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, AlgemeneKunstzijdeUnie of Holland

(hereinafter referred to as AKU) and VereinigteClanzstoffFabrikan AG of

West Germany (hereinafter 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. Total consideration of

1,40,000 Deutsche Marks were payable by the respondent company for

transfer of technical know-how. Clause 4 of the agreement provided that the

respondent company shall keep the technical information, knowledge,

know-how, experience, data and documents 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 the offer of

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

on March 16, 1963.

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

the respondent company which were subject matter of consideration, are

extracted below:

“Clause 6. The employee shall during the period of his

employment and any renewal thereof, honestly, faithfully,

diligently and efficiently to the utmost of his power and skill.

(a) xxx

(b) 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.”

Clause 9 provided that during the continuance of his

employment as well as thereafter the employee shall keep

confidential and prevent divulgence of any and all information

instruments, documents, etc., of the company that might come

to his knowledge. Clause 14 provided that if the company were

to close its business or curtail its activities due to circumstances

beyond its control and if it found that it was no longer possible

to, employ the employee any further it should have option to

terminate his services by giving him three months’ notice or

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three months’ salary in lieu thereof. Clause 17 provided as

follows:

“In the event of the employee leaving, abandoning or

resigning the service of the company in breach of the

terms of the agreement before the expiry of the said

period of five years he shall not directly or indirectly

engage in or carry on of his own accord or in partnership

with others the business at present being carried on by

the company and he shall not serve in any capacity,

whatsoever or be associated with any person, firm or

company carrying on such business for the remainder of

the said period and in addition pay to the company as

liquidated damages an amount equal to the salaries the

employee would have received during the period of six

months thereafter and shall further reimburse to the

company any amount that the company may have spent

on the employee’s training.”

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

During this period, he acquired knowledge of the technique, processes and

the technical know-how transferred by the Collaborators. Certain documents

were also supplied to him by the respondent company, which were to be

kept secret. The appellant who was working as Shift Supervisor, was

responsible for running of shift work in particular with the specifications

given by the said AKU.

5. The appellant continued serving the respondent company till

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

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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

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 or all information, instrument, documents etc. which may

have come to his knowledge. The stand of the appellant in the written

statement was that while working as shift supervisor 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 as under:

“(1) that the respondent company had established that the

appellant had availed himself of the training imparted by the

said AKU in relation to the manufacture of tyre cord yarn, the

operation of the spinning machines and that he was made

familiar with their know-how, secrets, techniques and

information;
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(2) that his duties were not merely to supervise labour or to

report deviations of temperature as alleged by him;

(3) that the said agreement was not void or unenforceable;

(4) that he committed breach of the said agreement;

(5) that as a result of the said breach the respondent company

suffered loss and inconvenience and was entitled, to damages

under clause 17 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

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. In the

evidence it was established that appellant was imparted training, during the

course in which information regarding the special processes and details of

the machinery evolved was divulged to him. As a result of employment in

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the rival company not only the benefit of training given to him at the cost of

respondent company was lost, even the secrets were also divulged by him,

which were to be exclusively used by the respondent company as per the

technical know-how transfer agreement. Rajasthan Rayon, where the

appellant got reemployed, started production of Tyre Cord Yarn from

January 1965, i.e. 2/3 months after the appellant joined service with it,

which established the fact that the technical knowledge gained by the

appellant with the respondent company was shared by him with his new

employer.

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

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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.”

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.
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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

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.

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