SlJPERJNTENDENCE COMPANY OF INDIA (P) LTD v. KRJSHAN MURGAI

the appellant company (original plaintiff) is directed against an inter-locutory order passed by the High Court in F.A.O. (0.S.) 86 of 1979 refusing grant temporary injunction in a suit which is stil\ pending. Princi- pally it raises two substantial questions : (a) whether a post-service restrictive covenant in restraint of trade as contained in cl. ( 10) of the service agreement between the parties is void under s. 27 of the and (b) whether the said restrictive covenant, Indian Contract Act ? assruning it to be valid, is on its terms enforceable at the instance of the appellant company against the respondent ? to ~y On March 21, 1980 we dismissed the appeal at the·copclusion of the hearing and it was stated that our reasons will follow. We now proceed to give .our reasons for the dismissal. I ' Briefly stated the facts are these. The appellant company carries on business as valuers and· surveyors, undertaking inspection of quality, weighment, analysis, sampling of merchandise and commodities, car It has estabilshetl goes, industrial products, machinery, textiles, etc. a reputation and goodwill in its business by developing its own tQil niques for quality testing and control and possesses trade secrets in. the form of these. teohniques and clientele. its head oflicd at Calcutta and a branch at New Delhi and employs various persons as managers and in other capacitie~ in Calcutta, New Delhi and other places. On March 2 7, 1971 the respondent was emplayed 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. Cause (10) of the terms and conditions of employment placed the respondent under a post-service restraint that ho 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 : - It has . "10. That you will not be permitted to join any firm ln similar of our competitors or run a business of your ow11 f I SUPBIUNTBNDENCB COMPANY V. KR!SHAN MURGA! (Tulz.apurkar, J.) lines directly and/ or indirectly, for a period of two years at the place of your lllst posting after you leave the company." 1283 A '-,,.,J.- terminated On November 24, 1978 the appellant company re.11pondent's services with effect from December 27, 1978. There after the respondent started his own business under the name and style of. "Superintendence and Surveillance Inspectorate of India" at B-'.i?2, South Extension, New Delhi on lines identical with or subStan~ tially '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 ccntained in cl. (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 appl'.J!ant cqmpany before the .expiry of two years from December 27, 1978. After filing the suit the appellant company sought an interim injunction by way of enforcirig the aforesaid negative cQlvenant and a Single Judgei 'of Dt:lhi 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 ne~ve covenant, being in partial restraint of trade, was reasonable inasmuch as it was limited both in point of time (two years) as well: 1 as the area of operation (New Delhi which was his last posting) and, therefore, ll(as not hit by s. 2 7 of the Contract Act. He also took the view that the negative covenant was enforceable as the expression, "leave" in cl. ( 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 ef the High Court reversed the order of the learned Single Judge on both the points and that is how the two questioru; indicated at the commencement of this judgment arise for our deter mination in this appeal. B c D E F Since in our vieW the appeal ii; capable of being dispooed of ,,n G 1be second .point we think it unnecessary to decide or express our opinion on the fiist question which was hotly and ably debated at the bar by counsel on either< sidei but we will indicate briefly the rival lines on which the arguments proceeded. On the one ·hand counsel for th~ reipO!ldent tried to support the view of the Division Bench by pointiilg out that in India the law on the subject was codified by statute which B wu edlaustive and on the topic of agreements in restraint of trade and excefl(ions in that behalf the Indian Courts cannot invoke oc derive y " ' A c D E F G B 12S4 SUPREME COURT REPORTS [1980] 3 s.c.R. assistance from the English Common Law and the exceptionsi deve loped thereto by English decisions from time to time, that s. 27 ol. the Indian Contract Act was absolute in terms .in that it did not make any distinction between par_tial or general restraints and that unless. a case was covered by the Exception provided thereunder every restraint ol' In trade, whether partial or general would be void under that section. 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 M.adhub Chunder v. Rajcoomar Doss(') wheres. 27 was interpreted in the aforesaid manner. Counsel urged that a dis tinction between a negative covenant operative during the period of employment and one that is operative during post-service period has been well recogttised and that all post-service restrictive covenants' were prima facie void, that the only exceptions were those given in the statute and that the exceptions developed by' the English case .law could not be invoked here. According to him the tes~ of reaso~ble­ ness had been wrongly adopted by the learned Singlei Judge. He pointed out that accepting the interpretation placed on s. 27 by High· Courts even the Law Commission has recommended a change in that the Division by suitable legislation. He further pointed out Bench has gone a step further and after considering whether the instim~ case would fall wi_thin those exceptions developed by English case . Law has come to a negative conclusion against the appellant company. i • On the other hand counsel for the appellant company contended that the interpretation of s. 27 as given by various Hfgh Courts includ ing Sir Richard Couch's decision in Madlmb Chzmder's case (supra) has not been so far considered by this Court and it to be· examined and considered by this Court, especially in view of certain observations made by this Court in· Niranjan Shankar Golikari's (2 ) case which warrant such reconsideration. Though i_t was a casei deal ing with negative c01Venant that was operative during the employment period counsel pointed out that entire case law Indian as well as English was discussed and this Court at page. 389 of repo<t observed thus : requires th<1 "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 contract.'" I (I) [1874] 14 Beng. L. R. 76. (2) [1967] 2 SCR 378. ... SUPERINTENDENCE COMPANY v. KRISllAN MURGA! (Tulzapurkar, J.) . . 