Madhu.T.K
Industrial Relations And Labour Laws
Archnahr
Consultant, Writer And Trainer
Tajsateesh
Recruitment/talent Acquisition, Career Counselling
+3 Others

Thread Started by #nambiarrajeev

Hi,
Is it correct for an employer to restrict an employee to join a competitor? Is it not against the constitution law of the individual.
If the businessman can start his business based on profitability or an employer launch a new product or an employer recruits from his competitor
why should not an employee join the competitor based on higher salary or better work condition.
14th June 2011 From India
No employer can rstrict an employee to join a competitor. Even if an employee has signed such an agreement with the employer, such document has no legal standing. Documents with conditions like restricting employees from joining a competitor is voidable in the court of law.
14th June 2011 From India, Pune
Hello Kamal Prasoon,
It would really be great if you can attach some more information regarding the same,there are many people who sign such bonds without even knowing their legality.
I would request you to mention the Act which specifies about such bonds being illegal or any such court proceedings or examples.
That would really be of help...
14th June 2011 From India, Delhi
Negative covenants in service agreements is void and against section 27 of the Contract Act. In Sandhya Organic Chemicals v. United Phosphorous (AIR 1997 Gujarat HC 177) it was held that an employee cannot be prevented from utilizing the knowledge and experience that he has gained while being in employment. Similarly, the Supreme Court in Superintendence Co. of India v. Krishun Murgai. (AIR 1980 SC 1717) has ruled that under Section 27 of the Contract Act, a service covenant extended beyond the termination of the service is void. Agreement restricting an employee from joining a competitor is one which accrues only after termination of service contract and hence it is void and not maintainable.
Regards,
Madhu.T.K
14th June 2011 From India, Kannur
Hello Kamal Prasoon Sinha,
I am not sure how did you arrive to the conclusion you mentioned:'.........is voidable in the court of law'.

Before going into the legality aspect, I hope everyone is clear the ACTUAL BASIS/REASON why some Companies get such a Document signed at all. Quite a few companies, especially US-based, HAVE THE GENUINE NEED to protect their trade secrets & IPRs. The need for this precaution is well-recognized the world over--pl note that this is different from HOW this is enforced.

Now, pl note that the Factuals of the Legal position on any such Agreement [this could be equally applied to Employment Agreements too....but that's beside the present issue] is this: Once an individual signs a document [in this case, the Bond/Agreement NOT to join a Competitor before a particular period of time], he/she is WILLFULLY BINDING himself/herself to that said position. Once he/she signs such a document, he/she can't later say it's not valid--if he/she knew it wasn't valid, then why did he/she sign it at all?
Hope you got the point.


The ONLY WAY the individual can get away EVEN AFTER SIGNING SUCH A DOCUMENT, will HAVE TO BE to show to the court[comfortably assuming that the Company WILL go legal in case of any violation] that the Company forced him/her into it by whatever means & ways. As you can see, that's a tough call to prove.
It's also IMPORTANT to remember that once the case goes legal AND the individual takes the above-mentioned stand, one can be REASONABLY SURE that the Company COULD PORTRAY that the individual acted contrary to the interests of the company by violating the IPR Act, etc., etc.....

And let's face it: EVEN IF there are Court Decisions/Rulings saying that such Agreements/Binds are illegal, just try to talk to any reasonably good lawyer. He/she will show you 'hazaar' ways to argue in the court that THOSE RULINGS DON'T APPLY TO THIS CASE.
Hope you get where this will be leading to--at the very minimum you will be stuck with a case rather than work in peace.

So, in a nutshell, pl sign such a document ONLY IF YOU INTEND TO HONOR IT. Else, look for another job where this won't be an issue.

Rgds,
TS
14th June 2011 From India, Hyderabad
Any type of Employment Bonds are nothing but a private agreement between two parties which are governed by Indian Contract Act. There is nothing called Employment Bond Act etc.



