An employee took VRS (Voluntary Retirment) from a PSU in 2002. He worked in private for 5 years. He saw an advertisement from a PSU in which there was no bar on VRS optees. He applied mentioning VRS in resume etc and got selected and joined another PSU in in 2007. The first PSU came to know about it and demanded refund of ex-gratia as per the application form he signed for VRS in 2002 in which it was pre-printed "I will not be allowed to join Govt/PSU and if I do, I will have to refund the ex-gratia received".

Now, the questions are

1.Whether such a condition from a PSU is valid in view of section 27 of contract act (restraint of trade is not valid)?

2.Whether the refund can be claimed as per contract act section 73 (no loss suffered by first PSU due to breach of contract)?

3.Whether refund can be enforced by the second PSU?

4.Whether disciplinary action can be initiated against the employee by the second PSU? There is no rule available to charge. The rule is clear "dishonesty against the company" is misconduct

From India, Salem
Industrial Relations
Legal Analyst, Hrm
Srinivas Nednurkar
Hr Operations
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Dear Annonymous,

You cannot mix-up the contract act conditions with the main service and gratuity act conditions. It is not a case of contract act, rather a case of termination of services an some extraordinary act of kindness, other than the usual conditions of termination from service by the employer or the employee by virtue of his resignation due to which he could get ex-gratia amount from his employer PSU, who allowed him to retire on vrs, when the usual retirement conditions were not filfilled, except on resignation. Any kind of ex gratia is not permissible for termination on resignation. So, the breached the specific terms of vrs on account of which the ex gratia was made to him as an act of kindness by the organisation, not as an entitlement of the employee or under any section of the service contract act. The question is not whether there was any loss to the company or not. But the element of breach of faith and trust was there on the part of the employee due to his doubtful integrity to cheat the employer for which he is liable for disciplinary action, besides recovery of the ex gratia amount he claimed by false declaration just to join another psu to extact undue and illegal benefits from the other Government organisation.

So, (1) the condition of the psu was quite valid; (2) refund necessarily becomes due to be recovered from the employee; (3) refund can be enforced by the present employer to be remitted to the last employer; and (4) the 2nd psu can initiate disciplinary action against the employee on his unbecoming of the employee of the psu by hiding the information/facts of the case that he claimed the ex gratia on the condition that he would not join any other Govt/psu in a bid to derive undue benefit of his past service. In fact the employee proved to be a dishonest and unreliable person even for the present psu.

From India, Delhi

Dear Sir,
Thanks for your opinion. I feel it is emotional not legal. I (as well as the high court) feel that there is no possibility or justification for such a claim or disciplinary action. Pl. go through if you get the time.

From India, Salem
srinivas nednurkar

1. He clearly mentioned in his resume about the his first govt job and VRS.
2. How 2nd psu can initiate disciplinary action against the employee on his unbecoming of the employee of the psu by hiding the information/facts of the case that he claimed the ex gratia on the condition that he would not join any other Govt/psu in a bid to derive undue benefit of his past service. In fact the employee proved to be a dishonest and unreliable person even for the present psu.????

From India, Hyderabad

Dear Sir,
It is not an extra ordinary or act of kindness. They paid the ex-gratia to avoid paying future salary. They gained a lot by the person leaving the company and want the ex-gratia also back. Where is the justification in it? They have not contributed in the person getting the job in the second PSU.
Many courts, including the SC have held that such a condition is not valid. Hydrabad div bench has held that VRS person can join another PSU in open competition and it is his fundamental right.
About honesty, the person never did the fact in resume. The second PSU had formed no policy. How can they charge a person for it? If they had advertised about the condition or if the person had not disclosed it, then he can be charged. Otherwise how can he be charged?

From India, Salem
srinivas nednurkar

Good Learning Curve for us/.. keep sharing post like this with closures..
From India, Hyderabad

Mr. Anonymous,

I hope you very well understand that reading between the lines can't bring perfection in knowledge. Had you read the Government/ PSU Conduct & Disciplinary Rules, you would not have stated that my opinion was emotional, not legal. Rules of Government/ PSUs are different than the CDA Rules of private companies. Whenever I say something about Government organisations or their PSUs, I don't try to make an admixture of Government Rules, private companies’ rules or form opinion merely with reference to the court judgments, ignoring the relevant rules, circumstances and the nature of the case. Any court judgment is case specific depending upon the characteristics, nature and circumstances of the case and does not have universal application on all cases of all the organisation with different nature, characteristics and circumstances of the case. In the specific case that you referred, you have perhaps not noticed that the main challenge was with reference to the competence of the authority, who initiated the disciplinary proceedings, not the organisation, which initiated the proceedings. Government/ PSU Rules very clearly lay down that the employee can be proceeded against on account of any offence related to his past service even in another Government/ PSU organisation. The delegated competent authority in current employment according to the status of the employee acts as the disciplinary authority and decides the case, not the previous employer.