1285 According to counsel the very fact that this Court has observed that A considerations qua post-service restrictions are different from those that are· to be considered in cases of restrictiops during the employiµent suggests that perhaP5 a rigorou~ test of reasonableness may have to be adopted in the former cases but there would be cases where post service restrictions, if !eason:able, even after app_lying rigorous tests may be valid as not falling under s. 2 7 of the Act, it was, there-. fore, not correct to ·say that aU post-service restrictions were volp. His precise contention was that even a post-service restrictive covenart,t, if it was reasonable, qualified or limited in operation both iD point bf time l\Ild area, as was the case here, does not amount to any restraint of trade at all within the meaning of s. 27 and such restrictive covenan could· be justified as being necessary and essential employer's interests, his trade secrets and his trade connections and, therefore, valid. As regards the argument based on codified excep tion, counsel pointed out, that even the case of a restrictive covenant operative during the period of employment between master and servant had not been provided for as an exceptiOl!I below s. 27 but even sa such restrictive covenant was never regarded as amounting to restraint of trade under s. 27 mainly because it was always; regarded as reason-· able and necessary tOI protect the employer's interests, which shows that the statutory exceptions were not exhaustive. . Lastly,· counsel urged that the Law Commission's recommendation on which reliance wa• · placed by respondent's coousel would be inconsequential because proceeds on the acceptance of the interpretation placed on s. 27 by various High•Courts and he is seeking tol get that interpretation eimmin- ed and considered bY-:this Court. to protect B c 1 o However, as we have said above, we do not propose to discuss or decide the aforesaid question inasmuch as this appeal can be disposed of by deciding the second question that has been raised before us and for that purpose we shall proceed on tbe assumption tbat the negative c~venant contained in cl. (10) of tbe service agreement is valid and not hit by s. 27 of tbe Contract Act. The question is whether tbe said restrictive covenant is on its terms enforceable against the respondent at tbe instance of tbe appellant1 company. ··, l \ We have already quoted the restrictive covenant contained In terms tbe clause provides that the restriction contained cl. ( 10). !herein will come into operation "after you (respondent) company". Admittedly in tbe instant case the respondent had not on his own left the .company but his services were terminated by the appel- !ant COOlpany by a. notice dated November 24, 1978 with effect from December 27, 1978. The question is whether the phrase "after you E F G B i 1286 SUPREME COURT REPORTS [1980] 3 s.c.R. leave the company" ml!llllS the leaving of service by the responde!llt voluntarily or would include even ~e case of termination of his services by the appellant company. The Division Bench of the High Court has ,taken the view that the word "leave" does not include termination Of service by the employer. Counsel for the appellant company con~ tended that the word "leave" occurring in the phrase "after you leave the company" would be wide enough to include all cases of cessation of service whether brought about by voluntary quitting on the part of the employee or termination of his services by the employer and in that behalf reliance was placed upon an English decision in Murray v. Giese(•) where it was held that an agreement restricting competition with an employer "after leaving his ser'1ice" would be operative on the termination, however accomplished, of the service, e.g. by a disnrissal without notice. ( vide : Stroud's Judicial Dictionery, 4th Edn., Vol. 3, page 1508, Item 13, under the word 'leaving'). In our view, the word "leave" has various shades of meaning depending upon the context or intent with which it is used. According to the plain grammatical meaning that word in relation to an employee would normally be construed as meaning voluntary leaving of the ser vice by him and would not include a case where he is discharged or dismissed or his services are terminated by his employer. Ordinarily the word "leave" appears to connote voluntary action. In Words & Phrases Permanent Edition Vol. 24 at page 499 the following statement of law based on an American decision occurs: "An application for the employment of a street car con ductor provided that in the event of his leaving the services for any reasons whatever within six months, the money paid to him for work under instruction while on trial shol1ld be deducted from such moneys as should be due from the com pany on the date of his_ "leaving". Held, that the word "leaving'; meant to quit or depart, implying, volition on the part of the person leaving, and limited the forfeiture of the instruction wages to a case where plaintiff left defendant's employ of his own volition, nor was such instruction effected by the words, "for any reason whatsoever." Muesling v. International Ry. Co., 147 N.Y.S. 177, 178, 85 Misc. 309_ ( I In our view having regard to the context the expression "leave" occurs in cl. (10) o~ the service agreement and reading alongwith all the other terms of employment it seems to us clear that in the instant case the word "leave" was intended by the parties refer only to a case where the employee has voluntarily left the services in which (I) 32 Law Times Old Series 89. B c D E F G H ... _,;;.' A 1287 SUP!!RINTBNDENCB COMPANY v. KRISHAN MURGA! (Sen, 1.) of the appellant company of bis own, and since hem the respondent's services were terminated by the appellant company restrictive covenant contained in cl. (10) would be inapplicable and, therefore, not enforceable against the respondent at the instance of the appellant company. Counsel for the appellant company urged that our constru~- tion would lead to puttin8. a premium upon an dishonest employee who by his own