Case Summary: Niranjan Shankar Golikari v. Century Spinning & Manufacturing Co. Ltd. (1967) | Section 27 of the Indian Contract Act

This case highlights the importance of balancing the protection of trade secrets with reasonableness, ensuring that such restrictions do not unjustly hinder an employee's professional freedom.

Case Title: Niranjan Shankar Golikari v. The Century Spinning and Manufacturing Co. Ltd.

Citation: AIR 1967 SC 1098

Bench: J.M. Shelat (J) and R.S. Bachawat (J)

Date of Judgment: January 17, 1967

Facts of the Case

The respondent, Century Spinning and Manufacturing Co. Ltd., engaged in the manufacture of tyre cord yarn, had entered into a technical collaboration agreement with foreign firms, Algemene Kunstzijde Unie (AKU) of Holland and Vereinigte Clanzstoff Fabrikan AG (VCF) of West Germany. Under this agreement, technical know-how was transferred to Century Rayon—the respondent’s plant in Kalyan—with a stipulation to maintain secrecy for the duration of the agreement and three years thereafter.

The appellant, Niranjan Shankar Golikari, was employed by the respondent as a Shift Supervisor in the tyre cord division under a five-year contract. The agreement required Golikari to:

• Exclusively devote his time to the respondent’s business.
• Maintain confidentiality regarding trade secrets, technical know-how, and processes.
• Refrain from working for any competitor during the term of his employment.

Golikari was trained in the manufacturing process of tyre cord yarn for nine months. Shortly after completing his training, he left the respondent’s employment and joined Rajasthan Rayon, a competitor, for higher remuneration. The respondent alleged that this was a breach of the employment contract and filed a suit seeking:

• An injunction restraining Golikari from working for Rajasthan Rayon or any similar competitor.
• A perpetual injunction restraining him from divulging trade secrets.
• Damages for breach of contract.

Issue

• Whether a negative covenant restricting an employee from working for a competitor during the subsistence of the employment contract amounts to a restraint of trade under Section 27 of the Indian Contract Act, 1872.

Contentions

Appellant’s Arguments:

1. The negative covenant was a restraint of trade and thus void under Section 27 of the Indian Contract Act.
2. The agreement was unreasonable, oppressive, and unconscionable.
3. The stipulation was unnecessary to protect the respondent’s legitimate interests.

Respondent’s Arguments:

1. The negative covenant was valid as it only operated during the employment period.
2. The restriction was necessary to protect confidential technical information.
3. The agreement was reasonable in scope, time, and nature.

Trial Court Findings:

• Golikari had been trained in specialized processes and technical know-how exclusive to the respondent.
• His employment with a competitor threatened the respondent’s trade secrets.
• The negative covenant was reasonable and enforceable.
• The respondent was entitled to an injunction and damages.

High Court Findings:

The High Court upheld the Trial Court’s decision, finding that:

• The negative covenant was specific to the tyre cord division and not a blanket restriction.
• The restriction was reasonable and necessary for protecting the respondent’s trade interests.
• The injunction did not compel Golikari to return to his previous employment but only prevented him from working for competitors.

Supreme Court Judgment

Key Legal Principles:

1. Negative Covenants During Employment: Negative covenants operative during the employment period, where the employee is bound to serve the employer exclusively, do not constitute a restraint of trade under Section 27.
2. Reasonableness of Restriction: A negative covenant restricting employment during the subsistence of the contract is valid if it is reasonable in scope, time, and nature.
3. Protection of Trade Secrets: Employers have a legitimate interest in preventing employees from disclosing trade secrets and confidential information to competitors.

Supreme Court’s Findings:

Nature of Restriction:

The negative covenant restricted Golikari from working for competitors in the tyre cord manufacturing business for the duration of the employment contract. This was reasonable, and necessary, and did not amount to a blanket restriction.

Reasonableness: The restriction was limited to:

• The duration of the contract.
• The specific nature of employment (tyre cord manufacturing).
• Geographical limits (India).
• Therefore, it could not be considered excessively harsh or one-sided.

Confidentiality and Trade Secrets:

Golikari had acquired confidential knowledge and technical know-how from the respondent’s training program. His employment with Rajasthan Rayon, a competitor, posed a significant risk to the respondent’s business interests.

Public Policy: The covenant was not against public policy. The respondent’s legitimate interest in protecting its trade secrets justified the enforcement of the negative covenant.

Injunction: The Court upheld the injunction, which restrained Golikari from:

1. Working for Rajasthan Rayon or any other competitor in a similar capacity until the contractual period expired.
2. Divulging trade secrets, processes, or confidential information obtained during his employment with the respondent.

Severability of Clauses:

The Court clarified that the rule against severance applies only to entirely void contracts. Where parts of a contract are enforceable, courts may grant a limited injunction to protect the employer’s interests.

Conclusion

The Supreme Court dismissed the appeal, holding that the negative covenant was valid, reasonable, and enforceable. Golikari was restrained from working for competitors or disclosing trade secrets for the remainder of the contractual period.

Significance of the Judgment

Clarification on Section 27: The judgment reaffirmed that negative covenants during the period of employment do not constitute a restraint of trade under Section 27 of the Indian Contract Act, provided they are reasonable and necessary.

Balance of Interests: The case strikes a balance between an employer’s right to protect trade secrets and an employee’s freedom to pursue their profession.

Guidelines on Reasonableness: The Court outlined factors such as scope, time, and geographical limits to determine the reasonableness of restrictive covenants.

Protection of Trade Secrets: The judgment underscores the importance of confidentiality clauses in employment contracts, especially in industries involving technical know-how and proprietary processes.

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