Are Lock-In Periods in Employment Contracts Arbitrable: Unpacking Lily Packers Ltd. vs Vaishnavi Vijay Umak & Ors.

Factual Background

This case involved three petitions filed by Lily Packers Private Limited (“The Petitioner”) against its former employees, Vaishnavi Vijay Umak, Meetkumar Patel, and Rahul Sharma (“The Respondents”). Each of these employees had signed a Service Employment Agreement (‘EA’) that included a 3-year lock-in period, confidentiality clauses, protection of intellectual property, and a requirement to settle disputes through arbitration. However, all three employees left their jobs before the 3 years were up, without providing a reasonable explanation.

Therefore, the Petitioner claimed that the employees broke their contracts by leaving early and is also concerned they all may have violated the confidentiality and intellectual property agreements.

The Petitioner invoked arbitration as stipulated in the employment contracts, but the Respondents either ignored the notice or did not submit to arbitration. The Petitioner has now approached the Delhi High Court under Section 11 (6) of the Arbitration and Conciliation Act, 1996 (hereinafter “A&C Act”) seeking the appointment of an arbitrator.

Issues

Whether Lock-In periods in employment contracts is valid in law or are they in contradiction to Fundamental Rights provided in the Constitution of India.

Whether disputes relating to a lock-in period in employment contracts are arbitrable in terms of the A&C Act, 1996.

Petitioner’s Position

The Petitioner contended that an enormous investment was made in the pursuance of training the Respondents, thus, the lock-in period should have been honoured as a result. In addition to this, it was argued that the presence of the dispute resolution clause mandates for the referral of any disputes to Arbitration. The presence of an arbitration clause demonstrates the party’s initial intent to resolve any potential disputes through arbitration rather than litigation.

Respondent’s Position

The Respondents argued that the present case was not arbitrable as per the A&C Act, 1996 as the Clause 5 of the EA constituting the Lock-In period violated Article 19 and Article 21 of the Indian Constitution. It was the Respondent’s submission that matters involving fundamental rights are not to be subjected to arbitration. Reliance was placed on Lombardi Engineering Limited vs Uttarakhand Jal Vidyut Nigam Limited where a pre-deposit clause to initiate arbitration was held to be violative of Article 14 and was held that “no agreement can waive off fundamental rights.”

Reliance was also placed on the decision of Kaushal Kishor v. State of U.P where the enforceability of fundamental rights was extended to non-state actors to put forth the applicability of fundamental rights to the Petitioner Company. Finally, there was an argument made that the Petitioner had demanded Rs. 50,00,000/- in the notice invoking arbitration as opposed to the amount of Rs. 10,00,000/-prayed by the Petitioner in the instant petition.

Decision and Reasoning

Issue 1

The Delhi High Court held that the Lock-In period clause was valid as the covenants in the current case were only operative during the subsistence of the EA, and it did not restrain the Respondent employees from seeking employment with any competitors of the employer.

The Court relied on the case of Brahmaputra Tea Co. Ltd. v. Scarth, where the court dealt with the issue of whether it would be lawful to bind an employee to the exclusive employment of the employer for a particular term and if he left the company before the end of his term, he would have to pay liquidated damages. Even though the trial Courts held such a negative covenant as void under Section 27 of the Indian Contract Act, the Calcutta HC held that such a covenant during the term of the agreement was valid.

The Delhi High Court also relied upon the decision of Supreme Court in Niranjan Shankar Golikari v. Century Spinning And Manufacturing Co., where it was held that negative covenants operating during the period of the contract of employment where the employee is bound to serve the employer exclusively are generally not contrary to the law. Finally, the Court relied upon Affle Holdings Pte Limited Vs. Saurabh Singh, where it was observed that negative and restrictive covenants that operate during the subsistence of the employment contract are valid. It also reaffirmed the position that such covenants in employment contracts that prohibit the employee from carrying on a competing business beyond the term of the contract are not enforceable.

The Delhi High Court in this decision ultimately held that negative covenants that are operative during the terms of employment are valid and enforceable.

Issue 2

On arbitrability, the court held that the disputes in question are arbitrable under the A&C Act. The Delhi High Court relied upon multiple cases to support its decision, such as BLB Institute of Financial Markets Ltd. v. Ramakar Jha, where in a similar fact scenario, the employee left before the expiry of lock-in period; here the Court provided an interim relief under Section 9 of the A&C Act, 1996 and held that a negative covenant preventing certain actions during employment is not in restraint of trade as the contract was only applicable during the subsistence of the service agreement.

The Court further distinguished the instant case from the case of Desiccant Rotors International Pvt. Ltd. v. Bappaditya Sarkar, where an agreement restricted the employee from seeking employment with an employer in a competing business, post Termination of his contract with the erstwhile employer. This particular clause was held invalid by the Court as it went against Section 27 of the Indian Contract Act.

The Delhi High Court also delved into the Respondent’s reliance on Lombardi Engineering Limited v. Uttarakhand Jal Vidyut Nigam Limited, where the Supreme Court held that an agreement which mandates a pre-deposit of the claimed amount for even referring the matter to arbitration was in violation of Article 14 of the Indian Constitution and such an agreement cannot be used to waive of any fundamental right. The Delhi High observed that the Lombardi decision would not be applicable in the present case as the law with regard to covenants in employment contracts is settled as lawful and reasonable covenants that are operative during the terms of employment are valid and enforceable. Such covenants are not in violation of any fundamental rights under the Indian Constitution.

Conclusion

In toto, the court held that the disputes relating to lock-in periods that apply during the subsistence of employments contracts are arbitrable under A&C Act, 1996 and appointed a sole arbitrator.

Author(s)

Ishan Sharan Kaushik

Student at NUALS, Kochi

Pathmanabhan Sooraj