misdemeanour and misbehaviour may invite termination of his services . .All that we can say is that the appellant company sholl1d have taken care · td use appropriate language while incorporat~ ing such restrictive covenant so as to include every case of cessation of employment arising from any reason whats0ever and not used the expression "leave," which normally is synonymous to the expression · C "quit" and indicates voluntary act on the part of the employee. B In the reswt the appeal is dismissed with no order as to costs. SEN, J. I regret that my learned brethren propose to express nd opinion on the question on which, in my view, the appeal turns. The question is whether a negative covenant which restricts the right of the term of service, or the the employee, after the cdnclusion of termination of the employment for other reasons, to engage in any business similar to or competitive with that of the employer, is in restraint of1 trade and, therefore, void under section 27 of the Con i have no doubt in my mind that the appeal tract Act,' 1972. · can'not be decided without deciding this question. This appeal on certifiCate from a judgment of the Delhi High restraint of trade contained in an court, relates to a covenant in company and the respondent in agreement between the appellant circumstances which we will explain. The appellant company carr- \.. ies on the business of valuer, surveyor, inspection of quality, weigh ~ ment, analysis, sampli'ng of merchandise and commodities, cargoes, It has its head office at industrial products, machinery, textiles, etc. Calcutta with a branch at New Delhi. On or about March 27, 1971, is a surveyor and· valuer was employed the respondent who by the appellant as the B~anch Manager of its New Delhi office. One of the terms and conditions of respondent would 'not serve elsewhere or enter into any business for a period of 2 years after leaving the service. The term is contained in cl~use 10 of the agreement which reads : the employment was that

10. That you will not be permitted to join any firm of our competitors or run a business of your own in similarity as directly and/or indirectly, for a period of two years at the D E ' F G e \ . <!i·--. 128f3 I SUPREME COURT REPORTS [1980] 3 :;.C.R. A of your posting after ! Company. The appellant terminated the services of the cespandent by its · . B c ' ' /D E I I F G H Jetter dated December 27, 1978. Thereafter the respondent star ted a business of his own under the name and styic of "Superinten dence aild Surveillance Inspectorate of India" at E-22, South Bx tensian, New Delhi on Jines identical° with and substantially simi th_e appellant. On April 19, 1979, the appellant lar to that of commenced a suit in the Delhi High Court in its original side claiming Rs. 55,000/- as damages on account of breach of the to restrain the respondent covenant and by himself, his servants or agents or otherwise from carrying on the said busi'ness or any other business on Jines similar to thg.t of appellant or associating or representing any Competitors of the app ellant before the expiry q_f two years from December 27, 1978. for permanent injunction restraint section 57 of sectian 27 of last posting of reaSO'nable; and restraint to a period of two years A Single Judge of the Delhi High Court/adopting the test cf the Cantract reasonableness, held Act to determine whether the agreement is void, one has to the nega whether illustratians ( c) tive covenent can be enforced as enjoined by specific Relief Act, 1963. He and (d) to held that Clause 10 of the agreement is not unreasonab:e, because to New Delhi, the place the area of re&tricted is not unlimited, being responde'nt and limited service. He went on to say that negative covenant in a contract of employment has always been enforced, if it is in the protection of the employer, and referred to Niranjan Shankar GoUkari v. Century further Spinning and Mfg. Co. Ltd. [1967] 2 S.C.R. p. 378. He held that the negative covenant was operative as the word "leave" in clause 10 was wide enough to include terminatio)J of service. He, accordingly, by his order dated May 25, 1979. made the earlier ex parte ad interim injunction granted by him on April· 24, 1979 ab~lute but restricted its operation to New· Delhi and for the period ending 27th December, 1980 or till the decision of suit, whichever is earlier. from the date he On appeal by the reversed respondent, a Division Bench of the High Judge hold learned Single Court ing that negative covenant operating beyond the period of employ ment was in restraint of trade and, therefore, void under sectioll 27 of the Contract Aot. the order of t • "'- ../ ' i I ~ ' . I SUPERINTENDENCE COMPANY V. KRISIIAB: MURGA! (Sen, !.) 1289 }. Four questions arise in this appeal : 1. Whether Clause 1 O of the agreement was in restraint of trade; and if so, being partial was reasonable?; 2. Whether according to valid and enforceable being the test of reasonableness laid down by Lor!! Macnaghten Norden/ell v. Hakim Nordenfelt Guns & Ammunition Co. Ltd.,(') an injunction to enforce the negative covenent can be granted under illustrations ( c) and ( d) to section 57 of the Specific Relief Act, 1963, despite section 27 of the Contract Act, 1872? 3. Whether, and to what extent, the provisions of Section 27 of the Contract Act are subject to the common law doctrine of restraint of trade ? 