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Synopsis

The Delhi High Court, recently, held that a reasonable lock-in period in employment contracts is in nature of ‘lawful and reasonable covenants’ and therefore, does not violate the fundamental rights enshrined in the constitution. The court further opined that disputes arising out of such lock-in periods during employment are arbitrable. 

The bench of Justice Pratibha M Singh held, “Reasonable lock-in periods in employment contracts that apply during the term of employment are valid in law and do not violate Fundamental Rights as enshrined in the Constitution of India”. 

The case arose from a petition filed by Lily Packers Pvt. Ltd. under Section 11(6) of the Arbitration and Conciliation Act, 1996, seeking the constitution of an Arbitral Tribunal as per the Service Employment Agreement dated 16th April, 2022. Lily Packers, engaged in manufacturing and trading corrugated packaging and outsourcing materials, hired Vaishnavi Vijay Umak as a fashion designer for its 'De Belle' division. The employment agreement included various conditions, such as salary, working hours, lock-in period, confidentiality, and data protection.

The agreement specified a three-year lock-in period, during which Vaishnavi agreed to dedicate her full time and energy to the company. Despite this, Vaishnavi went on leave on 14th June, 2023, and did not return, serving only one year and two months instead of the agreed three years. Lily Packers expressed concerns about potential breaches of confidentiality, intellectual property, and data protection clauses. 

Following these events, Lily Packers issued a notice on 21st June, 2023, invoking arbitration under the Act. In her reply on 18th July, 2023, Vaishnavi denied the allegations and refused to submit to arbitration, claiming harassment and humiliation. Consequently, Lily Packers sought the appointment of an Arbitral Tribunal.

The court's observations centered on disputes arising from Clause 5 of the Service Employment Agreements (Executive). This clause imposed a three-year lock-in period, preventing employees from leaving Lily Packers company prematurely. Lily Packers invoked arbitration under Section 21 of the 1996 Act, as stipulated in Clause 17 of the agreements, but Employees refused arbitration. The fundamental argument presented was that these disputes were not arbitrable, contending that Clause 5 violated Article 19 of the Constitution of India and Section 27 of the Indian Contract Act, 1872.

“Negative covenants in employment contracts which prohibit the employee from carrying on a competing business beyond the term of the contract are void and not enforceable. However, the Court further observed that such negative and restrictive covenants that operate during the subsistence of the employment contract, are valid”, the court highlighted. 

In the petitions, the court noted that employees entered into Service Employment Agreements (Executive) on various dates in 2021 and 2022 with the company. These agreements included Clause 5, imposing a three-year lock-in period requiring the employees to serve the company from their date of joining. The court found that such clauses, including other employment conditions like confidentiality and data protection, are typically negotiated voluntarily between parties. 

The court noted that such provisions, aimed at providing stability to the employer institution and reducing employee turnover, do not violate fundamental rights under the Constitution of India. “There may be certain employment conditions which could be considered unreasonable curtailment of the employee’s right to employment but a 3-year period of lock-in cannot be held to be such a condition”, the court added. 

The court observed that the key issue in these cases was whether the disputes themselves were arbitrable under the Arbitration and Conciliation Act, 1996. The court addressed the validity of arbitration clauses requiring a pre-deposit of arbitral claims. The court emphasized that lawful and reasonable covenants in employment contracts, including lock-in periods during employment, are valid and do not violate constitutional rights. Therefore, the court concluded that disputes concerning lock-in periods during employment contracts are arbitrable under the Act.

Based on the prayers and evidence presented, the court determined that the disputes raised were clearly within the scope of arbitration under Section 21 of the Act, 1996. However, the court clarified that its observations in the order would not bind the arbitrator, who would independently decide on all issues in accordance with the law.

Accordingly, the court disposed of the petition. 

Case Title: Lily Packers Private Limited v Vaishnavi Vijay Umak (2024:DHC:5115)