CHAPTER-V

LEGESLATIVE PROTECTION OF TRADE SECRETS IN INDIA

CHAPTER-V
LEGESLATIVE PROTECTION OF TRADE SECRETS IN INDIA

5.1 Introduction

It is not uncommon for the businesses to restrict employees from carrying on

similar activities in other business concern as had been carried on by them. Such
restriction can be put by making agreements with the employees in their previous
employments. The non-compete agreements are imposed by the employers in
order to avoid competition and for protection of trade secrets such as of business
contacts. Many a time disputes arise between parties whether such agreement
which prohibits from carrying on trade is a valid agreement or a void one.
The employers invest considerable money and resources in training employees
to acquire and sharpen specific skills and knowledge, so that they can contribute
for effective business growth. Their lays an anticipation of a long-term business
relationships between them. On the other hand, after gaining the requisite skills
and knowledge, employees tend to look for more rewarding job opportunities or
even sometime opening up of a rival company. Hence, employers restrict
employees from taking up similar employment to curb safeguard their interests.
Clearly, the employer and employee have conflicting interests in such a scenario.
In India such types of agreement are looked in light of Section 271 of the
“Indian Contract Act, 1872”. The section deals with the concept of “agreements
on restraint of trade”. This section provides any agreement which restricts a

1
The Indian Contract Act, 1872( Act 9 of 1872) s.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.

Exception1: Saving of agreement not to carry on business of which good-will is

sold-

One who sells the goodwill of a business may agree with the
buyer to refrain from carrying on a similar business, within
specified local limits; so long as the buyer, or any person deriving
title to the goodwill from him, carries on a like business therein,
provided that such limits appear to the Court reasonable, regard
being had to the nature of the business.

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person from exercising a lawful possession, trade or business of any kind is void
to that extent. The only exception is in relation to the sale of goodwill, where the
buyer may restrict the seller from carrying on similar business within specified
local limits.

5.2 Protection of Trade Secret under Indian Contract Act 1872

The Indian Contract Act, 1872, provides a framework of rules and regulations
governing the formation and performance of a contract in India. In India the
primary statutory provision for protection of “trade secrets” is governed by section
27 of the India Contract Act, 1872 and other than that, common law also provides
protection. Though the term “trade secrets” is nowhere mentioned in the provision
of the section but courts have interpreted the Section 27 of the Contract Act to
include agreement which can protect trade secrets in the form of nondisclosure
and non- compete agreements.
An agreement in restraint of trade is defined as an agreement by virtue of
which, a party agrees with any other party to restrict his liberty in the present or in
future to carry on a specified trade or profession himself or with other persons not
parties to the contract without the express permission of the latter party. These
negative covenants remain operative during the period of contract. In such cases,
question come before the court is that whether the restraints put by the employer is
reasonable or not. If, the restraint is put for protection of “trade secrets” or
confidential information for the purpose of flourishing of trade then it is
considered as valid restraint.

5.3 Agreement in Restraint Of Trade: A Comparative Study

With the advent of industrialization and globalization it has become very

important to protect the interest of the traders. The age old concept of “agreements
on restraint of trade” has also undergone change in modern times. It is important
to know the basis of such agreements and its applicability in trade. In order to
understand the concept in detail a comparative study of the agreement on restraint

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of trade and its validity under English law, American law and Indian law is made
and is discussed herein.

5.3.1 English Law

The fundamental principle followed by English courts is that “every restraint

whether partial or general is contrary to public policy and is prima facie void”. In
2
this context leading case of Mason v. Provident Clothing & Supply Co. Ltd is
pertinent where an outgoing employee was restricted by an agreement to carry on
business of “tent and supply of canvases”. The question arises whether the
plaintiff can be restrained from carrying on business in a place which is 25 miles
away from the defendant’s business place and also situated in a separate district.
The learned court held, the restrain to carry on business by such covenant is
against public policy and is not a valid one and amounts to “invalid agreement on
restraint of trade”.
The courts in England look at the circumstances of each case to ascertain the
validity of restraint. Court held, if the restrain being a reasonable one then
presumption of invalidity is rebutted. As in the case of Nordenfelt v. Maxim
Nordentfelt Guns & Ammunition & Co,3 in this case, “Thorsten Nordenfelt” had
established a valuable business in the manufacture of machine guns, operating in
Sweden and England. His customers included most national governments across
the world. He sold the business to a company, which then transferred it to “Maxim
Nordenfelt”. At that time “Thorsten Nordenfelt” entered into an agreement with
“Maxim” that he (Thorsten) would not for a term of 25 years engage in the
manufacture of guns, explosives, etc, other than on behalf of the company.
“Thorsten” later broke this covenant and started his own business in same field,
alleging that it was unenforceable as being in “restraint of trade”. The “Court of
Appeal” validated the restraint stating that the circumstances show it is necessary
that the restraint is allowed. The House of Lords affirmed the decision of the

2
(1913) A.C. 724.
3
(1894) A.C. 535, 565;(1891-94) All E.R. Rep 19(H.L)

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Court of Appeal and held that the covenant, though operating as a world-wide
ban, was necessary to protect the interests of “Maxim Nordenfelt”. Lord
Macnaghten stated the House’s view of the correct approach to contracts of this
type:4

The public have an interest in every person’s carrying on his trade

freely: so has the individual. All interference with individual
liberty of action in trading, and all restraints of trade of themselves,
if there is nothing more, are contrary to public policy, and
therefore void. That is the general rule. But there are exceptions:
restraints of trade and interference with individual liberty of action
may be justified by the special circumstances of a particular case.
It is a sufficient justification, and indeed it is the only justification,
if the restriction is reasonable – reasonable, that is, in reference to
the interests of the parties concerned and reasonable in reference to
the interests of the public . . . .

In Attorney General of Commonwealth v. Adelaide Steamship Co.,5 following a

period of “ruinous competition”, coal producers (known as “vend”) entered into
an agreement which fixed prices, allocated quotas and restricted the opening of
new mines. The coal producers also entered into a shipping agreement with
companies shipping coal from Newcastle which provided that they would deal
only with each other and fixed the maximum reselling price of coal. Question
arises whether such agreement of restraining on business transaction is fair or is
opposed to public policy. The Court observed that, the restraint must be
reasonable in the interests of both contracting parties and also in the interests of
the public otherwise it is an unfair restrain. The onus of proving reasonableness
lies upon the covenanter. But the onus of proving that the contact tends to injure
the public lies upon the opposite party. In present case prices were 'disastrously
low' due to years of 'cut-throat' competition. Lord Parker held:

4
Id. at 565.
5
(1913) A.C. 781, 796;(1911-1913) All E.R. 1120

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It can never ... be of real benefit to the consumers of coal that

colliery proprietors should carry on their business at a loss, or that
any profit they make should depend on the miners’ wages being
reduced to a minimum. Where these conditions prevail, the less
remunerative collieries will be closed down, there will be great
loss of capital, miners will be thrown out of employment, less coal
will be produced, and prices will consequently rise until it becomes
possible to reopen the closed collieries or open other seams. The
consumers of coal will lose in the long run if the colliery
proprietors do not make fair profits or the minors do not receive
fair wages. ... .

Hence the agreements were considered to be valid agreements and not against
public policy.
The restraint to be reasonable must not be more than what is reasonably
necessary to protect the covenantee’s interest. The House of Lords in Esso
Petroleum Co Ltd v. Harpers Garage (Stourport) Ltd.,6 held that, “solus
agreement” can sometimes, could amount to an unreasonable restraint on trade.
The matter will be looked case by case in such issues. This case concerned two
solus agreements in relation to two garages run by the defendant. In respect of
both, there was an agreement to take all supplies of petrol from “Esso”, and to
keep the garage open at all reasonable hours. In relation to garage ‘A’, the
agreement was to last for four years and five months. In relation to garage ‘B’, the
agreement was to last for 21 years, and was linked to a mortgage over the
premises held by “Esso”, which was also irredeemable for 21 years. The
defendants started to sell cut price petrol of other brands. “Esso” sought an
injunction to prevent them doing this. The defense was raised of ‘restraint of
trade’. The House of Lords held that, contracts of this type could be regarded as
being in restraint of trade. As with the categories looked at above, the question
was then whether the restraint was reasonable as between the parties, and

6
(1968) AC 269; (1967) 1 All ER 699.

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reasonable in the public interest. In relation to garage ‘A’, the five year restraint
was reasonable. The 21 years in relation to garage ‘B’, however, was
unreasonable, particularly as it was linked to a mortgage and hence restraint in
context of garage B is invalid one and held void.
But in Fitch v. Dewes,7 however, a potentially lifelong restraint on a solicitor’s
managing clerk was upheld. In this case, the defendant was employed as a
managing clerk of the plaintiff’s solicitors’ practice in “Taworth”. His contract
contained a clause that purported to restrict his work if he left the practice. He was
not to work in a solicitor’s office within seven miles of “Tamworth” for a period
that is extended to the rest of his life. Following the termination of his
employment, the defendant started business of same nature within seven miles of
“Tamworth”. The House of Lords while deciding validity of the restraint
agreement held that, the clause did not exceed what was reasonably necessary to
protect the plaintiff’s business. The justification was that the business was one to
which clients were likely to return over a long period of time, the client may
contact the plaintiff’s clerk for future course of litigation and hence effecting
cliental of the plaintiff so, lifelong restrain in this case is a valid restraint.

5.3.2 American Law

The American Law of restraint of trade are dealt under, “The Restatement on
Contracts” under the provisions § 513 to § 519. The provisions are enumerated as:

§513. Definition of a bargain in restraint of trade: A bargain is in restraint of

trade when its performance would limit competition in any business or restrict a
promisor in the exercise of a gainful occupation.

§514. When a bargain in restraint of trade is illegal: A bargain in restraint of

trade is illegal if the restraint is unreasonable.

7
(1921) 2 AC 158.