So, my advice to you is better re-read the judgment with specific reference to rules and delegations applicable in th Government/PSU orgnisations. Any PSU, may that works as a company, can not deviate from the Government rules and regulations, besides following statutory rules meant for the registered limited companies.

From India, Delhi

Dear Srinivas,

Probably you tried to something else other than what you could mention. In the first part of your question you seemed to have questioned, "how 2nd psu can initiate disciplinary action against the employee on his unbecoming of the employee of the psu by hiding the information/facts of the case that he claimed the ex gratia on the condition that he would not join any other Govt/psu in a bid to derive undue benefit of his past service, while in the 2nd part of the same para you have stated, "In fact the employee proved to be a dishonest and unreliable person even for the present psu.???? So, both the parts of the 2nd para gives the sense of contradiction to each other. I hope I have clarified your point in my previosu post in reply to the supplementary post of the querist, as to how 2nd PSU can initiate disciplinary action against the employee.

Secondly, mere mentioned in his resume about the his first govt job and VRS does not absolve him of his irregularity of falsely giving declaration that he would not join any Govet./PSY after VRS. Government Rule, being of statutory nature are sacrosanct to be followed scrupulously by the employees of the Govt/ PSUs.

From India, Delhi

Dear Anonymous,
Your 2nd supplementary post is merely an assumption or wishful thinking. You could better have checked with the legal meaning of ex-gratia before treating that, "not an extra ordinary or act of kindness." Undue benefit is not allowed legally, but only on account of an extra ordinary act of kindness in deferment of the regular service rules.

From India, Delhi

Dear Sir,

I would like to share the legal position with respect to the condition that "I will not be allowed to join another PSU. If I wish to join, I will refund the ex-gratia"

The above condition violates the Contract act section 27 and 73.

27. Agreement in restraint of trade, void.—Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. —Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.

73. Compensation for loss or damage caused by breach of contract.- When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.

Kerala High Court – State of Kerala Vs United Shippers and Dredgers Ltd, 1982KLJ430, due to breach of contract, the government did not suffer any legal injury or loss, so no compensation is payable as per contract act. Even if it is assumed that the person has breached the contract, the previous PSU has not suffered any “legal injury” or loss (but gained enormously). So, their claim is invalid.

“7...If the breach has not resulted in any harm, loss or damage to the other party, the question of recompensating him or restoring to him something he has lost would not arise.

8.....section 75 would necessarily indicate that the party who complains of a breach must have really suffered some loss or damage apart from being faced with the mere act of breach of contract....If in any case the breach has not resulted in or caused any loss or damage to a party, he cannot claim compensation”

Contract act section 27

Gauhati High Court – Oil India Ltd Vs Dilip Kumar Goswami, (2000)IILLJ415 Gau, No employer can restrict future job of an ex- employee.

“The employer cannot prescribe any term and condition in order to restrict future avocation of an employee after retirement. The bar for appointment after retirement may suit the employment policy of the Public Sector Undertakings and they may by way of policy decide not to appoint any retired employee of any other Public Sector Undertakings.

13. The clarification given by the Department of Public Enterprises in Column-5 shows that the Management of Public Enterprises have been asked to exercise its own managerial discretion and prudence while disposing of the cases of voluntary retirement. The clarification further requires the Management to invoke the powers of office memorandum dated December 14, 1982, January 25, 1998 and June 23, 1998 (sic) issued by Department of Public Enterprises if they find that an employee seeking voluntary retirement has opted for a job in any other Public Sector Undertaking. This condition also appears to be contrary to the provisions of Section 27 of the Indian Contract Act. An employee going on voluntary retirement and not taking any job in any Public Sector Undertaking will be entitled to full benefits under the Voluntary Retirement Scheme, but the said benefits will be restricted to certain amounts only if such employee takes fresh employment after retirement. The clarification given to this effect cannot be said to be in keeping with the spirit of the provisions of Section 27 of the Indian Contract Act. The Company while disposing of a request for voluntary retirement cannot discriminate in respect of benefits to which an employee is entitled to on such retirement on consideration that the employee concerned was going to take over a job in some other company. A bare reading of the guideline/circular shows that this was issued without any authority of law and against the basic principles behind 'voluntary retirement'.”

