by group two of fsmwmg – 17 a i ndian c ontract a ct team members neeraj srivastava – 82025 s....

By Group Two of FSMWMG – 17 A

INDIAN CONTRACT ACT

Team Members

Neeraj Srivastava – 82025S. Venkatakrishnan – 82038Subhash Sen – 82043Sanjeev Kumar – 82041Sharad Sachan – 82042Vivek Kumar – 82045

TOPICS FOR DISCUSSION

Relationship between a principal and an agent and the binding nature of acts of agent on his principal

When the agent exceeds his authority and enters into contract on behalf of his principal

When the act of agent incur heavy losses to the principal through such acts were done in good faith by the agent

Jumping of a Bond by an Employee. Its consequences.

Jumping of a Bond: Legal position in India with that of United States

An Introduction to ‘Principal’ and ‘Agent’

An Introduction

to Prinicpal and

Agent

‘AGENT’ AND ‘PRINCIPAL’ DEFINED

“Agent” is defined in Section 182 of the Act in the following words

An agent is a person employed to do any act for another, or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the “principal”

“The essence of the matter is that the principal authorized the agent to represent or act for him in bringing the principal into contractual relation with the third person”

DEFINITION OF AN “AGENT”

“The concept of “agency” has been thus explained by Ramaswami J of the Madras High Court in Krishna v Ganapathi

Every person who acts for another is not agent.

A domestic servant renders to his master a personal service; a person may till another’s field or tend his flocks or work in his shop or factor or mine or may be employed upon his roads or ways; one may act for another in aiding in the performance of his legal or contractual obligations of third persons… In none of these capacities he is an agent and he is not acting for another in dealings with third persons.

It is only when he acts as representatives of the other in business negotiations, that is to say, in the creation, modification or termination of contractual obligations, between that other and third persons, that he is an agent….Representative character and derivative authority may briefly be said to be the distinguishing feature of an agent.

AGENT NEED NOT BE COMPETENT

184. Who may be agent:

As between the principal and third persons, any person may become an agent, but no person who is not of the age of majority and of sound mind can become an agent, so as to be responsible to this principal according to the provisions in that behalf herein contained.

Ordinarily, an agent incurs no personal liability while contracting for his principal and therefore, it is not necessary that he should be competent to contract. Thus a person may contract through a minor agent, but the minor will not be responsible to his principal.

Section 184 lays down very clearly that “as between the principal and third persons any person may become an agent”. The agent need not be competent to contract.

CONSIDERATION FOR APPOINTMENT NOT NECESSARY

185. Consideration not necessary – No consideration is necessary to create an agency

Section 185 provides that no consideration is necessary to create an agency. Generally, as agent is remunerated by way of commission for services rendered, but no consideration is immediately necessary at the time of appointment.

Shivraj Reddy & Bros v S. Raghu Raj Reddy, AIR 2002 NOC 120 (AP), a person can become a partner in a firm, which is the position of an agent, without making any capital contribution

AGENT AND SERVANT

This distinction between an “agent” and a “servant” has been underlined by Supreme Court in Lakshminarayan Ram Gopal & Sons V Hyderabad Government.

An agent has the authority to act on behalf on his principal and to create contractual relations between the principal and a third party. This kind of power is not generally enjoyed by a servant.

“A principal has the right to direct what the agent has to do; but a master has not only the right, but also the right to say how it is to be done”. “A servant acts under the direct control and supervision of his master and is bound to conform to all reasonable orders given to him in the course of his work. But an agent, though bound to exercise his authority in accordance with all lawful instructions ….is not subject in its exercise to the direct control of supervision and principal.”

The mode of remuneration is generally different. A servant is paid by way of salary or wages, an agent receives commission on the basis of work done.

A master is liable for wrongly act of his services if it is committed in the course of the servant’s employment. A principal is liable for his agent’s wrong done within the “scope of authority”.

A servant usually services only one master, but an agent may work for several principals at the same time.

CREATION OF AGENCY

In the words of DESAI J of the Supreme Court: “The relation of agency arises whether one person called the agent has authority to act on behalf of another called the principal and consents so to act. The relationship has its genesis in a contract.

The relationship of principal and agent may be created in any of the following ways:

By express appointment By the conduct or situation of the parties By necessity of the case; or By subsequent ratification of an unauthorized act.