Such bonds are applicable only if the company has spent money on the personal grooving and enhancement of the employees, but not just a training that helps employees perform better.



i.) As per the Indian Contract Act contracts entered between two parties if is one sided then such contract would be null and void. Most of the Employment Bonds are one sided.

ii.) Again as per the Indian Contract Act no contract can be enforced on any person if the contract which is being so enforced causes any harm to the person on whom it is enforced and if performed would violate principles of natural justices.



In India Bond is illegal in relation to employment since as per the Indian Statute, bonded labor system was long abolished and no bond can force any person to work against the employees wishes.



Accorcing to Article 19 of Indian Constitution right work is a fundamental right, and under no circumstance does the Fundamental Rights under Article 19 be infringed by any person nor can any person be forced to do something that amounts to the violation of the rights mentioned under Article 19.



As per Sec 368 of Indian Penal Code if any person or institute holds back any document or any use any legal document or threatens any legal suits or actions and thus forces a person to perform any act against his wishes or which is illegal or wrong as per the statute of Law of the land.



Sec 368 of Indian Penal Code talks about extortion by the threatening to file a legal suit and minimum punishment under this act is two years.

The Hon. Supreme Court of India and several High Courts have clearly stated in a number of cases that no employee can be forcefully employed against his will, just because he has signed a contract with the employer and that the employer can not hold back any personal document of the employees as they are earned by the employees and the company has no claim on the same.



A bond merely as employee retention tool is bad in law.
15th June 2011 From India, Pune
i would like to add certain observations by the Court in Superintendence Co. of India v. Krishun Murgai. (AIR 1980 SC 1717):

"The drafting of a negative covenant in a contract of employment is often a matter of great difficulty. In the employment cases so far discussed, 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 law by virtue of the servant's duty of fidelity. In such cases the restriction 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. ……………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 imposition and oppression."

In the above case, The respondent was employed in the appellant firm. The contract of service contained a negative covenant restricting him from joining a competitor or doing a similar business of his own. He was terminated by the company and thereafter he started a business of his own which was similar in nature to the business done by the Superintendence Company of India P Ltd.

The court had also discussed in large the matter of "leaving/ resigning and joining a competitor" which should be treated different from 'dismissing/ Discharging/ terminating from service since in the instant case the employee did not leave by himself but was terminated from service.

Regards,

Madhu.T.K
15th June 2011 From India, Kannur
Hi,
Thanks for the replies. So it is clear that no employer can legally restrict an employee from joining a competitor unless the Employer proves that he has imparted and met expenses on the employee for a very specialised training which otherwise the employee would not have gained. This restriction will also have a time limit.But what happens if the employer does not settle the accounts of such an employee in full settlement due to such reasoning.
Regards
Rajeev Nambiar
15th June 2011 From India
Dear Mr. tajsateesh,

Your input about the factuals of the Legal position on any such Agreement that "Once he/she signs such a document, he/she can't later say it's not valid--if he/she knew it wasn't valid, then why did he/she sign it at all?" is not correct from legal point of view.

First I would like clear your conception about an contract agreement signed between two parties.

There are two types of contract agreemnets which is bad in law.

1.) Void Contract Agreement - means an agreement which is not enforceable by law and which is bad in law right from its origin.

2.) Voidable Contract Agreement-means an agreement which is enforeceable at the option of one of the parties. Such contract agreements are bad in law if one of the parties raise an objection to it.

Employment Contract falls in the 2nd category of contract agreement. . If a party raise an objection against the clauses of the agreement in court of law, it may be declared as void by the court.

Your input that "EVEN IF there are Court Decisions/Rulings saying that such Agreements/Binds are illegal, just try to talk to any reasonably good lawyer. He/she will show you 'hazaar' ways to argue in the court that THOSE RULINGS DON'T APPLY TO THIS CASE." is confusing.