4. Whether the word "leave" in Clause 10 of the agreement between y the parties makes the negative covenant operative only when a ser vant voluntarily leaves his employment, or, applies even in a case of termination of his services by an order of dismissal or termina tion of his services? ¥ \ that !hey are the employee fmm working elsewhere during Agreements of service, contajl;ting a negative covenant preven covered by the agreement, are not void under section 27 of Contract Act, on the ground in restraint of trade. is obvious. The Such agreements are enforceable. the conti doctrine of restraint of nuance of a contract of employment; contract comes to an end. While during the period of employment, the Courts undoubtedly would not grant any specific per formance of a contract of personal service, nevertheless; Section 57 of the Specific Relief A_ct clearly provides for the grant of an junction to restrain the breach of such a covenant as it is not in restrafut of, but ill furtherance of trade. trade never applies during it applies only when 1be reason In Niranjan Shankar GoUkari's case, supra, \_ , distinction between a restriction this Court drew a in a contract of employment which is operative du.ring the period of employment and one which rermi'nation of employment. After referring to certain Englisn cases where such distinction had been drawn, the Court observed: to operate after thP, "A similar distinction has also been drawn by the Courts in India and a restraint by which a person binds himself during the term of his agreement directly or indirectly not to take service with any other employer or be engaged by a third party has been held not to be void and not against sec tion 27 of the Contract Act." (1) L. R. [1894] A. C. 535 23-610SCI/80 \ B ~ \ D E F G n A B c D E F G H 1290 SUPREME COURT REPORTS [1980] 3 s.c.R. It referred to with approval the decision in The Brahmaputra ·rea Cv. Ltd. v. Scarth, LL.R. (1885) 11 Cal, 545, where the con dition under which the covenantee was partially restrained from com peting after the term of his engagement with his former employer, was held the condition by which he bound himself during the term of his agreement, not, directly or indirectly, and obser to compete with his ved: employer was held good, to be bad but agreement of "At page 550 of the report the Court observed tha1 a person binds service by which himself during service with any one else, or directly, or in directly take part in, promote or did any business in direct competition with that of his employer was not hit by section 27." the term of agreement 'not i • The Court further observed: "An agreement a person exclusively for a definite is a difficult to see how that the due protection to its essential of the interests of the employer, while the agreement is in force." lawful . can be · unlawful which fulfilment, and to agreement, a'nd The Court also approved of the several Indian decisions where an agreement of service contained both a positive covenant viz. that the employee shall devote his whole-time attention to the service of the employers and also a negative covenant preventing the employee from working elsewhere during the term of the agreement, and flte High Courts have enforced such a negative covena'nt during the t~ of employment having regard to illustrations ( c) and ( d) to section 57 of the Specific Relief Act which, in terms, recognised such con traets and the existence of negative covenants therein, a:nd stated that the contention that the existence of such a negative covenant in .a service agreement made the agreement void on the ground that it was in restraint of trade and contrary to section 2 7 of the Contract Act had no validity. :{ In conclusion, the Court observed: "The result of the above discussion that con siderations against restrictive covenants are different in cases whete the restriction is to apply during the period after the te.J'mination of the qmtract than those in cases where it is to operate during !he period of the contract. Negative 1291 SUPERINTENDENCE COMPANY V. KRISHAN MURGA! (Sen, /.) ·covenants operative during the period of the contract of . employment when the employee is bound to serve his emplo- yer exclusively are generally not regarded as restraint of trade and therefwe do not fall under section 27 of the Con- . tract Act. A negative covenant that the employee would not engage himself in a trade or business or would not get himself employed by any other master for whom he would perform similar or substantially similar duties is not therefore a restraint of trade unless the c9ntract as aforesaid is unconscionable or excessively harsh or unreasonable or one sided." A · 1 8 (Emphasis supplied) The decision in Niranjan Shankar Golikari's case supra is therefore C \ of little assistance to the appellant. It is not seeking to enforce the .ll!egative covenant during the term of employment of the respondent but after the termination of his services. The restriction contained in Clause 10 of the agreement is obviously in restraint of trade and, there- fore, illegal and unenforceable under section 27 of the Contract Act. D In support of the appeal, learned counsel for the appellant has, in ·substance, advanced 11. two-fol.d contention. It is submitted, firstly, upon the common law doctrine of restraint of trade that though the -covenant is in restraint of trade, it satisfies the 'test of reasonableness', .as laid down by Lord Macnaghten in Nordenfelt v. Maxim Nordenfelt E ·Guns & Ammunition Co. Ltd., supra, and is, therefore, enforceable despite section 27 of the Contract Act, 1872, and, secondly, that the word "leave" in Clause 10 of the agreement is wide enough to make the covenant operative even on the termination of employment i.e. it I am afraid, the contentions are wholly 1includes the case of dismissal. ·'devoid of substance. F While the Contract Act, 1872, does not profess to be a complete code dealing with the law' relating to contracts, we emphasise that to · the extent the Act deals with a particular subject, it is exhaustive upon the same and it is not permissible to import the principles of English Law de hors the statutory provision, unless the statute is such that it G .. cannot be understood without the aid of the English Law. The provi •-"° sions of Section 27 of the Act were lifted from Hom. David D. Field's • Draft Code for New York based upon the old English doctrine of restraint of . trade, as prevailing in ancient tiiles. When a rule of English law receives statutory recognition by the Indian Legislature, it is the language of the Act which determines the scope, uninfluenced H ·by the manner in which the anologous provision comes to be construed 0narrowly, or, otherwise modified, in order to bring the construction y '\. 