DEFINITIONS OF EXPRESS AND IMPLIED AUTHORITY

186. Agent’s Authority may be expressed or implied

187.Definitions of express and implied authority.-An authority is said to be express when it is given by words spoken or written. An authority is said to be implied when it is to be inferred from the circumstances of the case; and things spoken or written, or the ordinary course of dealing, may be accounted circumstances of the case.

‘A’ owns a shop in Serampore, living himself in Calcutta, and visiting the shop occasionally. The shop is managed by B, and he is in the habit of ordering goods from C in the name of A for the purposes of the shop, and of paying for them out of A's funds with A's knowledge. B has an implied authority from A to order goods from C in the name of A for the purposes of the shop.

DEFINITIONS OF EXPRESS AND IMPLIED AUTHORITY

Chairman, Life Insurance Corporation Vs Rajiv Kumar Bhaskar AIR 2005 SC 3087

The Life Insurance Corporation under the Salary Saving Scheme had covered a large number of employees of an employer, and the agreement employer accepted the sole responsibility to collect premium from the employees and remit the same by means of one cheque to Corporation. No individual employee was required to send his premium. There was a failure on the part of the employer regarding the payment of the premium, and the Corporation disclaimed its liability to pay the assured amount. It was held that the employer had implied authority to act as agent of the Corporation in view of the provisions of section 186. It was held by the Supreme Court that if the employees had the reason to believe that their employer was acting on behalf of the corporation, a contract of agency might be inferred.

EXTENT OF AGENT'S AUTHORITY

188. Extent of agent's authority: An agent having an authority to do an act has authority to do every lawful thing which is necessary in order to do such act. An agent having an authority to carry on a business has authority to do every lawful thing necessary for the purpose, or usually done in the course, of conducting such business.

A is employed by B, residing in London, to recover at Bombay a debt due to B. A may adopt any legal process necessary for the purpose of recovering the debt, and may give a valid discharge for the same.

A constitutes B his agent to carry on his business of a ship-builder. B may purchase timber and other materials, and hire workmen, for the purpose of carrying on the business.

EXTENT OF AGENT'S AUTHORITY

Case law : Dingle V Hare An agent was authorised to sell artificial manure. He had no authority to

give any warranty about the goods. Yet he warranted the buyer that the manure contained 30 per cent phosphate of lime.

The warranty turned out to be false and the principal was sued for its breach.

He was held liable, because it was usual in the artificial manure trade to give a warranty of this kind.

An agent to sell has general authority to do all that is usual and necessary in the course of such employment.

Thus every agent has the implied authority to act according to the customs and usages of a particular market or trade.

The principal is bound by such usages even if he is unaware of them or even if they conflict with his instructions.

AGENT'S AUTHORITY IN AN EMERGENCY

189.Agent's authority in an emergency.-An agent has authority, in an emergency, to do all such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence, in his own case, under similar circumstances.

A consigns provisions to B at Calcutta, with directions to send them immediately to C, at Cuttack. B may sell the provisions at Calcutta, if they will not bear the journey to Cuttack without spoiling

Relationship between a principal and an agent and the binding nature of acts of agent on his principal

Principal and

Agent

Relationship

RELATIONS OF PRINCIPAL AND AGENT

Duties of Agent Mutual rights and duties of principal and agent may be

wholly provided for in their contract. But the following duties of general natures are imposed by law upon every agent, unless they are modified or excluded by special contract

Duty to execute mandate The first and foremost duty of every agent is to carry out

the mandate of his principal. He should perform the work which he has been appointed to do. Any failure in this respect would make the agent absolutely liable for the principal’s loss.

RELATIONS OF PRINCIPAL AND AGENT

Duty to execute mandate In such cases the agent is held

liable to the principal for the amount which would have been recovered if the goods had been insured

Pannalal Jankidas V Mohanlal (AIR 1951 SC 144)A commission agent purchased goods for his principal and stored them in a godown pending their despatch. The agent was under instruction to insure them. He actually charged the premium for insurance, but failed to insure the goods. The goods were lost in an explosion in the Bombay harbour.The agent was held liable to compensate the principal for his loss minus the amount received under the Bombay Explosion (Compensation) Ordinance, 1944, under which the Government paid compensation up to fifty percent of the uninsured merchandise lost in the explosion.