At one point you are accepting that there are court rulings saying such agreements are illegal at the same time you are talking about lawyers who says that THOSE RULINGS DON'T APPLY TO THIS CASE."

You should know that the law laid down by Supreme Court of India is binding upon all courts in the country under Article 141 of the Constitution, and numerous cases all over the country are decided in accordance with the view taken by Supreme Court. Pleading(argument) and Appeal in courts is a right of every Indian citizen, its a part of legal procedure. But it doesnt mean that court will give judgement in your favor.

I dont understand how a lawyer is going to argue and win a CASE in any court of India which has already been declared as illegal by the Supreme Court.

regards,

kamal
15th June 2011 From India, Pune
Dear Archna, Hope your request for specific Acts and court rulings related to employment contract are met. regards Kamal
15th June 2011 From India, Pune
Thank you Madhu and Prasoon....
I'm sure such references of court rulings will benefit many of our members who just sign the bonds without even knowing about them in detail, and once they are stuck or find better opportunity then they look for options to come out of it.
Thankful to you both.
Regards,
15th June 2011 From India, Delhi
Employer has such kind of clause only to avoid their employees joining their competitors - to reduce the attrition rate. But such law is leagal and not many companies follow it. Top reputed companies may be stating, you are not permitted to join at the clients place within specified period of span but this clause is not practised by many
15th June 2011 From India, Bangalore
Few more case references

Pepsi Foods Ltd vs Bharat Coca Cola Holding Pvt. Ltd

Pepsi Foods Ltd. filed a suit in the High Court against the Bharat Coca Cola Holding Pvt. Ltd., stating that it has a strong and well trained employees who have executed an undertaking not to take up any employment with its competitor within a year of leaving employment for any reason whatsoever, whereas the Bharat Coca Cola Holding Pvt. Ltd. has been inducing many of its employees to breach their existing employment contracts and other obligations with Pepsi Foods Ltd. Hence the Bharat Coca Cola Holding Pvt. Ltd. be restrained by the Court from doing so as it has been hindering its business.

The Bharat Coca Cola Holding Pvt. Ltd. submitted that it has not committed any actionable wrongs but has acted in furtherance of its legitimate business. It further submitted that to restrain the defendants(employees) from doing so would be to stifle free competition. The defendants as employers were entitled to the most meritorious employees and the employees similarly cannot be legitimately denied the opportunity of bettering their prospects and service conditions. It was further mentioned that the Pepsi Foods Ltd has sought to do so contractually by introducing the prohibitory clause which is void and unenforceable in violation of section 27 of the Contract Act.

The Delhi High Court declined to grant the injunction as prayed for stating that :

i. The injunction, if granted would certainly have direct impact of curtailing the freedom of employees for improving their future prospects and service conditions by changing their employment.

ii. Rights of an employee to seek and search for better employment cannot be restricted by an injunction.

iii. Injunction cannot be granted to create a situation such as “Once a Pepsi employee, always a Pepsi employee”. It would almost be a situation of ‘economic terrorism’ or a situation creating conditions of

‘bonded labour’.

iv. Freedom of changing employment for improving service conditions is a vital and important right of an employee, which cannot be restricted or curtailed by a Court injunction.

v. Inter-changeability of service is an accepted norm of Service Jurisprudence which cannot be curtailed by a Court injunction.

vi. Employees’ right to terminate their contracts also cannot be curtailed by Court injunction.

vii. An injunction can be granted only for protecting the rights of the plaintiffs, but cannot be granted to limit the legal rights of the defendants.

viii. In a free market economy, everyone concerned, must learn that the only way to retain their employees is to provide them attractive salaries and better service conditions. The employees cannot be retained in the

employment perpetually or by a Court injunction.

ix. Free, fair and uninterrupted competition is the life of trade and business.

This freedom, in free market economy, has to be zealously protected in the larger interest of free trade and business. No injunction can

be granted which is likely to restrict or curtail this freedom.

