Superintendence Company of India (P) Ltd. v. Krishan Murgai

A branch manager's appointment letter barred him from competing for two years after he left the company. The company dismissed him and then tried to enforce that clause. Two judges decided the appeal on the meaning of one word and left section 27 open. The third judge held that such a post-service clause is void.

Quick Revision

Read the full judgment: Supreme Court of India (sci.gov.in)

Parties

Superintendence Company of India (P) Ltd. — appellant and original plaintiff. A valuer and surveyor company with its head office at Calcutta and a branch at New Delhi.

Krishan Murgai — respondent. He was the company's Branch Manager at New Delhi and started his own rival business after his services were terminated.

Procedural History

1. Suit. On 19 April 1979 the company sued in the Delhi High Court on its Original Side. It claimed Rs. 55,000/- as damages for breach of the negative covenant (a promise not to do something) in clause (10). It also asked for a permanent injunction (a court order to stop an act) against the respondent.
2. Ad interim injunction. The company asked for an interim injunction to enforce the covenant. A Single Judge granted an ad interim injunction first. Tulzapurkar, J. gives the date as 29 April 1979. Sen, J. gives it as 24 April 1979, and calls it ex parte.
3. 25 May 1979: Single Judge. After hearing the respondent, the Single Judge confirmed the injunction. Sen, J. adds that it was made absolute but limited to New Delhi and to the period ending 27 December 1980, or the decision of the suit if earlier.
4. Single Judge's reasoning. The covenant was a partial restraint, reasonable in time (two years) and area (New Delhi, the last posting). So section 27 did not hit it. The word leave in clause (10) was wide enough to include termination by the company.
5. Division Bench. The respondent appealed (F.A.O. (O.S.) No. 86 of 1979). By judgment dated 20 July 1979 the Division Bench reversed the order on both points. It held that a covenant operating beyond the employment is a restraint of trade, void under section 27. It also held that leave does not include termination by the employer.
6. Supreme Court. The company appealed (Civil Appeal No. 1933 of 1979). The judgment's heading calls it an appeal by special leave. The headnote and Sen, J.'s opinion call it an appeal by certificate.
7. 21 March 1980. The Court dismissed the appeal at the end of the hearing and said reasons would follow.
8. 9 May 1980. The reasons were delivered in two opinions. Tulzapurkar, J. wrote for himself and Untwalia, J. Sen, J. wrote separately.

Facts

Dates and details below are as the opinions state them. The judgment has no numbered paragraphs, so the opinion is named instead.

1. The appellant company carries on business as valuers and surveyors. It inspects the quality, weighment, analysis and sampling of merchandise, commodities, cargoes, industrial products, machinery and textiles (Tulzapurkar, J.).
2. The company says it built a reputation and goodwill (the value of its business name and connections) by developing its own techniques for quality testing and control. It says it holds trade secrets in these techniques and in its clientele (Tulzapurkar, J.).
3. The head office is at Calcutta and there is a branch at New Delhi. The company employs managers and others at Calcutta, New Delhi and other places (Tulzapurkar, J.).
4. On 27 March 1971 the respondent was employed as Branch Manager of the New Delhi office. The terms were in a letter of appointment of the same date. Sen, J. adds that the respondent is a surveyor and valuer.
5. Clause (10) of the terms placed the respondent under a post-service restraint for two years at his last posting. It barred him from joining a competing firm or running a similar business of his own, directly or indirectly. The restraint began after you leave the company, in the words of the clause (Tulzapurkar, J.).
6. On 24 November 1978 the company terminated his services by notice, with effect from 27 December 1978 (Tulzapurkar, J.). Sen, J. says the termination was by letter dated 27 December 1978.
7. The respondent had not left the company on his own. The Court records this as admitted (Tulzapurkar, J.).
8. He then started his own business, Superintendence and Surveillance Inspectorate of India, in South Extension, New Delhi. It ran on lines identical or substantially similar to the company's. Tulzapurkar, J. gives the address as B-22 and Sen, J. as E-22.
9. The company sued on 19 April 1979, as set out under Procedural History.
10. The suit is still pending. The appeal is against an interlocutory order that refused a temporary injunction (Tulzapurkar, J.).

Issues Raised

Tulzapurkar, J. (for himself and Untwalia, J.)

1. Is a post-service restrictive covenant in restraint of trade, as in clause (10) of the service agreement, void under section 27 of the Indian Contract Act? The Court did not decide this question.
2. Assuming the covenant is valid, is it enforceable on its terms by the company against the respondent?

Sen, J.

1. Was clause 10 in restraint of trade? If so, was it valid and enforceable because it was partial and reasonable?
2. By the reasonableness test of Lord Macnaghten in Nordenfelt v. Maxim Nordenfelt Guns & Ammunition Co. Ltd., can an injunction enforce the negative covenant under illustrations (c) and (d) to section 57 of the Specific Relief Act, 1963, despite section 27?
3. Whether, and to what extent, are the provisions of section 27 subject to the common law doctrine of restraint of trade?
4. Does the word leave in clause 10 make the covenant operate only when the servant voluntarily leaves? Or does it also apply when his services end by dismissal or termination?

