Contract of Personal Service : Not Enforceable in law being in Restraint of Trade : Delhi High Court Rules

Justice Amit Bansal Delhi High Court

Justice Amit Bansal recently [in Global Music Junction P. Ltd. v. Annapurna Films P. Ltd. – Neutral Citation No. 2023/DHC/000064] delivered a judgment examining the law relating to restraint of trade under S. 27 of the Indian Contract Act, 1872. The Court was examining the claim of a Plaintiff who was seeking restraint on an artist from breaching exclusivity clauses in the agreements signed between the parties. The Court held that such clauses in agreements would tantamount to a restraint of trade and would fall foul of S. 27 of the Indian Contract Act, 1872. The relevant findings of the Court are as under:

“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. 

Exception 1.–Saving of agreement not to carry on business of which goodwill 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.”

“17. The result of the above discussion is that considerations against restrictive covenants are different in cases where the restriction is to apply during the period after the termination of the contract than those in cases where it is to operate during the period of the contract. Negative covenants operative during the period of the contract of employment when the employee is bound to serve his employer exclusively are generally not regarded as restraint of trade and therefore do not fall under Section 27 of the Contract Act. A negative covenant that the employee would not engage himself in a trade or business or would not get himself employed by any other master for whom he would perform similar or substantially similar duties is not therefore a restraint of trade unless the contract as aforesaid is unconscionable or excessively harsh or unreasonable or one- sided as in the case of W.H. Milsted & Son Ltd. Both the trial court and the High Court have found, and in our view, rightly, that the negative covenant in the present case restricted as it is to the period of employment and to work similar or substantially similar to the one carried on by the appellant when he was in the employ of the respondent Company was reasonable and necessary for the protection of the company’s interests and not such as the court would refuse to enforce. There is therefore no validity in the contention that the negative covenant contained in clause 17 amounted to a restraint of trade and therefore against public policy.”

“56. The legal position with regard to post-contractual covenants or restrictions has been consistent, unchanging and completely settled in our country. The legal position clearly crystallised in our country is that while construing the provisions of Section 27 of the Contract Act, neither the test of reasonableness nor the principle of restraint being partial is applicable, unless it falls within express exception engrafted in Section 27.

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58. We have perused the relevant portions of Niranjan Shankar Golikari [(1967) 2 SCR 378 : AIR 1967 SC 1098] , Superintendence Co. of India [(1981) 2 SCC 246] and Gujarat Bottling [(1995) 5 SCC 545] which have been extracted by the learned Judges of the Division Bench and quoted in extenso. In the circumstances, there can be no manner of doubt that the Division Bench was right in coming to the prima facie conclusion drawn by it, and in setting aside the Single Judge’s order. No case was made out by the appellant for compelling Respondent 1 to appoint the appellant as his agent in perpetuity. In view of the personal nature of the service and relationship between the contracting parties, a contract of agency/management such as the one entered into between the appellant and Respondent 1 is incapable of specific performance and to enforce the performance thereof would be inequitable. Likewise, grant of injunction restraining the first respondent would have the effect of compelling the first respondent to be managed by the appellant, in substance and effect a decree of specific performance of an agreement of fiduciary or personal character or service, which is dependent on mutual trust, faith and confidence. 

59. The appellant can be adequately compensated in terms of money if injunction is refused. In our view, grant of injunction, in the present case, would result in irreparable injury and great injustice to the first respondent which is incapable of being remedied in monetary terms, as he would be compelled to enter into a relationship involving mutual faith, confidence and continued trust against his will. 

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63. Under Section 27 of the Contract Act: (a) a restrictive covenant extending beyond the term of the contract is void and not enforceable, (b) the doctrine of restraint of trade does not apply during the continuance of the contract for employment and it applies only when the contract comes to an end, (c) as held by this Court in Gujarat Bottling v. Coca-Cola [(1995) 5 SCC 545] this doctrine is not confined only to contracts of employment, but is also applicable to all other contracts.”

“64. Assuming without admitting that the negative covenant in clause 31(b) is not void and is enforceable, it was nevertheless inappropriate, if not impermissible, for the Single Judge to grant an injunction to enforce it at the interim stage, for the following reasons:

(i) Firstly, grant of this injunction resulted in compelling specific performance of a contract of personal, confidential and fiduciary service, which is barred by clauses (b) and (d) of Section 14(1) of the Specific Relief Act, 1963. 

(ii) Secondly, it is not only barred by clause (a) of Section 14(1) of the Specific Relief Act, but this Court has consistently held that there shall be no specific performance of contracts for personal services. 

(iii) Thirdly, this amounted to granting the whole or entire relief which may be claimed at the conclusion of trial, which is impermissible. (Bank of Maharashtra v. Race Shipping & Transport Co. (P) Ltd. [(1995) 3 SCC 257] (SCC paras 10-12). 