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§515. When a restraint of trade is reasonable: A restraint of trade is

unreasonable, in the absence of statutory authorization or dominant social or
economic justification, if it:
a) is greater than it required for the protection of the person for whose benefit the
restraint is imposed; or
b) imposes under hardship upon the person restricted; or
c) tends to create, or has for its purpose to create, a monopoly, or to control
prices or to limit production artificially; or
d) unreasonably restricts the alienation or one of anything that is a subject of
property; or
e) is based on a promise to refrain from competition and is not ancillary either to
a contract for the transfer of goodwill or other subject of property or to an existing
employment or contract of employment.

§516. Instances of reasonable restraints: The following bargains do not impose

unreasonable restraint of trade unless effecting, or forming part of a plan to effect,
a monopoly:
a) A bargain by the transferor or of a business not to compete with the buyer in
such a way as to injuries the value of the property or business sold;
b) A bargain by the buyer or lessee of property or of a business not to use it in
competition with or to the injury of the seller or lessor;
c) A bargain to enter into partnership with an actual or possible competitor;
d) A bargain by a partner not to interfere by competition or otherwise with the
business of the partnership while it continues, or subject to reasonable limitations
after his retirement;
e) A bargain to deal exclusively with another;
f) A bargain by an assistant, servant, or agent not to compete with his employer,
or principal, during the term of the employment or agency, therefore, within such
territory and during such time as may be reasonably necessary for the protection
of the employee or agents.

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§517 Bargain to stifle competition in completive bidding is illegal.

§518 Divisible promise in restraint of trade: Where a promise in reasonable

restraint of trade in a bargain had added to it a promise in unreasonable restraint,
the former promise is enforceable unless the entire agreement is part of a plan to
obtain a monopoly but if full performance of a promise invisible in terms would
involve unreasonably restraint, the promise is illegal and is not enforceable even
for so much of the performance as would be a reasonable restraints.

§519 Collateral effect of bargain in restraint of trade: The fact that one is a
party to a provision of illegal contract, agreement or combination with other
restraining competition in that business does not invalidate a subsequent bargain
by him that is neither in furtherance of an attempt to obtain a monopoly nor
otherwise illegal; nor is a party to such a previous illegal contract or agreement
deprived of legal protection of his property in the business.
As stated in §519 the restraint of trade may be illegal but collateral effect it is
not rendered illegal: for example if A, C, D, have entered into an illegal bargain
to monopolize a business, contract jointly to sell goods in the usual course of
business to B. The invalidity of the bargain between A, C and D does not
invalidate the contract with B.
Adverting to the six classes of permissible restraint of trade mentioned in
Section 516 Taft J said.8

It would be stating it too monopoly to say that these six classes of

covenants in restraints of trade include all of those upheld as valid
at the common law; but it would certainly seem to follow from the
tests laid down for determining the validity of such an agreement
that no embodying it, is merely ancillary to the main purpose of a
lawful con-legitimate fruits of the contact, or to protect him from
the dangers of an unjust use of those fruits by the other party.
8
United States v. Addyston Pipe etc. Co.85-F 271; affirmed Addyson Pipe etc. v. U.S., 175 U. S.
211; 44 L Ed 136.

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The reason for holding restraints as invalid has been very nicely brought out in
Mitchell v. Reynolds.9 In this case, plaintiff hired defendant as an apprentice
baker. Defendant promised not to compete with plaintiff in the local parish for a
period of time in return for training in the bakery business. Question arose that did
the non-compete agreement constitute a restraint of trade? Court held that promise
made by the plaintiff was necessary for him to be motivated to hire individuals
like defendant. Court found that although there was a restraint of trade here, the
non-compete agreement constituted an ancillary/incidental restraint necessary to
accomplish a larger economic/legitimate purpose. Since the underlying purpose of
the agreement was to train defendant, the restraint was said to be reasonable.
Reasonableness was to be the test to determine the legality of a restraint of trade.
Learnent judge further elaborate:10

The true reasons for the distinction upon which the judgments in
these cases of voluntary restraints are founded, are first, the
mischief which may arise from them, first to the party, by the loss
of his livelihood and the subsistence of this family; secondly, to the
public by depriving it of a useful member.
Another reason is, the great abuses where voluntary restraints
are liable to; as for instance, from corporations, who are
perpetually laboring for exclusive advantages in trade and to
reduce it into as few hands as possible; as likewise from masters,
who are apt to give their apprentices much vexation on this
account, and to use many indirect practices to procure such bonds
for them, lest they should prejudice them in their custom when
they come to set for themselves.
Thirdly because in great many instances they can be of no use
to the oblige; which holds in all cases of general restraint
throughout England; for what does I signify a tradesman in London

9
(1711) 1 P Wms 181; (1711) 24 ER 347 QB.
10
Available at: [Link] case [Link]/2014/05/mitchell-v-reynolds-case-brief
[Link] (last visited on May 30, 2014).

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have nothing to do with what another does at New Castle? And

surely it would be unreasonable to fix a certain loss to one side,
without any benefit to the other.

It is observed by the court in various cases, that the promise to non-compete

and injury to the public are inter-related and vary from case to case. In Horner v.
Graves,11 question arises, whether a restraint preventing a dentist’s assistant from
practicing dentistry within 100 miles of his employer’s town while the latter was
practicing was invalid because unreasonably broad. The court held such restrain is
invalid one and further observed:12

The injury to the public is not the one arising indirectly from the
injury to the promisor but that arising from lack of competition.
Owing to the withdrawal of the promise from the field there will be
the consequent tendency to a partial monopoly. Nevertheless, both
in England and America a covenant which exceeds the reasonable
requirements of the promise is rendered unlawful for that very
reason alone.

In United States v. American Tobacco Company,13 suit was commenced on

July 19, 1907 by the United States, to prevent the continuance of alleged
violations of the 1st and 2d sections of the anti-trust act of July 2, 1890. (26 Stat.
at L. 209, chap. 647, U. S. Comp. Stat. 1901, p. 3200.) The defendants were
twenty-nine individuals, The ground of complaint against the “American Tobacco
Company” rested upon the nature and character of that corporation and the power
which it exerted directly over the five accessory corporations and some of the
subsidiary corporations by stock ownership in such corporations, and also upon
the control which it exercised over the subsidiary companies by virtue of stock

11
7 Bing 735; (1831)131 Eng. Rep. 284 C.P.
12
Ibid.
13
(1911) 221 U.S. 106.

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held in said companies by the accessory companies by stock ownership in which

the “American Tobacco Company” exerted its power of control. Question
aroused, whether the company restricting the business of fellow corporations by
controlling supply of tobacco and control of ownership court held each and all of
the defendants, individuals as well as corporations, should be restrained from
doing any act which might further extend or enlarge the power of the combination,
by any means or device whatsoever. The combination in this case is one in
restraint of trade and an attempt to monopolize the business of tobacco in
interstate commerce within the prohibitions of the “Sherman Antitrust Act, 1890”.
The company was then split into 4 competitors.
In Chicago Board of Trade v. United States,14 “Chicago Board of
Trade” (CBOT) was a commodity market, dealing in spot sales (sales of grain
stored in Chicago and ready for delivery), future sales (grain to be purchased for
delivery at a later time), and “to arrive” orders (grain which is en route to
Chicago). “CBOT” introduced a new “call rule” which regulated board members
buying or selling sales of “to arrive” orders—at the close of the call session
(which at that point was 2:00 p.m Central Time), the price of grain is set and
dealers can’t sell grain at any other price. The “United States Department of
Justice” accused “CBOT” of price-fixing, and in 1913, filed suit against the Board
in the United States District Court for the Northern District of Illinois. At trial,
“CBOT” asserted that the rule did not have any unlawful purpose, but rather was
set up to curb certain pre-existing problems and abuses. “CBOT” claimed that a
group of agents were lowering discounts on commissions to those people buying
grain after hours. These agents would wait until after hours, and then buyers
would get cheaper prices. “CBOT” wanted to curb the power of such type of
buyers by making prices same for everyone after hours. Also, the rule shortened
the traders’ work hours, for the convenience of its members. The district court
passes order prohibiting making any such rules and held it amounts to restraint of
trade. On appeal the Supreme Court reversed the order and held:15

14
(1918) 246 U.S. 231.
15
Ibid.

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Every agreement concerning trade, every regulation of trade,

restrains. To bind, to restrain, is of their very essence. The true test
of legality is whether the restraint imposed is such as merely
regulates and perhaps thereby promotes competition or whether it
is such as may suppress or even destroy competition.

The Court went on to say that the condition of the particular business, both
before and after the imposition of restraints, must be examined and a
determination of the actual and probable effect of the restraint is to be seen in each
of such case.
The modern trend is that a restriction may be unlimited in respect of time or
space if really it is necessary for the protection of the covenantees. It would be a
great hardship on the covenanters if it were to be both. The proper test to find
whether the restriction is unreasonable, irrespective of whether it is unlimited in
time and space should be looked upon circumstances of each of the cases.

5.3.3 Indian Law

In India section 27 of “Indian Contract Act 1872” deals with concept of agreement
in restraint of trade. In Indian law reasonableness is not a factor to be considered
in determining the validity of contracts in restraint of trade. It can be inferred from
a look at the two leading commentaries on Indian contract law. One commentator
observes, “This section (section 27 of the Indian Contract Act) does not say that
only unreasonable restraint of trade is void and reasonable restraint of trade is
valid.”16 Another commentator i.e. in the opinion of Pollock and Mulla, “In the
Indian law, a service covenant extending beyond the term of service is void,
whereas is similar cases, the English law would allow restraint which is
reasonable.”17 The difference can be seen to be that reasonable post-contractual

16
P.C. Markanda , The Law of Contract , Balakrishnan K.G. edn., 586 (LexisNexis Butterworths,
Wadhwa, Nagpur, 2006).
17
Pollock & Mulla, Indian Contract Act and Specific Relief Acts Nilima Bhadbhade edn., 816
(Butterworths, New Delhi, 12th edn., 2001).

