In a case wherein, the petitioner preferred this petition to raise an issue concerning the appointment of an arbitrator under section 11(6) of the Arbitration and Conciliation Act 1996 (‘Act 1996’), against respondent employees who resigned prematurely, violating the lock-in period.

Background

The petitioner is a company that appointed three employees under a Service Employment Agreement with clauses governing covenants such as lock-in period, compliance, termination with notice, consequences of termination, dispute resolution, confidentiality, etc. The respondent employees did not abide by their respective service agreements and resigned prematurely, i.e., before the lock-in period expired. Responses to the notice of demand and invocation of arbitration sent by the petitioner to resolve the issue were not satisfactorily received or replied to.

Issues for Consideration

Primary issues for consideration before the single judge bench of Delhi High Court were as follows –

Analysis

It is well-settled that there cannot be an agreement to waive off fundamental rights as enshrined in the Constitution[1], and such rights can be enforced against persons other than the state or its instrumentalities.[2]

Laws related to covenants in employment contracts have been discussed in detail across jurisdictions over time. As early as 1885, the Court, in Brahmaputra Tea Co. Ltd v. Scarth[3] considered whether binding an employee to exclusive employment for a particular term would be lawful. Usually, cases for this particular lock-in period clause bind the employee for a term, and in case of premature resignation, they are obligated to pay liquidated damages. Another negative covenant in this case was the further restraint on the employee post-termination to be engaged in the cultivation of tea, which was the employer's primary business. The trial court, first held that both the covenants were in the teeth of Section 27 of the Indian Contract Act 1872. However, the Court of Appeal clarified further that only the covenant restricting the employee from engaging in tea cultivation is void. Other than that, the covenant binding employees to serve the employer exclusively for a particular period during the term of the agreement is valid.

Similarly, in Niranjan Shankar Golikar v. Centuary Spinning & Manufacturing Company[4], the Court drew a distinction between negative covenants operating during the term of the employee contract and those operating post-termination. It held that negative covenants operating during the period of the contract of employment wherein an employee is exclusively bound to serve the employer are generally not contrary to law.

The Courts' position was reiterated in the case of Percept D’ Mark (India) Private Limited v. Zaheer Khan[5], and Affle Holding Private Limited v. Saurabh Singh,[6] where it was observed that negative and restrictive covenants operating during the employment contract's subsistence are valid.

Interpretation and Judgement

In the present case, the clause for the lock-in period, pursuant to which the employees were bound to serve the petitioner for a period of 3 years, was scrutinised as a violation of fundamental rights. The Court explained that the terms on which employees agree in employment, such as the lock-in period, pay fixation, benefits, etc., are the subject matter of negotiation. The clauses are usually decided upon voluntarily, as entered into upon their consent and validation. The Respondent employees have sought to terminate their employment with the petitioner company on their own violation before the expiry of the lock-in period.

The Court opined that such clauses in employment contracts are necessary for the health of the employer institution as they provide the required stability and strength to the institution and its framework. It further observed that employment contracts generally are contractual disputes, not disputes that raise issues of violation of fundamental rights.

For the issue of disputes being arbitrable under the Act 1996, the Court cited similar case of BLB Institute of Financial Markets Limited v. Ramakar Jha[7], which had referred the dispute to arbitration.

The Court held that reasonable lock-in periods in employment contracts that apply during the term of employment are valid in law and do not violate Fundamental Rights. Moreover, disputes relating to lock-in periods that apply during the subsistence of employment contracts are arbitrable under the Act 1996.

Author: Shreyas Mehrotra

Footnotes

[1] Lombardi Engineering Limited v. Uttarakhand Jal Vidyut Nigam Limited (2023) SCC OnLine Sc 1422

[2] Kaushal Kishore v. State of U.P. (2023) 4 SCC 1

[3] Brahmaputra Tea Co. Ltd v. Scarth

[4] Niranjan Shankar Golikar v. Centuary Spinning & Manufacturing Company (1967) SCC OnLine SC

[5] Percept D’ Mark (India) Private Limited v. Zaheer Khan (2006) 4 SCC 227

[6] Affle Holding Private Limited v. Saurabh Singh MANU/DE/0152/2015

[7] BLB Institute of Financial Markets Limited v. Ramakar Jha (2008) SCC OnLine Del 1075