(iv) Fourthly, the Single Judge’s order completely overlooked the principles of balance of convenience and irreparable injury. 

Whereas Percept (the appellant) could be fully compensated in monetary terms if they finally succeeded at the trial, Respondent 1 could never be compensated for being forced to enter into a contract with a party he did not desire to deal with, if the trial results in rejection of Percept’s claim. (Hindustan Petroleum Corpn. Ltd. v. Sriman Narayan [(2002) 5 SCC 760]) 

(v) The principles which govern injunctive reliefs in such cases of contracts of a personal or fiduciary nature, such as management and agency contracts for sportsmen or performing artistes, are excellently summarised in a judgment of the Chancery Division in Page One Records Ltd. v. Britton [(1968) 1 WLR 157 : (1967) 3 All ER 822] . In this case it was held that, although the appellant had established a prima facie case of breach of contract entitling them to damages, it did not follow that entire of them were entitled to the injunction sought; that the totality of the obligations between the parties gave rise to the fiduciary relationship and the injunction would not be granted, first, because the performance of the duties imposed on the appellant could not be enforced at the instance of the defendants and, second, because enforcements of the negative covenants would be tantamount to ordering specific performance of this contract of personal services by the appellant on pain of the group remaining idle and it would be wrong to put pressure on the defendants to continue to employ in the fiduciary capacity of a manager and agent someone in whom he had lost confidence.”

“6. A perusal of contract as entered into between plaintiff and defendant No. 1 would show that it was a purely commercial contract. Plaintiff had taken sufficient care to see that it does not suffer losses on its investments and provided that if the performance of defendant No. 1 was below the expectations of plaintiff so as to result into insufficient returns to the plaintiff on investments made for promoting defendant No. 1, the contract could be terminated by plaintiff with defendant No. 1 irrespective of the fact that the contract was for a period of ten years. Though there is no provision in the contract for defendant No. 2 to terminate the contract but I consider that where a contract between the parties is entered into for mutual profits and gains and if running of the contract is found disadvantageous by either of the party, it can be terminated by either party irrespective of the fact whether there is a termination Clause in the contract or not. The right of termination of contract cannot be restricted only to plaintiff. It may be that if the performance of defendant No. 1, in the eyes of plaintiff fell below the mark, the contract could be terminated by plaintiff. Similarly, if defendant No. 1 considers that the performance of plaintiff or the deal as entered by him with plaintiff was not advantageous, he could also terminate the contract. This can happen even if the perception of plaintiff or defendant No. 1 about each other is factually incorrect but the contract can be terminated irrespective of such incorrect perception. Performance of such a contract of service or management cannot be specifically enforced and the only remedy is to claim damages, if it is considered that the termination of the contract by defendant No. 1 with plaintiff has resulted into any loss or damages to the plaintiff. 

7. The contract of representation and services is based on mutual trust and if the trust is lost between the parties, one party cannot be compelled by the Court to keep the contract alive. I also consider that in view of Section 27 of Indian Contract Act, the restrictions cannot be put on a player from terminating the contract of an agency of one company and giving it to some other company. Section 27 disapproves and negates the restrain or restriction on the trade and business or profession. In Rajasthan Breweries Limited v. Stroh Brewery Co. MANU/DE/0860/2000 : AIR 2000 Delhi 450, the Division Bench of this Court had observed that even in absence of specific Clause authorizing and enabling either party to terminate an agreement in the event of happening of events specified therein, a commercial transaction could be terminated even without assigning a reason by serving a reasonable notice and ultimately if it is found that the termination was bad in law or contravening any terms or the agreement, the remedy of the appellant would be to seek a compensation for such wrongful termination but not claim for specific performance.”

“14. Contracts not specifically enforceable– The following contracts cannot be specifically enforced, namely– 

(c) a contract which is so dependent on the personal qualifications of the parties that the court cannot enforce specific performance of its material terms; and 

(d) a contract which is in its nature determinable.” 

The provisions of Section 14 prior to its amendment on 1.10.2018 are set out below:

“14. Contracts not specifically enforceable.–(1) The following contracts cannot be specifically enforced, namely,– 

(a) a contract for the non-performance of which compensation in money is an adequate relief;

(b) a contract which runs into such minute or numerous details or which is so dependent on the personal qualifications or volition of the parties, or otherwise from its nature is such, that the court cannot enforce specific performance of its material terms;

(c) a contract which is in its nature determinable;

(d) a contract the performance of which involves the performance of a continuous duty which the court cannot supervise.”

To be noted, the present Section 14(c) of the Specific Relief Act, 1963 is pari materia with the erstwhile Section 14(1)(b) and the present Section 14(d) is identical to the erstwhile Section 14(1)(c).