1292 SUPREME COURT REPORTS [1980] 3 s.c.R; A within the scope and limitations of the rule governing doctrine of restraint of trade. the English' -+. i It has often been pointed out by the Privy Council and this Court that where there is positive enactment of Indian Legislature the proper course is to examine the language of the statute and to ascertain its· proper meaning uninfluenced by any consideration derived from the previous state of the law or the English law upon which it may be founded. Ir; Satyavrata Ghosh v. Kurmee Ram Bangor, [1954] S.C.R. 310, Mukherjee J. while dealing with the doctrine of frustration of contract observed that the Courts in India are to be strictly governed by the provisions of Section 5 q of the Contract Act and not to be ·"'v influenced by the prevailing concepts of the English Law, as it has· 1'. passed through various stages of development since the enactment of the Contract Act and the principles enunciated in the various decided cases are not easy Jo reconcile. What be says of the doctrine of frus-c tration under s. 5 6 of the Contract Act is equally true of the doctrine of restraint of trade under section 2 7 of the Act. Now, so far as the present case is concerned, the law is to be found' in section 27 of the Contract Act 1872, which reads: "27. Agreem,,ent in restraint of trade void-Every agree ment by which any one. is restrained from exercising a lawful profession, trade or business of. any kind is to that extent· void. Exception : One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local linllts, so long as the buyer or any other person deriving title to the goodwill from him, carries on a like business therein, provided that . such limits appear to nature of the busi!ness." the Court reasonable, regard being had to I The section is general in terms, and declares all agreements in restraint· void pro tanto, except in the case specified in the exception. ~ The question whether an agreement is void under section 27 must· be decided upon the wording of that section. There is nothing in the wording of section 27 to suggest that the principle stated therein does not apply when the restraint is for a limited period only or is confin• ed to a particular area. Such matters of partial restriction. have effect only when the fact fall within the exception to the section. A contract, which has for its object a restraint of trade, is prirri(.l Section 27 of the Contra_ct Act is general in terms and' fpcie, void. B D E F G ·.u 1293 SUPERINTENDENCE COMPANY V, KRIS~ MURGA! (Sen,!.) •UJl!ess a particular contract can be distinctly brought within Exception 1 there is no escape from the prohibition. We have nothing to do ·with the policy of such a law. All we have to do is to take the words of the Contract Act and put upon the meaning which they appear section was expre8sed by Sir .plainly to bear. This view of the Richard Couch C.J. in celebrated judgment in Madhub Chunder v. Rajcoomar Doss [1874] Beng L. R. 76 at pp. 85-86 laying down that whether the restraint was general or partial, unqualified or quaTh fied, if it was in the nature of a restraint of trade, it was void. ,.._ t The observations of Sir Richard Couch, C.J., in Madhub Chunder v. Rajcoomar Doss, supra, which have become the locus classicus were ...._,..these: "J "The words 'restraint from exercising a lawful profession, trade or business' do not mean an absolute restriction, and restriction are intended to apply to a partial restriction, a limited to some particular place, otherwise the first exception would have been unnecessary." Moreover, "in the follow ing section (s. 28) the legislative authority when it intends to speak of an absolute restraint and not a partiall one, has introduced the word 'absolutely'. . . The use of this word in s. 28 supports the view that in s. 27 it was intended to! pre vent not merely a total restraint from carrying on trade or ;business but a partial one. We have nothing to do with the policy of such a law. All we have to do is to take thel words of the Contract Act, and put upon them the meanin!J which they appear plainly to bear." Y The test laid down by Sir Richard Couch, C.J. in Madhub Chunder v. Rajcoomar Doss, supra, has stood the test of time and has invaria bly been followed by all the High Courts in India. ' The agreement in question is not a 'goodwill of business' type of contract and, therefore, does not fall within the exception. agreement on the part of the respondent puts & restraint even though ·partial, it was void, and, therefore, the contract must be treated as one ·which cannot be enforced. If It is, however, argued that the test of the validit}j of a restraint, It is whether general or partial, is dependent on its reasonableness. -pointed out that the distinction drawn by Lord Macclesfield in Mitchel v. Reynolds (1711) 1 PMas_161 between general and partial restraint, was removed 5y the House of Lords in Nordenfelt v. Maxim Nortlen Je/t Guns and Ammunition Co. (supra). According to the judgment of A B c D E F G H A B 1 c D 1294 SUPREME COURT REPORTS U980] 3 s.c.11. •. ) Lord Macnaghten in N ordenfelf s case, the validity in either case was. reasonableness with reference to particular circumst~ces. It is urged that all covenants in restraint of trade partial as well as general a.re prima facie void and they cannot be enforced, according to the laid down by Lord Macnaghten in Nordenfelt's case and accepted by the House of Lords in Mason v. Provident C/.othing arui Supply Co. Ltd., L.R. [1930] A.C. 724, unless the test of reasonableness is testi fied. It is also urged that while an employer is not entitled to protect himself against competition per se on, the part of an employee after the employment has ceased, he is entitled to protection of his proprietary interest viz. his trade secrets, if any, and a blisiness connection. t The test of reasonableness which now governs the commoni doctrine. of restraint of trade has been stated in Chitty on Contracts,, 23rd Edn., Vol. I. p. 867 : . I( "While all restraint of trade to which1 the doctrine applied are prima facie unenforceable, all, whether partial or total, are enforceable, if reasonable." A contract in restraint of trade is one by which a party restricts his future liberty to carry on his trade, bnsiness or profession in such manner and with such persons as he chooses. A contract of thi~ class. is prima fade void, but is becomes binding upon proof that th<i triction is justifiable in the circumstances as being reasonable from the E. point of view of the parties themselves and also of the community. In Elizabethan days, all agreements in restraint of trade, whether general or restrictive to a particular area, were held to be bad; but a distinction came to be