Electrosteel Castings, Ltd. v. Saw Pipes Ltd., And Others

Ajoy Nath Ray, ACJ.:— This is an application for interim reliefs in aid of an appeal preferred from an interlocutory order passed on the 18 April, 2004, whereby the learned Judge, granted only one part of the prayers of injunction made by the plaintiff/appellant. An order was granted restraining defendants 2 to 7 from divulging secrets, but an order restraining them altogether from working with the first defendant was refused.

2. The matter is pending final disposal before the interlocutory Court and directions for affidavits have been given. However, the matter is due to appear again only in December this year. The appeal has been filed on grounds of urgency. In these circumstances, we propose to dispose of the appeal along with the application for stay and the appeal is, therefore, treated as on the day's list. Since the appeal is from an ad interim order only, it would not be right to keep the appeal pending and to allow subsequent interim order of the interlocutory Court to wipe out the appellate ad interim order for all purposes while the appeal goes on being in the pending state.

3. The grievance of the appellant is in regard to six of its employees who are defendants Nos. 2 to 7 in the suit. They also complain against the defendant No. 1 who is the first respondent and who is a rival manufacturer. The case of the appellant against its erstwhile employees is that they have broken their contract of employment which contained a clause prohibiting them from joining any competitors within five years after they leave service. The complaint against the first respondent is for inducement of breach of contract and for enticing away the said six employees; the appellant urges that the first respondent poached upon its employees.

4. The factory of the appellant is situated at Khardah in West Bengal. It produces specialty goods which are ductile iron pipes known in the trade D.I pipes. These are produced in the appellant's unit from as raw a material as iron ore. It is said that the ore is converted through a blast furnace into pig iron which is mixed up with certain other metals to form alloys and that the molten alloy is put through a centrifuge to produce the necessary pipes. These are of wide diameter and several meters long, principally put in use for the purpose of underground sewerage systems. The inside of the pipe is coated with a special slurry to prevent the sewage effluents from chemically reacting with the pipes. The outside surface which is under the roads, has, because of special production techniques, a greater stress bearing capacity. It is said that the appellant is practically the sole manufacturer of D.I pipes in India. It has a large market. Its turnover in the last year is claimed to be above Rs. 700 crore and its export during that year is claimed to be of the order of Rs. 120 crore.

5. The complaint is that the respondent No. 1 has set up a factory for producing D.I pipes at Bhuj in Gujarat. Since the process has a lot of trade secrets and practical know-how involved in it, allegedly the respondent No. 1 has enticed away the appellant's key workers for the purpose of divulging these trade secrets and know-how to the respondent No. 1 and this help it in setting up its factory for producing competing goods.

6. The employees all left the plaintiff appellant in the months of April and May this year and had put in between 5 and 14 years of service with the appellant. Their salaries ranged between Rs. 6200 per month and Rs. 26,500. They filled diverse designations such as Engineer, Manager, Supervisor and Sales/Market Technician.

7. It is complained that the respondent No. 1 though admitting that the employees are now all in their employment has not produced the letters of employment of any one of the employees. The allegation is that these employees have been enticed with larger salary than they were earlier drawing. It appears that the employment of these employees with the first respondent commenced after a certain time-gap subsequent to the leaving of the jobs by the employees of the appellant. It is submitted on this basis that unless the employees were sure to be absorbed by the defendant No. 1 and there had been a prior understanding amongst them, no employee would have dared to resign even before getting a new job.

8. It is further submitted that the employees hide from the appellant that they were leaving their jobs for the purpose of joining a competitor. One employee gave a false reason that he was going to join his brother-in-law's business in the USA, but actually went over to Bhuj to join the first respondent. Others gave such reasons as financial and spiritual need and also personal reasons.

9. Five of the employees, excepting only the seventh respondent, were released upon their signing as affidavit wherein they reiterated the clause in their contract of not joining a competitor within five years of leaving service.