Arguments Contended

The arguments below are recorded in the opinions of Tulzapurkar, J. and Sen, J. Tulzapurkar, J. notes that the first question was hotly and ably debated, and he sets out the rival lines only briefly.

For the appellant company

1. The High Courts' reading of section 27, including Couch, C.J.'s decision in Madhub Chunder v. Rajcoomar Doss, has not been examined by this Court. It needs examination (Tulzapurkar, J.).
2. Observations in Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co., Ltd. warrant that re-examination. That case dealt with a covenant during employment, but it discussed the Indian and English case law (Tulzapurkar, J.).
3. Golikari held that considerations differ for restrictions after termination and restrictions during the contract. So a rigorous test of reasonableness may apply after termination. Some reasonable post-service restrictions may then be valid. It is wrong to say all are void (Tulzapurkar, J.).
4. A covenant that is reasonable, and limited in time and area as here, is not a restraint of trade under section 27 at all. It protects the employer's interests, trade secrets and trade connections (Tulzapurkar, J.).
5. The statutory exceptions are not exhaustive. A covenant during employment is not listed as an exception under section 27. Yet it was never treated as a restraint of trade because it is reasonable and protects the employer (Tulzapurkar, J.).
6. The Law Commission's recommendation is inconsequential. It proceeds on the High Courts' interpretation, which the company wants this Court to examine (Tulzapurkar, J.).
7. The word leave covers every cessation of service, whether the employee quits or the employer terminates. The company relied on Murray v. Close, as digested in Stroud's Judicial Dictionary (Tulzapurkar, J.).
8. Reading leave as voluntary leaving puts a premium on a dishonest employee, who may invite termination by misconduct (Tulzapurkar, J.).
9. Sen, J. records a two-fold contention. First, the covenant is in restraint of trade but passes the reasonableness test of Lord Macnaghten in Nordenfelt, so it is enforceable despite section 27. Second, leave is wide enough to cover dismissal.
10. Sen, J. also records the points pressed on this side. The distinction of Lord Macclesfield in Mitchel v. Reynolds between general and partial restraints was removed by the House of Lords in Nordenfelt. Validity in either case depends on reasonableness. All such covenants are prima facie void unless reasonable, per Mason v. Provident Clothing and Supply Co. Ltd. An employer cannot guard against competition as such after the employment ends. He may protect his proprietary interest, such as trade secrets and business connection.

For the respondent Krishan Murgai

1. The Indian law on this subject is codified by an exhaustive statute. Indian Courts cannot invoke English Common Law or the exceptions English decisions developed (Tulzapurkar, J.).
2. Section 27 is absolute in terms. It draws no distinction between partial and general restraints. Unless a case falls in the statutory Exception, every restraint of trade is void (Tulzapurkar, J.).
3. He relied on many High Court decisions, beginning with Sir Richard Couch, C.J. in Madhub Chunder v. Rajcoomar Doss (Tulzapurkar, J.).
4. A distinction between a covenant operating during employment and one operating after it is well recognised. All post-service covenants are prima facie void. Only the exceptions in the statute are allowed (Tulzapurkar, J.).
5. The Single Judge wrongly adopted the test of reasonableness (Tulzapurkar, J.).
6. Accepting the High Courts' reading of section 27, the Law Commission has itself recommended a change by legislation (Tulzapurkar, J.).
7. The Division Bench went further. It asked whether the case falls within the exceptions developed by English law and answered no (Tulzapurkar, J.).
8. The opinions do not record separate arguments from the respondent on the meaning of leave. The Division Bench's view on that word is recorded under Procedural History.

Court's Reasoning

The two opinions reach the same result by different routes. The judgment has no numbered paragraphs, so steps are cited by opinion.

Tulzapurkar, J. (for himself and Untwalia, J.)

