AIR 1967 SC 1098

Niranjan Shankar Golikari v. The Century Spinning And Manufacturing

Co. Ltd.

FACTS

1. The respondent company had its plant at Kalyan known as

Century Reyon. Amongst other things it manufactured tyre chord yarn. Vide

agreement dated January 19, 1961, a Holland company (referred to as AKU)

and a West Germany company, (referred to as VCF) agreed to transfer their

technical know-how to the respondent company. It was to be used

exclusively by it for its tyre cord yarn plant at Kalyan. Clause 4 of the

agreement provided that the respondent company shall keep the technical

information passed on by the said AKU and VCF to the respondent company

until the termination of the agreement and three years thereafter. Century

Rayon was to enter into corresponding secrecy arrangement with its

employees.

2. The respondent company invited applications for appointments

in its said plant. The appellant was offered appointment as shift supervisor in

the Tyre Cord Division vide letter dated March 1, 1963. If offer appointment

was acceptable to the appellant, he was required to sign the contract in

standard form for a term of five years. The appellant accepted the terms on

March 5, 1963 and joined the service with the respondent company on

March 16, 1963.

 2

3. The relevant clauses of the contract signed by the appellant

provided that the employee shall during the period of his employment devote

the whole of his time and energy exclusively to the business and affairs of

the company and shall not engage directly or indirectly in any business or

serve, whether as principal, agent, partner or employee or in any other

capacity either full time or part time in any business whatsoever other than

that of the company. He was further required to keep confidential all

information of the company that might come to his knowledge.

It further provided that in the event of the employee leaving service of

the company before the expiry of five years he shall not directly or indirectly

engage in business or serve in any capacity with any person carrying on such

business for the remainder of the said period.

4. The appellant received training from March to December 1963.

During this period, he acquired knowledge of technical know-how

transferred by the Collaborators, which was used by him discharge of his

duty.

5. The appellant continued serving the respondent company till

September 1964. Thereafter he absented from duty. On November 7, 1964

he resigned w.e.f. October 31, 1964. The respondent company vide letter

dated November 23, 1964 asked him to resume the work, stating that his

resignation has not been accepted. On November 28, 1964 the appellant

replied stating that he has got another employment. Having come to know

that the appellant had joined Rajasthan Rayon Company engaged in

manufacturing Tyre Cord Yarn at a higher salary, the respondent filed a suit

praying for injunction restraining the appellant from serving in any capacity

whatsoever till March 15, 1968 (five years period if counted from the date
 3

the appellant joined service on March 16, 1963). Damages of ₹ 2,410/-

being salary for six months were also claimed. In terms of clause 17 of the

contract, perpetual injunction was prayed for restraining the appellant from

divulging any information, hich may have come to his knowledge. The stand

of the appellant in the written statement was that he has not got any

specialized technical knowhow. He was merely a supervisor and controlling

the labour. Further stand taken was that the said agreement was

unconscionable, oppressive and executed under coercion. The same was

challenged being opposed to public policy.

6. The Trial Court on consideration of the evidence led by the

parties held that the appellant was imparted training by the said AKU in

relation to the manufacture of tyre cord yarn and he was made familiar with

their know-how, secrets, techniques and information; his duty was not

merely to control labour ; the said agreement was not void or unenforceable;

that he committed breach of the said agreement; and lastly that the company

was entitled to an injunction.

Finally, the following order was passed:

(1) The injunction is granted against the defendant and he is

restrained from getting in the employ of or being engaged or

connected as a Shift Supervisor in the Manufacture of tyre cord

yarn or as an employee under any title discharging substantially

the same duties as a Shift Supervisor in Rajasthan Rayan, Kotah

or any other company or firm or individual in any part of India

for the term ending 15th March 1968.

(2) The defendant is further restrained during the said period

and, thereafter, from divulging any of the secrets, processes or

 4

information relating to the manufacture of tyre cord yarn by

continuous spinning process obtained by him in the course of

and as a result of his employment with the plaintiffs.”

7. The appellant preferred appeal before the High Court.

8. As regards the challenge to the validity of Clauses 9 and 17 of

the contract, the High Court concluded that these related only to the business

in Tyre Chord Division and not to any other business carried on by the

respondent company. The restrictions were not blanket. It was held to be a

reasonable restriction to protect the interest of the respondent company,

which had spent huge amount to obtain technical know-how from AKU and

had spent considerable amount for the training of the appellant.

9. Before Hon’ble the Supreme Court the appellant raised

following arguments:

“(1) that the said agreement constituted a restraint on trade

and was therefore opposed to public policy,

(2) that in order to be valid and enforceable the covenant in

question should be reasonable in space and time and to the

extent necessary to protect the employer’s right of property and

(3) that the injunction to enforce a negative stipulation can

only be granted for the legitimate purpose of safeguarding the

trade secrets of the employer. He argued that these conditions

were lacking in the present case and therefore the respondent

company was not entitled to the enforcement of the said

stipulation.”
 5

10. An employer has no legitimate interest for preventing an

employee after leaving his service, from entering the services of a

competitor, merely on the ground that he is a competitor. Any negative

covenant during the period of contract, when an employee is bound to serve

the employer exclusively, are generally not considered bad as they do not

fall under Section 27 of the Contract Act. Such a negative covenant will not

amount to restraint of trade unless the contract is unconscionable or

unreasonably harsh or unnecessarily one sided. In the case in hand, the

negative covenant restricted the part of the employment and to work

substantially similar to carried on by the appellant when he was in

employment and the condition was held to be reasonable and necessary for

protection of the companies interest. The Courts will not restrain to enforce

such a condition. The argument that Clause 17 in the agreement amounted to

restraining trade and was against the public policy, was rejected.

11. Where an agreement is challenged on the ground of being a

restriction on trade, the onus is upon the party supporting the contract to

show that the restriction is reasonable and necessary to protect his interest.

Once it is discharged, the onus shifts and the parties attacking the period of

contract is to show that restriction is nevertheless injurious to the public.

12. Distinction was drawn between the restrictions applicable

during the terms of contract of employment and those which apply after its

cessation.

13. On the issue as to whether Courts could grant injunction in such

matters, it was opined that Courts have wide discretion to enforce by

injunctions, even a negative covenant. His apprehension was that an

employee who was imparted training and knowledge of the technical

 6

know-how by the respondent-company, will reveal those secrets to the

competitor. The protection in such cases is required only from divulging the

specialised knowledge imparted to an employee and not regarding the

general experiences gained by him. Courts can grant limited injunction to

the extent it is necessary to protect the employers interest where the negative

stipulation is not wide.

14. Any plea of hardship raised by the employee has to be rejected.

The Hon’ble Supreme Court while upholding the judgment of the High

Court rejected the appeal filed by the employee.

15. In my view, the rights of both the parties have been balanced.

The contract clearly provided the period of employment and the restrictions

contained therein. The employee signed the same knowing well the effects

thereof. Idea was to protect interest of the employer who obtained technical

know-how on payment and further had imparted training to the employee by

spending substantial amount. There was a condition put in by the technical

know-how supplied that the same shall not be divulged to any third party

and a contract to that extent had to be entered even with the employees. Such

a condition imposed was to protect the interest of the employer. It was not a

case of restriction to carrying on trade.