DUTY TO FOLLOW INSTRUCTIONS OR CUSTOMS [S. 211]

211. Agent’s duty in conducting principal’s business – An agent is bound to conduct the business of his principal according to the directions given by the principal, or in the absence of any such directions, according to the custom which prevails in doing business of the same kind at the place where the agent conducts such business.

When the agent acts otherwise, if any loss be sustained, he must make it good to his principal, and if any profit accrues, he must account for it.

DUTY TO FOLLOW INSTRUCTIONS OR CUSTOMS [S. 211]

Example

A, an agent engaged in carrying on for B a business, in which it is the custom to invest from time to time, at interest, the moneys which may be in hand, omits to make such investment. A must make good to B the interest usually obtained by such investments.

B, a broker, in whose business it is not the custom to sell on credit, sells goods of A on credit to C, whose credit at the time was very high. C, before payment, becomes insolvent. B must make good the loss to A.

DUTIES OF AGENT…. The act provides that an agent is bound to conduct the business of

his principal according to the directions given by the principal and to keep himself within the confines of his authority.

For example, an estate agent cannot make a binding contract on behalf of his principal with a third party. In the absence of directions, the agent has to follow the custom which prevails in businesses of the same kind and at the place where the agent conducts such businesses.

When the agent acts otherwise, if any loss to be sustained, he must make it good to his principal, and if any profit accrues, he must account for it.

DUTIES OF AGENT….

Example, in Lilley V Doubleday: (1881) 7 QBD 510

An agent was instructed to warehouse his principal’s goods at a particular place. He placed a part of them at a different warehouse which was equally safe. But the goods were destroyed without negligence.

The agent was held liable for the loss. Any disobedience of, or departure from, the instructions makes the agent absolutely liable for the loss. (ex: an agent authorized to buy cotton, bought for the principal and divers others in one large-scale contract so that the principal had no particular contract to enforce, held bound to refund principal’s money).

DUTIES OF AGENT… Where a principal had given instructions of ambiguous nature which were

capable of two meanings, he was not permitted to argue as against the agent that he should have read the instructions in the other sense than what he actually did. (ex: Ireland V Livingston, Where the directors of the company were instructed to purchase a business as it then stood, they were held not liable when the business turned out to be insolvent. It is imprudent instruction on the part of the principal).

In the absence of any instructions, business customs must be followed. Where, for example, the customs of a particular trade require that goods should not be sold on credit or in return for a negotiable instrument, the agent should not do so. If he does so, he would be liable to the principal for any loss resulting from the transaction.

DUTIES OF AGENT…

It is the duty of an agent to maintain the business secrets of the principal.

A bank is under similar duty of secrecy so far as the customer’s dealings with him are concerned and would be liable in damages if any loss is caused to the customer by leakage of secret information.

Certain currency notes were deposited with a bank for demonetization. The bank informed the Income Tax Authorities and the customer thereby lost the utilization of that money. Even so the customer’s action against the bank failed. The bank was under a higher national duty which superseded the duty of the customer. (Shankarlal V State Bank of India, AIR 1987 Cal 29).

DUTIES OF AGENT…

An agent is also under a duty to maintain confidence, secrecy and non-disclosure of any sensitive information about the affairs of his principal. A banker may be liable if the state of his customer’s account is leaked, except where the disclosure is under compulsion of law, e.g. duty to obey an order under Bankers’ Books Evidence Act, or under higher duty owed to State or public institutions which supersedes lower duty or under any statement in a formal claim or with customer’s permission.

DUTY OF REASONABLE CARE AND SKILL

The Agent should conduct the business with the skill and diligence that is generally possessed by persons engaged in similar business, except where the principal knows that the agent is wanting in skill (S.212)

Where a lawyer proceeds under a wrong section of law and thereby the case is lost, he shall be liable to his client for the loss.

Agent who is having authority to sell goods on credit, sells goods on credit without making proper and usual enquiries as to the insolvency of the buyer. The buyer at the time of such sale, is insolvent. The agent has to compensate his principal in respect of any loss thereby sustained.

