NATIONAL LAW UNIVERSITY, JODHPUR

SUMMER SEMESTER
(AUGUST- DECEMBER 2022)
(Term paper towards partial fulfillment of the assessment in the subject of Interpretation of
Statutes)

FLSMIDTH PVT. LTD. V. SECAN INVESCAST (INDIA) PVT. LTD.

2013 (1) CTC 886

SUBMITTED BY: SUBMITTEDTO:

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 INTRODUCTION

The law relating to contracts in India is governed by The Indian Contract Act, 1872
[“Contract Act”]. An agreement is regarded as a contract when it is enforceable by law.
Section 10 of the Act deals with the conditions of enforceability, according to this section, an
agreement is a contract if it is made for some consideration, between parties who are
competent to contract, with free consent and for a lawful object. Under Section 2(j) of the
Contract Act, an agreement not enforceable by law is said to be void. A void contract is
distinguished from a voidable contract. An agreement which is enforceable by law at the
option of one of the parties but not at the option of other is a voidable contract whereas a void
contract cannot be enforced by either party. Sections 20 to 30 provide for the situations
wherein a contract is void. In our assignment we have dealt with sections 27 of the Contract
Act.

In FLSmidth v. Secan Invescast (India) Pvt. Ltd., the matter before the Court fell under
Section 27 of the Act. Section 27 lays down the conditions which render a contract void due
to a restraint of trade. The Court here failed to examine whether the condition of the contract
restraining trade fulfilled the requirements of Section 27.

Analysis by Naman Badsiwal and Lakshya Sharma

RELEVANT PROVISION:

Sec. 27 of the Indian Contract Act, 1872 renders void any agreement which restrains a
person from exercising a lawful profession or trade or business of any kind. An exception
within the Sec. allows the seller of a goodwill to agree with the buyer that he will not carry on
a similar business within reasonably specified local limits.

BRIEF FACTS:

In this case, the appellant was a supplier for spare parts and services in the cement
plant machinery sector. The respondent was a vendor for the appellant for manufacturing
certain products which were to be made strictly as per the specifications of the appellant. The
respondent’s mandate was to use the appellant’s prototypes to manufacture the final product
and then supply the same to the appellant for final supply to the end-user. