Contract Law

Niranjan Shankar Golikari v. Century Spinning & Manufacturing Co. Ltd.

AIR 1967 SC 1098

Facts

Century Spinning selected Niranjan Shankar Golikari for specialised training in the manufacture of tyre-cord yarn.
The company possessed confidential technical information and manufacturing processes obtained through foreign collaboration.
Golikari entered into an employment agreement for a fixed period.
The agreement required him:
to serve Century during the agreed term;
not to work for another employer during that term;
not to disclose confidential technical information.
Before the agreed employment period expired, Golikari left Century and joined a competing company.
Century sought an injunction restraining him from:
serving the competitor during the remaining contractual period; and
disclosing confidential information.
Golikari argued that the negative covenant restricted his right to work and was void under Section 27 of the Indian Contract Act.

Whether a covenant preventing an employee from working for a competitor during the subsistence of the employment contract is void as an agreement in restraint of trade under Section 27.

Section 27 generally renders void an agreement restraining a person from exercising a lawful profession, trade or business.
However, a negative covenant operating only during the contractual period is ordinarily not treated as a restraint of trade.
An employee may validly promise to work exclusively for one employer during the agreed term.
The court may enforce a negative covenant by injunction where:
it operates during the contract;
it protects legitimate interests such as confidential information;
it is not excessively harsh, one-sided or unconscionable.
Courts will not order specific performance of a contract of personal service, but may restrain breach of a valid negative obligation.

Golikari had not merely agreed not to compete after his employment ended.
The restriction applied only during the period for which he had voluntarily agreed to serve Century.
Century had spent time and resources training him in specialised processes.
He had also gained access to technical information that could benefit a competitor.
Allowing him to leave before expiry and immediately join a rival would permit him to disregard the exclusivity obligation while retaining the benefit of Century’s training.
The Court distinguished:
a restriction during employment, which supports performance of the existing bargain; and
a post-employment restraint, which prevents a person from working after the contract has ended.
A post-employment restraint would ordinarily attract Section 27.
The present covenant merely required Golikari to perform the contract for the agreed duration.
The injunction did not compel him physically to work for Century.
It only prevented him from working for the competing employer during the remaining term.
The restriction was therefore connected to the contract’s performance and protection of confidential information.
The Court found that the covenant was not unreasonable or unconscionable.

The Supreme Court upheld the injunction.
The negative covenant operating during the employment period was not void under Section 27.
Use this case for: an exclusivity or non-compete covenant during the subsistence of employment is generally valid, unlike a post-termination restraint.