DUTY OF REASONABLE CARE AND SKILL

To render proper accounts

To communicate with the principal in case of difficulty

Not to make any secret profits

Not to deal on his own account

Not entitled to any remuneration for misconduct

Not to disclose confidential information supplied

To protect all reasonable steps for the protection and preservation of the interests entrusted to him

When the agent exceeds his authority and enters into a contract on behalf of his principal

When the

Agent exceeds

his authority

WHEN THE AGENT EXCEEDS HIS AUTHORITY

Section 227 of the Contract Act When the agent exceeds his authority and the part of what he

does, which is within his authority, can be separated from the part which is beyond his authority, so much only of what he does as is within his authority, is binding as between him and the principal

Example: ‘A’ being the owner of Ship and Cargo, authorizes ‘B’ to procure an insurance for Rs. 4,000/- on the ship. ‘B’ procures a policy of Rs. 4,000/- on the ship and another for the like sum on the cargo. A is bound to pay the premium for the policy on the ship, and not the premium for the policy on the cargo.


The Court in Alliance Mills (Lessees) Pvt. Ltd. v. India Cements Ltd., AIR 1989 Cal 59 said that “Where the agent enters into the contract in his own name, without disclosing, in the contract note, that he is acting as agent and without disclosing in the contract note, the name of his principal, the agent himself is described as the purchaser or seller as the case may be. The agent cannot come before the court and say that he is not bound by the contract himself.” The Principal in such case shall not have any liability.

The question whether an agent, who has made a contract on behalf of his principal, is to be taken to have contracted personally, or merely on behalf of his principal, and, if personally, what is the extent of his liability on the contract, depends on what appears to have been the intention of the parties to be deduced from the nature and terms of the particular contract and the surrounding circumstances. (AIR 1941 Cal 643: 73 CLJ 356)


Suppose an agent exceeds her authority, but the person she's dealing with reasonably doesn't understand that she's exceeding it. If the principal knew (or reasonably should have known) that the agent has exceeded her authority in similar circumstances, but has done nothing about it, the principal may be bound by the contract negotiated by the agent. On the other hand, if the principal is not aware of the agent's actions that exceed her authority, the contract will only be enforceable against the principal if it was reasonable for the other person to believe the agent was acting within her authority.


Examples: In contrast, if an insurance agent wrote an insurance policy from his company

that exceeded the policy amount he was authorized to write, but the insurer never told the customer about this, the customer would be acting reasonably to assume that the insurer was authorized, and the customer probably could collect on a claim above his limit. Or if an automobile salesperson signs a contract on behalf of a car dealer that, without the dealer's authority, gives the customer a warranty for forty thousand extra miles, the dealer might very well be bound by the contract.

A, being owner of a ship and cargo, authorizes B to procure an insurance for Rs 4,000 on the ship. B procures a policy for Rs 4,000 on the ship and another for the like sum on the cargo. A is bound to pay the premium for the ship, but not the premium for the policy on the cargo.


Section 228 of the Contract Act deals with cases where authority cannot be separated. Where an agent does more than he is authorized to do and what he does beyond the scope of his authority cannot be separated from what is within it, the principal is not bound to recognize the transaction.

llustrations:

A authorizes B to buy 500 sheep for him. B buys 500 sheep and 700 lambs for lump sum of Rs 6,000. A may repudiate the whole transaction.

A authorizes B to draw bills to the extent Rs 200 each. B draws bills in the name of A for Rs 1,000 each. A may repudiate the whole transaction.


Ahammad V Mammad Kunhi and Ors AIR 1987 Ker 228

Appellant in this second appeal filed O.S. 108/76 before the Subordinate Judge, Tellicherry for specific performance of agreement for sale and also for injunction restraining the defendants from disturbing his possession. The suit was dismissed by the trial court and the decision was confirmed by the District Judge, Tellicherry.

The subject matter of the suit is 30 cents of land which belonged to defendants 2 and 3. They gave power of attorney to the 1st defendant authorizing him to sell ½ right over the said property; however defendant 1 entered into an agreement with the plaintiff to sell the entire 30 cents.

Both 2nd and 3rd defendants contended that defendant 1 had authority to sell only ½ of the property and that the power was subsequently cancelled.


Ahammad V Mammad Kunhi and Ors AIR 1987 Ker 228

Both the trial court and the appellate court found that the agreement to be valid to the extent of ½ right over the suit property. At the same time, basing on Section 227 and 228 of the contract act, the trial court and the appellate court found that the agreement entered into by the 1st defendant beyond his authority is not separable from the portion for which he had the authority. On the ground the agreement was found to be not enforceable.

