V.N. Deshpande v. Arvind Mills Co. Ltd. (AIR 1946 Bombay 423)

This case is about a negative covenant in a service contract. The employee, Mr. Deshpande, left Arvind Mills mid-term and joined a rival mill. The employer asked the court to stop him from working for the rival during the agreed period. The Bombay High Court held that such a covenant, when reasonable and linked to the contract period, is enforceable. The court granted an injunction until the contract term ended.

1. Are the covenants in the service agreement unreasonable and is the whole agreement unenforceable?
2. Should the court grant an injunction to stop the employee from serving a rival during the contract term?

• A negative covenant in a service agreement does not automatically become void under Section 27, Indian Contract Act.
• If the covenant is reasonable, narrow, and tied to the contract period, courts may enforce it.
• Protecting confidential information and trade secrets is a legitimate purpose (e.g., Clause 9 in this case).

Teaching Tip The focus is on the scope and reasonableness of the restraint, not on a blanket label of “restraint of trade”.

The court found the agreement reasonable. The evidence did not show any unfairness. A negative covenant in a service contract is not automatically void under Section 27. Protecting trade secrets via Clause 9 is legitimate.

An injunction was granted restraining Deshpande from serving as a weaving master at Rohit Mills until 31 December 1946. The appeal was dismissed with costs; interim stay was discharged.

Ratio: A reasonable, narrow, and time-limited negative covenant tied to employment can be enforced. Such a clause does not, by itself, offend Section 27 when it aims to protect legitimate employer interests like confidentiality.

• Clarifies that employment-linked restraints can be valid.
• Supports confidentiality and trade secret protection.
• Guides drafting of clear, narrow negative covenants.

1. Reasonableness wins: Courts look at scope, duration, and purpose.
2. Not a blanket ban: Section 27 does not void every negative covenant.
3. Confidentiality counts: Properly worded clauses like Clause 9 help.
4. Relief is tailored: Injunction matched the remaining contract period.

Mnemonic: “Reasonable Restraint, Respects Secrets” — the 3 Rs.

1. Spot the covenant → Is it narrow and time-bound?
2. Shield secrets → Does it protect confidential info?
3. Shape the remedy → Injunction only for the term.

Issue: Is the negative covenant unreasonable/void under Section 27? Should an injunction be granted?

Rule: Reasonable, time-bound restraints linked to employment and confidentiality may be enforced.

Application: Covenant limited to term; protects trade secrets (Clause 9); no evidence of unfairness.

Conclusion: Covenant valid; injunction granted until 31 Dec 1946; appeal dismissed with costs.

Negative Covenant

A promise not to do certain acts (e.g., not to join a rival during the contract term).

Section 27

Provision against restraint of trade; interpreted with reasonableness in employment context.

Injunction

A court order stopping a party from doing a specific act.

Trade Secrets

Confidential processes/information that give a business an advantage.