10. In the case of the last employee, a notice to the employer terminating his employment is duly served, giving the required notice for one month, but it is followed up neither by the appellant's acceptance nor by the affidavit which the others signed.

11. The clauses of the contracts of employment of the six employees need to be considered at this stage.

12. All the employees were permanent employees when they left. By Cl. (4), the appellant agreed to provide them with bachelor company accommodation in or around Khardah Works. By Cl. (7) they were to retire on attaining the Age of 55 years.

13. By Cl. (9), their services were liable to be terminated without assigning any reason by either party by giving one month's notice to the other in writing, or salary, in lieu thereof.

14. Clause (10) is the clause for maintenance of secrets. Under Cl. 10(a), they were forbidden from disclosing any technical know-how, manufacturing process, formulas or other confidential information acquired in the course of their employment without the written consent of the appellant.

15. The said clause would be operative both during the continuance and after the termination of employment.

16. By Cl. 10(b), within a period of five years from the date of cessation of employment, the employment should neither enter into any competition with the appellant, nor associate himself with any competitor's firm or business without the appellant's written consent.

17. Sri Anindya Mitra pressing the appeal, submitted that fresh qualification holders got expert training in the Khardah Works of the appellant by their practical participation in the appellant's factory. Each different employee acquired his own special expertise. By reason of the restrictive covenants the employee is restrained from joining a competitor's firm with the acquired know-how which was obtained by reason of employment with the appellant. The employees are seeking to break this covenant. They have joined a competitor, viz., Saw pipes which is a jindal concern.

18. In the Court below the injunction which was granted was restricted to an injunction against the employees forbidding them from disclosing why their know-how and experience. Sri Mitra submitted that the injunction cannot practically be of any use to the appellants if the employees go on working, they are bound to disclose their know-how and they are bound to use their experience but this can never be proved since they will be working in the privacy of the first respondent's organisation.

19. He also submitted that the affidavits given before leaving their jobs by five of the six employees are fresh agreement or at least fresh undertakings which should be enforced by the Court. A person cannot swear a false affidavit, never intending to abide by it, and yet get away scot free.

20. Sri Kapur, appearing for the employees, submitted that the affidavits are not false. Only one affidavit of one employee, which mentioned about going to the United States contained only a while lie. It would be unconscionable according to him, to stop the livelihood of this employee because of this slip of his considering especially the large and total mismatch between the comparatively helpless position of this employee and the extreme financial strength possessed by the appellant.

21. Sri Jayanta Mitra, appearing for the first respondent, submitted that his clients did not poach for any employees of the appellant. The advertisements were published by saw pipers, at a cost of about Rs. 11 lakhs for inviting applications of employees from all over India; nearly 15,000 applications were received. Saw pipes engaged about 300 employees out of these, and only six of those figure in this litigation, the employees have all voluntarily joined on their own.

22. Apart from these basic submissions, various other points were raised by learned counsel both on facts and on points of law. Various authorities were cited. The same cases were relied upon by both sides seeking to draw sustenance therefrom. We deal with the main points hereafter. The first and foremost point was the impact of S. 27 of the Indian Contract Act, 1872. That section is set out below:

“27. 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 goodwill of 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 goodwill 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.”

23. To be read in conjunction with this section are two illustrations given under S. 57 of the Specific Relief Act, 1877. The said section and illustrations (c) and (d) thereof are set out below:

57. Injunction to perform negative agreement.— Notwithstanding S. 56, Cl. (f) where a contract comprises an affirmative agreement to do a certain act coupled with a negative agreement, express or implied, not to do a certain act, the circumstances that the Court is unable to compel specific performance of the affirmative agreement shall not preclude it from granting an injunction to perform the negative agreement: Provided that the applicant has not failed to perform the contract so far as it is binding on him.

(c) A contracts with B to sing for twelve months at B's theatre, and not to sing in public elsewhere. B cannot obtain specific performance of the contract to sing but he is entitled to an injunction restraining A from singing at any other place of public entertainment.