Section 227 of the Contract Act says is that when an agent does more than he is authorised to do, and when the part of what he does, which is within his authority, can be separated from the part which is beyond his authority, so much only of what he does as is within his authority is binding as between him and the principal.

Section 228 says is that when an agent does more that he is authorized to do, and what he does beyond the scope of his authority cannot be separated from what is within it, the principal is not bound to recognize the transaction.

WHEN THE ACTS OF AGENT INCUR HEAVY LOSSES TO THE PRINCIPAL THOUGH SUCH ACTS WERE DONE IN GOOD FAITH BY THE AGENT

When the Agent

incur heavy losses

to principal


Agent to be indemnified against consequences of lawful acts

Section 222 of the Act provides that the employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him.

The primary duty of the principal is to indemnify the agent against the consequences of his lawful acts. The rights of an agent against his principal flows from the principal that an agent, as the representative of his principal and acting wholly on his behalf is entitled to be indemnified for such liabilities incurred and losses suffered as were in contemplation when the agency was undertaken, or as were stipulated by the contract of agency.

A principal is bound to compensate the agent against the consequences of all lawful acts done in exercise of the authority conferred upon him, but not in excess of expressly stipulated consideration. An agent is entitled to indemnity even if the payment in respect of which he claims the indemnity is not such a payment for which the principal could be made liable.


Illustrations:

B, at Singapore, under instructions from A of Calcutta, contracts with C to deliver certain goods to him. A does not send the goods to B, and C sues B for breach of contract. B informs A of the suit, and A authorizes him to defend the suit. B defends the suit, and is compelled to pay damages and costs, and incurs expenses. A is liable to B for such damages, costs and expenses.

B, a broker at Calcutta, by the orders of A, a merchant there, contracts with C for the purchase of 10 casks of oil for A. Afterwards A refuses to receive the oil, and C sues B. B informs A, who repudiates the contract altogether. B defends, but unsuccessfully, and has to pay damages and costs and incurs expenses. A is liable to B for such damages, costs and expenses.


Shree Digvijay Cement Co. Ltd. Vs. The State Trading Corporation of India Ltd. AIR2006Delhi276

Civil — Recovery — Suit for recovery of amount spent on unutilized craft paper bags along with interest — Whether there was relationship of principal and agent between the parties — Facts revealed defendant had arranged license on service margin for plaintiff and had imposed conditions on plaintiff that incase any un-utilized stock remaining with plaintiff same had to be disposed off in manner or specified by defendant — Further plaintiff had no right to sell or dispose of any un-utilized paper bags — Held relationship of principal and agent established in respect of transaction — Plaintiff entitled to recovery of amount claimed

AGENT TO BE INDEMNIFIED AGAINST CONSEQUENCES OF THE ACTS DONE IN

GOOD FAITH

Section 223 of the Contract Act

Agent shall have the right to be indemnified against consequences of acts done in good faith

B, at the request of A, sells goods in the possession of A, but which A had no right to dispose of. B does not know this and hands over the proceeds of the sale to A. Afterwards C, the true owner of goods, sues B and recovers the value of the goods and costs. A is liable to indemnify B for what he has been compelled to pay to C and for B’s own expenses, provided C has acted in good faith and he had no knowledge that the goods did not belong to A.

AGENT TO BE INDEMNIFIED AGAINST CONSEQUENCES OF THE ACTS DONE IN

GOOD FAITH

However, it must be remembers that agent cannot claim indemnification for criminal act, even though the principal had agreed to do so (S 224)

A employees B to beat C and agrees to indemnify him against all consequences of that act. B thereupon beats C and has to pay damages to C for so doing. A is not liable to indemnify B for those damages.

B, the proprietor of a newspaper, publishes, at A’s request, a libel (defamation in writing) upon C in the paper and A agrees to indemnify B against the consequences of the publication and all costs and damages of any action in respect thereof. B is sued by C and ha s to pay damages and also incurs expenses. A is not liable to B on the indemnity.

Right to compensation for injury caused by principal’s neglect (S 225) The principal must make compensation to his agent in respect of injury caused to such

agent by the principal’s neglect or want of skill

A employs B as a bricklayer in building a house and puts up the scaffolding himself. The scaffolding is unskillfully put up and B is in consequences hurt. A must make compensation to B.