taken between covenant in general restraint of trade, and those where the restraints were only partial. '<!: F G H According to !lie test laid down by Parker, C.J. (later Earl of Macclesfield) in Mitchel v. Reynolds, supra, the general restraint was one which covered an indefinite area, and was, as a rule held bad,. while a partial restraint was valid if reasonable, the onus being upon f the covenanter to show it to be unreasonable. , There is no higher authority upon this subject than Tindal, C.J .,. who had to do much with moulding of the law on this subject and bringing it into harmony with the needs of the changing Iw Mornen v. Graves [1831] 7 Bing. 735, Tindal, C.J. said : times. ' "The law upon this subject (i.e. restraint of trade) has been laid down with so much authority and precision; by Parker, C.J., in giving the judgment of the Court of B.R. (King's Bench) in the case of Mitchel v. ,Reynolds which has been the leading case on the subject from that time: to • , 1 95 SUPERINTENDENCE COMPANY V. KRISHAN MURGA!. (Sen, J.) the present, that little more remains than to apply the prin ciple of that case to the present. Now the rule laid down by the court in that case is . 'that voluntary reitraints, 'by agreement between the parties, if they amount to a general restraint of trading by either party, are void, whether. with or without consideration, but particular restraints of trading, if made upon a good and adequate consideration, so aS' to be a proper and useful contract, that is, so as it is a reason able restraint only, are good:' Later on he goes on to observe : "Parker, C.J., says, : a restraint to carry on a: throughout the kingdom must be void; a res_traint to carry it. on within a particular place is good, which are rather in-', stances and examples than limits of the application of the·. rule, which can only be at least what is a reasonable restraint with reference to the particular cases." A B \ I q \ ' By decrees, the common law doctrine of restraint of trade, bas been D progressively expanded and the legal principles applied and developed so as to suit the exigencies of the times, with the growth of ~ade and co=erce, rapid industrialisation and improved means of communi- cation. ' In Nurdenfelt v. Maxim Nordenfelt Guns & Ammunition Co. Ltd., (supra), Lord. Macnaghton held that the only true test in all cases, whether of. partial .or general restraint, was the test proposed by Tindal, C.J. : What.is ·a ·reasonable restraint with reference to ·a particular case?: Thereby he denied that general and partial restraints. fall into distinct categories. A partial restraint in his opinion was not prima fade' valid. i.e. It was on the same footing as a general prima facie void, but valid, if reasonable. restraint / In Mason v. Provident Clothing and Supply Co. Ltd., supra, the, HmJSe of Lords held that ·Lord Macnaghton's proposition was a cor rect statement of the modem law. · The House of Lords in this case developed the law in two respects : First, it held that all covenants in restrnlnt of trade, partial as: well as &eneral, prima fade void and that they cannot be enforced unless the test of reasonableness as propound ed by Lord Macnaghton is satisfied. Secondly, it made a sharp dis tinction, stressed as long ago as 1869 by James, L.J., in Leather Cloth Co. v. Lorsont [1869] L.R. 9 Eq. 345, between contracts of service and contracts for the sale of a business. ' ."" r In Herbert Morris Ltd. v. Saxelby, supra, the House of Lords held that a master cannot protect himself from competition by an ex-servant E F G H . 12 36 SUPREME COURT REPORTS 11980] 3 s.c.R . A 01 his new employer. He cannot stipulate freedom from competition. P. ut he can protect his trade secrets or his confidential information. The 'test of reasonableness' evolved in co=on law after the deci- ion of Lord Macnaghton, in Nordenfelt's case, supra, and re-affinned by the two decisions in Mason v. Provident Clothing & Supply Co. Ltd.:and Herbert Morris Ltd. v. Sexelby, supra, is that such covenants are prima facie, void and the onus. rests upon the covenante to prove that the restraint is reasonable. In Nordenfelfs case, Lord Macnaghton also adverte.d to the distinction between covenant entered by the seller of the business on the one hand and the covenant by the employee on the other. Framers of section 833 of Field's Draft Code for New York designed some hundred and twenty-five years ago, expressed the iiiten• tion to replace the co=on law stating that "contracts in restraint of td a very dangerous trade have been allowed by modern decisions extent", and they proceeded to draft the provision with the d~liberate intention of narrowmg the law. The provision was never applied to New York, but found its way into the Contracti Act, 1872 as section 27. Several sections of the Field's Code were enacted in the! Act. The Cede was anathema to Sir Frederick Pollock who in his preface to Pollock and Mulla's Indian Conlf<lct Act, p. 5, described the Code as the evil genius of the Act, the worst principles of codification produced, and advocated that 'whenever the Act wasi revised every thing taken from the Code should be strnclc out'. It must be remembered that the test of reasonableness comes from th~ judgment of Lord Macnaghten in Nordenfelfs case in the House of Lords in 1894. In 1862, however, when the Field provision'. was drafted, it was not easy to foresee that the co=on law would shortly in Mitchel v. discard the distinction drawn by Lord Macclesfield Reynolds in 1711, between general and partial restraints. A general restraint was one which covered an indefinite area, and was, as a rule, held bad, while a partial restraint was valid, if reasonable, the onu$ being upon the covenanter to show it to be unreasonable. This was a mere rule of thumb, but was stubbornly adhered to by as great a com mon lawyer as Bowen, L.J., as late as 1893, when the Nordenfelf:l case was in the Court of Appeals : L.R. [1893] 1 Ch. D. 630. Be that as it may, in Field's draft, as early as 1862, ar<? clearly expressed two principles th'lt govern the modem ~o=on law today, - but were unknown to it at that stage, and were not unequivocally stated until 1916, first that restrictive covenants are prima facie, invaJid, and secondly between master and servant covenants on the one hand and vendor and purchaser covenants on the other; there is a great gulf i ( I B I c! 0 E F G I H l SUPERINTENDENCE COMPANY v. KRISHAN MURGA! (Sen, /.) 