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TMI Blog1979 (7) TMI 245X X X X Extracts X X X X X X X X Extracts X X X X ..... dent and the temporary injunction should be vacated in the appeal. We must, Therefore, first see the facts and the pleadings, and the law applicable on such facts to know if a good prima facie case was made out to justify the grant of temporary injunction. THE FACTS: 2. The plaintiff carries on business of inspecting merchandise with a view to assess their quality and claims that it has established reputation and goodwill in its business, developed its own technique for quality testing and control, and possesses trade secrets in the form of these techniques and clientele. The plaintiff has been employing various persons as Manager and in other capacities in Calcutta, New Delhi and other places. The employees are put in posts of trust and confidence sharing the secrets of business and trade of the plaintiff. 3. The defendant was employed by the plaintiff on 27th March 1971. During his service the defendant appellant was given various positions including that of the Manager of the New Delhi branch of the plaintiff. The relevant terms in the appointment letter of the defendant are: 9. that while in our employ, you will not be permitted to engage yourself in any part tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for this conclusion are as below: Section 27 of the Contract Act, 1872, reads as under: Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. Explanation 1, - One who sells the good-will of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the good-will from him, carries on a like business therein, provided that such limits appear to the Court reasonable, regard being had to the nature of the business . The key to the construction of S. 27 is to be found in the following observation in Pollock and Mulla on Indian Contract and Specific Relief Acts, Ninth Edition by Justice J. L. Kapur, at p. 271: Agreements in restraint of trade. -This section, like the last, unfortunately follows the New York draft Code, which has been the evil genius of this Act. The first paragraph is taken almost word for word from S. 833 of that production. The original draft of the Indian Law Commission did not contain any specific provision on the subject. The New York draftsmen were of opi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the period of service contract. 10. In Niranjan Shankar Golikari v. The Century Spinning Mfg. Co. Ltd. (1967)ILLJ740SC , Shelat, J, reviewed the whole law on the subject and arrived at the following conclusion: The Court takes a far stricter view of covenants between master and servant than it does of similar covenants between vendor and purchaser or in partnership agreements, (The agreement between vendor and purchaser and between partners are the exceptions to the rule in S. 27 stated above). An employer, for instance, is not entitled to protect himself against competition on the part of an employee after the employment has ceased.......... (Page 384) The Courts however have drawn a distinction between restraints applicable during the term of the contract of employment and those that apply after its cessation. (Page 385) A similar distinction has also been drawn by 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 S. 27 of the Contract Act. In Brahmaputra Tea Co. Ltd. v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to say, covenant in restraint of trade cannot be justified merely because it is for adequate consideration; and (3) An employer is not entitled by a covenant taken from the employee to protect himself after the employment has ceased against his former servant's competition per se, although a purchaser of goodwill is entitled to protect himself against such competition on the part of the vendor. There are at least two reasons given for this distinction. An employer may not, after his servant has left his employment, prevent him from using his own skill and knowledge in his trade or profession, even if acquired when in the employer's service. That skill and knowledge are only placed at the employer's disposal during the employment. They have not been made a subject of sale after that employment has ceased. On the other hand, when a purchaser takes over the goodwill of a business, if he is to have all its advantages it must in his hands be immune from its former owner exercising his special knowledge to the buyer's detriment. 11. Restraints imposed on the carrying on of the business after the expiry of the period of service contract by a covenant between the employ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estraint is reasonable have been upheld by the English decisions. Each of these three grounds as applicable to the facts of the present case is considered below: (1) Protection of a proprietary or quasi-proprietary or commercial interest of the employer. (2) Protection of the trade secrets of the employer; and (3) Protection of the trade connection of the employer. (1) Protection of a proprietary or quasi-proprietary or commercial interest of the employer. 15. What is the meaning of interest in this connection? Freedom from ordinary trade competition is not considered to be an interest which can be protected by the employer by such a covenant (G. H. Tritely - The Law of Contract, Fourth Edition, page 298). An interest to be enforceable must be based on common law, some previous contract other than the impugned one or a statute. The restrictive covenant in the present case is not based on any of them. (2) Trade Secrets: 16. A trade secret is some secret process of manufacture. For example, the Coca-Cola formula which the Coca-Cola firm refused to disclose in India is a trade secret. In the pleading by the plaintiff there is no reference to any such trade secret. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I can hardly regard Mr. Morris's uncorroborated evidence as very satisfactory proof that the practices in question were unknown to other firms. Still, the manner in which Sargant, J. dealt with this part of the case appears to me to be unanswerable. Though the defendant had access to the E Charts, the L sheets, the drawings of special machines, the cost index and other documents were far too detailed for the defendant to carry away the contents thereof in his head. All that he could carry away was the general method and character of the scheme of organisation practiced by the plaintiff company. Such scheme and method can hardly be regarded as a trade secret. The same applies to the plaintiff company's system of standardizing mechanical apparatus capable of being used in more than one class of machine. The nearest approach that I can find in the evidence to anything in the nature of a trade secret is the mention of certain formulae, said to be based on the plaintiffs' experience, and to be more trustworthy than Molesworth's formulae for similar purposes. During the course of the argument your Lordships asked for but failed to obtain these formulae, and Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e been shown to have had influence over the customers of the employer when the employee came to know them, the case could have been made out for restraining the employee from dealing with these customers. 19. Cheshire and Fifoot on the Law of Contract, Ninth Edition, page 380 have laid down the following tests of finding out whether the employee had opportunity to develop influence over the customers of the employer during the period of service: A restraint is not valid unless the nature of the employment is such that customers will either learn to rely upon the skill or judgment of the servant or will deal with him directly and personally to the virtual exclusion of the master, with the result that he will probably gain their custom if he sets up business on his own account. It is true that the defendant being the Manager of the plaintiff's business in the New Delhi Branch had full opportunity of knowing customers of the plaintiff. But what was the nature of the defendant's work? Practically nothing is known about it. The various words used by the plaintiff describing its business are totally inadequate to give us any idea of it. When two persons come in a contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . If the law applicable to the facts of the present case set out above is correct, then the view of law taken in the order under appeal does not, with respect, seem to be in accordance with it. This will be apparent by the perusal of the following extracts from the order: 1. Under the S. 27 of the Contract Act to determine whether the agreement is void, one has to determine whether the restraint is reasonable. If the restraint is reasonable the agreement will not be, void. The negative covenant has been enforced from time to time. Injunctions are granted under Section 42 of the Specific Relief Act, 1963 to enforce negative agreement, express or implied . With respect, all post-service restrictive covenants are prima facie void. The only exceptions are those given in the statute or those developed by the English case law stated above. 2. It is well known that if the covenant is unreasonable the same is void and unenforceable, In case the covenant is reasonable the same can be enforced............In case before the Supreme Court ( Niranjan Shankar Golikari v. Century Spinning Manufacturing Co. Ltd ., (1967)ILLJ740SC ), the injunction was issued on the ground that it was res ..... X X X X Extracts X X X X X X X X Extracts X X X X
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