IN THE SUPREME COURT OF INDIA

Civil Appeal No.1933 of 1979

Decided on: 21.03.1980

Decided on :09.05.1980

Appellants: Superintendence Company of India (P) Ltd.

Vs.

Respondent: Krishan Murgai

Hon’ble Judges/Coram:

A.P Sen, N.L. Untwalia and V.D. Tulzapurkar,JJ.

Counsels :

For Appellant / petitioner/plaintiff: A.K. Sen and P.P Rao,N.D. Garg, R. venkataramani and S.K.
Bisaria,Advs

For respondents/Defendant :K.K. Venugopal, H.K. Puri , and S.C. Dhanda, Advs.

Case Note:

Service – restrictive covenant- Section 27,28 and 56 of Indian contract Act,1872 – matter related to
validity of post service restrictive covenant of trade as contained in clause 10 of service
agreement between parties – under Section 27 Service covenant beyond termination of service is
void –under section 27 to determine whether agreement is void one has to see reasonableness of
restraint and onus being upon covennter to show it to be unreasonable – as per clause 10 negative
covenant not to serve anywhere else or enter competitive business in similar lines- restriction
contained in clause 10 is restraint of trade and therefore illegal and unenforceable under section
27.

JUDGMENT

1.This appeal at the instance of the appellant company (original plaintiff) is directed against an
interlocutory order passed by the High Court in (original plaintiff) is directed against an interlocutory
order passed by the High Court in F.A.O. (O.S.) 86 of 1979 refusing to grant temporary injunction in
a suit which is still pending.Principally it raises two substantial question: (a) whether a post-service
restrictive covenant in restraint of trade as contained in clause (10) of the service agreement
between the parties is void under section 27 of the Indian Contract Act? And (b)whether the said
restrictive covenant, assuming it to be valid, is on its terms enforceable at the instance of the
appellant company against the respondent?

2.On march 21,1980 we dismissed the appeal at the conclusion of the hearing and it was stated that
our reasons will follow. We now proceed to give our reasons for the dismissal.

3.Briefly stated the facts are these. The appellant company carries on business as valuers and
surveyors, undertaking inspection of quality, weightment, analysis, sampling, of merchandise and
commodities,cargoes, industrial products, machinery, textile, etc. It has established a reputation and
goodwill in its business by developing its own techniques for quality testing and control and
possesses trade secrets in the form of these techniques and clientele. It has its head office at
Calcutta and branch at New Delhi and employs various persons as managers and in other capacities
in Calcutta, New Delhi and other places. On March 27,1971 the respondent was employed by the
appellant company as the Branch manager of its New Delhi office on terms and conditions
contained in the letter of appointment issued to him on the same date. Clause (10) of the terms and
conditions of employment placed the respondent under a post-service restraint that he shall not
serve any other competitive firm nor carry on business on his own in similar line as that of the
appellant company for two years at the place of his last posting. Since it is vital we set out the said
clause which ran thus:-

10. That you will not be permitted to join any firm of our competitors or run a business of your own
in similar lines directly and/ or indirectly, for a period of two years at the place of your last posting
after you leave the company.

4. On November 24, 1978 the appellant company terminated the respondent’s services with effect
from December 27, 1978. Thereafter the respondent started his own business under the name and
style of “Superintendence and Surveillance Inspectorate of India” at B – 22, South Extension , New
Delhi on lines identical with or substantially similar to that of the appellant company .On April 19,
1979 the appellant company brought a suit in the Delhi High Court on its Original side claiming Rs.
55,000/- as damages on account of the breach of the aforesaid negative covenant contained in
clause (10) and , for permanent injunction restraining the respondent by himself, his servants,
agents or otherwise ,from carrying on the said business or any other business on lines similar to that
of the appellant company or associating or representing any competitors of the appellant company
before the expiry of two years from December 27, 1978. After filing the suit the appellant company
sought an interim injunction by way of enforcing the aforesaid negative covenant and a singly judges
of the Delhi High Court initially granted an ad interim injunction on April 29 , 1979 which was
confirmed by him on may 25, 1979 after hearing the respondent. The learned single judge took the
view that the negative covenant, being in partial restraint of trade, was reasonable inasmuch as it
was limited both in point of time (two years) as well as the area of operation (New Delhi which was
his last posting) and, therefore , was not hit by section 27 of the Contract Act. He also took the view
that the negative covenant was enforceable as the expression “leave” in Clause (10) was not
confined to voluntarily leaving of the service by the respondent but was wide enough to include
termination of his services by the appellant company. On appeal by the respondent , a Division
Bench of the High Court reversed the order of the learned single judge on both the points and that is
how the two questions indicated at the commencement of this judgment arise for our determination
in this appeal.

5. Since in our view the appeal is capable of being disposed of on the second point we think it
unnecessary to decide or express our opinion on the first question which was hotly and ably debated
at the bar by counsel on either side but we will indicate briefly the viral lines on which the
arguments proceeded. On the one hand counsel for the respondent tried to support the view of the
Division Bench by pointing out that in India the law on the subject was codified by statue which was
exhaustive and on the topic of agreements in restraint of trade and exceptions in that behalf the
Indian Courts cannot invoke or derive assistance from the English Common Law and exceptions)
developed thereto by English decisions from time to time , that Section 27 of the Indian Contract Act
was absolute in terms in that it did not make any distinction between partial or general restraints
and that unless a case was covered by the Exception provided thereunder every restraint of trade ,
whether partial or general would be void under that section. In this behalf reliance was placed on a
number of decisions of various High Courts commencing from the celebrated decision , of Sir Richard
Couch , C.J. in Madhub Chunder V. Rajcoomar doss (1874) 14 Beng. L.R. 76 where Section 27 was
interpreted in the aforesaid manner. Counsel urged that a distinction between a negative covenant
operative during the period of employment and one that is operative during post-service period has
been well recognized and that all post-service restrictive covenants were prima facie void , that the
only exceptions were those given in the statue and that exceptions developed by the English Case
law could not be invoked here. According to him the test of reasonableness had been wrongly
adopted by the learned Single Judge . He pointed out that accepting the interpretation placed on
section 27 By High Courts even the Law Commission has recommended a change in that , by suitable
legislation. He further pointed out that the division bench has gone a step further and after
considering whether the instant case would fall within those exceptions developed by English Case
Law has come to negative conclusion against the appellant company.

6.On the other hand counsel for the appellant company contended that the interpretation of Section
27 as given by various High Courts including Sir Richard Couch’s decision in Madhub Chunder’s case
(supra) has not been so far considered by this court and it requires to be examined and considered
by this court especially in view of certain observations made by this court in Niranjan Shankar
Golikari’s MANU/SC/0364/1967 : (1967)ILLJ740SC case which warrant such reconsideration Though
it was a easel dealing with negative covenant that was operative during the employment period
counsel pointed out that entire case law Indian a well as English was discussed and this court at page
389 of the report observed thus:

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 court.

According to counsel the very fact that his court has observed that considerations qua post-service
restrictions are different from those that are to be considered in cases of restrictions during the
employment suggests that perhaps a rigorous test of reasonableness may have to be adopted in the
former cases but there would be cases where post-service restrictions, if reasonable , even after
applying the rigorous tests may be valid as not falling under section 27 of the act , it was, therefore,
not correct to say that all post-service restrictions were void.