Niranjan Shankar Golikari v Century Spinning and Manufacturing Co Ltd (1967)

Section 27 is one of the shortest and most severe provisions in the Contract Act. It says that every agreement restraining anyone from exercising a lawful profession, trade or business is void to that extent, and it allows exactly one exception on its own face — the sale of goodwill. There is no reasonableness test written into it. That single fact is the largest doctrinal gap between Indian and English contract law, and it is a guaranteed exam question.

Golikari is the case that shows where the line actually falls. It holds that a negative covenant which operates during the term of the employment is not a restraint of trade at all, and can be enforced by injunction; whereas a covenant operating after the employment ends is prima facie void under s. 27 and cannot be saved by showing that it is reasonable. Learn that division and you have the whole of s. 27 in employment contracts.

In the early 1960s Century Spinning and Manufacturing Company was moving into a technically demanding new line: the manufacture of tyre cord yarn. It did not have the technology, and obtained it through a collaboration with foreign producers who possessed the process know-how. Those collaborators were not going to hand over their secrets on trust. The collaboration agreement obliged Century to keep all technical information confidential and — the important part — to obtain corresponding secrecy undertakings from its own employees, so that the information could not walk out of the factory gate in somebody's head.

Niranjan Shankar Golikari was engaged against that background, appointed to a technical post in the tyre cord yarn plant on a modest salary under a written agreement for a fixed term of five years. Two terms mattered:

• He undertook to keep confidential all technical information, machinery, plans, designs and processes coming to his knowledge in the course of his employment.
• He undertook that during the period of the agreement he would serve the company faithfully and exclusively, and would not serve anywhere else in any capacity in a similar line of business, even if he left Century's service before the five years were out.

Century then trained him and gave him access to the collaborators' processes; the whole point of employing him was that he would come to know how the plant worked.

Well before the five years expired, Golikari resigned and took a job with a rival concern setting up to make the same product. The reason, on the evidence, was a substantially higher salary. Century sued for an injunction restraining him from serving elsewhere in a similar business for the unexpired part of the term and from disclosing what he had learned. The trial court granted it, the appellate court upheld it, and Golikari carried the matter to the Supreme Court.

1. Is a negative covenant that prevents an employee from serving elsewhere during the subsistence of his contract of employment an agreement in restraint of trade within s. 27?
2. If it is not, on what basis can a court restrain the employee, given that a contract of personal service cannot be specifically enforced?
3. Was this particular covenant, in its scope as to duration, kind of employment and area, one that should be enforced?
4. Does the position differ for a covenant operating after the employment has ended?

For Golikari: s. 27 admits no exceptions except the one written into it; "every" leaves no room for judicial qualification; the covenant restrained him from exercising his trade as a technician and was void to that extent; enforcing it compelled him either to stay with Century on Century's terms or remain idle, which is indirect specific enforcement of a contract of personal service; and courts had refused injunctions in comparable cases, notably Gopal Paper Mills Ltd v Surendra K. Ganeshdas Malhotra (1962).

For Century: the covenant did not restrain Golikari from working at all — it required him to work for Century, which is what he had agreed and was being paid to do. A covenant operating only while the employment subsists is a covenant of service, not a covenant in restraint of trade. To hold otherwise would make every fixed-term contract of employment void, since every such contract prevents the employee from serving anyone else for its duration. The company also pointed to its obligations to the collaborators and the real risk of its process information reaching a competitor.

The appeal was dismissed. The Supreme Court (Shelat J) held:

• A negative covenant operating during the period of employment, restraining the employee from serving elsewhere, is not hit by s. 27. Such a covenant does not restrain the employee from exercising a lawful profession — it binds him to the employment he has contracted for.
• The covenant here was valid. The five-year term was reasonable, the employer had a legitimate interest to protect in the shape of confidential technical information obtained under a foreign collaboration, and the restraint was limited as to time, as to the nature of the employment and as to area.
• An injunction was properly granted to enforce the negative stipulation for the unexpired part of the term.
• Restraints operating after the termination of employment stand on a different footing and are ordinarily void under s. 27.

Shelat J's disposal of the merits was blunt: the appellant had torn the agreement to pieces only because he had been offered higher remuneration, and he could not be heard to say that no injunction should issue against him. The injunction, being restricted as to time, as to the nature of the employment and as to area, could not be said to be too wide, unreasonable, or unnecessary for the protection of the company's interests.