Hydrabad Div Bench – S.Rami Reddy Vs Vice-Chairman and Managing Director, Andra Pradesh State Irrigation Development Corporation Limited, 2003(4)ALD609. There is no ban on VRS optees to join any other PSU in open competition

“31. According to the learned counsel, Clause 8 of G.O. Ms. No. 16, dated 22-3-2001, which requires the identified employee to give an undertaking to the effect that he would not seek re-employment in other Government undertakings, is arbitrary and illegal for it violates the provisions of Articles 16 and 21 of the Constitution of India, and in support of this submission, he placed reliance on the judgement of the Gauhati High Court reported in Oil India Ltd. v. Dilip Kumar Goswami, 1999 (7) SLR 494.

76. The effect of the other contention advanced by the learned counsel for the petitioners that the condition in the impugned notice insofar as it mandates the identified employee who opts for VRS to give an undertaking that he shall not be eligible for re-employment in any Government Departments and Public Sector Undertakings, which is in consonance with sub-clause (8) of Clause 8 of G.O. Ms. No. 16, dated 22-3-2001, is arbitrary inasmuch as it takes away their right to livelihood enshrined under Article 21 of the Constitution of India, is also liable to be rejected, inasmuch, the learned single Judge of this Court, having considered this contention, in the above judgement, held thus: In the considered view of this Court, Clause 8(8) of G.O. Ms. No. 16, dated 22-3-2001 suffers from no infirmity. It does not deprive persons, who have opted for Voluntary Retirement Scheme from competing by way of direct recruitment to any Public Office.

77. It should be noted that the impugned condition only prohibits the petitioners from taking re-employment in Government Departments/Public Sector Undertakings. They are not precluded from taking employment in private organizations or compete by way of direct recruitment to public offices.”

Supreme court – Gouri Shankar Ghosh Hazara Vs Hindustan Copper, 8-5-2001, A VRS optee can join another PSU, he will be eligible for all VRS benefits

“It is clear that there was as such no embargo on an employee of a public sector undertaking being employed by another public sector undertaking”

Gujarat High Court – Lalbhai Dalpatbhai & Co Vs Chittaranjan Chandulal Pandya, AIR 1996 Guj 189. Restriction on employee after termination of employment is not valid. Employee does not have any bargaining power and has to sign on dotted line.

“9....If it is not going to benefit ”the employer in any legitimate manner, the court would not injunct the employee from exercising his skill, training and knowledge merely because the employee has agreed to it”

Gujarat High Court – Sandhya Organic Chemicals P Ltd Vs United Phosphorous Ltd, AIR 1997 Guj 177. as per contract act, service covenant beyond service period is not valid.

“16....The supreme court has also ruled that under section 27 of the contract act, a service covenant beyond the termination of the service is void”

Supreme court – Superintendence Company of India Vs Krishnan Murgai, AIR 1980 SC 1717. Post service conditions are not valid. Even partial condition is not valid. Inequality of bargaining power with employees. Harsh and oppressive conditions.

“29.A contract, which has for its object a restraint of trade, is prima facie void....whether the restraint was general or partial, unqualified or qualified, if it was in the nature of a restraint of trade, it was void.

32.....If the agreement puts a restraint even though partial, it was void and therefore, the contract must be treated as one which can not be enforced.

53....Not a Indian Decision has been brought to our notice where an injunction has been granted against an employee after the termination of his employment.

58....If the covenant is to operate after the termination of services, or it is too widely worded, the court may refuse to enforce it.

59....there is inequality of bargaining power between the parties, indeed no bargaining may occur because the employee is presented with a standard form of contract to accept or reject... ”

The Chairman has held in Annexure A, that the language of the undertaking the petitioner is clear (Annexure-C), whereas, it is a pre-printed format which the petitioner had to sign under compulsion of retrenchment.

Supreme court – Niranjan Shankar Golikari Vs Century Spinning, AIR 1967 SC 1098, negative covenant in a service agreement is void. Negative covenant after termination of contract is not valid.

Supreme court – Percept D Mark (India) Ltd Vs Zaheer Khan, AIR 2006 SC 3426, any condition after termination of contract will be invalid.

“55. On the pleading contained in the arbitration petition, there can be no escape from the conclusion that what the appellant sought to enforce was a negative covenant which, according to the appellant, survived the expiry of the agreement. This, the High Court has rightly held is impermissible as such clause which is sought to be enforced after the term of the contract is prima facie void under section 27 of the contract Act”

268. Supreme Court of India : Bank Of India & Ors vs O.P. Swarnakar Etc on 17 December, 2002, Bench: H Sema, S Sinha on the topic of VRS

..... It is difficult to accept the contention raised in the Bar that a contract of employment would not be governed by the Indian Contract Act. A contract of employment is also a subject matter of contract. Unless governed by a statute or statutory rules, the provisions of the Indian Contract Act would be only applicable at the formulation of the contract as also the determination thereof.

From India, Salem

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