allegedly contacted suppliers and customers of the plaintiff on behalf of
Defendant No. 2 who is enjoying illegal gains with the same to the detriment
of the plaintiff.

Defendant No. 2 has submitted that its impleadment in the present suit
is motivated and is an abuse of the court‟s process. The sole intention behind
Defendant No. 2‟s impleadment is to stall its progress as it is a new entrant
in the Indian market. In view of all of the above-stated, I am of the view that
the plaintiff has failed to show any cause of action against Defendant No. 2.
The present application is allowed and Defendant No. 2 is deleted from the
array of parties as it is not connected with the present suit by virtue of the
fact that there exists no contractual relationship between the plaintiff and
Defendant No. 2. However, if the plaintiff has any evidence that any act of
Defendant No. 2 amounts to infringement of its legal and valid rights,
including technical know-how or information of other such nature of which
the plaintiff is the rightful owner, then he is at liberty to initiate legal action
in accordance with law. On the mere basis of apprehension, a party cannot
be sued. The present application filed by Defendant No. 2 is therefore

List the matter on 14th September, 2009 before the Joint Registrar.
JULY 14, 2009

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