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restraints are valid under common law, while all post-contractual restraints are
void under section 27 of the Indian Contract Act, 1872.18

[Link] Historical Background of Development of Section 27 of Indian

Contract Act 1872

Section 27 of Indian Contract Act 1872 follows the “Hon. David D. Field’s Draft
Code for New York” it is based upon the old English doctrine of restraint of trade,
as it prevailed in ancient time.19 The reason for its incorporation is that ‘contract
in restraints of trade was allowed by Court decisions to a very dangerous extent,’
and the framers of that Code, drafted the section with the deliberate intention of
narrowing the common law. The provision was never adopted in New York, but
was adopted in four American States.20
The original draft of the “Indian Law Commission” did not contain any
specific provision on the subject. The provision was incorporated in this Act at a
time between the resignation of the “Indian Law Commission” and the enactment.
The object appears to have been to protect trade. It has been said that “trade in
India is in its infancy; and the legislature may have wished to make the smallest
number of exceptions to the rule against contract whereby trade may be
restrained.”21

18
Indian Contract Act, 1872 (Act 9 of 1872), s.27 reads as :
(1) Every agreement by which any one is restrained from exercising a lawful
profession, trade or business of any kind, is to that extent void.
Exception 1.-Saving of agreement not to carry on business of which good-will is
sold.—
One who sells the good-will of a business may agree with the buyer to refrain
from carrying on a similar business, within specified local limits; so long as the
buyer, or any person deriving title to the good-will from him, carries on a like
business therein, provided that such limits appear to the Court reasonable, regard
being had to the nature of the business.
19
Ramya Seetharaman and Vandana Pai, “ Restrictive covenants in employment” 2 CLJ 104
(2002).
20
California, North Dakota, South Dakota and Oklahoma.
21
Oakes & Co. v Jackson (1876) 1 Mad 134 per Kindersley J. at 145

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[Link] Exceptions under Section 27 of Indian Contract Act 1872

The section 27 of the Indian Contract Act, 1872 is general in its terms, and
declares all agreements in restraint of trade as void agreement, except in the cases
specified in the exception. This section lays down a very firm rule invalidating
restraints, not only general restraints but also partial ones are declared to be void.
As regards the exception it was stated:22

The extension of modern commerce and means of communication

has displaced the old doctrine that the operation of agreements of
this kind must be confined within definite neighborhoods. But the
Anglo-Indian law has stereotyped that doctrine in a narrower form
than even the old authorities would justify…Meanwhile the
common law has, on the contrary, been widening; the old fixed
rules as to limits of space have been broken down, and the court
has only to consider in every case whether the restriction is
reasonable… .

Even the Allahabad High Court has observed that “it is unfortunate that section
27… seriously trenches upon the liberty of the individual in contractual matters
affecting trade”.23In this case plaintiffs were members of a firm of commission
agents who carry on business at Fatehgarh(Uttar Pradesh). The defendants were
17 in number and were members of an association unincorporated and
unregistered, which is located in Lindsayganj(Uttar Pradesh) market at
Farrukhabad and is called “Anaj Behohar Sabha”. The plaintiffs contend that the
defendant association’s objects and methods are unlawful---the chief object of the
association being to create a monopoly and to drive out all rivals from the field by
recourse to unfair competition.
The heads of charges as enumerated in Para. 3 of the plaint are as follows:

22
Ibid. at 136.
23
Bholanath Shankar Das v. Lachmi Narain (1930) 53 All 316 at 322, AIR 1931 All 83 at 85,
(1913) All LJ 84.

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(1) That no one can open a shop in “Bazar Lindsayganj” without the permission of
this Committee.
(2) The permission for opening a shop is given in the month of “Kuar” and
“Phagun”.
(3) If anyone carries on business or opens a shop without the permission of the
Committee, no one can sell goods to him or purchase goods from him.
(4) If anyone who has not opened a shop wants to purchase goods directly, he
cannot do so without the medium of any such shop-keeper whom the Committee
might have permitted to open a shop.
(5) That weighmen who have obtained a license from the Municipal Board and
who are themselves the owners of the “Phars” (the open space in front of each
shop) or who have taken “Phars” on rent cannot sell the goods to or weigh the
goods of the persons not permitted by the Committee to make the purchase.
(6) If any weighman or shop-keeper sells goods to or purchases from any such
person not allowed by the Committee, then penal orders are passed against him,
such as fine, suspension of all business and purchase and sale.
The question arouse before the court was that whether such association was
making up monopoly and restraining trade for other businesses?

The learned court held that:24

It is perfectly clear that the defendants did not unlawfully or by

illegal means procure any breaches of contract in favour of the
plaintiffs. There was no conspiracy on the part of the defendants to
compel the plaintiffs' vendors not to supply goods to the plaintiffs.
A certain amount of pressure was brought to bear upon their
constituents, the object of which was that if the latter wished to
continue to be members of the association they had to obey the
edicts of the association and to cease to deal with outsiders. They
were not the victims of any coercion on the part of the defendants.
Where a person has a choice of one or other of two courses with
24
Ibid.

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their attendant advantages or disadvantages, coercion is not

necessarily one of the elements involved in the transaction. There
was no organized conspiracy on the parts of the defendants to do
harm to the plaintiffs. The association of the defendants was,
formed with the primary object of keeping the trade in their own
hands and not with the intention of ruining the trade of the
plaintiffs. The association, therefore, was not unlawful and there
was no cause of action for a claim founded upon conspiracy. The
plaintiffs are, therefore, not entitled to the relief claimed.

There are two types of exceptions that may be placed against an agreement in
restraint in India. They are statutory exceptions and restrictions placed under
judicial interpretations. Statutory exceptions may be created through the sale of
goodwill as mentioned in the section and the “Indian Partnership Act, 1932”. The
exceptions under judicial interpretation are exclusive dealing agreements as
accepted by the vendor of a business or by the distributors of merchandise,
restraints arising from combinations for the regulation of trade relations and the
restraints upon employees. Such restrictions arise in a contract of employment,
which forms the basis of relationship of a master and his servant. 25 Such
restrictive clauses may be incorporated in a contract of employment or at any time
the employer desires to place the restrictions on his employees.
The doctrine of restraint of trade has always been applied in contracts of
employment, which generally limits the freedom of the employee. 26 Restrictive
clauses are those, which restrain one of the parties from doing an otherwise lawful
activity, say, a job or a business and are therefore in restraint of trade. 27 Such
clauses may be incorporated in two situations. Firstly, when the owner of a
business sells the business to another with or without goodwill and secondly,
when the employer desires to place certain restrictions on his employees. The

25
[Link] et al., Law of Contracts 391 (LexisNexis, Butterworths, London, 1986).
26
Chitty, Contracts: General Principles Vol. I 887 (Sweet and Maxwell, London, 28th edn., 1999).
27
Ibid.

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nature of restriction may not be defined definitely because it depends upon its
purpose and therefore differs from case to case.
Such restrictive clauses in employment contracts may operate in situations
whereby the employees agree not to set up business on their own account on
leaving the employer or to enter into a rival firm or that they will not carry on any
other trade or business except that with the employer.28 The restraint may be
imposed at various stages of the employment. They may be imposed during the
course of employment, after the termination of employment or there may be even
premature removal. They are sometimes also imposed for the protection of trade
secrets.

[Link].1 Restraint during Employment

It is well settled that an employer can legally restrain an employee from

competing with them or taking any other employment while the employment
contract is in force. An employer has the right to obtain the exclusive services of
the employee during the term of employment. Negative clauses that operate
during the period of the contract of employment are generally not regarded as
restraint of trade under section. 27. It is a general notion that during the period of
employment, the employee is bound to serve the employer and the employer has
the exclusive right to the services of the employee. This is because there is a
promise on the part of the employee to perform his duty well, which operates from
three angles. Firstly, there is a duty to perform work. Secondly, there is a duty to
perform the work well. Thirdly, there is a duty to perform it faithfully, which
includes elements like confidentiality and non-competition with the employer
himself. The third element is considered to be the most important one. In lieu to
this, the doctrine will have no application unless and until the employee is
sterilized of his capacity to work because of the terms of the agreement. The
position is same in both English law and in Indian law.29

28
Supra note 17 at 812.
29
[Link], The Law of Contracts 422 (Sweet and Maxwell, London, 10th edn., 1999).

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In the case of Herbert Morris v. Saxelby,30 question aroused, whether a servant

can use information’s which he gathered from the master during course of
employment for setting up his own business. Atkinson and Shaw JJ. held that,
“trade secrets” in the form of the names of customers and other such things were
objective knowledge and therefore these may not be given away by a servant.
They are the master’s property and hence the servant may be restrained from
taking part in any business, which is in direct conflict with that of his employer
during the course of his employment with him. Employers are permitted to protect
their trade secrets, customer lists, etc. Further Lord Praker observed:

The reason and the only reason for upholding such a restrain on the
part of an employee is that the employer has some propriety rights,
whether in the nature of trade connection or in the nature of the
“trade secrets”, for the protection of such restraints, is having
regards to the duties of an employee, reasonably necessary. Such a
restraint has never been upheld, if directed only to the prevention
of competition or against the use of the personal skill and
knowledge acquired by the employee in the employer’s business.

Indian law also runs in similar line. A company may restrain an employee to
carry on a similar kind of work in another establishment during the course of the
employment. This is in the interest of the business houses who give training to
their employees investing in a lot of money. The employees might just receive the
training and leave the establishment before the termination of contract. In the case
of Niranjan Shankar Golikari v. Century Spinning and Manufacturing Company
Limited,31 the employer was obliged to keep certain technical information
confidential due to an agreement with its foreign collaborator. Accordingly, the
employer entered into secrecy agreement with its employees. During training the
defendant employee acquired knowledge of such technical know-how and after
some time sought employment with employer’s rivals. The plaintiff contended
30
(1916) All ER 1 AC 688.
31
AIR 1967 SC 1098.

