Published On: September 28, 2021 at 14:17 IST
Introduction
We know that an employment contract or agreement which is usually between an employer organization and an individual employee, forms a contractual relationship. It is between the high level manager or a chief executive officer that an employment contract is common. These types of contracts usually aren’t intended to last forever but there may be instances that require the parties to sever the employment relationship. There are a large number of reasons that are there to break a contract and some of them are ethical and the others are not.
A party when agrees with the other party to restrict his choice and liberty to carry on a trade is known as a restraint of trade. In these types of agreements, the negative restraints are direct and these constraints are often found in the contracts between employees and employers so as to enter into a rival firm.
There should be a balance between the rights of employee and the employer in employment contracts while determining the negative covenants of the contract. Here the agreement should also be read jointly and the primacy shall be given to the rights of the employees since the employer has the greater power.
As we also know that employment contracts also don’t last for a long time which may held instances that require the parties to sever the employment relationship as per depending upon the circumstances. The contracts for employment also must include certain perks in an agreement. If any of the terms and conditions of a mutually agreed contract is falling, the contract may be considered as unethical.
For example, some contracts contain nondisclosure and confidentially clauses and contracted employees who improperly disclose any data or information are thus breaking the contract in an unethical manner.
In the contracts if the services aren’t rendered according to terms and conditions or the employer fails to pay for the services rendered by the employee the failing of the contract could be there. The manner here is simply referred to as unethical as on which the contract is considered to be broken. Even if the company had no real intention to pay the employee for his/her services then also the breaking of the contract by not adhering to the conditions is likely to be considered as unethical. Hence relying on the terms and conditions of the contract is the most important thing for a contract to be held upon.
Validity of Negative Covenants
In the three stages the validity of the negative covenants can be assessed:
- If the restraint is reasonable and not the arbitrary
- If the agreement amounts to total restraint
- If the restraint protects the legitimate interest of the employer or the covenantee
The stage where the restraint is reasonable involves a twofold test i.e. the restraint should be reasonable and with reference to the interest of the public. This test is to test whether the covenant is providing the restraint and is designed to protect the legitimate interest of the employer and the employee. For example, a negative covenant as a seller in business in the same locality would be reasonable. This is because it protects the interests of the businessman.
At-Will Vs Contract
For the most workers employment-at-will is a doctrine that most employers follow when they hire their workers. This kind of employment relationship could be terminated by the employee or the employer without even any notice. At-will employment may also end up for any reason or for no reason at all depending upon the discriminatory reasons. The main difference between the employment-at-will and a contract is that the contract requires advance notice if either of the party wants to terminate the agreement. According to the terms of agreement, breaking a contract through advance notice is entirely ethical.
Stages of Imposing negative agreements
The Supreme Court, while making a distinction between negative covenants that are operative for the duration of the employment contract and negative covenants that are operative after the termination of the contract of employment as:
- Covenants during Employment
Negative clauses are generally not considered as barriers to trade that apply during an employment contract and therefore do not fall under Section 27 of the Indian Contract Act, 1872.
It is a common perception that the exclusive right to the services of the employee are available only to the employer and at the time of employment an employee is obliged to work for an employer. Covenants during the employment may be related to confidentially and the same type of business as other entities at the time of the employment.
- Covenants related to look
The Court have treated these restrictions that Indian Airlines and Air India flights have set up for the age and weight of their employees and non-compliance which may result in termination or suspension as appropriate and non-discriminatory against women. The problem arises as male workers are not subjected to the same circumstances hence, we get to know that women in Indian Airlines are based upon looks.
- Restraints after employment
It is under the Indian law that to prevent an employee from competing with his/her employer as an agreement after the termination of employment is not valid. The Supreme Court under the Section 27 of the Indian Contract Act, 1872 a service covenant that went beyond the termination of service is invalid.
Section 27 states the Liability for misapplication of money or property by a partner.
This section states that where:
“(a)A partner acting within his apparent authority receives money or property from a third party and misapplies it or (b) a firm in the course of its business receives money or property from a third party and the money or property is misapplied by any of the partners while it is in the custody of the firm is liable to make good the loss.”
In this section two kinds of cases of misapplication of money or property have been mentioned:
- Liability for money or property received by a partner who misapplies the same:
According to Section 27(a), when a partner acting within his apparent authority receives money or property from a third party and misapplies the same, the firm is liable for that.