(d) B contracts with A that he will serve him faithfully for twelve months as a clerk. A is not entitled to a decree for specific performance of the contract. But he is entitled to an injunction restraining B from serving a rival house as clerk.”

24. On behalf of the respondents, the submission is that the restrictive covenant preventing the employees from taking up employment with saw pipes is contrary to S. 27 of the Contract Act and therefore, wholly unenforceable.

25. The appellants immediately showed that S. 27 does not have that type of all embracing application. If the application of it were that wide, then and in that event the two illustrations (c) and (d) quoted above could not have found their way in the statute book at all.

26. They submit that S. 57 was practically reproduced in identical terms in the Specific Relief Act, 1963 under S. 42. The illustrations were omitted. But, they submit, the omission of the illustrations does not mean that those illustrations have become bad law. On the other hand unless there are contrary indications, the illustrations are, for all purposes, to be treated as continued in the new Act also. There Supreme Court cases were relied upon in this context. The first is the Golikari case reported at A.I.R 1967 S.C 1098. In that case, a shift supervisor had agreed to serve for a fixed number of years, but he sought to join another concern before the term had run out.

27. The term of employment fixed was for five years and the agreement provided that even in the case of the employee leaving or resigning the service, before the expiry of the said period he would not be associated with any person, first or company carrying on similar business.

28. In that case the Supreme Court did grant an order of injunction, confirming the decision of the High Court, for the unexpired term of five years.

29. Regarding the injunction about not divulging any information, no objection was raised on behalf of the employee separately.

30. The second Supreme Court case is that of the Superintendence Company of India Limited, reported at (1981) 2 SCC 246 : A.I.R 1980 S.C 1717. The restrictive covenant there would operate for two years after the employee left service. The majority Judges opined that the clause did not have any operation as the employee had not “left” service. Justice Sri A.R Sen, speaking for himself, however, said that the point of applicability of S. 27 of the Contract Act squarely arose and the matter could not be disposed of in that simple way. His Lordship's judgment leaves no manner of doubt that according to him, S. 27 operated to rob the two years restrictive period after the employment of all legal and enforceable effect.

31. The third Supreme Court case is of Gujarat Bottling, reported at (1995) 5 SCC 545. This was a case, not so much of an employee, but of a concern obtaining a franchise in respect of the bottling of the Coca Cola company. Although dealing with a different situation, the Supreme Court did consider the employer-employee situation also. It went so far as to say that in an employment situation the Court takes a far stricter view in regard to restrictive clauses [see 565(f)(g)]. It is noted in Para. 23, with reference to the case of Superintendence Company (vide supra), mentioned above that Sir Frederick Pollock, the celebrated first commentator on the Indian Contract Act observed that the law of India is tied down by the express language of the section, but such a strict view and then been “exploded” in England.

32. In a Division Bench judgment of our High Court given in the case of Burn Company, reported at 9 C.L.J 190, an Engineer Macdonald had been brought by that company from England to work for them for five years. In case of his leaving employment earlier he was to pay damages of £ 100. He left employment and refused to pay damages. The Court did not permit him to continue his work one Srinath Roy & Brothers, whom he had joined. The Court opined that the employee, could not act in such an overbearing manner. The Court proceeded on the illustrations (c) and (d) quoted by us above. It did not advert to S. 27 at all.

33. There are other Calcutta cases on this aspect also. There is a decision of a learned Single Judge given in the case of Sree Gopal Paper, reported at A.I.R 1962 Cal. 61, where a 20 years period of engagement was opined to be oppressive and unfair bargain. The Supreme Court in the Superintendence case has considered the old Calcutta case of Bramhaputra Tea Company, reported at I.L.R (1885) Cal. 545 and the same case has been considered in Para. 12 of the Golikari judgment also.