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that confidentiality had been breached when the defendant sought employment
with his employer’s rivals. The Supreme Court held that the plaintiff’s interest in
the secret manufacturing process should be protected by restraining the defendant
from divulging trade secrets to competitors. The court granted an injunction as
sought by the employer against the employee. The reason given by the court was
that the clause was restricted to the period of the service and also to the work that
was substantially similar to the one carried out by the covenanter. Therefore it was
necessary and reasonable for the protection of the employer’s interest.
Similarly, in [Link] v. Arvind Mills Company Limited,32 an employee
contracted to serve as a weaving master for three years and agreed not to serve
anyone else in India during that period. He left the service after one year and
joined another mill as a weaving master. Question aroused whether such an
agreement is “agreement on restraint of trade”? And hence void. It was held that
the agreement was reasonable and an injunction was issued against the employee.
It was understood that the prohibition was confined to the profession of the
weaving master and therefore enforceable.
In Charlesworth v. MacDonald,33 in this case defendant agreed to become
assistant to the plaintiff for a period of three years, who was a physician and
surgeon. The appointment was subject to the clause against practicing in the same
territory. Within a year of appointment defendant voluntarily left the job. The
plaintiff filled a suit for injunction. Farran CJ while granting the restrain explained
the principle as:

An agreement of this class does not fall within section 27. If it did,
all contracts of personal service for a fixed period would be void.
An agreement to serve exclusively for a week, a day, or even for
an hour, necessarily prevents the person so agreeing to serve, from
exercising his calling during that period for anyone else than the
person with whom he so agrees.

32
AIR 1946 Bom 423.
33
(1898) ILR 23 Bom.

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Hence the defendant was restrained from practicing on his own till the end of
the said term.
This principle has also been applied by one of the Supreme Court decision in
Coke v. Gujarat Bottling Company.34 In this case “Gujarat Bottling
Company”(GBC) entered into an agreement in 1993 with Coke for grant of
franchisee to prepare, bottle, sell brands of coke, and at the same time agreed not
to be concerned with the beverages of any other brand during the subsistence of
the agreement and agreed of 1 year notice period for its termination (Para 14)
under the agreement, “GBC” also had right to discontinue supplying syrup on
effective transfer of control of “GBC” by transfer of shares or any other indicia
without the prior express consent of Coke (Para 19). In all the agreement of 1993
was for grant of license to “GBC” under common law by Coke. Subsequently in
the year 1994 “GBC”, entered into another agreement with Coke where under it
was required to make an application to register the agreement under the statute
as “Registered User Agreement”. Though the period of termination notice was
reduced to 90 days from 1 year but no similar provision as that of para 14 of 1993
agreement was stipulated and neither was 1993 agreement expressly substituted.
The shareholding of “GBC” was transferred subsequently to Pepsi and it served
Coke with a notice of 90 days to terminate 1994 agreement, and as a matter of
abundant precaution, as 1 year notice period for terminating 1993 agreement,
notwithstanding the contention that 1993 stands replaced by 1994 agreement.
Coke sought, “GBC” to be refrained from dealing with the beverages of Pepsi for
the period of 1 yr. of termination notice. Issues raised in the case were, whether
1994 agreement substituted 1993 agreement? And whether para 14 of 1993
agreement was in restraint of trade under section 27 of Indian Contract Act 1872
hence void? The apex court in it decision held, since 1993 agreement was grant of
license to “GBC” under common law and 1994 agreement is executed under the
requirements of statute for the purpose of registration of “GBC” as user under the
relevant Act, hence, the nature and scope of two agreements was considerably

34
AIR 1995 SC 2372; (1995) 5 SCC 545.

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different; such that 1994 agreement could not be considered as substituting 1993
agreement. “Novation of Contract” as under section 62 provides for substitution of
an agreement by a new agreement but both consensus ad idem between the parties
and an intention to substitute the original agreement are must. No such intention
of the parties to substitute 1993 agreement could be construed from 1994
agreement. Further it was observed that, when the contract is in promotion,
furtherance or facilitating of trade, then it cannot be said to be in restraint of trade.
Secondly, except in cases where the contract is wholly one sided and
unconscionable, normally when the restriction is subsisting only during the period
of the contract and not thereafter, such restriction isn’t held to be in restraint of
trade. However, while construing a covenant in light of section 27, balance of
rights of both the parties needs to be taken into consideration. Restrictions
imposed on employees must be carefully scrutinized for there is inequality of
bargaining power between the parties in employment contracts; with employees
being presented with standardized forms of contract either to accept or reject.
However, 1993 agreement was commercial agreement where both parties
undertook obligations to “wholeheartedly” promote the sale and production of
Coca Cola goods for their mutual benefit, such that the restriction not to deal with
the competing goods was for facilitating the distribution of goods of franchiser
(Coke) and was not in any way restraint of trade. Further, since the negative
covenant is applied only during the period of sustenance of 1993 contract and not
thereafter, hence it not being ‘unduly harsh or unconscionable’ cannot be held to
be in restraint of trade. Therefore the court granted the injunction.
But restraints that operate during the term of employment may not be
enforceable if they are one-side and intensely favour the employer. In Gopal
Paper Mills v. Ganesh Das Malhotra,35 the plaintiff appointed the defendant to
serve for a period of 20 years, during which the defendant could not serve any
other person or divulge any information relating to the plaintiff. The increase in
pay was marginal, further the employer had power to terminate the plaintiff’s
service without notice. In such circumstances, the court held that the agreement

35
AIR 1962 Cal 61.

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was oppressive and one-sided. Therefore, the negative covenant preventing the
employee from working at another place was unenforceable.

[Link].2 Restraint after Termination of Employment

The Indian courts do not enforce employment contracts that restrict employees
from working elsewhere or setting up their own business after the termination of
employment. In some cases, employers have attempted to enforce the “non-
compete” obligation beyond the employment period on ground of reasonableness.
In such cases, employers have argued that the post-termination restraints should
be upheld if it is applicable for a short duration or if it is a partial restraint. But
courts refuse such arguments.
In Brahmaputra Tea Company v. E. Scarth,36 the defendant, the respondent in
this appeal, on the 3rd of October 1880 entered into an agreement with the
“Brahmaputra Tea Company”, by which he undertook to serve the Company as
assistant tea-planter for a term of three years, to be computed from the date of the
termination of his fourth year’s service under a prior agreement. The Company
agreed to pay him a salary of Rs. 300 a month for the fifth year, Rs. 350 for the
sixth year, and Rs. 400 for the seventh year. Further the employee was made to
enter an agreement according to which he was restrained from competing for five
years after the period of service. It was admitted that this agreement took effect
from the 5th of November 1881. On the 17th of May 1882, the defendant gave
notice of his intention to leave, and on the 27th of November following, he
actually did leave the Company's service without their consent, and became
manager of the “Moabund Tea Estate”, which is about two miles distant from one
of the company’s gardens. One of the question before the court was whether such
agreement is valid which restraint party from carrying on business after
employment was over? In the judgment it was said this- contracts by which
persons are restrained from competing, after the term of their agreement is over,
with their former employers within reasonable limits are well known in English

36
(1885) ILR 11 Cal 545.

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law. But the omission to make any such contract an exception to the general
prohibition contained in “Indian Contract Act, 1872”, section 27 indicates that it
was not intended to give them legal effect in this country. Therefore a difference
exists between English law and Indian law on this point and hence such restrain is
not a valid restrain in India.
In Sandhya Organic Chemicals Private Limited v. United Phosphorous
Limited,37 the plaintiffs has claimed that it has invented a new process for
manufacturing “Aluminium Phosphide” (AIP for short) and “Zinc Phosphide”
(ZnP for short) by substituting while/ yellow phosphorous for red phosphorous by
conducting trial, experiment and research for a long period and is, therefore,
entitled to a declaration that the plaintiff is exclusively entitled to the right, like to
and interest in the new process invented by it and also for a permanent injunction
against the defendants restraining them from adopting, using and resorting to, in
any manner whatsoever, form a new process as invented by the plaintiff for the
manufacture of “AIP” and “ZnP” by using any information, knowledge, know-
how relating thereto or any drawing or material relating thereto and from selling
such products in the open market or secretly and from divulging, passing on any
information, documents, drawing descriptions etc. Defendant No. 3 was employed
in the factory of the plaintiff as a “Plant Manager” on May 15, 1992 and signed a
non- disclosure agreement. One of the question before the court was whether the
ex- employee is absolutely barred from working with others after termination of
employment where he can use his personal skill and knowledge? Supreme Court
held that under Section 27 of the “Indian Contract Act, 1872”, a service covenant
which extended beyond the termination of the service is void. Moreover by
providing an injunction for validating restrain in such cases it would restrain the
defendant for all times to use his knowledge and experience which he gained
during the course of his employment either with the plaintiff or from any other
employer and that would be not fair. Having obtained sufficient experience in the
course of his employment either with the plaintiff or other companies, the
experience being assets of the employee, it is unfair to injunct him unless

37
AIR 1997 Guj 177.

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appropriate evidence is provided which shows that he has disclosed or used any
confidential information which was reposed in him while he was in the service
with the plaintiff company.
Though the English law provides for restraints after the termination of
employment, it is made applicable only to protect confidential information. It may
not be extended if it is in the self- interest of the employer who treats the other
company as its competitor.38
In Percept D’Markr (India) Pvt. Ltd. v. Zaheer Khan & Anr.,39 the defendant
an Indian cricket player made an agreement with the appellant company for
management of his media affairs for a term of 3years further term provided prior
to the completion of first negotiation period and thereafter, plaintiff will have the
‘right of first refusal’ in regard to any offer for services of management of media
affairs received by defendant; such that defendant cannot accept any third party
offer without offering plaintiff right to match the offer on same terms. However,
defendant entered into an agreement with third party after the termination of the
said agreement and plaintiff claimed permanent injunction. Question arises
whether the covenant was in restraint of trade under section 27 and hence void?
The court held in this case the contract of agency is entered between the parties is
of personal in nature and forcing the negative covenant will mean compelling the
defendant to get his affairs managed by the plaintiff company even after the initial
agreement lawfully terminated; this will be in restrain of his right to free trade. So
long as it is sought to enforce the covenant while the subsisting of the agreement it
is valid, but the moment it is sought to be enforced after the contract has been
terminated, it will be violation of section 27. A restriction extending beyond the
tenure of the contract to prevent competition is clearly hit by the Contract Act,
1872, section 27 and is prima facie void and hence, unenforceable.
There are a number of cases where the courts have struck down non-compete
clauses that continue beyond the term of employment. Courts have recognized the
rights of an employee to explore business opportunities, as this stems from their

38
Adrian Books, “The Limits of Competition: Restraint of Trade in the Context of Employment
Contracts” 24(2) UNSWLJ 346 (2001).
39
(2006) 4 SCC 227.

