Background

The case involves three petitions filed by Lily Packers Private Limited against three different respondents working at different positions in the Petitioner company (ARB.P. 1210, 1212 and 1213/2023). All the Respondents had left the company during the lock-in period of 3 years from the date of joining the company. The employment contract had an arbitration clause that specifies that Disputes are to be resolved through arbitration as per the Arbitration and Conciliation Act, 1996.

The employment contract had following common clauses.

1. Lock-in Period: Employees are required to serve the company for a specified period (usually 3 years) and cannot terminate the contract before this period.
2. Negative Covenant: Employees must devote their full time and energy to the company and cannot engage in other employment without prior approval.
3. Confidentiality: Employees must keep all confidential and proprietary information in confidence and not divulge it to any person.
4. Intellectual Property: Employees have obligations towards the company’s intellectual property.
5. Data Protection: Employees must protect the company’s data.
6. Termination: The company can terminate the employment with a 30-day notice, while employees must give a 180-day notice after the lock-in period.

The contract provided several remedies and actions in the event of breach.

1. Compensation for Damages: The company is entitled to recover compensation equivalent to the damages suffered due to the breach. Additionally, the company can claim an amount equivalent to six months’ total emoluments calculated at the rate drawn at the time of the breach.
2. Permanent Injunction: The company can seek a permanent injunction to prevent further breaches. This means that the court can order the employee to stop engaging in activities that violate the agreement.
3. Return of Company Property: The employee must return all company property, including confidential information and intellectual property, which is in their possession.
4. Non-Compete Clause: The employee agrees not to establish, set up, maintain, engage, or participate in a related or competing business for a period of six months after their employment with the company ends. This clause is intended to protect the company’s confidentiality and goodwill.

Court Ruling

1. Legal Enforceability: The court found that the lock-in period stipulated in the employment contracts is legally enforceable. The lock-in period requires employees to serve the company for a specified duration (usually three years) and prohibits them from terminating the contract before this period.
2. Fundamental Rights: The court determined that the lock-in period does not violate any fundamental rights of the employees. The court emphasized that the employees voluntarily agreed to the terms of the employment contract, including the lock-in period, and that such agreements are binding.
3. Arbitrability of Disputes: The court also ruled that disputes related to the lock-in period are arbitrable under the Arbitration and Conciliation Act, 1996. This means that any disagreements regarding the lock-in period must be resolved through arbitration as specified in the employment contracts. The court emphasized that the arbitration clause covered all disputes arising out of the agreement, including those related to the lock-in period. The court found that the parties had agreed to resolve their disputes through arbitration, and this agreement was binding.
4. Legal Precedents: The court referred to previous judgments that supported the arbitrability of employment disputes, including those related to lock-in periods. The court highlighted that arbitration is a valid and effective method for resolving such disputes, provided that the arbitration clause is clear and unambiguous.

To sum up

The court’s decision sets important legal precedents for employment contracts in India, particularly regarding the enforceability of lock-in periods and the arbitrability of related disputes. The ruling would also help companies to protect their IP rights that are generally at risk of being exposed with the departing employee. This ruling will guide future cases involving similar contractual clauses.