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Whether Foreiture Clause In An Employment Agreement Is Enforceable In Law

Court :
[Del] CS (OS) No.1157of 2014

Brief :
The Plaintiff resigned from Defendant which was accepted on the same day and he was relieved from duty. The plaintiff joined in a competitor's business. When the Plaintiff approached the Defendants for payment of the balance incentive award, he was informed that he did not comply with the terms and conditions of the incentive award and hence the payment was not liable to be made.

Citation :

[Del] CS (OS) No.1157of 2014.


1. The Plaintiff is the employee of Defendant Company and he was awarded a bonus for the years 2006-07, 20067-08 & 20098-09.

2. The award of the said bonus was split 50-50. 50% comprised a cash award, which was paid to the Plaintiff and 50% was retained as a deferred incentive award. Cash portion was paid to the Plaintiff at the relevant time and the remaining was deferred over a period of three years and was to be given to him with interest.

3. This bonus award contained a forfeiture clause, by which if an employee joins a competitor's business, the withheld bonus would be forfeited.

4. The Plaintiff resigned from Defendant which was accepted on the same day and he was relieved from duty. The plaintiff joined in a competitor's business. When the Plaintiff approached the Defendants for payment of the balance incentive award, he was informed that he did not comply with the terms and conditions of the incentive award and hence the payment was not liable to be made.


5. The first and foremost question is whether the forfeiture clause is valid and enforceable in law.

6. The forfeiture clause is clear: If a person engages in a competing business/service within the two years period after leaving Cargill, the outstanding amount can be forfeited.

7. It is the settled position, in India at least, that no employer has a right to restrain an employee from taking up competing employment after the term of employment.

8. Such a clause is invalid and unenforceable as per Section 27 of the Indian Contract Act, 1872.

9. But what Cargill is doing in the present case is not restraining him from pursuing his competing business but refusing to disburse the balance incentive award amount to him since he allegedly engaged in a competing business.

10. Can such a clause be held to be valid and enforceable?

11. The answer to this question depends upon the nature of the sum being withheld. The deferred incentive is an amount which was awarded to an employee as a reward for good performance "during the course of employment".

12. The said amount is awarded in full in favour of the employee. Only the payment is postponed partially and for the postponement of the payment, interest is also paid by Cargill to the employee. Thus, the amount belonging to the employee is being withheld by Cargill. Ideally, the entire amount ought to be disbursed at the time when it was awarded but as a part of Cargill's company policy it is being deferred. If the deferment is to enforce a clause which is otherwise unenforceable, the forfeiture based on the said clause, is itself illegal.

13. The amount does not belong to Cargill. It belongs to the employee and Cargill is merely making the employee agree to take the amount with interest after the period of two years. That does not mean that under the garb of paying interest, Cargill can forfeit something on the basis of an invalid and unenforceable clause in the agreement.

14. The terms used in the clause, namely, "forfeiture", and "awarded but not yet distributed" clearly show that the amount vests in the employee and only the disbursement is deferred. The fact that interest is being paid on the unpaid incentive amount also shows that the intention of Cargill seems to be merely enforce conditions on employees which cannot otherwise be enforced in law, at least in India.

15. The condition in an employment contract that an employee cannot engage in competing business after employment for any period is, in restraint of trade, as is clear from a reading of Percept D'Mark India Pvt. Ltd. v Zaheer Khan, (2006) 4 SCC 227 and Niranjan Shankar Golikari v Century Spinning and Manufacturing (1967) 2 SCR 378.

16. There is yet another dimension to the forfeiture clause: By the said clause, the company seeks to abrogate money which vests in the employee. This would also be in restraint of trade. The factum of the award has not been disputed and the conditions of the deferred incentive are also not disputed. The resignation and the acceptance thereof are also not disputed.

17. Under these circumstances, the court is thus not embarking on an adventure which is completely alien to the dispute in hand i.e. the payment of the outstanding deferred incentive amount.

18. The arguments on behalf of Cargill i.e. that the conduct of the Plaintiff raises a triable issue may not be correct inasmuch as the court in this case is not adjudicating the violation of the employment contract or the alleged breach of fiduciary relationship between the Plaintiff and the Defendants. The same would have to be considered and adjudicated in appropriate proceedings if Cargill chooses to file any.