1297 fixed. The onus of proving. reasonableness under Exception 1, was A placed on the covenantee, while the common law at the\ time placed ·1t upon the covenanter to show unreasonableness. r Sir Frederick Pollock's criticism(') of the substantive part of ~ection 27 was that it laid down too rigid' a rule of invalidity, not merely for general bnt also for partial restraints, and of the exceptions that they were too narrow, being based upon an idea of the common law, now outmoded, that a restraint must be confined within loca~ limits. · His views on the main body of the section may be illustrated by , twd quotations : "The law of India .... is tied down by. the language of the section to the principle, now exploded in England, of a hard and fast rule qualified by strictly limited exceptions •.• " c "To escape the prohibition, it is not enough to show that the restraint created by an agreement is partial, and general." Two passages. from his comments on Exception 1 may also be D -cited ; "The extension of modem commerce and means of com munication has displaced the old doctrine that the operation <>f agreements of this kind must be confined within a definite neighbourhood. But the Anglo Indian law has stereotyped that doctrine ill a narrower form than even the old authodties would justify." E "Meanwhile the common law has, .on the contrary; been widening the old fixed rules as to limits of space have been broken down, and the court has only to consider in every case of a restrictive agreement whether 'reasonable in reference to the interests of the parties con- cemed reasonable in reference to the interests of the public." .,. f Reverting to th~ judgment . of Sir Richard Couch in Madlmb ·Chunder v. Rajcoomar Doss, supra, we find that that eminent Judge held that section 27 of the Contract Act does away with the distinction observed in English cases following upon Mitchel v. Reynolds, supra, G :between partial and total restraints of trade, and makes all contracts falling within the terms of section void, unless they fall within the exceptions. As already stated, that decision has always been followed. the restriction F In Shaikh Kalu v. Ram Saran Bhagat, [1908] 13 C.W.N. 388 :Mllkherjee and Camduff, JJ, referred to the history of the legislation H (l Pollock & Milla's India Contrzct and Specific Relief Act, 9th Ed., at pp, 271, 274 and 292. 1298 SUPREME COURT REPORTS !1980] 3 S.C.R. A on the subject and observed that the framers of the Act deliberately reproduced Section, 833 of Field's Code with the. full knowledge that the effect would be to lay down a rule much narrower than what was. recognised at the time by the co=on law, while the rules of the , co=on law, on the other hand, had since been considerably widened and developed, on entirely new lines. They held that the wider cons truction put upon section 27 by Sir Richard Couch.in Madhub Chundur v. Raj Coomar Doss, supra, is plainly justified by the language used, and that the selection had abolished the distinction between partial and' total restraints of trade and said : 1 c D E F G H "The result is that the rule as embodied in sec. 27 of the Indian Contract Act presents an almost startling dissimilarity to the most modern phase of the English rifle on the .subject. They went on to observe: in its original form, that the Courts have "As observed, however, by Sir Richard Couch in the case to which we have referred, we have nothing to do with the policy of the law, specially as the Legislature has deliberately left the provision in sec. 21; though other provisions of the Contract Act have from time to time been amended. The interference would be almost irresistible under these circumstances, rightly ascertained the intention of the legislature. The silence of the Legislature in a case of this description is almost as emphatic as an express recognition of the construction which .has been judicially put upon the statute during many years past. In this view of the matter, if we adopt the construction of sec. 27 of the Indian Contract Act as first suggested by Sir Richard Couch and subsequently affirmed in the cases to which we have referred, a construction which is consistent with plain language of the section, the agreement in this case must be pronounced to be void." (Emphasis supplied) The Law Commission, in its Thirteenth Report, has recommended that Section 27 of the Act should be suitably. amended to allow such restrictions and all contracts in restraint of trade, general or partial, as were reasonable, in the interest of the parties as well as of the public. That, however involves a question of policy and that is a matter for Parliament to decide. The duty of the Court is to interpret the section according to its plain linguage. The question for consideration is whether, assuming that the \vider construction placed by Sir Richard Couch in Madlu1b Clmndur v. f SUPERL'HENDENCE COMPANY V. KRISHAN MURGA! (Sen, J.) Raj Coomar Doss, supra, to have been the law, at the time of enact- . ment, it has since become obsolete. A law does not cease to be opera tive becaus~ it is an anachronism or because it is antiquated or because the reason why it originally became the law, would be no reason for the introduction of such a law at the present time. . - 129~ Neither the test of reasonableness nor the principle of that the res traint being partial was reasonable are applicable to a case governed _ by Section 2 7 of the Contract Act, unless it falls within Exception 1. We, therefore, feel that no useful purpose will be served in discussing the several English Decisions cited at the Bar. Under Section 27 of the Contract Act, a service covenant extended beyond the termination of the service is void. Not a single Indian Decision tas been brought to our notice where an injunction has been granted against an employee after the termination of his employment. There remains the question whether the w01:_d 'leav()' in clause 10 of the agreement is wide enough to make the negative covenant operative D on I.he termination of employment. We may for convenience of refe rence, reproduce that covenant below : - "10. that you shall