In one case, the Delhi High Court observed that “you cannot have the cake and eat it too”. But an employer who obtains a temporary injunction against an employee restraining him from joining any firm of his competitors or running a business of his own in similar lines directly and/or indirectly after he leaves the service or when his services are terminated, eats the cake and also preserves.In this context, the Court has made reference to the provisions of section 27 of the Contract Act, 1872 which reads as under : “Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.

In Niranjan Shankari v. The Century Spinning and Mfg. Co. Ltd., 1967 (2) SCR 378 the court stated an employer, for instance, is not entitled to protect himself against competition on the part of an employee after the employment has ceased. 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. 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 section 27 of the Contract Act.
16th June 2011 From India, Pune
Hello Kamal Prasoon Sinha & others,

Looks like the Comm gap between what I 'meant to convey' & what 'was perceived to be conveyed' in my last Posting was HUGE.

When I mentioned the various aspects of 'how things can be argued legally', what I was trying to convey was the various ways Employers can handle this issue--IF it goes legal.

However, let me be clear on one thing: I WASN'T primarily focusing on the legal aspects--NOT because there are more qualified members in this Forum, BUT because I AM NOT qualified.

I was focusing on the NEXT/SUBSEQUENT step altogether. Let me explain.

All of us are, by & large, unanimous that this sort of Restriction to join a Competitor is ILLEGAL [maybe unethical too]. But what I was trying to point out was: how will all this exercise help the person involved NOW--who is waiting for a way to handle this issue since, he/she has to make a decision reg a job-in-hand?

Now, in general, when a candidate attends the Interview & is selected, he/she will be presented with this document to sign BEFORE joining.

How do you think he/she can/should respond/react? If he/she takes all the Court Verdicts/Rulings/Judgments & shows it to the HR person, what is the response likely to emanate: Will the HR exec say: "Oh...we didn't know that what we were doing was illegal. Fine....forget this & you can join tomorrow?" DEFINITELY NOT. A more likely answer would be: 'Our legal dept has told us it's legal & they are there to take care of such things. If you want this job, you need to sign this. If not........'--in the best-case-scenario.

By this exercise thru this thread, all I can see is BUILDING AN AWARENESS--about this issue. NOT THAT THIS IS WRONG OR UNNECESSARY--DEFINITELY NOT. But at the same time, Nothing else--even though the projected motive seems to be to resolve the issue [pl correct me if I am wrong].

An analogy would be this--but before taking it up, let me be very clear that EXCEPT FOR THE FUNDAMENTAL ASPECT, nothing else is common between the issue under discussion & the analogy.....the scale, length, breadth, depth, etc between the two are worlds apart.

Despite knowing well where the fault lies for all the corruption we see around us, why did Anna Hazare 'engage' the Government? He & others in his team knew very well that howsoever the LEVEL OF AWARENESS among the people of this country about corruption, it's FINALLY the GoI which has to take the Final call/stand IF CORRUPTION has to be reduced, if not altogether eliminated--BECAUSE IT CONTROLS THE LEVERS OF IMPLEMENTATION/PRACTICE.

Coming back to our issue, instead of trying to prove that this practice is WRONG [where none may be needed, after having so many Court Rulings] to the individuals/candidates who FACE THE BRUNT OF THIS PRACTICE, MAYBE it would be BETTER TO FOCUS ON THE HR Managers of such Companies--who actually lay-out the policies & finally implement such practices? Since until there's some Law forbidding such practices, I can't see any other way out [not that laws can prevent such occurances.. but that's beside the point].

As long as Companies don't stop from practicing such measures, all we will keep seeing are more Court Rulings: THAT THIS IS ILLEGAL.

There's another aspect to the whole issue--which I mentioned earlier: '........argue in the court that THOSE RULINGS DON'T APPLY TO THIS CASE' for which Kamal Prasoon Sinha said: how can that happen when the SC rulings are there?