1. Noted: the appeal is against an interlocutory order. It refused a temporary injunction in a suit that is still pending. (Tulzapurkar, J.)
2. Noted: two substantial questions arise. One is whether the post-service covenant is void under section 27. The other is whether the covenant, if valid, is enforceable on its terms by the company. (Tulzapurkar, J.)
3. Noted: the Court dismissed the appeal on 21 March 1980 at the end of the hearing and now gives its reasons. (Tulzapurkar, J.)
4. Noted: the Court recites the company's business, the respondent's employment, clause (10), the termination, the new business, the suit and the orders of the Single Judge and the Division Bench. (Tulzapurkar, J.)
5. Noted: the Single Judge held the covenant a reasonable partial restraint, so not hit by section 27. He also held it enforceable because leave was wide enough to include termination. The Division Bench reversed both views. (Tulzapurkar, J.)
6. Held: the appeal can be disposed of on the second question. It is unnecessary to decide, or express an opinion on, the first question. (Tulzapurkar, J.)
7. Noted: counsel for the respondent argued that Indian law is codified and exhaustive and that section 27 makes no distinction between partial and general restraints. He relied on High Court decisions from Madhub Chunder onwards. He pointed out the difference between covenants during and after service, and the Law Commission's recommendation. (Tulzapurkar, J.)
8. Noted: counsel for the appellant argued that the High Courts' reading of section 27 had not been considered by this Court. He relied on the observation in Golikari at page 389 that considerations differ for restrictions after termination and during the contract. (Tulzapurkar, J.)
9. Held: the Court proceeds on the assumption that clause (10) is valid and not hit by section 27. The only question is whether the covenant is enforceable on its terms by the company. (Tulzapurkar, J.)
10. Noted: by its terms the restriction operates after you leave the company. The respondent did not leave on his own. The company terminated him by notice dated 24 November 1978, effective 27 December 1978. (Tulzapurkar, J.)
11. Noted: the question is whether the phrase means voluntary leaving or also covers termination by the company. The Division Bench held that leave does not include termination by the employer. (Tulzapurkar, J.)
12. Noted: the company argued that leave is wide enough to cover every cessation of service. It relied on Murray v. Close, which held that an agreement restricting competition after leaving service operates on termination however accomplished, such as dismissal without notice. The case is digested in Stroud's Judicial Dictionary, 4th Edn., Vol. 3, page 1508. (Tulzapurkar, J.)
13. Held: the word leave has "various shades of meaning depending upon the context or intent with which it is used". (Tulzapurkar, J.)
14. Held: by plain grammatical meaning, leave in relation to an employee means voluntary leaving of the service. It does not include discharge, dismissal or termination by the employer. Ordinarily the word connotes voluntary action. (Tulzapurkar, J.)
15. Noted: Words & Phrases, Permanent Edition, Vol. 24, page 499, states an American decision, Muesling v. International Ry. Co. A tram conductor's application said that if he left the service for any reason within six months, his instruction wages would be deducted. The decision held that leaving meant to quit or depart, implying volition. The words for any reason did not change that. (Tulzapurkar, J.)
16. Held: the context of leave in clause (10) and the other terms of employment show what the parties meant. They meant only a case where the employee voluntarily left of his own accord. The respondent's services were terminated by the company, so the covenant is inapplicable. It is not enforceable against him at the company's instance. (Tulzapurkar, J.)
17. Noted: counsel for the company urged that this construction puts a premium on a dishonest employee who invites termination by his own misbehaviour. (Tulzapurkar, J.)
18. Held: the Court's answer is that the company "should have taken care to use appropriate language". It should have covered every case of cessation of employment for any reason. It should not have used leave, which normally means quit and indicates a voluntary act by the employee. (Tulzapurkar, J.)
19. Held: the appeal is dismissed with no order as to costs. (Tulzapurkar, J.)

Sen, J.

