Problem Statement:

A contract of employment has a fixed term of 3 years requiring the employee to commit to
working with Amazon for the said ‘lock-in’ term One such contract employee is not happy
with the wage and working conditions and is keen on taking up employment outside Amazon
within the lock.in period Please advise the Amazon HR team who want you to enforce the
specific performance of the ‘lock-in’ term in the employment contract.

Solution:

 What is ‘Lock-in’ term in employment contract?

Terms in an agreement prescribing for a time period within which any one of the contracting
parties or either of the contracting parties cannot terminate the contract is known as a lock-in
clause.

 What happens if contracting party to terminate the ‘Lock-In’ clause?

If a contracting party terminates the contract within the lock-in period then such clause claims
that the breaching party has to pay the rent for the remaining of the lock-in period, even
though he would not be using the licensed premise anymore as a result of the termination of
the contract.

 Legal implications of ‘Lock-In’ clause

Remedies in case of breach of a lock-in clause is same to that of the remedies for any other
contractual breach i.e., damages and specific performance of the contract. Damages to be
paid in breach of the contract is generally quantified in the agreement itself. Nevertheless, in
each case it is for the court to decide reasonability of the damages claimed based on
evidences advanced during trial. Only reasonable damages are to be awarded by a court for a
breach of any contract irrespective of whatever damages amount had been expressly
consented upon by both the parties in the agreement.

Compensation/ Damages is awarded to make good the losses suffered by the aggrieved
party, so as to reinstate him in his original position. Law does not penalise a contracting
party for a contractual breach and neither does it allow the aggrieved party to take advantage
of such a situation. The rule is that the parties are free to breach the contract provided they
compensate the other party, if the other party has incurred an actual loss due to such breach
Similarly, as a result of a lock-in clause, a licensor cannot ask the licensee to vacate his place
before completion of 3 years. If the licensor does so, then it will amount to breach of contract
and the licensee can sue the licensor claiming reasonable damages for the actual loss he
suffers due to the breach of the agreement or, ask for specific performance of the contract
whereas he has to prove that non-performance of the contract will cause an irreparable
damage to him, which cannot be compensated by monetary award.

 Negative covenant and injunction against the employee

The agreement/contract which prevents a party to the agreement/contract from doing specific
things is called a negative covenant. Some negative covenant restrains the employee from
serving other company or organisation involved in similar types of businesses during the
course of employment, and some negative covenants do the same even after the course of
employment, i.e., even after the end of the terms of employment stipulated in the employment
agreement. The objective of the negative covenant is to protect the trade secrets of the
employer and to restrict the employee from using the confidential information, skills,
knowledge acquired from training provided by the employer and activities of the employer
acquired by the employee during the service period for personal benefit of the employee
himself or that of similar other business organization.

In a number of cases decided by the Honourable Supreme Court, the Apex Court has
observed that negative covenants during the course of employment are valid in the eye of the
law, but the same operating after the termination of employment are void. The findings of the
Apex Court, in Niranjan Shankar Golikari Vs The Century Spinning and MFG. Co. Ltd.
reported in AIR 1967 SC 1098 may be referred in connection with this particular point of
law. In that case, the Apex Court observed that- the considerations against covenants are
different in cases where the restriction is to apply after the termination of the contract than
those cases in 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 the employer exclusively are generally not regarded as restraint of trade and therefore
do not fall u/s 27 of the Indian Contract Act. A negative Covenant that the employee will not
engage himself in trade or business and will not get himself employed by any other master for
performing 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.
An important question decided in the same case was whether the injunction to enforce a
negative covenant can be granted by the court. It was held that there is nothing to prevent the
court from granting a limited injunction to the extent it is necessary to protect the employer’s
interests where the negative stipulation is not void.

Thus, from the above discussions it can be asserted that though the court may grant injunction
to enforce negative covenants, such power should be utilised carefully considering the
different facts and paradigms that may vary from case to case, such as excessive harshness of
the contract, its opposition to the public policy and good conscience, etc. The court has to see
while enforcing the negative covenant that the employee should not be unnecessarily and
unjustly driven to idleness or sent back to the respondent organisation to serve in lieu of an
inappropriately lesser remuneration. Above all, the yardstick of reasonability must always be
observed.