A negative covenant in a contract of employment which is operative only during the subsistence of the employment, and which is not unconscionable, excessively harsh or one-sided, does not fall within s. 27, and may be enforced by injunction under s. 42 of the Specific Relief Act 1963 notwithstanding that the contract of service is not specifically enforceable.

The statement that a restraint operating after the end of the employment is void under s. 27 is, strictly, obiter in Golikari — the covenant before the Court was a during-term covenant and nothing turned on the post-term position. But it approves a line of authority going back to Brahmaputra Tea Co Ltd v E. Scarth (1885), where the Calcutta High Court refused to restrain an employee from competing for five years after his service ended, reasoning that the omission of any exception for such contracts from the general prohibition in s. 27 showed that the legislature did not intend to give them effect in India. Later Supreme Court decisions have adopted the proposition as settled law.

Why the during-term covenant escapes s. 27. The reasoning comes from the older Bombay authority: if a covenant to serve exclusively were a restraint of trade, then all contracts of personal service for a fixed period would be void, because an agreement to serve one employer for a week, a day, or even an hour necessarily prevents the servant from serving anyone else during that time. Section 27 cannot have been meant to abolish the contract of employment. It is read as directed at agreements that shut a person out of his trade, not at agreements by which he commits his working time to one employer for an agreed period.

Why an injunction was available. This is where the Specific Relief Act comes in — the part students most often leave out.

• A contract of personal service is not specifically enforceable, and under s. 41(e) of the Specific Relief Act 1963 an injunction cannot ordinarily be granted to prevent breach of a contract that would not be specifically enforced. Left there, the employer would have no remedy but damages.
• Section 42 removes that obstacle for negative stipulations:

Notwithstanding anything contained in clause (e) of section 41, 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 circumstance 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 plaintiff has not failed to perform the contract so far as it is binding on him.

The structure is: affirmative agreement (Golikari will serve Century for five years) coupled with a negative agreement (he will not serve anyone else during that period). The court cannot order him to work for Century; it can restrain him from working for the rival. Note the proviso — the employer must himself have performed. An employer in breach cannot invoke s. 42.

Why it was not oppressive. Shelat J distinguished Gopal Paper Mills on the ground that the contract there ran for twenty years and gave the employer an arbitrary power to terminate without notice; such a contract is one-sided and would be struck down. The test that emerges is not "reasonableness" in the English sense but whether the covenant is unconscionable, excessively harsh, or unnecessary for the protection of the employer's legitimate interests. If it is, the court refuses the injunction — a discretionary remedy — even though s. 27 does not strike the clause down.

Superintendence Company of India v Krishan Murgai (1980). Murgai was an employee of an inspection and quality-testing company. His service agreement contained a post-service restraint: for two years after leaving he was not to start or join a similar business in Delhi. He left and set up in competition. The Supreme Court refused the injunction. The judgments are not uniform in their reasoning — part turns on the construction of the clause, which by its language applied where the employee "left" and not where he had been terminated — but the propositions taken from the case and repeated since are:

• A restraint operating beyond the term of service is prima facie void under s. 27.
• The only route by which such a restraint can be justified is by bringing it within the goodwill exception to s. 27.
• Even a valid post-service restraint applies only where the term has run its natural course or the employee has left of his own accord — not where the employee has been prematurely and wrongfully dismissed. Leaving a service is one thing; premature termination by the employer is another, and the restraint clause becomes inapplicable.

Percept D'Mark (India) Pvt Ltd v Zaheer Khan (2006). A celebrity-management agreement with the cricketer contained a "right of first refusal" clause which continued to bite after the agreement had expired, requiring him to offer terms to Percept before contracting with anyone else. The Supreme Court held the clause void under s. 27. Three propositions from this case are worth memorising:

• Section 27 is not confined to employment contracts. It applies to all contracts and transactions — agency, commerce, partnership, endorsement agreements.
• Negative covenants tied to positive covenants during the subsistence of the contract are not normally regarded as being in restraint of trade, unless unconscionable or wholly one-sided. That is Golikari, restated and generalised.
• In construing such covenants neither the test of reasonableness nor the fact that the restriction is only partial is applicable in India. The case must fall within the statutory exception or the clause is void. And no party can be put in a position where he must either stay with the present principal or face idleness.

Around the edges. High Courts have refused to enforce "garden leave" clauses that prohibit employment for a period after cessation of service, treating them as post-term restraints. Confidentiality and trade-secret clauses, by contrast, are generally upheld and their breach sounds in damages, because protecting secret information is not the same as shutting a person out of his trade. Restraints between employers not to poach each other's staff have been held void as too wide.