Lock-in period clauses in employment agreements restrict an employee’s ability to leave a company for a specific period of time from the date of their appointment. Such clauses are frequently incorporated by companies in order to ensure a degree of commitment from their newly hired employees as well as to ensure a return on the investments made on an employee’s skill development and training.
Lock-in period clauses in employment agreements assume significance in the backdrop of commercial realities such as rising attrition rates, the spreading of gig economies as well as increased instances of moonlighting among employees.
Over the years, the validity and enforceability of such clauses have been judicially scrutinized on the anvil of Section 27 of the Indian Contract Act, 1872 (‘ICA’) which lays down that agreements in restraint of a person’s lawful exercise of trade are void.
The principles of law in this regard have been long settled by the Hon’ble Supreme Court of India in its landmark judgment titled as ‘Niranjan Shankar Golikari v. Century Spg. and Mfg. Co. Ltd., 1967 SCC OnLine SC 72’. While analyzing the enforceability of an employment lock-in clause, the apex court laid down that its legal validity can be assessed on the basis of its ‘reasonability’, that is, in so far as it relates to the protection of an employer’s legitimate business interests. Thus, the court ruled that such clauses would not be in violation of Section 27 of the ICA as long as they are imposed during the subsistence of the tenure of the employee and aim to protect legitimate business interests, that is, specialized information and confidential know-how acquired by the employee during training for instance.
The aforesaid interpretation of the apex court has also been affirmed in the cases of BLB Institute of Financial Markets Ltd. v. Ramakar Jha, 2008 SCC OnLine Del 1075, and Percept D'Mark (India) (P) Ltd. v. Zaheer Khan, (2006) 4 SCC 227.
A recent ruling of the High Court of Delhi in Lily Packers vs. Vaishnavi Vijay ARB Pet. 1210 of 2023 has generated further discussions on employment lock-in period clauses.
The dispute in the matter arose out of three employment agreements which provided for a lock in period restraining the respective employees (‘respondents’) from leaving the employer company (‘petitioner’) for a period of three years from the date of their joining. On account of premature resignations tendered by the respondents, the petitioner invoked the arbitration clause contained in the employment agreements and filed a petition before the High Court of Delhi seeking the appointment of an arbitrator. The respondents objected that the inclusion of a lock-in period clause constitutes as a violation of Article 19 of the Constitution of India as well as the doctrine against restraint of trade.
The Delhi High Court, after analyzing the settled principles of law laid down by Niranjan Shankar Golikari v. Century Spg. and Mfg. Co. Ltd., 1967 SCC OnLine SC 72’ ruled that a three-year lock-in period included in the contract was reasonable and not in violation of the respondent’s fundamental rights. The Delhi High Court justified its decision by recognizing that such a lock-in period clause aims to protect inter alia the health of an employer institution’s stability, reduce attrition levels and protect the investments made by the employer in training their employees in making them acquire specialized knowledge. Apart from the above, the ruling further went on to acknowledge that the quantum of damages, if any, would be dependent on the evidence furnished by the employer regarding the nature of employment, the position held by the employee, the kind of training imparted by the employer as well as the details of the investments made by the employer.
The Delhi High Court’s ruling has been passed while having jurisdiction limited to the appointment of an arbitrator. However, the observations made by the court serve as a significant re-iteration of the settled principles of law with respect to employment lock in period clauses.
A lock-in period operating during the subsistence of a contract would not itself be hit by the rigors of Section 27 of the ICA. However, employers would have to discharge the onus of demonstrating a legal injury resulting from the breach in order to claim damages. Such legal injury may be demonstrated on the basis of the variables laid down by the Delhi High Court, that is, the kind of training imparted to the employee as well as the details of the investment made on such training. There are precedents where courts have presumed legal injury when significant investments are found to have been made on the employee in the form of special training or conferring of unique benefits involving financial commitments (Toshnial Brothers (Pvt) Ltd v E Eswarprasad & Ors). However, in absence thereof, the employer must prove actual injury from the breach. Such an interpretation balances the equities by protecting employers' business interests with the need to safeguard employees from unfair penalties.
The Delhi High Court has also proceeded with its decision based on the assumption that such employment agreements are usually a product of negotiation and are decided on the basis of an individual's own consent and volition. However, it is also interesting to note that the hon’ble apex court of India as well the Gujarat High Court in Superintendence Co. of India v. Krishan Murgai; and Lalbhai Dalpatbhai & Co. v. Chittaranjan Chandulal Pandya respectively, provided a caveat that an employee’s covenants ought to be carefully scrutinized due to an inherent inequality in the bargaining powers between the parties in some cases.
Apart from the above, there may be several examples where despite the legal validity of a lock-in period clause, instances such as fundamental breach of agreement committed by the employer himself, deterioration of physical and mental health of the employee during the tenure of the lock-in and/ or workplace harassment faced by the employee could be reasonable justifications for not granting damages to the employer. Thus, the ruling passed by the Delhi High Court albeit while having limited jurisdiction beyond the issue of arbitrability, would serve as a crucial precedent in the identification of circumstantial variables which both employees and employers ought to be conscious of while entering into employment agreements.
About the authors: Aquib Ali is a Partner, Anish Lakhanpal is a Senior Associate and Sarim Fazli is an Associate at Rise Legal.
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