19. As on date, when the court enquired as to whether the Defendants took any action against the Plaintiff in respect of allegations made by them in the leave to defend application or if they had sought refund of the cash part of the incentive already given to him, the answer was a categorical no. If the cash part of the incentive has not been withdrawn and the amount has vested in the Plaintiff, there can be no reason to withhold disbursement of the same.

20. The forfeiture clause is clearly not enforceable, as it is in restraint of trade.


From above discussion and case law it is clear that any agreement /contract ,which restrains trade is unlawful and void. Article 19(6) of the Constitution of India provides us freedom to practice any profession, or to carry any trade ,occupation or business. An agreement that deals with trade freedom is found unlawful since it is a trade restriction agreement that is also contradictory to public policy. If any restrictions are imposed they must be reasonable and according to public policy. The act of the company in this case is against the provisions of article 19(6) and also against public policy. A company cannot withhold benefits of any employee on the basis of a clause in the employment agreement or a forfeiture clause in the award agreement with the employee.

DISCLAIMER: The article presented here is only for sharing information and knowledge with the readers. The views are personal. In case of necessity do consult with consultants for more clarity and understanding on subject matter.


The aim of Section 27 of the Indian Contract Act, 1872 is that any agreement that restricts commerce or business is unlawful. An agreement that prevents or restricts one p erson from engaging in trade, business, or lawful profession of any type is void, according to the clause. As a result, a void agreement is one in which a person refrains from engaging in a certain business of his interest that is unfavourable to the other parties. Every law must be structured in accordance with the dependence of the Indian Constitution, and trade restraint is also allowed under Part XIII of the Indian Constitution. The freedom of trade, business, and exchange is recognised under Articles 301 to 307 of the Constitution. It ensures that every Indian citizen has the ability to choose any legal profession, business, or trade.

Under Section 27 of the Indian Contract Act, 1872, there are exceptions that are considered valid contracts. However, Act 9 of 1932 repeals exceptions 2 and 3 but exception 1 is regarded as a valid contract, that is as follows:

Exception 1: Saving of agreement not to carry on the business of which goodwill is sold;

When one party (seller) sells the goodwill of a business to another party (buyer), the buyer agrees to refrain from carrying on the same business within specified local limits as long as the buyer purchases the title of goodwill from the seller, who is giving an offer not to carry on a similar business within certain limits. This criteria makes the court appear reasonable owing to the nature of the company.

Public Policy underlying Section 27 of Indian Contract Act, 1872

Every person should be free to engage in his or her profession, i.e., occupation, and to conduct his or her business (i.e., buying and selling products and services) and trade in any specified area of activity, according to public policy. This liberty is important for society's economic development. It encourages both competition and industry.

Agreements that restrict this liberty are against public policy and are thus null and void.

This is also an exception to the rule in this case.

If 'A' sells his business to 'B,' for example, 'B' may tell 'A' that he would not engage in the same business in the same town as 'B.' Such a contract limits his business independence, which is fair. Public policy is implemented by Section 27 and it gives effect to the exception.

Exceptions 2,3 have been repealed, but Sections 11(2) and 55 of the Partnership Act of 1932 have been added to replace them. The Indian Constitution guarantees freedom of trade, profession, and business under Article 19 (1)(g). An agreement that deals with trade freedom is found unlawful since it is a trade restriction agreement that is also contradictory to public policy. Under Article 19 (6) of the Indian Constitution, reasonable restrictions on freedom of trade are enforced. The goal of public policy is to promote trade while avoiding monopolies.

Scope of Section 27 of the Indian Contract Act, 1872

The Section is broad in scope, declaring all contracts in restraint of trade unlawful, pro tanto (to that extent or for so much) unless the exception is met. The Section establishes a very strong rule that disproves restraints, both general and partial, and prevents the exception of specific local limits. Agreements in restraint of trade, in broad terms, are those in which one or both parties limit their ability to work or carry on their profession or company in some way. Such agreements are frequently criticised since they are in contradiction with the public interest and are unjust in that they limit human freedom unnecessarily. Every commitment connected to commercial activities, in certain ways, acts as a trade restraint since it limits the promisor's future responsibility.

The restraint is "unreasonably destructive to a genuinely competing private economy." Lord Birkenhead has set up two criteria for determining whether an agreement is a trade restraint. They are as follows:

  • Whether it is reasonable in the view of the parties.
  • Whether it is consistent with the public's intention.

FCS Deepak Pratap Singh
on 20 September 2022
Published in Corporate Law
Views : 36
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