1. Noted: Sen, J. regrets that his brethren express no opinion on the question on which, in his view, the appeal turns. The question is whether a negative covenant restricting the employee after the term of service ends, or after termination for other reasons, is in restraint of trade. He has no doubt that the appeal cannot be decided without deciding it. (Sen, J.)
2. Noted: he recites the company's business, the respondent's employment on or about 27 March 1971 and the text of clause 10. His text of the clause ends with the words after you leave the Company. (Sen, J.)
3. Noted: he records the termination by letter dated 27 December 1978, the new business and the suit of 19 April 1979. (Sen, J.)
4. Noted: the Single Judge applied the reasonableness test under section 27. He held the negative covenant enforceable under illustrations (c) and (d) to section 57 of the Specific Relief Act, 1963. Clause 10 was not unreasonable, because the area was limited to New Delhi and the period to two years. (Sen, J.)
5. Noted: the Single Judge said negative covenants in employment contracts have always been enforced to protect the employer, citing Golikari. He held that leave was wide enough to include termination. He made the ex parte ad interim injunction absolute, limited to New Delhi and to 27 December 1980 or the decision of the suit. (Sen, J.)
6. Noted: the Division Bench reversed. It held that a negative covenant operating beyond the period of employment is in restraint of trade and void under section 27. (Sen, J.)
7. Noted: Sen, J. frames four questions. They are on restraint of trade and reasonableness, the section 57 injunction, the reach of the common law doctrine into section 27, and the meaning of leave. (Sen, J.)
8. Held: agreements of service with a negative covenant that stops the employee working elsewhere during the term are not void under section 27 as restraints of trade. Such agreements are enforceable. (Sen, J.)
9. Why: the doctrine of restraint of trade never applies while the contract of employment continues. It applies only when the contract ends. (Sen, J.)
10. Noted: during employment the courts would not grant specific performance of a contract of personal service. Section 57 of the Specific Relief Act still provides for an injunction against breach of such a covenant. The covenant is in furtherance of trade, not in restraint of it. (Sen, J.)
11. Noted: Golikari drew a distinction between a restriction during employment and one after termination. It cited English cases and said Indian courts draw the same distinction. A restraint binding a person during his agreement not to take service with another has been held valid under section 27. (Sen, J.)
12. Noted: Golikari approved The Brahmaputra Tea Co. Ltd. v. Scarth. That case held bad a condition that partly restrained competition after the term of engagement. It held good a condition that bound him during the term. The report at page 550 said such an in-term agreement is not hit by section 27. (Sen, J.)
13. Noted: Golikari said an agreement to serve exclusively for a fixed term is lawful. It is hard to see how something essential to its fulfilment and to protecting the employer can be unlawful while it is in force. (Sen, J.)
14. Noted: Golikari also approved Indian decisions that enforced negative covenants during the term, relying on illustrations (c) and (d) to section 57. They rejected the argument that such a covenant makes the agreement void under section 27. (Sen, J.)
15. Noted: Golikari concluded that considerations differ for covenants after termination and during the contract. Negative covenants during the contract are generally not restraints of trade. They are not, unless the contract is unconscionable, excessively harsh, unreasonable or one sided. (Sen, J.)
16. Held: Golikari is of little assistance to the appellant. The company is not enforcing the covenant during employment but after termination. Clause 10 is obviously in restraint of trade, and illegal and unenforceable under section 27. (Sen, J.)
17. Noted: the appellant advanced a two-fold contention. First, the covenant passes the reasonableness test of Lord Macnaghten in Nordenfelt, so it is enforceable despite section 27. Second, leave covers dismissal. (Sen, J.)
18. Held: both contentions are wholly devoid of substance. (Sen, J.)
19. Held: the Contract Act does not profess to be a complete code. To the extent it deals with a subject, it is exhaustive. It is not permissible to import English law de hors (outside of) the statute, unless the statute cannot be understood without it. (Sen, J.)
20. Noted: section 27 was lifted from the Hon. David D. Field's Draft Code for New York. That Code was based on the old English doctrine of restraint of trade as it stood in ancient times. (Sen, J.)
21. Held: when an English rule gets statutory form in India, the language of the Act decides its scope. It is not affected by how the analogous English rule was later narrowed or modified. (Sen, J.)
22. Noted: the Privy Council and this Court have often said that with a positive Indian enactment, the proper course is to read its language alone. The Court must find its proper meaning uninfluenced by the previous state of the law or the English law on which it may be founded. (Sen, J.)
23. Noted: in Satyavrata Ghosh v. Kurmee Ram Bangor, [1954] S.C.R. 310, Mukherjee, J. said Indian courts are governed strictly by section 56 of the Contract Act. English concepts, which developed after the Act, do not influence them. Sen, J. says the same is true of the doctrine of restraint of trade under section 27. (Sen, J.)
24. Noted: section 27 reads: "Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind is to that extent void." The Exception says a person who sells the goodwill of a business may agree with the buyer not to carry on a similar business within specified local limits. The agreement lasts only while the buyer, or anyone deriving title to the goodwill from him, carries on a like business there. The limits must appear reasonable to the Court. (Sen, J.)
25. Held: the section is general in terms. It declares all agreements in restraint void pro tanto (to that extent), except the case in the Exception. (Sen, J.)
26. Held: validity under section 27 depends on the wording of the section. Nothing in it suggests that a limited period or a limited area takes the restraint outside the principle. Partial restriction matters only where the facts fall within the Exception. (Sen, J.)