34. On the basis of these decisions we give our findings on this point. The first argument of Sri Mitra was that S. 27 does not embrace a contract of employment also. He sought to rely upon the observations of the Supreme Court given in the S.J Hospital case, reported at (1970) 1 SCC 735 : A.I.R 1970 S.C 1407, specially Para. 14, but in our opinion, with all due respect, the observations in regard to determining what is an industry and what is not should not be used, without due caution in the context of interpreting a general section of the Contract Act. In any event, that case laid down that a profession is neither trade nor business and that in the case of a profession, the usual employer-employee relationship and the co-operation which is found in the case of an industry for the purpose of production of goods is not to be found.

35. In our respectful opinion profession is definitely different from trade or business. However, Sri Mitters argument that a contract of employment is outside the scope of S. 27 is to be negatived for the simple reason that S. 27 by its express words is applicable to every agreement; whether the agreement is of employment or not, S. 27 applies to it. What is necessary is that it should restrain one from exercising a lawful profession, trade or business. If such restraint occurs in a contract of employment, it will be just as bad to that extent, as it will be if it occurs in any other type of agreement or contract. Sri Mitters argument was that agreements in restraint of trade are made void because they are contrary to public policy. It would be contrary to public policy to keep a man and his expertise idle. Dicta to this effect are to be found in the judgment of Lord Atkinson in the Herbert Morris case reported at 1917 All E.R 305. Sri Mitter said that the general prohibition of contracts against public policy is preserved in S. 23 of the Contract Act, and for contracts of employment one has to look to S. 23 and not S. 27. This argument is similarly to be, with respect, rejected because S. 27 is not limited to any particular type of agreement.

36. Sri Mitters next argument was that if S. 27 is so clear cut, then and in that event the Court in the various reported cases should not have entered into detailed discussions about what is a reasonable restriction and what is not. Permission of reasonable restriction in restraint of trade is given by the English law. If the Indian Law is so different, then why should the Courts, and even the Supreme Court enter into the question of reasonableness of restriction?

37. In our opinion the answer to this question and the harmonization of S. 27 with the illustrations (c) and (d) will be found in the same place.

38. If an employee agrees with an employer, say, to work for five years faithfully and not to work with a competitor during that time, then the clause is a good clause.

39. We are concerned here only with whole time employment.

40. The clause is a good one, because it is not in restraint of any profession, trade or business. The restriction against the working with a competitor during the period of one's parent employment is not a restriction against profession but it is a restriction against breach of faith and loyalty. A whole-time employee, if he is to be diligent and loyal, can obviously serve only one master. The clause, therefore, only enforces this condition of employment and is not in reality restrictive.

41. We make it clear that in our opinion the words “lawful profession” occurring in S. 27 include both an independent profession and a salaried profession. One can be a professional engineer both in service and in independent consultancy.

42. Thus one can profess the calling of engineering, medicine or the law, both independently and also in service. This we say in passing only to clear up any confusion that might otherwise remain in mind, and because the contrary view was also argued.

43. At its inception, therefore, the five years period to work for a single employer is a good clause. Nobody can say at the inception that the employee will not work all five years actually with the same employer.

44. Suppose the clause also contains another term, like in the Golikari case (vide supra), that in case of leaving employment midway, the employee will still not work with a competitor for the rest of five years. Is that a good clause? How can that not be a good clause because the Supreme Court granted injunction in the Golikari case (vide supra)?

45. Our respectful answer to these questions is that the clause is bad and against the express words of S. 27 in so far as it prevents the employees from working with a competitor even after leaving the first employment. But this clause does not taint the whole clause, i.e, if the employee is working with an employer, he will work with that employer only. This is clarified by the words of S. 27 that the bad clause is only “to that extent void.”

