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Is the interpretation of Section 27 of Indian Contract Act in nature exhaustive or narrow?

Gaurav Parashar ,
  18 June 2020       Share Bookmark

Court :
Supreme Court of India
Brief :
The court held that the restraint may not be greater than necessary to protect the employer, nor unduly harsh and oppressive to the employee. The court held that even on their part the word ‘leaves’ in clause 10 of the agreement is capable of another construction as being used on conclusion, e.g. 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.
Citation :
Appellant:Superintendence Company of India Ltd. Respondent: Krishna Murgai Citation:1980 AIR 1717; 1980 SCR (3)1278; 1981 SCC (2) 246
  • Superintendence Company of India Ltd. V. Krishna Murgai
  • Bench: Justice V.D. Tulzapurkar, JusticeN.L. Untwalia and Justice A.P. Sen

Issue:

  • What does the word “leave” in the Clause 10 means?
  • Is the interpretation of Section 27 of Indian Contract Act in nature exhaustive or narrow?

Facts:

  • The appellant is a company having business of undertaking inspection of quality,valuers and surveyors, weighment, analysis, sampling of merchandise and commodities, cargoes, industrial products, machinery, textiles, etc.
  • The appellant holds a reputation and goodwill by developing its own techniques for quality testing and control and possesses trade secrets in the form of these techniques and clientele.
  • The head office of appellant is situated in Calcutta and a branch at New Delhi and employs many people as managers in Calcutta, Delhi and other places.
  • The respondent was employed by the appellant on 27thMarch, 1971 as Branch Manager in New Delhi office subject to terms and conditions as specified in the letter of appointment.
  • Clause (10) of the terms and conditions placed on the respondent a post- service restraint that he shall not work with any competitive firm and will not open his own business related to that of appellant for a period of 2 years from his last posting after leaving the company of respondent.
  • The appellant terminated the respondent's services on 24th November, 1978 with effect from December 27, 1978.
  • Afterwards the respondent started his own business in New Delhi similar to appellants business. He named his company “Superintendence and Surveillance Inspectorate of India.”
  • The appellant filed a suit in the Delhi High Court on 19thApril, 1979 and claimed Rs. 55,000/- as damages from the respondent for breach of negative covenant contained in Clause 10 and for permanent injunction restraining the respondent to carry on his business and to stop him from working with any competitor till the expiry of two years from 27thDecember, 1978.
  • After the suit was filed, the appellant also sought an interim injunction by enforcing Clause 10 and the Judge of the Delhi High Court granted an ad interim injunction.
  • On appeal of respondent, a Division Bench of the High Court reversed the order of the learned Single Judge on both the points and hence the present appeal lies.

Argument raised by Appellant:

  • The appellant argued that the interpretation of Section 27 as given by many High Courts including Sir Richard Couch's decision in Madhub Chunder's Caseis not considered and it must be examined in relationto observations made by this Court in Niranjan Shankar Golikari's case which legalise this reconsideration.
  • The appellant argued that considerations in post-service restrictions are different from those of during the employment and states that a reasonable test is to be employedearlier but there will be chances that post-service limits even after applying rigorous tests may be valid and not falling under Section 27 of the Act, therefore, it will be wrong to say that all post-service restrictions are void.
  • It was argued that that a statutory exception in case of restrictive covenant operativethroughout the period of employment is not provided as an exception underSection 27 but still such covenant is never considered as restraint of trade under Section 27 because it was considered necessary to protect the employer's interests, which implies they are not exhaustive.
  • The appellant denied the respondents reliance on Law Commission's recommendation as it was trivial because since it is based upon interpretation ofSection 27 by HCs.

Argument raised by Respondent:

  • The respondent supported the view of the Division Bench by pointing that Indian law is codified by statute which is exhaustive and on topic of agreements in restraint of trade and the courts cannot take assistance from Common Law and states that Section 27 Act is absolute as it does not make any division between partial or general restraints, and that unless it is an exception under restraint of trade would be void.
  • The respondent argues that the test of reasonableness was wrongly adopted by the learned Single Judge. It wasargued that accepting the interpretation placed on s. 27 by High Courts even the Law Commission has recommended a change in that by suitable legislation.

Judgment:

The court held that the restraint may not be greater than necessary to protect the employer, nor unduly harsh and oppressive to the employee. The court held that even on their part the word ‘leaves’ in clause 10 of the agreement is capable of another construction as being used on conclusion, e.g.  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.

 
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