27. Held: a contract with the object of restraining trade is prima facie (on first view) void. Unless the contract falls clearly within Exception 1, there is no escape from the prohibition. The Court has nothing to do with the policy of the law. (Sen, J.)
28. Noted: this view was stated by Sir Richard Couch, C.J. in Madhub Chunder v. Rajcoomar Doss, [1874] Beng. L.R. 76 at 85-86. A restraint is void whether it is general or partial, unqualified or qualified. (Sen, J.)
29. Noted: Sen, J. calls Couch, C.J.'s observations the locus classicus (the classic passage). The words restraint from exercising a lawful profession do not mean only an absolute restriction. They cover a partial restriction limited to some place, or the first exception would be unnecessary. Section 28 uses the word absolutely where it means an absolute restraint, which supports this reading. (Sen, J.)
30. Noted: the test in Madhub Chunder has stood the test of time. All the High Courts in India have invariably followed it. (Sen, J.)
31. Held: the agreement is not a goodwill-of-business contract, so it is outside the Exception. A restraint of the respondent, even a partial one, is void. The contract cannot be enforced. (Sen, J.)
32. Noted: it was argued that validity depends on reasonableness. The distinction of Lord Macclesfield in Mitchel v. Reynolds (1711) 1 PMas 161 between general and partial restraints was removed by the House of Lords in Nordenfelt. On Lord Macnaghten's judgment, validity in either case is reasonableness in the circumstances. (Sen, J.)
33. Noted: it was also urged that covenants, partial or general, are prima facie void unless reasonable, as accepted in Mason v. Provident Clothing and Supply Co. Ltd. [1930] A.C. 724. An employer cannot protect himself against competition as such after employment ends. He may protect his trade secrets and business connection. (Sen, J.)
34. Noted: Chitty on Contracts, 23rd Edn., Vol. I, p. 867, says all restraints of trade are prima facie unenforceable, but all, partial or total, are enforceable if reasonable. A contract in restraint of trade restricts a party's future liberty to carry on his trade, business or profession as he chooses. Such a contract becomes binding on proof that the restriction is reasonable from the point of view of the parties and the community. (Sen, J.)
35. Noted: in Elizabethan days all restraints of trade were held bad, general or local. Later a distinction was drawn between general and partial restraints. Under Parker, C.J. in Mitchel v. Reynolds, a general restraint covered an indefinite area and was usually bad. A partial restraint was valid if reasonable, and the covenanter had to show it unreasonable. (Sen, J.)
36. Noted: Tindal, C.J. in Mornen v. Graves [1831] 7 Bing. 735 said Mitchel v. Reynolds was the leading case. A general restraint is void, but a particular restraint on good consideration is good if reasonable. Parker, C.J.'s examples of a kingdom-wide and a local restraint are instances, not limits of the rule. (Sen, J.)
37. Noted: the common law doctrine has grown with trade, commerce, industrialisation and communications. In Nordenfelt, Lord Macnaghten held the only true test is what is a reasonable restraint in the particular case. He denied that general and partial restraints are separate categories. A partial restraint is on the same footing, prima facie void but valid if reasonable. (Sen, J.)
38. Noted: in Mason the House of Lords held Lord Macnaghten's proposition to be the modern law. It also stressed a sharp distinction between contracts of service and contracts for the sale of a business, as James, L.J. did in Leather Cloth Co. v. Lorsont [1869] L.R. 9 Eq. 345. (Sen, J.)
39. Noted: in Herbert Morris Ltd. v. Saxelby the House of Lords held that a master cannot protect himself from competition by an ex-servant or his new employer. He can protect trade secrets or confidential information. (Sen, J.)
40. Noted: the common law test is therefore that such covenants are prima facie void, and the covenantee must prove the restraint is reasonable. Lord Macnaghten also pointed to the difference between a seller's covenant and an employee's. (Sen, J.)
41. Noted: the framers of Section 833 of Field's Draft Code for New York meant to replace the common law with a narrower rule. Their view was that contracts in restraint of trade had been allowed to a very dangerous extent. The provision was never applied in New York but became section 27. Several sections of Field's Code were enacted in the Act. (Sen, J.)
42. Noted: Sir Frederick Pollock called the Code the evil genius of the Act in his preface to Pollock and Mulla's Indian Contract Act. He advised striking out whatever was taken from it when the Act was revised. (Sen, J.)
43. Noted: the reasonableness test came from Lord Macnaghten's judgment in 1894. In 1862, when the Field provision was drafted, no one could foresee that the common law would drop the distinction drawn in 1711. Bowen, L.J. still adhered to it in 1893 ([1893] 1 Ch. D. 630). (Sen, J.)
44. Noted: Field's draft, as early as 1862, expressed two principles of modern common law. First, restrictive covenants are prima facie invalid. Second, master and servant covenants differ greatly from vendor and purchaser covenants. These were not stated unequivocally in England until 1916. (Sen, J.)
45. Noted: under Exception 1 the onus of proving reasonableness was put on the covenantee. The common law of that time put the onus on the covenanter to show unreasonableness. (Sen, J.)
46. Noted: Pollock criticised section 27 as too rigid, since it invalidates partial restraints too, and the exceptions as too narrow. He said Indian law is tied to a principle now exploded in England. He said that showing a restraint is partial is not enough to escape the prohibition. (Sen, J.)
47. Noted: Pollock said modern commerce had displaced the old idea of limits to a neighbourhood. He said Anglo-Indian law fixed that idea in an even narrower form than the old authorities justified. In England the old fixed limits of space had been broken down. The court now asks only whether the restriction is reasonable for the parties and the public. (Sen, J.)
48. Noted: Couch, C.J. held that section 27 does away with the distinction between partial and total restraints. It makes every contract falling within its terms void unless it is within the exceptions. That decision has always been followed. (Sen, J.)