I am not a legal person, but I can definitely tell this much: if the lawyer can manage, with some level of smart arguments, to get the 'matter' [not sure if this is the right 'legal' word] posted & not dismissed at the outset, then the case can go on & on and the individual/complainant had it--in terms of timeframe, energy, etc. I know this can happen SINCE I HAVE SEEN IT HAPPEN.

Maybe the court will finally give a Ruling that the Company is wrong--but when?. AND who will pay for the time [maybe years], effort, money [even if the case is 'with costs']? Knowing our legal process, is it worth for the individual to first sign such a Agreement WITH THE INTENT to jump later? I know what it entails, again, since I HAVE SEEN IT HAPPEN. For the legal professionals, that's THEIR PROFESSION but for the individual, IT'S NOT--that's the basic & the whole difference.

That's what I meant when I said: 'pl sign such a document ONLY IF YOU INTEND TO HONOR IT. Else, look for another job where this won't be an issue'. By saying this, my intent was to be 'practical & realistic' rather than any other way--mind you, ethics may be involved, but I didn't even consider that aspect.

I hope I haven't created more confusion :-)

Rgds,

TS
16th June 2011 From India, Hyderabad
Dear Mr TS,
With your latest input now I am doubting that you are a lawyer....in your own words...lawyer can manage, with some level of smart arguments, to get the 'matter' (here input) posted & not dismissed at the outset, then the case can go on :-)
No confusion at all :)
regards,
Kamal
17th June 2011 From India, Pune
Hello Kamal Prasoon Sinha,
No confusion at all---about what? I don't get it. Pl elaborate.
If you mean: no confusion at all THAT I AM lawyer--forget it--I AM NOT A LAWYER. And to the extent possible/necessary, I try to keep myself away from them.
All I can say is: I have seen & faced of how the law can be distorted/misused--EVERYTHING LEGALLY--by those who 'want' to, misusing the legal knowledge-base they have. That's what I meant when I said: SINCE I HAVE SEEN IT HAPPEN. Such experiences may not have taught me 'how to do things' but DEFINITELY TAUGHT me on 'how not to do things'--if I have to keep my conscience clear.
Suffice it to say that there are many things I have faced & missed that for most average persons could be 'casual/taken-for-granted/assumed', but were 'luxuries' for me.
Rgds,
TS
17th June 2011 From India, Hyderabad
Dear TS,
Plz dont be serious. I know you are not a lawyer.
We are here to share our knowledge and learn from each other's experiences. What you said is also right that there are lawyers to manipulate and argue the cases just to delay the final decision of the court and we all know about the slow judicial process of our country. That's why govt. is coming up with an amendment where the court has to dispose off a case in maximum period of three and a half years.
regards,
Kamal
17th June 2011 From India, Pune
Commonnnn Kamal Prasoon Sinha........
I am not serious--just setting the record straight.
I thank HIM for ensuring that aspect--if not I would have gone mad/bonkers long back.
Let's see how the Govt works out the nitty-gritty of the new law.
However, we Indians are adept @ finding loopholes which seem to miss from the sight of most nationalities :-)
If this sounds cynical/pessimistic, food for your thought [don't remember who said it]: An Optimist invented the Airplane & the Pessimist invented the Parachute :-)
Rgds,
TS
17th June 2011 From India, Hyderabad
Thank you Kamal Prasoon Sinha for more references...its really going to help many of our members...
Great Job!! just wanted to know the source of such references...if you can mention that as well...
Regards,
17th June 2011 From India, Delhi
Dear Archna,
Almost all High courts and Supreme court is online now and all judgements are uploaded on the site.
There are few websites also which provides interactive platform and keeps you updated on the subject.
Plus I have also done LL.B and have seen and attended the proceedings of several lower courts, industrial courts and few high courts in the last 12 years of my HR career.
regards,
Kamal
18th June 2011 From India, Pune
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