not be permitted to join any firm of our competitors or run business of your own in similarity as directly and/or indirectly for a period of 2 years at the place of your last posting af!er you leave the Company." • On a true construction of clause 10 of the agreement, the negative covenant not to serve elsewhere or enter into a competitive business does not, in my view, arise when the employee does not l~ave the ser vices but is dismissed from service. Wrongful dismissal is a repudiation of contract of service which relieved the employee of the restrictive covenant General Bil/posting v. Atkinson L.R. [1909] AC. 116 . It is, however, urged that the word 'leave' must, in the context in which it appears, be construed to mean as operative on the termination of employment. Our attention is drawn to Stroud's Judicial Dictio nary, 4th Edn., Vol. If, Pr. 13 p. 1503. There is reference to Mars v. Close, 32 L.T.0.S. 89. Ari agreement restricting competition with an employer "after leaving his service" was held to be operative on the termination, however, accomplished, of th-e service, e.g. by ~ dismissal without notice. E G The word 'leave' has various shades of meaning depending upon H the context or intent with which it is used. According to the plain to an emplgyee, should be , meaning, the word 'leave' in relation ;r- ' . 1300 SUPREME COURT REPORTS [1980] 3 S.C.R • construed to mean where he "voluntarily" leav~s i.e. of his own volition and does not include a case of dismissal. . The word 'leave' appears to connect voluntary action, and is synonymous with the word 'quit'. It does not refer to the expulsion of an employee by the act of his employer without his. consent and against his remonstrance. That is a ~eaning in consonance with justice and fair play. It is also the ordinary ln shorter Oxford English Dictio plain meaning of the word 'leave'. nary, 3rd Ed. Vo1. X, page 1192, th,e following meaning is given- "to depart from; quit; relinquish, to quit the service of a person." ·C The drafting of a negative covenant in a contract of employment is often a matter of great difficulty .. In the employment cases so far dis cussed, the issue has been as to the validity of the covenant operating after the end of the period of_ service. Restrictions on competition during that period are normally valid, and indeed may be implied by In such cases the res law by virtue of the servant's duty of fidelity. triction is generally reasonable, having regard to the interest of the employer, and does not cause any undue hardship to the employee, who will receive a wage or salary for the period in question. But if the, covenant is to operate after the termination of services, or is· too widely worded, the Court may, refuse to enforce it. , )<; :F It is well settled that employees covenants should be carefully scrutinised because there is inequality of bargaining power between the parties; indeed no bargafuing power may occur because the employee is presented with a standard form of contract to accept or reject. At the time of the agreement, the employee may have given little thought to the restriction because of his eagerness for a job; such contracts "tempt improvident persons, for the sake of present gain, to deprive themselves of the power to make future acquisitions, and expose them to iinpositiOn and oppression." TI1ere exists a difference in the nature of the interest sought to be protected in the case of an employee and of a purchaser and, therefore, G . as a positive rule of law, the extent of restraint permissible in the two types of case is different. The essential line of distinction is that the p11rchaser is entitled to protect himself against competition on the patt of his vendor, while the employer is not entitled to protection against mere competition on the part of his servant. In addition thereto, a restrictive covenant ancillary to a contract of employment is likely to affect the employee's means or procuring a livelihood for himself and his family to a greater degree than that' of a seller, who usually receive ample. consideration for the sale of the goodwill of his- business. .H f, ( " • SUPERINTENDENCE COMPANY V, KRISHAN MURGA! (Sen, !.) 1301 The distinction rests upon a substantial basis, since, in the f0rmer in the class of contracts we deal with the sale of commodities, and latter class with the performance of personal service-altogether diffe rent in substance; and the social and economic implications !Ire va~tly different. The Courts, therefore, vi~ with disfavour a restrictive covenant by an employee not to engage in a business similar to or competitive with that of Jhe employer after the termination of his contract of employ ment. The true rule of construction is that when a covenant or agreement is impeached on the ground that it is in restraint of trade, the duty of the Court is, first to interpret the covenant or agreement itself, and to ascertain according to the ordinary rules of construction what is fair meaning of the parties. If there is an ambiguity it must receive a In Mills v. Dunham, L.R. narrower construction than the wider. (1891] 1 Ch. 576, Kay, Ll. observed: "If there is any ambiguity in a stipulation between em- ployer and employee imposing a restriction on the latter, it ought to receive the narrower construction rather than the wider-the employed ought to have the benefit of the doubt. It would not be following out that principle correctly to give the stipulation a wide construction so as to make it illegal and thus set the employed free from all restraint. It is also a settled canon of construction that where a clause is ambigu- ous a construction which will make it valid is to be preferred to one which will make it void." The restraint may not be greater than necessary to protect the employer, nor unduly harsh and oppressive to the employee. I would, therefore, .for my part, even if the word 'leave' contained in clause 10 of the agreement is susceptible of another construction as being opera tive on termination, however, accomplished of the service e.g. by dis missal without notice, would, having regard to the provisions of Sec tion 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 res triction 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. S.R. Appeal dismissed. I c· It E' B '