49. Noted: in Shaikh Kalu v. Ram Saran Bhagat, [1908] 13 C.W.N. 388, Mukherjee and Carnduff, JJ. traced the legislative history. They said the framers deliberately reproduced section 833 of Field's Code, knowing it was narrower than the common law of the time. (Sen, J.)
50. Noted: they held Couch, C.J.'s wider construction plainly justified by the language. They said the section had abolished the distinction between partial and total restraints. They described the result as an almost startling dissimilarity to the modern English rule. (Sen, J.)
51. Noted: they added that courts have nothing to do with the policy of the law. The Legislature left section 27 in its original form while amending other sections. Its silence is almost as emphatic as an express recognition of the long-standing construction. On that construction the agreement before them was void. (Sen, J.)
52. Noted: the Law Commission in its Thirteenth Report recommended amending section 27 to allow reasonable restraints, general or partial, in the interest of the parties and the public. Sen, J. says that is a matter of policy for Parliament. The Court's duty is to interpret the section by its plain language. (Sen, J.)
53. Held: a law does not stop operating because it is an anachronism or antiquated. It does not stop because the reason it became law would not justify enacting it now. This answers whether Couch, C.J.'s wide construction has become obsolete. (Sen, J.)
54. Held: neither the test of reasonableness nor the principle that a partial restraint is reasonable applies to a case under section 27 unless it falls in Exception 1. No useful purpose is served by discussing the English decisions cited at the Bar. (Sen, J.)
55. Held: under section 27 a service covenant that extends beyond the end of the service is void. Not a single Indian decision was cited where an injunction was granted against an employee after termination of employment. (Sen, J.)
56. Noted: the remaining question is whether leave in clause 10 is wide enough to make the covenant operate on termination of employment. (Sen, J.)
57. Held: on a true construction, the negative covenant does not arise when the employee does not leave but is dismissed. Wrongful dismissal is a repudiation (a refusal to perform) of the contract of service, which relieves the employee of the restrictive covenant. This follows General Billposting Co. v. Atkinson, [1909] A.C. 118. (Sen, J.)
58. Noted: the appellant relied on Stroud's Judicial Dictionary, 4th Edn., Vol. II, which refers to Mars v. Close, 32 L.T.O.S. 89. There an agreement restricting competition after leaving his service was held to operate on termination however accomplished, as by dismissal without notice. (Sen, J.)
59. Held: leave has various shades of meaning depending on the context. By plain meaning, it means to leave voluntarily, of one's own volition, and does not include dismissal. (Sen, J.)
60. Held: the word connotes voluntary action and is synonymous with quit. It does not mean expulsion by the employer without the employee's consent and against his protest. That meaning is in consonance with justice and fair play, and it is also the ordinary plain meaning. (Sen, J.)
61. Noted: the Shorter Oxford English Dictionary, 3rd Ed., Vol. X, page 1192, gives these meanings: to depart from; quit; relinquish; to quit the service of a person. (Sen, J.)
62. Noted: drafting a negative covenant in an employment contract is often difficult. Restrictions on competition during service are normally valid and may be implied by the servant's duty of fidelity. The restriction is generally reasonable and causes no undue hardship, because the employee receives a wage. (Sen, J.)
63. Held: if the covenant is to operate after the termination of services, or is too widely worded, the court may refuse to enforce it. (Sen, J.)
64. Noted: employee covenants must be carefully scrutinised, because the parties bargain unequally. There may be no bargaining at all where the employee gets a standard form (a fixed set of terms) to accept or reject. He may give little thought to the restriction in his eagerness for a job. Such contracts, the Court says, lead careless persons to trade away their future earning power for present gain, and expose them to imposition and oppression. (Sen, J.)
65. Noted: the interest protected differs for an employee and a purchaser. The purchaser may protect himself against competition from his vendor. The employer may not protect himself against mere competition from his servant. So the permissible extent of restraint differs in the two kinds of case. (Sen, J.)
66. Noted: a covenant ancillary to employment is likely to hit the employee's means of livelihood for himself and his family more than a seller's covenant. The seller usually receives ample consideration for the goodwill. (Sen, J.)
67. Noted: the distinction rests on a substantial basis. One class concerns the sale of commodities. The other concerns the performance of personal service. The social and economic implications are vastly different. (Sen, J.)
68. Held: the courts view with disfavour a covenant by an employee not to engage in a similar or competitive business after the end of employment. (Sen, J.)
69. Noted: the true rule of construction is that the court first interprets the covenant by ordinary rules to find the fair meaning of the parties. If it is ambiguous, it must get the narrower construction rather than the wider. (Sen, J.)
70. Noted: in Mills v. Dunham, [1891] 1 Ch. 576, Kay, L.J. said that an ambiguous restriction on an employee should get the narrower construction, and that "the employed ought to have the benefit of the doubt". (Sen, J.)
71. Noted: Kay, L.J. also said a wide construction should not be given so as to make the stipulation illegal and set the employee free from all restraint. He said a construction that makes an ambiguous clause valid is preferred to one that makes it void. (Sen, J.)
72. Held: the restraint may not be greater than necessary to protect the employer, nor unduly harsh and oppressive to the employee. (Sen, J.)
73. Held: even if leave could bear a wider meaning, operating on termination however accomplished, Sen, J. would still preserve clause 10 by a restrictive meaning. He would read it as implying volition, where the employee resigns or voluntarily leaves. The restriction is too wide and violates section 27, so it must get the narrower construction. (Sen, J.)
74. Held: the appeal fails and is dismissed with no order as to costs. (Sen, J.)