NEGATIVE COVENANTS IN EMPLOYEMENT CONTRACTS AND THEIR ENFORCEABILITY

Jumping of bond by

an Employee – An

Indian Perspective


An agreement of service by which a person binds himself during the term of agreement not to take service with anyone else or directly or indirectly take part in or promoter or aid any business in direct competition with that of his employer is valid.

Like any other contract, damages can be claimed for breach of contract or service.

Section 73 provides that the party suffering by breach of contract is entitled to receive, from the party breaking the contract, compensation for loss or damage of the specified category

ServiceAgreements


Organizations spend a lot of time, money and energy in training the staff in the management techniques.

It will be unfair to these organizations if trainees left for other organizations immediately after training. Therefore, a Service Bond is normally get signed by the trainee, containing a provision that he shall not leave the company before the expiry of a specified period and further, that if he does so, then he shall have to pay a particular sum of money to the organization.

This is just to indemnify the organization which has occurred some expenditure on the training of the trainee. But if the amount of the bond is excessive and disproportionate, the court has jurisdiction to reduce that amount.

Service Bonds


The country is experiencing an unprecedented boom in civil aviation sector owing to which the country is running short of pilots

Recent past has been induction of many few airlines

Shortage of pilots has resulted in poaching of pilots by the Airline Companies by offering lucrative job offers. As a result Pilots have been indiscriminately resigned from their existing Airlines to join more lucrative Airlines.

Eg: The leading Airlines pay more than Rs. 4,00,000 per month to flight captains and close to Rs. 2,25,000 to co-pilots.

RecentTrends


The low cost carries on the other hand pay around Rs.1,75,000 a month to co-pilots.

The obvious fallout of this trend has caused tremendous loss of money and reputation to the respective Companies which suffered attrition of the pilots.

The practical example is when Chief Minister of Mumbai was literally grounded by the ongoing pilot poaching war among private airlines. The private company entrusted with the task of operating and maintaining the state government’s Beech aircraft 350 expressed its inability to fly the Chief Minister or his nominees since both the pilots employed by it


The low cost carries on the other hand pay around Rs.1,75,000 a month to co-pilots.

The obvious fallout of this trend has caused tremendous loss of money and reputation to the respective Companies which suffered attrition of the pilots.

The practical example is when Chief Minister of Mumbai was literally grounded by the ongoing pilot poaching war among private airlines. The private company entrusted with the task of operating and maintaining the state government’s Beech aircraft 350 expressed its inability to fly the Chief Minister or his nominees since both the pilots employed by it had left the Company to grab lucrative offers by another Airline Company. Ultimately the Director General of Civil Aviation had to step in to curb the trend among the Pilots by issuing a notification on September 1, 2006 thereby mandating pilots to serve 6 months notice before leaving an Airline.


In the business process outsourcing (BPO) sectors also, the lucrative offers in the higher value-added segments like engineering has resulted in frequent resignation by employees leading to hampering of business plans of the companies.

Similarly the recent past has seen legal battles between the software giants to curb each other from poaching their key managerial personnel.

The story is endless and the aggrieved companies in desperate attempts to restrict their manpower from leaving their organization resort to filing court cases against the employees to obtain injunction against their exit from the company and joining competitors. The Companies seek to enforce the strict agreements executed by the employees containing severe negative covenants.


With regard to contract of employment sought to be enforced by an employer, injunction under Section 42 against the employee may be granted only when all of the following conditions are satisfied. The contract of employment contains a positive covenant The positive covenant is coupled with a negative

covenant; and The employer has not failed to perform the contract so

far as it is binding on him.


Mr. Jan Peter joined Jet Airways dated 30th April 1998 and had to undergo training and technical / performance examination within two attempts failing which his training would stand automatically terminated.

On successful completion of the training, he was to be kept on probation.

Mr. Jan Peter was also required to pay back the training cost of Rs. 15 lacs viz. Rs. 7.50 lacs through deposit / Bank guarantee for a period of 7 years and balance Rs. 7.50 lacs was to be recovered in installments from the salary.

Mr. Jan Peter was also required to execute an indemnity bond with two surities for an amount of Rs. 7.50 lacs agreeing to serve the company for the period of 7 years and he was not to accept employment similar in nature, either full or part time with any other employer.