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fundamental rights to earn a livelihood by practicing a trade or profession of their

choice.
In Ambiance India Pvt. Ltd. v. Shri Naveen Jain,40 the defendant was employed
by the plaintiff-company as a “Fabric Technologist”. Vide an Agreement dated
30th August, 2003, he was appointed as a “Client Executive” considering his
efficiency and work. The agreement between the plaintiff and defendant provided
that during the continuance of his employment, the defendant shall not engage
directly or indirectly in any other occupation, business or employment or any
similar business or occupation and would not divulge anything which may
adversely affect the business of the plaintiff-company. It was also provided that
during the tenure and for three years thereafter, the defendant shall not reveal any
trade information of the plaintiff and for a period of two years after the
termination of the service, he would not directly or indirectly take any
employment or deal with the plaintiff’s customers. On 19th June, 2004, the
defendant left the plaintiff's company terminating the agreement. On 10th of June,
2004, itself, he had joined one of the customer’s of the plaintiff, namely, “M/s.
Indigo Orient Limited” of U.K. with whom the plaintiff had an agreement to
supply goods from 17th July, 2001 for a period of three years. Plaintiff contended
that, this act of the defendant is alleged to be in violation of the agreement dated
30th August, 2003. It is alleged that the defendant with a view to make illegal
personal gains and cause wrongful loss to the plaintiff had clandestinely
persuaded the aforesaid client of the plaintiff to open an office in India and joined
it in violation of the agreement dated 30th August, 2003. The plaintiff, therefore,
prayed for a permanent injunction against the defendant restraining him from
dealing with its customers, clients, directly or indirectly and taking any benefit
from them. One of the question before the court was that whether the agreement
dated 30th August, 2003 is in violation of section 27 of “Indian Contract Act,
1872” ? The Court held:41

40
(2005) 122 DLT 421.
41
Ibid.

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Of prima facie view that the agreement between the parties

prohibiting the defendant for two years from taking employment
with any present, past or prospective customer of the plaintiff is
void and hit by section 27 of the “Indian Contract Act”. This
stipulation was prima facie against public policy of India and an
arm twisting tactic adopted by an employer against a young man
who was looking for a job. The contract between the plaintiff and
“M/s. Indigo Orient Limited” has already come to an end and as
such no prima facie case remains in favor of the plaintiff to restrain
the defendant from remaining in the employment of the said
company. The employment contract between the plaintiff and
defendant was determinable in nature and as such the defendant
was entitled to determine the same and seek another employment.
Everybody has a right to strive for progress in career. The
restrictions imposed upon the defendant in the agreement,
therefore, were void and unconscionable.

However, the plaintiff was allowed to get adequate compensated in terms of

money and allowed to receive damages for the breach, if any. But injunction was
not granted as the agreement was in violation of provision under section 27 of
“Indian Contract Act, 1872”.

[Link].3 Premature Removal

A employee is bound to be faithful towards the employer when he/she is working

for him further it is well settled that after termination of employment, a employee
cannot be restricted to work anywhere where he uses his personal skill and
knowledge. But, it is developed that any kind of restraint that has been placed
against an employee who has been prematurely removed will cease to exist.
Position in India is much similar to that of United Kingdom.

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In General Billposting Company v. Atkinson,42 the defendant was employed by

the plaintiff and the contract of service contained a clause restricting his right to
trade within a specified area for two years after his engagement with the company
terminated. Subsequently the employers (plaintiff) dismissed their employee
(defendant). The employee had successfully brought an action for wrongful
dismissal and then commenced business on his own behalf. The employer brought
an action against him for breach of the restraint of trade provision. The leanest
court, while giving away judgment held: a restraint beyond the term of service
would be prima facie void and that the only ground on which it might be justified
is by bringing it within the scope of the exception that is by showing that it is
necessary for the protection of the employer’s goodwill. Even if such a restraint is
valid, it will only apply after the expiry of the term in its natural course and not
when the employee is wrongfully dismissed earlier. There is a difference between
leaving a service and a premature termination and hence injunction not granted.
Similarly in India in the case of Superintendence Company of India Pvt. Ltd. v.
Krishan Murgai,43 the employing company carried on business as “Valuers and
Surveyors” and had established a reputation and earned goodwill in its business by
developing its own techniques for quality testing and control. It possessed trade
secrets in the form of these techniques and its clientele. The terms and conditions
of employment contained a post-service restraint preventing the employee from
serving any competitive firm, or carrying on a business himself in the same line as
that of the appellant company. The employee’s (defendant) employment was
terminated by the plaintiff company, after which the employee started his own
business, which was in competition with that of the employer. The employer
sought a permanent injunction against the employee to prevent breach of the terms
of the employment, and claimed damages. Thus, the issue before the Court was
two-fold-(a) whether the contract was in restraint of trade and hence invalid; and
(b) whether the non-compete clause applied only when the employee left

42
(1909) All ER AC 118.
43
AIR 1980 SC 1717.

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voluntarily, or also when his services were terminated. Of the three judges on the
Bench,44 two clearly stated:45

Since in our view the appeal is capable of being disposed of on the

second point we think it unnecessary to decide or express our
opinion on the first question which was hotly and ably debated at
the bar by counsel on either side but we will indicate briefly the
rival lines on which the arguments proceeded. After considering
the arguments canvassed by both counsel, the Court proceeded to
decide that the term “leave”, as used in the terms and conditions,
envisaged only voluntary departure and not termination.

On this basis, the Court held that the injunction could not be granted, and left
the appropriate interpretation of section 27 undecided. However, the third judge of
the bench, Justice Sen, chose to discuss the issue in detail, and held that section 27
bars all post-contractual restraints, and does not permit the “reasonableness”
inquiry.46The clause of the agreement provided that the restriction contained will
come into operation “after the defendant left the company”. But here, the
defendant had not on his own left the company but the plaintiff company
terminated his services by a notice. According to the plain grammatical meaning
the word ‘leave’ in relation to an employee would normally be understood as
meaning voluntary leaving of the service by him and would not include a case
where he is discharged or dismissed or his services are terminated by his
employer.

[Link].4 Protection of Trade Secrets

One of the principles of valid restrain is that a master is entitled to restrain his
servant after the termination of employment for the purpose of reasonable
44
The judges were Justice Tulzapurkar, Justice Untwalia and Justice Sen.
45
Supra note 43 at para. 5.
46
Supra note 43, para 11 onwards.

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protection against exploitation of “trade secrets” and maintenance of commercial

confidentiality. In an employment contract it is not just the employee’s right,
which is the concern. The rights of the employer also impose duty upon the
employee too. When it comes to the employee, he owes a duty of fidelity to his
employer. The employee must not disclose to others the confidential information,
which he learns or obtains during the course of employment. An injunction may
be granted against disclosure of such information’s by the servant. However, this
does not extend to all information, which might at times be needed during
employment. An employee is entitled to protect confidential information only
which amounts to a trade secret.
Confidential information must be highly confidential before it has been termed
as a trade secret. There are certain factors that have to be taken into account before
terming information as “trade secrets”. Firstly, the nature of work carried on
during the employment has to be taken into account. Secondly, the nature of the
information must be considered. Thirdly, it must be seen whether the employer
asked the employees to keep the information confidential. The judicial
pronouncements show that contractual restraints exist for the purpose of
protection of “trade secrets”. But there is lack of uniformity in decision.
In Star India Limited v. Laxmiraj Setharam Nayak,47 the plaintiff was a
company incorporated under the “Companies Act, 1956” presently known as “Star
India Private Limited”. It carries on a business of television serials including news
channels and commissions production of television programs for television
channels. The defendant was an employee of the plaintiff company and signed a
non-compete agreement while undergoing employment agreeing not to divulge
confidential information and not work or establish any competing business after 6
months of leaving the service of plaintiff. The defendant tendered his resignation
from the service of the plaintiff by a letter dated 16-9-2002 intending to resign
from the employment of the plaintiff. The defendant requested the plaintiff by his
subsequent letter dated 23-9-2002 to be relieved from employment by 15-10-
2002. By a reply dated 26-9-2002 the plaintiff refused to accept the resignation
47
AIR 2003 Bom 563.

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sent by the defendant and insisted that he should continue in service till 30th June
2004 in accordance with the terms and conditions stipulated in the service
contract. The defendant by his letter dated 1-10-2002, however, asserted his
absolute right to resign from employment and insisted that his resignation would
become effective from the date of his letter and that he should be relieved from
employment by 15-10-2002. The defendant discontinued to report for work from
16-9-2002 and joined other company dealings with news circulation. “Plaintiff
Company” wanted an injunction against the defendant. The court held that merely
because for some duration the plaintiff might face some inconvenience and
competition, the defendant may not be forced to come back and work for plaintiff.
It is against public policy to restrict healthy competition. By granting an
injunction in favour of the plaintiff to enforce the negative covenant of the
agreement it would be indirectly forcing the contract in respect of personal
service, which otherwise may not be granted and such covenant comes under the
purview of section 27 of the “Indian contract Act, 1872”. But at the same time
court ordered that, the defendant shall not disclose or divulge the plaintiff’s
business plans and franchisee agreements which he has come to know during his
employment.
In Diljeet Titus v. Mr. Alfred A. Adebare and Others,48 the defendant, an
advocate, was in full-time employment at the plaintiff’s law firm. Upon cessation
of employment, the defendant took away crucial business data, such as client lists
and proprietary drafts, belonging to the plaintiff. The plaintiff contended that such
information is “trade secrets” of the firm and cannot be used by the defendant.
The defendants contended that, since the express relationship between the parties
was not that of an employer and employee, so they were the owners of the
copyright of the work done by them during their employment. The court rejected
this connection and ruled that the plaintiff had a clear right in the material taken
away by the defendant. Accordingly, the court restrained the defendant from
carrying on a similar service by using the concerned secret information’s. The
defendants were only restrained from using the information they took, as this was
necessary to protect the interest of the plaintiff.
48
(2006) 32 PTC 609 Del.