Authorities

The judgment has no numbered paragraphs, so each line names the opinion.

• Madhub Chunder v. Rajcoomar Doss, [1874] Beng. L.R. 76 at 85-86 (Couch, C.J.). The headnote spells it Madhub Chander v. Raj Coomar Dass, and one passage spells it Madhub Chundur v. Raj Coomar Doss. Sen, J. approved it as the locus classicus. It holds that section 27 voids partial restraints too (Sen, J.). Respondent's counsel also relied on it (Tulzapurkar, J.).
• Shaikh Kalu v. Ram Saran Bhagat, [1908] 13 C.W.N. 388. Cited by Sen, J. for the history of section 27 and the wider construction.
• Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co., Ltd., [1967] 2 S.C.R. 378. The appellant relied on it (Tulzapurkar, J.). Sen, J. distinguished it because it concerned covenants during employment.
• The Brahmaputra Tea Co. Ltd. v. Scarth, I.L.R. (1885) 11 Cal. 545. Sen, J. cited it, as Golikari did, for the line between in-term and post-term covenants.
• Satyavrata Ghosh v. Kurmee Ram Bangor, [1954] S.C.R. 310. Followed by Sen, J.: the Indian statute's language governs, not English developments.
• Murray v. Close, 32 Law Times Old Series p. 89 (called Mars v. Close in Sen, J.'s opinion), via Stroud's Judicial Dictionary. The appellant relied on it. Tulzapurkar, J. does not discuss it further. The reporter's headnote alone says it is held inapplicable to Indian law. Sen, J. said leave means voluntary leaving.
• Muesling v. International Ry. Co., 147 N.Y.S. 177, 178, 85 Misc. 309. Quoted by Tulzapurkar, J. on leaving as a voluntary act (the headnote says with approval).
• General Billposting Co. v. Atkinson, [1909] A.C. 118 (page printed as 116 in the text). Referred to by Sen, J.: wrongful dismissal repudiates the contract and relieves the employee.
• Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. Ltd., [1894] A.C. 535 (Sen, J.'s issue 2 spells it Nordenfelt v. Hakim Nordenfelt Guns & Ammunition Co. Ltd.). Discussed by Sen, J.: Lord Macnaghten's reasonableness test does not apply to section 27 cases.
• Mason v. Provident Clothing and Supply Co. Ltd., [1930] A.C. 724. Discussed by Sen, J.: covenants are prima facie void unless reasonable, and service and sale of business differ.
• Herbert Morris Ltd. v. Saxelby. Discussed by Sen, J.: a master cannot bar competition by an ex-servant but may protect trade secrets.
• Mitchel v. Reynolds (1711) 1 PMas 161. Described by Sen, J.: the old rule on general and partial restraints.
• Mornen v. Graves [1831] 7 Bing. 735. Quoted by Sen, J. for Tindal, C.J.'s statement of the rule in Mitchel v. Reynolds.
• Leather Cloth Co. v. Lorsont [1869] L.R. 9 Eq. 345. Cited by Sen, J. for James, L.J.'s distinction between service and sale of business.
• Mills v. Dunham, [1891] 1 Ch. 576. Quoted by Sen, J. (Kay, L.J.) for the narrower construction of an ambiguous restriction.
• Nordenfelt v. Maxim Nordenfelt Guns & Ammunition Co. Ltd. in the Court of Appeal, [1893] 1 Ch. D. 630. Sen, J. cited it for Bowen, L.J.'s adherence to the old distinction.
• Chitty on Contracts, 23rd Edn., Vol. I, p. 867; Stroud's Judicial Dictionary, 4th Edn.; Words & Phrases, Permanent Edition, Vol. 24, p. 499; Shorter Oxford English Dictionary, 3rd Ed., Vol. X, p. 1192; Pollock and Mulla's Indian Contract Act; Field's Draft Code for New York, Section 833; and the Law Commission's Thirteenth Report. These are texts and reports used by the opinions as stated above.

Also cited in footnotes: none stated in the judgment.

Statutory provisions

• Section 27, Indian Contract Act, 1872: an agreement that restrains anyone from a lawful profession, trade or business is void to that extent. Exception 1 allows a seller of goodwill to agree not to carry on a similar business within reasonable local limits.
• Section 28, Indian Contract Act: Couch, C.J. noted that it uses the word absolutely where Parliament means an absolute restraint (Sen, J.).
• Section 56, Indian Contract Act: frustration of contract, mentioned in Satyavrata Ghosh as strictly governed by the statute (Sen, J.).
• Section 57, Specific Relief Act, 1963, illustrations (c) and (d): allow an injunction to restrain breach of a negative covenant in a contract of service during the term. The Single Judge relied on them (Sen, J.).

Judgement

1. The appeal is dismissed (Tulzapurkar, J.; Sen, J.).
2. The order of the Division Bench refusing the temporary injunction therefore stands.
3. There is no order as to costs (Tulzapurkar, J.; Sen, J.).
4. The suit remains pending, and the Court gave no direction on it.

Legal Principle / Ratio

Tulzapurkar and Untwalia, JJ. assumed the covenant valid and held that leave in clause (10) means voluntary leaving. A covenant that begins after you leave the company does not bind an employee whom the employer terminates. They left section 27 undecided.

Sen, J. held that section 27 is exhaustive and voids even a partial or reasonable restraint that runs after service ends. The key holding is: "Under Section 27 of the Contract Act, a service covenant extended beyond the termination of the service is void."