46. Notwithstanding the partial potential or prospective voidness of this clause of restraint, the Court still retains a power of granting an equitable injunction for the period of five years during which the employee had agreed to serve the employer. This power the Court retains whether there is a bad clause restraining the employee, even after cassation of the first employment, from joining a second employer or not in the Burn Company case (vide supra), which was not restrictive clause, but still the Court granted an order of injunction on this basis. The basis was that five years had been agreed to be served, five years had not been served. It was not equitable for Madonald to go away and serve another employer in the facts and circumstances of that case. It was on this basis that the Golikari (vide supra), injunction would be made operative for the unexpired term of five years although there was coupled with it a restrictive clause not to work for a second employer even after leaving the first employment, and though the restrictive clause was void. The voidness of the clause does not take away the Court's equitable power to the sustain the second employment. What parties cannot achieve by agreement, the Court can do by an order of injunction.

47. We are aware that the Hon'ble Supreme Court of India did not exactly proceed on this basis; however we have read the Golikari (vide supra), judgment more than once and in our respectful view what we have said above is nowhere in conflict with what the Supreme Court has laid down in the Golikari case (vide supra).

48. It is because the Court has to deal with propriety of passing an order of injunction during the unexpired term of the agreed period of employment, that questions and consideration of reasonableness and fairness come in. When the agreed term is not served out, the Court has to weigh the circumstances and answer to itself the question whether the employee should serve out that unexpired term. The Court cannot directly grant an injunction compelling the employee to complete the balance period of employment. The Specific Relief Act directly prevents it. But the Court can grant a restrictive order of injunction stopping the employee from working with forbidden employers during the unexpired term. That is a permissible equitable order. No doubt, the Court indirectly almost forces the employee thereby to work with the first employer, but the enforcement is not absolute. It has been held and we respectfully agree that if the case is so extreme that the employee has no option but to work with the first employer or else starve, then the Court will ordinarily not giant an injunction.

49. Thus, between S. 27 and the two illustrations there is no conflict. Section 27 enjoins the employer only to fix a reasonable term for employment and to leave the matter there. It should not think of unexpired terms of employment or insert restrictive clauses on such contingencies. Those restrictive clauses would be hit by S. 27. But if the employee leaves midway during employment, the Courts can always be approached in their equitable jurisdiction and on the principles of S. 12 of the Specific Relief Act, 1963 and the various decided cases in that field, the Court will grant an injunction of a restrictive nature in just and appropriate cases.

50. What do we find if we apply these principles to our case? We find that no fixed period of employment is specified at all. The contract of employment is terminable with a month's notice. If a month's notice is served, it can at best be said that during that month the employee should not work with a competitor. Once the period of notice runs out, there is no breach of contract even if a competitor is joined, because the restrictive covenant of five years even beyond the agreed period of employment is void by reason of S. 27 of the Contract Act.

51. On this simple basis we are of the opinion that there is no case for injunction made out against the employees.

52. The learned Judge in the Court below has opined that the validity or otherwise of the agreement would be determined at the time of trial. With all due respect, in a case of this nature such a postponing of the matter is not possible. Before the suit is heard out very likely five years will elapse. If the plaintiffs do not have an injunction during that time what use will the determination of the issue in the suit even in their favour be to them. On the other hand if an order of injunction is granted, then it will be of no use to the employees after five years to know, at the trial of the suit that no order of injunction should, after all have been passed against them.

53. We, therefore, have to take a decision now and we do take a decision now that in the facts and circumstances of the case there was no case for injunction to go to trial against any of the employees, all of them having served the requisite notice for one month.

54. The extra-affidavits given by the employees do not add any further weight to the appellant's case. If those are outside the contracts then those would have no consideration to support them. If there are a further emphasis only of the contractual term, then that emphasis cannot take the appellant's case any further.

55. We are unable to opine that because of the inexactitude, or even falsity, in the affidavits the employees have so much tilted the balance of justice that the Court should, in its equitable jurisdiction, stop them from working with Saw Pipes for five years and again put them loose on the job market. The appellant says that they are ready to take the employees back, but in situations of this nature the employees cannot be expected to come back to an organization which, five out of six of them, have slinked out from.

56. As against the first respondent Sri Mitter ran the case of commission of the tort of inducement of breach of contract.

