The Hon’ble High Court of Delhi vide order dated 11 July 2024, in the recent case of Lily Packers Private Limited Vs. Vaishnavi Vijay Umak & Others (Judgement) held that a reasonable lock-in period contained in employment contracts is in the nature of ‘lawful and reasonable covenants’ and therefore, does not violate the fundamental rights enshrined in the Constitution of India.

BACKGROUND

Lily Packers Pvt. Ltd. (the Petitioner) is involved in manufacturing and trading of corrugated packaging and sourcing and outsourcing of materials s by way of hiring and/or contracting with third-parties to perform tasks, handle operations, or provide services for various companies worldwide. Since the three petitions had similar causes of action, facts and were filed by the same company, they have been tagged together and the court has adjudicated on them in the Judgment. The facts of the case are that the Petitioner had hired the respondents at various positions, and had asked the employees to sign agreements to that effect (Agreements). The Agreements included terms related to salary, benefits, work hours, employment conditions, a lock-in period, confidentiality, and data protection. Clause 5 of the Agreements stipulated a year lock-in period during which the employee could not terminate their employment. The Agreements also covered intellectual property, data protection, and termination clauses, while providing arbitration for disputes. The Petitioner claimed that during their respective lock-in periods, the Respondents went on leave did not return. The Petitioner also expressed concerns about potential breaches of confidentiality, intellectual property, and data protection clauses. Following the Respondents’ departure, the Petitioner issued a demand and summons for arbitration. However, the Respondents made allegations of harassment and humiliation and refused to participate in arbitration. Consequently, the Petitioner approached the Delhi High Court to appoint an arbitral tribunal under Section 11 of the Arbitration and Conciliation Act, 1996 (Arbitration Act). The Respondents contended that the disputes raised in the petition are not subject to arbitration.

ISSUES CONSIDERED

1. Whether a lock-in period in employment contracts is valid in law, or does it violate the fundamental rights enshrined in the Constitution of India?

2. Whether disputes relating to a lock-in period in employment contracts are arbitrable in terms of the Arbitration Act?

 

HELD

The Hon’ble Court held that a lock-in period is valid in India because it merely requires an employee to serve the employer for a specific duration, during the term of employment. In employment contracts, terms like the lock-in period, salary, and benefits are typically negotiated. These clauses are usually decided voluntarily, with both parties entering the contract by their own consent. Such clauses are often necessary for the stability and strength of the employer institution, providing the needed continuity within its framework. Further, the principles regarding the validity of covenants in employment contracts are well established. Any reasonable covenant that applies during the term of the employment agreement is considered valid and lawful. Therefore, it cannot be argued that reasonable lock-in period contained in employment contracts involve a violation of any Fundamental Right as outlined in the Constitution of India. It was also noted that employment contracts generally constitute contractual disputes rather than issues of fundamental rights violations. While some employment conditions could be seen as unreasonably restricting the employee's right to work, a two or three-year lock-in period is not considered such a condition.

Finally, the Hon’ble Court held that the employer is not attempting to prevent the employees from seeking employment with competitors after the termination of the employment agreements. Instead, the covenants in these agreements are only effective during the period of employment. Based on the communications exchanged between the Petitioner employer and the Respondent employees, the Court noted that the employer aimed to protect its confidential information and sought damages from the employees. Since these disputes fall within the scope of the employment agreements, the Court determined that the issues were clearly subject to arbitration under the Arbitration Act and consequently appointed an Arbitrator to resolve the disputes between the employer and the employees.
 

MHCO Comment: The Delhi High Court's judgment clarifies that lock-in periods in employment contracts, which prevent employees from leaving a company for a set period, are legal and do not violate constitutional rights. This Judgment provides stability for employers, particularly those investing heavily in training, by reducing employee turnover costs. It also emphasizes transparency and informed consent for employees. The decision allows employers more flexibility in structuring contracts by including reasonable lock-in periods, ensuring commitment from new hires, especially in critical roles. Moreover, the judgment confirms that disputes over lock-in clauses can be resolved through arbitration under the Arbitration Act, offering a faster and more cost-effective alternative to court proceedings.

This update was released on 18 Jul 2024.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

Legal Update Team
MANSUKHLAL HIRALAL & COMPANY
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