Subsequent Treatment

Only the supplementary judgment below was available. Each point is stated as that judgment's text states it.

Vijaya Bank v. Prashant B Narnaware — 2025 INSC 691; Civil Appeals No. 11708 and 11499 of 2016; Supreme Court of India; Pamidighantam Sri Narasimha and Joymalya Bagchi, JJ.; judgment by Bagchi, J.; 14 May 2025.

• Facts: the bank's appointment letter, clause 11(k), required three years of service and an indemnity bond of Rs. 2 lakhs, payable on resigning earlier. The High Court quashed the clause. The employee had resigned in 2009 and paid under protest.
• Issue: whether the clause was a restraint of trade under section 27 or opposed to public policy under section 23 (para 10).
• Use of Murgai: the Court records that Sen, J. in Murgai gave a concurrent opinion. It quotes his statement that service agreements with a negative covenant during the term are not void under section 27 (para 14).
• Conclusion drawn: the Court concludes that law is well settled that a covenant operating during employment does not clog the freedom to trade or be employed (para 15).
• Standard-form contracts: the Court notes that Sen, J. had expressed a view in Murgai that employee covenants need careful scrutiny because of unequal bargaining power. It quotes his passage (para 20).
• Burden: the Court lists principles for standard-form employment contracts, including that the employer must prove a restrictive covenant is not opposed to public policy (para 21).
• Result: the Court held clause 11(k) was neither a restraint of trade nor against public policy. It allowed the bank's appeal and set aside the High Court judgment (paras 35-36). The connected appeal was dismissed (para 37).
• Note: Vijaya Bank does not discuss the section 27 holding on post-service covenants beyond its reference to Murgai's scrutiny of employee covenants.

Comparative Analysis

Analysis based on the two judgments only.

• Murgai: the covenant ran after the employment ended. Sen, J. held it void under section 27 and the majority held it inapplicable on its words.
• Vijaya Bank: the covenant ran during the employment. It fixed a minimum three-year service with a payment on early resignation. The Court held that it furthered the employment contract and did not restrain future employment (para 16).
• Common thread: Sen, J. in Murgai and the Court in Vijaya Bank treat covenants during employment as outside section 27. Both treat employee covenants with scrutiny because of unequal bargaining power.
• Difference: Vijaya Bank also tested the clause against public policy under section 23 and looked at the bank's reasons for the clause (paras 26-31). Murgai did not reach a public policy question.

Critical Analysis

Analysis based on the judgment text.

• The main question is left open by the majority. Tulzapurkar, J. says the first question was hotly debated at the bar. He leaves it undecided and assumes the covenant is valid. The section 27 holding rests on Sen, J. alone.
• The two opinions differ on how a wider meaning of leave would be handled. The majority treats leave as plainly voluntary. Sen, J. adds that even if the word could be read wider, he would give it the narrower meaning to save the clause from section 27. This second route is not part of the majority reasoning.
• The dishonest-employee point is answered only by drafting. The majority says the company should have used appropriate language. The judgment does not say what remedy an employer has against a dismissed employee who misbehaves.
• The record has small differences. The opinions give different dates for the ad interim injunction and the termination. They give different clause wording, address and appeal route. The opinions do not say which is correct.

Significance

• Sen, J. gives a full account of why section 27 differs from the English common law of restraint of trade. It was drawn from Field's Draft Code and is not open to the reasonableness test.
• The case separates covenants during employment from covenants after it. The first are outside section 27. The second are void under Sen, J.'s opinion.
• The two-judge majority shows that the wording of a restrictive clause decides its reach. A clause triggered by leave does not bind an employee who is terminated.
• The opinions say that courts read employee covenants narrowly and with care, because of unequal bargaining power.

Exam-Important Points

• Facts in one line: a Branch Manager was terminated and started a rival firm. The company sued to enforce a two-year post-service covenant.
• Result: appeal dismissed, no costs. The respondent was not restrained.
• Majority (Tulzapurkar and Untwalia, JJ.): assumed the covenant valid, and held that leave means voluntary leaving. The covenant did not apply to a terminated employee. Section 27 was not decided.
• Sen, J.: a post-service covenant is void under section 27, even if partial or reasonable. The common law reasonableness test is not imported. Exception 1 covers only the sale of goodwill.
• Trap: do not say the Court held post-service non-competes void. Only Sen, J. said so.
• Trap: covenants during employment are not void under section 27. Sen, J. relied on Golikari for this.
• Cases to pair: Madhub Chunder v. Rajcoomar Doss (section 27 covers partial restraints); Golikari (covenants during employment); Nordenfelt (English reasonableness test, not applied).
• Drafting lesson: the company should have taken care to cover every kind of cessation of employment, not only leaving.
• Later law: Vijaya Bank (2025) relies on Sen, J. for the point that a covenant during employment is not a restraint of trade.

Prepared from the full text of the judgment. The judgment has no numbered paragraphs, so steps are cited by opinion. Paragraph numbers for the later case follow its official text.