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An employee may not be restrained from taking up employment if it cannot be

proved by the employer that the employee may, on joining a competitor, divulge
confidential information and secrets learned while in the employer’s services.
In Gopal Paper Mills Limited v. Surendra K. Ganesh Das Malhotra,49 the
plaintiff carried on the business of manufacture of paper. The defendant was
appointed as an assistant to serve for a period of twenty years. During the twenty
years he was prohibited to give advice or services to any other person or company
or give away any information to any person, which he might receive or obtain
during course of employment with regard to the affairs of the plaintiff. The
defendant left the service after one year of joining. An injunction was sorted by
the plaintiff. It was proved that no confidential information was supplied to the
defendant during this one year of service. The court denied injunction to the
plaintiff on the ground that, as no “trade secrets” or confidential information was
imparted to the defendant therefore the question of protecting the employer’s
interests never arose. Such a view is taken by the courts in order to protect public
policy. This may be understood in the sense that, there will be restriction in
competition if an injunction is simply granted in such cases based on agreement
where no confidential information is disclosed.
Similarly in Jet Airways Ltd. v. Mr. Jan Peter Ravi Karnik,50 the appellant
company employed the defendant as a pilot. The company had organized training
to enable the defendant and other pilots to fly new generation aircrafts. There was
an agreement made between them that defendant will serve the appellant for a
period of seven years and not to take up similar employment with any other
organization during that period. However, the defendant resigned within six
months of completion of training and joined another airline. An injunction was
sorted against the defendant. The “Bombay High Court”, refused to restrain the
defendant from taking up employment with a rival airline on the grounds that the
negative covenant was a one-sided and unreasonable one. The court held that
there was no proprietary interest of the employer that required protection. The

49
AIR 1962 Cal 61.
50
(2000) 4 Bom C.R. 487.

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court distinguished the facts of the Jet Airways case from that of Golikari’s case,51
and held that the training received by the defendant in the present case was not a
secret unlike in Golikar’s case. Even the employees of the competitor airline
received the same training which is provided by the appellant airlines. The
defendant had not received any special knowledge of any trade secret that
belonged exclusively to his employer.
In Sandhya Organics Pvt. Ltd. v. United Phosphorous Ltd.,52 the plaintiff and
defendant were manufacturer of the same industrial chemical. The defendant hired
a former employee of the plaintiff, who was under an obligation for maintaining
“trade secrets” after the end of employment by a covenant. The plaintiff raised an
objection that as the employee engaged by the defendant is his former employee
so information possessed by such employee is confidential information and cannot
be divulged to the defendant company and is contrary to the agreement signed by
the employee. It was proved that the defendant was carrying on the same business
even before the employee joined their services further the concerned employee
was an experienced person in such nature of work and was in such nature of work
for last 15 years in different places. Therefore, the court held that the employee
could not be restrained from joining the defendant and can use his personal skill
and knowledge which he gained in course of employment and the restrictive
covenant is invalid one but any specific business information or data of the
plaintiff company cannot be used by the employee while working for defendant’s
company.
In American Express Bank Ltd. v. Ms. Priya Puri,53 the plaintiff was a banking
company under the laws of “State of Connecticut” USA, doing banking business
in India and having its branch office at “Hamilton House, Connaught Place, New
Delhi”. The defendant was an employee of plaintiff and was working as head of
wealth management, “Northern Region”. The defendant was employed in the
management cadre. The term of employment provided that, after confirmation, if
she want to resign from the Company’s service, she will be required to give one
51
Niranjan Shankar Golikari v. Century Spinning and Manufacturing Company Limited, AIR
1967 SC 1098.
52
AIR 1997 Guj 177.
53
(2006) III LLJ 540 Del.

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month’s notice in writing to the Company or one month’s salary in lieu thereof.
Similarly, the company may terminate her employment by giving you one
month’s notice or one month’s salary in lieu thereof. Further maintaining of the
confidentiality of all the information was also a clause. The defendant submitted a
letter dated 19.9.2005 to Mr. Kaustubh Majumdar, director and head of “Wealth
Management” conveying her wishes to resign from the employment of the
plaintiff as per the terms of appointment and gave a 30 days’ notice. The plaintiff
alleged that a significant development occurred on 24.9.2005 when defendant
obtained some confidential data and information which comprises of customer
information of around 800 clients. This information was received by the defendant
through Mr. Kaustubh Majumdar. It was alleged that Ms. Shikha Sharma (another
employee) had handed over a file to Mr. Kaustubh Majumdar. which had about
40-50 pages containing detailed information of large number of customers and the
data also had an exhaustive list of all the investment accounts mentioned with the
plaintiff branch and customer information of more than 800 persons. The said data
accounts of other managers also and had an exhaustive list of all investments
accounts maintained with the plaintiff branch. But, the plaintiff admitted that
defendant did not have a password called “IWB/MFID” which could be used to
access confidential information, however, defendant forced Mr. Vasant Pathuri
and Mr. Saurabh Verma to get the access to the confidential information utilizing
her position and gave the password and thus the defendant had taken the
information. Plaintiff asserted that defendant be restrained from using the
information and data regarding the wealth of the customers of the plaintiff bank
and customer’s wealth management operations and wealth View
program/operations of the plaintiff's bank which amounts to confidential
information. Court held:54

Rights of an employee to seek and search for better employment

are not to be curbed by an injunction even on the ground that she
has confidential data in the present facts and circumstances. Such
an injunction will facilitate the plaintiff to create a situation such as

54
Ibid.

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“Once a customer of “American Express”, always a customer of

“American Express”. In the garb of confidentiality the plaintiff
cannot be allowed to perpetuate forced employment with
“American Express”. Freedom of changing employment for
improving service conditions is a vital and important right of an
employee which cannot be restricted or curtailed on the ground
that the employee has employer’s data and confidential
information of customers which is capable of ascertainment on
behalf of defendant or anyone else, by an independent canvass at a
small expense and in a very limited period of time. Such a
restriction will be hit by Section 27 of the “Indian Contract Act,
1872” and common law and equitable doctrine of “English Law”
will not be applicable in the fact and circumstances. An injunction
can be granted for protecting the rights of the plaintiff but at the
same time cannot be granted to limit the legal rights of the
defendant especially when the court has a doubt about the veracity
of plaintiff's version and as it appears that the injunction has been
sought for extraneous reasons. Hence injunction cannot be granted.

5.4 Protection under Right to Information Act 2005

The “Right to information Act, 2005” provides provisions of disclosure of

information by the public authorities. Nowadays, even the private sector business
entities which are earning and doing business in India and having an impact in life
of common people are also included in its ambit of the Act. But, the “trade
secrets” and confidential information of the businesses are still protected under the
legislation in the form of exception under the Act. Section 8 of the Act provides
exemption from disclosure of information and “trade secrets” comes under this
exemption clause.55 Section 8(1) (d) clearly says that trade secret is protected from

55
The Right to Information Act, 2005 (Act 22 of 2005) , s. 8: Exemption from disclosure of
information :

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disclosure under “Right to information Act, 2005”. So any information which is

supplied to any public authority or possessed by businesses if comes under the
category of “trade secrets” is protected from disclosure unless public interest
exceeds the private interest of the owner.

5.5 Trade Secrets and Competition Law

Members countries of the “TRIPS” in Article 40 took note of and deplored the
practices and conditions prevalent in the licensing of IPRs which restrain
competition, have an adverse effect on the trade and which can impede the
transfer and dissemination of technology. The member countries are authorized by
article 4(2) to prevent or control the practices or conditions that may constitute an
abuse of the IPRs having an adverse effect on competitors in the relevant market.
Each member is entitled to specify practices or conditions associated with IP
licensing which may, in particular cases constitutes abuse of IPRs. 56
When IP right holders fix unreasonably high prices compared to the cost of
production resulting into large monopoly profits, necessarily it is a case of unjust
enrichment; and an abuse of “IPR”. Countries formulate laws for protection of
public interest in such cases.
The “TRIPS” agreement provides provision of restricting situation of anti-
competition. It states: “Nothing in this agreement shall prevent members from
specifying in their legislation, licensing practices or conditions that may particular
cases constituted an abuse of IPRs…”57

(1)Notwithstanding anything contained in this Act, there shall be no obligation

to give any citizen,(d) information including commercial confidence, trade
secrets or intellectual property, the disclosure of which would harm the
competitive position of a third party, unless the competent authority is satisfied
that larger public interest warrants the disclosure of such information;
56
Ashwani Kr Bansal, “Economic vs. Morality of IPRs: Strengthen Competition Act 2002”, 40
JCPS 243-251(2006).
57
The TRIPS Agreement 1995, Article 40(2).