On resigning the employee will bear the entire cost of training and / or damages if any;

CASE LAW

Jet Airways Ltd.

Vs. Jan Peter


The termination clause in the appointment letter provided that the company would be entitled to terminate the services of the employee without assigning any reason , by giving three month notice in writing or by payment of three months salary in lieu of such notice. Similarly, if the employee desires to leave the services at any time after confirmation was required to give three month notice in writing and the company however, at its sole discretion could waive such notice.

The employee left the services because of the change in conditions of service of Jet Airways. His seniority was severely affected due to denial of promotion.

Jet Airways sought for permanent injunction restraining the defendant taking up any similar job including sahara airlines and also demanded a sum of Rs. 6,94,000/- together with interest.

CASE LAW

Jet Airways Ltd.

Vs. Jan Peter


Court observed that in case of resignation or leaving the services, the defendant had to pay to the company on pro rata cost in respect of training.

A clause in the appointment letter gave an option to both the company and the employee to terminate / resign from the services by giving 3 months notice. The company could even waive off the notice. Hence, there is not effect on the 7 year period restrictive covenant was to run. However, he would still bound to perform the negative covenant provided the covenant is not in restraint of trade, being unreasonable and unconscionable.

Further, the court observed that the training has been received by the defendant at his own expense. Thus the company had no proprietary rights in the intellectual property rights which flow form the training.

The Court finally held that no injunction could be granted which would prevent the defendant from exercising his proprietary rights. In fact, it would be positively against the public interest to compel a disgruntled pilot to work for an employer for whom he does not wish to work. Jet Airways was keen to protect the tremendous investment made in training of the defendant. Thus, there is no public interest but only commercial interest.

CASE LAW

Jet Airways Ltd.

Vs. Jan Peter


The Hon’ble Delhi High Court has beautifully summarized the reasons for refusal of grant of injunction to enforce the negative covenants in the following words:

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;

Rights of an employee to seek and search for better employment cannot be restricted by an injunction. Injunction cannot be granted to create a situation of economic terrorism or a situation creating conditions of

“bonded labour”; Freedom of changing employment for improving service jurisprudence which cannot be curtailed by a court

injunction; Inter-changeability of service is an accepted norm of service jurisprudence which cannot be curtailed by a

court injunction; “Employees” right to terminate their contract also cannot be curtailed by court injunction; An injunction can be granted only for protecting the rights of the plaintiff, but cannot be granted to limit the

legal rights of the defendants; An injunction can be granted only for protecting the rights of the employer, but cannot be granted to limit

the legal rights of the employee; Rough and tumble of the business including stiff competition has to be faced in a free market economy. The

problems which should be settled in the market place cannot be brought to law courts or settled by a court injunction.


In economic matters, while granting injunction, business realities have to be taken into consideration. The employee seeks betterment and advancement of their careers, while they are in service. It is impracticable and unrealistic to artificially create a situation by a Court injunction when employees would first leave the employment and then look for better service conditions and job opportunities elsewhere. 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.

Free, fair and uninterrupted competition is the life of the 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.


NON-POACHING AGREEMENTS In the light of discussions of the legal principles culled out from the decisions with

regard to the scope and ambit of the provisions of Section 27 of the Indian Contract Act, it remains to be considered as to whether the non-solicitation clause in Agreement amounts to a restraint of business or profession.

The nature of such contract is to restrict either party from enticing and / or alluring each other’s employee away from their respective employments. Such contracts are not contract between an employer and employee and covenants bar either party from offering inducements to the other’s employees to give up employment and join them. As such, these contracts by itself do not put any restriction on the employees and are therefore not covered within the purview of Section 27 of the Contract Act.


The judicial precedents discussed above and the combined effect on Section 27 of the Contract Act 1872 and Section 42 of the Specific Relief Act can be summarized in the following words:

A restrictive covenant extending beyond the term of the contract is void and not enforceable;

The doctrine of restraint of trade does not apply during the continuance of the contract for employment and it applies only when the contract comes an end;

The aggrieved employer can claim damages for the losses suffered from the erring employee owing to the termination of the contract of employment;

Section 27 of the Contract Act, 1872 is not applicable to the non-poaching or non-solicitation agreements.

Conclusion

by group two of fsmwmg – 17 a i ndian c ontract a ct team members neeraj srivastava – 82025 s....

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