57. In this regard 45 Halsbury 1516 is material and the said paragraph is set out below:

“1519. Liability for inducing a breach of contract by an employee. Since it is a violation of legal right to interfere with contractual relations recognized by law if there is no sufficient justification for the interference, an action lies at the suit of an employer against any person who knowingly and intentionally and without justification, induces the employee to commit a breach of the contract of service and leave his employer before the time fixed for the lawful determination of his service.

A person may be liable for procuring a breach of a contract not only where he directly persuades a party to the contract to break it, but also if he commits a wrongful act so as to prevent the party from performing the contract, or to persuade a third person to do an act in itself wrongful or not legitimate which renders performance of the contract impossible but he is not liable if he persuades a third person to perform an act which is in itself lawful even if the result is to induce a breach of contract by the party to it. If a person has acted individually, no action lies against him if no breach of the contract of service is actually committed, although if two or more persons join together in a combination of which the predominant purpose is to damage a third person an damage actually results, they may be liable to the third person for a tortious conspiracy, even though they have not induced any actual breach of a contract.

Apart from the effects of combination, any person may, with impunity, induce an employee to leave his employer when the period for which he was engaged expires, even until that person interfered.

The employee had no intention of leaving, or to decline to renew an engagement which in the ordinary course, but for such interference, would have been renewed by the employee without question. In accordance with the same principle it is not actionable for a person to induce the employee, to give such notice to his employer as may be requisite for the lawful determination of his contract of service, even though the effect of giving notice may be to determine the contract at a date earlier than either of the parties to it had anticipated. In these cases there is no violation of the employer's legal right to the services of his employee and the motive by which the person who induces the employee to leave his employer is, therefore, immaterial.”

58. From the said passage it appears that if an employee has a right to terminate his employment with a month's notice and somebody induces the employee to serve that month's notice, it is no inducement to commit breach of contract. The answer as to why this should be so is very simple. A person inducing an employee in this manner is not inducing him to break the contract but only inducing him to end it. Such an inducement is not a known tort.

59. Questions were raised about Sri Mitter's client not having any secrets to protect at all. No patent or copyright was claimed. It was thus said that there is nothing secret to protect. We do not think that this is the right view. In a complicated process of manufacture which the appellant undertakes there are bound to be practical experiences and know-hows which need serious learning, and are, therefore, subject to and capable of protection. But that protection must be made in a legal and proper way. The contract here seeks to protect this type of knowledge and know-how by inserting a fixed five year term of any and every employee, whether he leaves one month after getting permanent employment or after fourteen years. This is so unequal and might become so harsh that no Court of equity will enforce it, apart from the term itself being contrary to S. 27 of the Contract Act.

60. We are aware that both the appellant and the first respondent will survive without the six employees in question and that the investment and powers of the Kejriwals and Jindals are too big to be really affected by the six employees who have become the subject-matter of their present battle. We recognize it a battle of business competition and not really of keeping the employees home. However, the battle might well have ended in some guidance being had whether by Kejriwals or others for drafting appropriate employment contracts in cases of industries where know-hows need to be protected without there being any patent or copyright.

61. In these circumstances, we do not call for affidavits. The allegations in the petition cannot be taken to be admitted. The appeal and the application are both dismissed. We would have vacated the infructuous order of injunction which prevents the employees from divulging their know-how since there is no practical way of enforcing it or proving that they are divulging their know-how, as they will all be working with the first respondent in its privacy, yet we do not vacate that order of injunction as there is no cross-appeal. We also do not pass any opinion on the point whether part of the clause restraining use of know-how and experience also is void as being contrary to S. 27 of the Contract Act, i.e, whether S. 10(a) is void also like 10(b).

62. In the result we respectfully uphold the order passed by the Hon'ble Sri Justice Subhro Kamal Mukherjee.

63. Parties and all others concerned to act on an authenticated copy of this order on the usual undertakings.

Arun Kumar Mitra, J.:— I agree.

Appeal and application dismissed.