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Article 8(2)58 is more explicit in this regard; the provision clearly establishes
that the TRIPS do not interfere with measures taken by government against anti-
competitive, dominant or monopolistic conduct of right-holders.
The “Competition Act, 2002” of India59 was passed to provide economic
development, prevent practices having adverse effect on competition in order to
promote and sustain competition in markets, to protect the interests of consumers
and to ensure freedom of trade carried on by other participants in markets, in
India, and for matters connected therewith or incidental thereto.
The major purposes of the “Competition Act, 2002” and the earlier
“Monopolistic and Restrictive Trade Practice (MRTP) Act, 1969” laws are control
of monopoly, monopolistic or dominant power, control of predatory practices,
restrictive business practices or unfair trade practices, promoting competition,
honesty and fair play in commercial activities, truthful advertising and oversee the
interest of consumers.
The “Competition Act” directs all enterprises not to enter into an agreement
which causes or is likely to cause an appreciable adverse effect on competition
within India.60 The agreement may be with regard to production, supply,
distribution, storage, acquisition or control of goods or provision of services. All
such anti-competitive agreements are declared to be void.61 It also lays down the
agreements which are presumed to have an appreciable adverse effect on
competition.
The law gives limited exemption to IP right holders from the provisions of
section 3, to take all or any steps to vindicate any of the IP rights granted through
six named enactments. It permits IP right holders – a) to engage in a conduct
including entering into anti-competitive agreements to restrain any infringement
of IP rights, or b) ‘to impose reasonable conditions’ as may be necessary for

58
The TRIPS Agreement 1995.
59
The legislation is based on then recommendations of High Level Committee on Competition
Policy and Law (SVS Raghavan Committee, May 2000).
60
The Competition Act, 2002 ( Act 12 of 2003), s. 3(1).
61
The Competition Act, 2002 ( Act 12 of 2003), s. 3(2)

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upkeep of the rights which are conferred on the IP right- holder. This exemption is
provided under the Act. Section 3(5) provides the exemption. It reads as under:62

Nothing in this section shall restrict-

(i) the right of any person to restrain any infringement of, or to
impose reasonable conditions, as may be necessary for protecting
any of his rights which have been or may be conferred upon him
under-
(a) The Copyright Act, 1957(14 of 1957);
(b) The Patent Act, 1970(39 0f 1970);
(c) The Trade and Merchandise Marks Act, 1958 (43 of 1958) or
now the Trade Marks Act, 1999(47 of 1999);
(d) The Geographical Indications of Goods (Registration and
Protection) Act, 1999(48 of 1999);
(e) The Designs Act, 2000(16 of 2000);
(f) The Semi-conductor Integrated Circuits Layout- Design Act,
2000(37 of 2000)
(ii)The right of any person to export goods from India to the extent
to which the agreement relates exclusively to the production,
supply, or control of goods or provision of services for such
export.

In relation to the conflict between IPRs on the one hand and the norms of
competition as policy and law, on the other, there was sufficient clarity in the high
level committee on competition policy and law, known as “Raghavan
Committee”, which stated as follows:63

All forms of IP have the potential to raise competition policy/law

problems. IP provides exclusive rights to the holders to perform a

62
The Competition Act, 2002 ( Act 12 of 2003), s. 3(5)
63
SVS Raghavan Committee, India May 2000.

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productive or commercial activity, but this does not include the

right to exert restrictive or monopoly power in the market or
society…But at the same time there is a need to curb and prevent
anti-competition behavior that may surface in the exercise of IPRs.

There is, in some cases, a dichotomy between IPRs and competition

policy/law. The former endangers competition while the latter promotes
competition. There is a need to appreciate the existence of a right if any anti-
competitive trade practice or conduct is visible to the detriment of consumer
interest or public interest; it ought to be assailed under the competition
policy/law.64
The exercise of IPRs is to be in a manner which promotes competition as also
upholds reward in the form of IPR for human creativity, effort and investment in
the subject matter of IPRs. The exclusive rights granted under IPRs are not
allowed to become tools to justify anti-competition behavior or trade practices that
are clearly detrimental to public interest.
Under “MRTP Act, 1969” section 33(3) was somewhat parallel to present
section 3(5), but the whole purpose of “Competition Act, 2002” was to strengthen
competition and remove the difficulties experienced in “MRTP Act, 1969”. The
principle idea of these provisions is that the IP right-holder should not abuse the
dominant or monopolistic position resulting from exclusive rights vested by virtue
of any IP laws.

5.6 Criminal Remedies for Misappropriation of Trade Secrets

Though there are no criminal remedies available for misappropriation of “trade

secrets” under Indian law. But some of the provisions under “Indian Penal code
1860” and “Information Technology Act, 2000” (as amended on 2008) provide
some sort of remedies that can be also availed for “trade secrets”

64
Ibid.

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misappropriation. Sections 405-40965 of the “Indian Penal Code” (IPC) which

relates to criminal breach of trust and section 41866concerning cheating can be
invoked to get an appropriate remedy against a grave offence. Further Section 4367

65
The Indian Penal Code, 1860 (Act 45 of 1860), s. 405: Criminal breach of trust.
Whoever, being in any manner entrusted with property, or with any dominion
over property, dishonestly misappropriates or converts to his own use that
property, or dishonestly uses or disposes of that property in violation of any
direction of law prescribing the mode in which such trust is to be discharged, or
of any legal contract, express or implied, which he has made touching the
discharge of such trust, or wilfully suffers any other person so to do, commits
“criminal breach of trust”.
s. 406: Punishment for criminal breach of trust.
Whoever commits criminal breach of trust shall be punished with imprisonment
of either description for a term which may extend to three years, or with fine, or
with both.
s. 407: Criminal breach of trust by carrier, etc.
Whoever, being entrusted with property as a carrier, wharfinger or warehouse-
keeper, commits criminal breach of trust, in respect of such property, shall be
punished with imprisonment of either description for a term which may extend
to seven years, and shall also be liable to fine.
s. 408: Criminal breach of trust by clerk or servant.
Whoever, being a clerk or servant or employed as a clerk or servant, and being
in any manner entrusted in such capacity with property, or with any dominion
over property, commits criminal breach of trust in respect of that property, shall
be punished with imprisonment of either description for a term which may
extend to seven years, and shall also be liable to fine.
s. 409: Criminal breach of trust by public servant, or by banker, merchant or agent.
Whoever, being in any manner entrusted with property, or with any dominion
over property in his capacity of a public servant or in the way of his business as
a banker, merchant, factor, broker, attorney or agent, commits criminal breach of
trust in respect of that property, shall be punished with {[Link] Act 26 of 1955,
s.117 and Sch., for "transportation for life"} [imprisonment for life], or with
imprisonment of either description for a term which may extend to ten years,
and shall also be liable to fine.
66
The Indian Penal Code, 1860 (Act 45 of 1860),
s. 420: Cheating and dishonestly inducing delivery of property.
Whoever cheats and thereby dishonestly induces the person deceived to deliver
any property to any person, or to make, alter or destroy the whole or any part of
a valuable security, or anything which is signed or sealed, and which is capable
of being converted into a valuable security, shall be punished with imprisonment
of either description for a term which may extend to seven years, and shall also
be liable to fine.
67
The Information Technology Act 2000(as amended on 2008, Act 10 of 2009)
s.43 Penalty and Compensation for Damage to Computer, Computer System, etc.
If any person without permission of the owner or any other person who is
incharge of a computer, computer system or computer network - (a) accesses or
secures access to such computer, computer system or computer network or

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of the “Information Technology Act, 2000” makes offender liable to pay damages
by way of compensation not exceeding Rs 1 crore to the person affected. In
addition section 6668 of the said legislation provides for imprisonment for a period

computer resource (ITAA2008) (b) downloads, copies or extracts any data,

computer data base or information from such computer, computer system or
computer network including information or data held or stored in any removable
storage medium; (c) introduces or causes to be introduced any computer
contaminant or computer virus into any computer, computer system or computer
network; (d) damages or causes to be damaged any computer, computer system
or computer network, data, computer data base or any other programmes
residing in such computer, computer system or computer network; (e) disrupts
or causes disruption of any computer, computer system or computer network; (f)
denies or causes the denial of access to any person authorised to access any
computer, computer system or computer network by any means; (g) provides
any assistance to any person to facilitate access to a computer, computer system
or computer network in contravention of the provisions of this Act, rules or
regulations made thereunder, (h) charges the services availed of by a person to
the account of another person by tampering with or manipulating any computer,
computer system, or computer network, (i) destroys, deletes or alters any
information residing in a computer resource or diminishes its value or utility or
affects it injuriously by any means (Inserted vide ITAA-2008) (i) Steals,
conceals, destroys or alters or causes any person to steal, conceal, destroy or
alter any computer source code used for a computer resource with an intention
to cause damage, (Inserted vide ITAA 2008) 17 he shall be liable to pay
damages by way of compensation not exceeding one crore rupees to the person
so affected. (change vide ITAA 2008) Explanation - for the purposes of this
section - (i) "Computer Contaminant" means any set of computer instructions
that are designed - (a) to modify, destroy, record, transmit data or programme
residing within a computer, computer system or computer network; or (b) by
any means to usurp the normal operation of the computer, computer system, or
computer network; (ii) "Computer Database" means a representation of
information, knowledge, facts, concepts or instructions in text, image, audio,
video that are being prepared or have been prepared in a formalised manner or
have been produced by a computer, computer system or computer network and
are intended for use in a computer, computer system or computer network; (iii)
"Computer Virus" means any computer instruction, information, data or
programme that destroys, damages, degrades or adversely affects the
performance of a computer resource or attaches itself to another computer
resource and operates when a programme, data or instruction is executed or
some other event takes place in that computer resource; (iv) "Damage" means to
destroy, alter, delete, add, modify or re-arrange any computer resource by any
means. (v) "Computer Source code" means the listing of programmes, computer
commands, design and layout and programme analysis of computer resource in
any form (Inserted vide ITAA 2008).
68
The Information Technology Act 2000(as amended on 2008, Act 10 of 2009).
s. 66 Computer Related Offences (Substituted vide ITAA 2008)
If any person, dishonestly, or fraudulently, does any act referred to in section 43,
he shall be punishable with imprisonment for a term which may extend to two
three years or with fine which may extend to five lakh rupees or with both.
Explanation: For the purpose of this section,- a) the word "dishonestly" shall
have the meaning assigned to it in section 24 of the Indian Penal Code; b) the