For example, one of the partners of a firm of solicitors was requested by a client to obtain loan for the client on the mortgage of some property. The said partner told the client that the mortgages wanted some additional security and thus obtained from the client some share warrants payable to bearer. He subsequently misappropriated the share warrants and absconded.
The other partners had no knowledge of the deposit of the warrants and subsequent appropriation thereof. It was found that on some earlier occasions such share warrants had been received through the same partner from the same client by this firm. It, was therefore held that the apparent authority of the partner to receive the share warrants the transaction was a partnership transaction and the other partners were liable for the misappropriation of the warrants made in the case.
- Liability of misapplication of money or property received by a firm and misapplied by a partner:
Where the firm in the course of its business receives money or property from a third party and the same is misapplied by any of the partners while it is in the custody of the firm, the firm can be made liable towards the third party to make good the loss.
Case Laws
- Cleather Vs Twisden[i]
Other partners in a contract could not be held liable
In this case one of the partners of the firm of solicitors received some bonds payable to the bearer and misappropriated the same. It was found that the receipt of such securities for the safe custody was not a part of the business of the solicitors and therefore it was held that the other partners could not be held liable for the same.
- British Homes Corporation Ltd. Vs Patterson[ii]
Anything illegal received in personal capacity does not held partners liable
Herein one of the partners of a partnership firm obtained a cheque payable to himself and not in the name of the firm. It was held that for the misappropriation of such a cheque which had been received by him in his personal capacity, the other partners could not be made liable.
- Gujarat Bottling Co. Ltd. and Others Vs Coca Cola Company and Others[iii]
Responsibility rests with the covenantee to provide proof that it is necessary to protect the covenantee’s interests
It was held that there should be a balance between the interests of the employer about the public policy by laying down that a negative covenant in restraint of trade should be reasonable and should be necessary to protect the interests of the covenantee and should take into account the interests of the covenantee.
The Court further stated that the responsibility rests with the covenantee to provide proof that it is necessary to protect the covenantee’s interests and that if this is done it removes the responsibility to show that the prohibition is determined to the public in the attacking party.
- Coke Vs Gujarat Bottling Company[iv]
Negative agreements are especially important in industries such as the aviation and pharmaceutical industries
It was held that the agreement between the parties was a trade agreement in which both parties had made mutual obligations. The order therefore was sought and was given. Negative agreements are especially important in industries such as the aviation and pharmaceutical industries where the employer has to spend a lot of money to make his work fit for the type of work he has undertaken.
Under such circumstances, there may be a relation because, in his absence, the employee will simply acquire this skill and leave that job, which means that it would result in a huge loss for the employer both financially and professionally.
- Rhodes Vs Moules[v]
The transaction was a partnership transaction and the other partners were liable
It was held that one of the partners of a firm of solicitors was requested by a client to obtain loan for the client on the mortgage of some property. The said partner told the client that the mortgages wanted some additional security and thus obtained from the client some share warrants payable to bearer. He subsequently misappropriated the share warrants and absconded. The other partners had no knowledge of the deposit of the warrants and subsequent appropriation thereof.
It was found that on some earlier occasions such share warrants had been received through the same partner from the same client by this firm. It, was therefore held that the apparent authority of the partner to receive the share warrants the transaction was a partnership transaction and the other partners were liable for the misappropriation of the warrants made in the case.
Conclusion
To prevent potential ethical dilemmas the best way is to discuss the employment terms and conditions before signing it. If possible, consulting an attorney is also the best option as an expert advice is always a wise choice especially when the terms and conditions of the contract can affect professional livelihood. These days certain agreements have been evolved that are restrictive in nature and then also does not fall directly under the Restrictive Employment which is under Section 27 of the Contract Act.
References
[i] Cleather Vs Twisden [28 Ch. D. 340.]
[ii] British Home Assurance Corporation Ltd Vs Paterson on 1902 [86 L.T. 826.]
[iii] Gujarat Bottling Co. Ltd. and Others Vs Coca Cola Company and Others on 4 August, 1995 [1995 AIR 2372]
[iv] Coke Vs Gujarat Bottling Company on 4 August, 1995 [1995 AIR 2372]
[v] Rhodes Vs Moules on 1895 [1 Ch. 236.]