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of up to three years or a fine of up to Rs 5 lakhs or both. The legislation also

recognizes third party liability if the party knowingly accepts or had reasons to
believe that the information given to it was stolen. This two Act provides criminal
sanctions for misappropriation of “trade secrets” but they are very rarely used
further there scope is very limited as the mentioned provisions are specifically not
made for misappropriation of trade secret.
In Pramod, Son of Laxmikant Sisamkar… v. Garware Plastics and
Polyester…,69 the petitioners were engineering graduates, employed in the
respondent No.1 Company. While entering the company they agreed to common
terms and conditions of service in the company. The petitioners were initially
appointed for a period of 3 years thereafter their period of service was extended by
further period of 3 years. However, before the completion of the extended period
of 3 years, they left their service and joined some other company. The respondent
No. 1 Company filed the complaint case against them on the ground that the
petitioners left the service in contravention of the terms and conditions of service
agreed to by them. It is alleged in the complaints against them that at the time of
leaving the service they were required to hand over charge of the entire documents
in their possession. It is also alleged in the complaints that the petitioners had
gained special technical know-how by the special training in the company which
they carried with them and used them in the other company which they joined. On
the basis of the written complaints the “Chief Judicial Magistrate” registered the
cases against the petitioners for offences of criminal breach of trust and cheating
punishable under sections 408 and 420 of the “Indian Penal Code 1860”. The
petitioners have challenged the aforesaid orders of the learned trial Magistrate
directing issue of process against them. The complaints did not mention any
specific documents which were in possession of the petitioners at the time they
left the service. There was not even a general statement which documents of the
company used to be in their possession during their services which they would be
required to hand over at the time of leaving their service.

word "fraudulently" shall have the meaning assigned to it in section 25 of the

Indian Penal Code.
69
(1986) 3 BomCR 411.

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The high court held that:70

In my view these complaints are really premature. It cannot be said

on the basis of the facts that the petitioners have used the technical
know-how of the respondent No.1-company which is a
requirement for an offence under section 405 I.P.C. relating to
criminal breach of trust. It cannot also be said till the technical
know-how is used by them that they cheated the company by
fraudulently or dishonestly gaining the technical know-how of the
respondent No.1-company for being used in other company. It is
well settled that a criminal prosecution is a serious matter and
would amount to harassment of the accused and also to the abuse
of the process of the Court if without any sufficient grounds it is
allowed to proceed. Care, therefore, be taken to see that it is not
allowed to be used as an instrument of harassment or for seeking
private vendetta or with an ulterior motive to pressurize the
accused. In the instant cases, it is therefore, necessary to see that
the petitioners who are young engineering graduates and who
perhaps have left employment for better prospects are not
unnecessarily harassed by these criminal prosecutions sought to be
launched against them. It appears that the learned trial Magistrate
has not applied his mind to the requirements of sections
408 and 420 I.P.C. As already shown, in the absence of specific
reference to the specific documents in the complaints and also in
view of the fact that the alleged technical know-how cannot yet be
said to be put to any use by the petitioners since the factories of the
new company which they are alleged to have joined are not fully
established and have not started functioning, there are no sufficient
grounds to proceed against the petitioners for offences
under sections 408 and 420 of the “Indian Penal Code”. The

70
Available at: [Link] / (last visited on May 16, 2016).

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learned trial Magistrate was, therefore, in error in issuing process

against them in these cases. His order in these cases directing issue
of process against them is liable to be set aside.

5.7 Conclusion

The Indian Contract Act 1872 deals with the legality of non-compete covenants
under section 27 and stipulate that, an agreement, which restrains anyone from
carrying on a lawful profession, trade or business, is void to that extent. The
Indian law has certain flows in context of present time. There is also some
difference in very concept of “Restraint of Trade” in USA and UK.
In America and England reasonable restraints are valid and justified under law.
In England the emphasis is upon the impropriety of requiring a promise, greater in
extent than is required for the need of the promise, whereas in America emphasis
is more on the injury to the public. For instance, if because of the restraint
monopoly gets created than it is considered as against public policy and hence
invalid restraint.
The Indian law is rigid in that it invalidates all restraints, whether general or
partial, and neither the test of reasonableness nor the test of restraint being partial
applied to a case governed by section 27 of the “Indian Contract Act, 1872”,
unless they fall within the exception of the section. This stems from the
fundamental rights of every person to practice any trade or profession.
The section 27 of “Indian Contract Act, 1872”, was enacted at a time when
trade was yet undeveloped and the object underlying the section was to protect the
trader from restraints. But with the passage of time, trade in India has developed
there is no reason why a more liberal attitude should not be adopted by
acknowledging reasonable restraints. With these observations, the “Law
Commission of India” recommended that this section be amended to permit
reasonable restraint on the right to carry on trade.71 The Report also stated that

71
The Law Commission of India, 13th Report on the Contract Act 1872(26 September 1958) Para
55 at 26-27.

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trade in India does not lag behind as that in England or USA, and recommends
that in the “Indian Contract Act, 1872”, section 27, for the words “is to that extent
void” the words “is to that extent void except in so far as the restraint is
reasonable having regard to the interest of the parties to the agreements and of the
public” be substituted.72
English law allows for agreements which restrain an employee from competing
with his employer after the termination of employment provided, the restraints are
reasonable. For instance, the parties many a times makes such agreements for
protecting the disclosure of confidential information comprising of trade secrets.
In England, a contract term restricting an employee from disclosing “trade
secrets” and confidential information after the termination of employment is
enforceable. The reason for upholding restraint against an employee is to protect
the proprietary rights of the employer if it is necessary in the case of trade
connections and “trade secrets”.73
But in the Indian law, an agreement to restrain an employee from competing
with his employer after the termination of employment is not permissible in any
situation. Indian courts allow restrictions on competition from the employees
during the term of employment, unless the restriction favors the employer
intensely. Furthermore, an employer can lawfully prohibit his employee from
accepting, after the end of his employment, a position where the employee is
likely to use the proprietary rights of the employer acquired during the course of
employment. However, an employer cannot restrain an employee, after expiry of
employment, from taking up employment elsewhere or setting up his own
business that involves using the skills and knowledge gained during the course
employment. The employer is only protected against misuse of his proprietary
rights and not against competition.
In India the law relating to restraint of trade is clear and tends to be pro-
employee unlike United Kingdom and United States of America. Section 27 of the
“Indian Contract Act, 1872” implies that, to be valid, an agreement in restraint of

72
Id. at 78.
73
Ansons, ‘Law of Contract’, Jack Beatson, Andrew Burrows, [Link]. (eds.), 362 (Oxford University
Press, London, 27th edn., 1998).

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trade must be reasonable as between the parties and consistent with the interest of
the public. The quintessence of the “Indian Contract Act, 1872”, section 27 is that
all agreements in restraint of trade are prima facie unenforceable. But the court
decisions shows that the law does not condemn every such covenant as long it is
found to be reasonable and not to be detrimental to the society which is
determined by public interest test. The legislative provision is not clear as literal
meaning of the section says all restraints against trade are invalid whereas in some
cases courts validate restraint based on public interest. There is very much need of
implementing the suggestion of law commission of India in the statue itself so as
to remove the ambiguity.
The Indian courts have some time protected the interest of the traders by liberal
interpretation of the provision 27 of the “Indian contract Act, 1872” when it
comes to protection of “trade secrets” in the form of confidential information but
there lacks uniformity of rulings and that is because of absence of specific
legislation in this regard. It is high time that specific law for protection of “trade
secrets” is made as section 27 does not cover all aspects of “trade secrets” but
only one aspect i.e. non-compete clauses. Other issues such as theft of trade
secrets, misappropriation of “trade secrets” for use by third party, disclosing the
“trade secrets” to public for causing loss are not covered by the section. This
section is used in course of judicial activism to guard protection of “trade secrets”
against an ex-employee but the actual purpose of the section is invalidating
restrain in trade so the very purpose of the section differs from nature of
protection needed for “trade secrets”.
The “Right to Information Act, 2005” and “Competition Act, 2002” also
protects disclosure of “trade secrets” in interest of the proprietor further as regard
penal provision is concerned some of the provisions of “Indian Penal Code 1860”
and “Information Technology Act, 2000” may be used for penalization for
misappropriation of “trade secrets” but such provisions are exclusively not made
for “trade secrets” misappropriation hence not effective in safeguarding the
interest of the traders.
It is well accepted that the section 27, protected “trade secrets” of the
employers against the employees but with development of science and

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technologies new dimensions of protection is needed which is lacking in the

section. Though there is law for protection of “trade secrets” but it is scattered,
some protection under Indian “Indian Contract Act, 1872” some under common
law whereas some provided by virtue of “Indian Penal Code 1860”: and
“Information Technology Act, 2000”. Moreover a definite legislation is needed
for protecting all aspects of “trade secrets” so as to establish an appropriate regime
of “trade secrets” protections.
To sum up, the set-up of the legislative provisions for “trade secrets” protection
in India is as:
(1) In India in some cases courts protected “trade secrets” by liberal interpretation
of the provision 27 of the “Indian contract Act, 1872” but there lacks
uniformity of rulings.
(2) Section 27 of the “Indian contract Act, 1872” does not cover all aspects of
“trade secrets” but only one aspect i.e. non-compete clauses.
(3) Issues such as theft of “trade secrets”, misappropriation of “trade secrets” for
use by third party, disclosing the “trade secrets” to public for causing loss are
not covered by Section 27 of the “Indian contract Act, 1872”.
(4) Section 27 of the “Indian contract Act, 1872” is used in course of judicial
activism to guard protection of “trade secrets” against an ex-employee but the
actual purpose of the section is invalidating restrain in trade so the very
purpose of the section differs from nature of protection needed for “trade
secrets”.
(5) The “Right to Information Act, 2005”, “Competition Act, 2002”, Indian Penal
Code 1860” and “Information Technology Act, 2000” also protects disclosure
of “trade secrets” in interest of the proprietor but such provisions are
exclusively not made for “trade secrets” misappropriation hence not effective.
(6) It is high time that specific law for protection of “trade secrets” is made as the
available legislative provisions are neither specific nor effective.

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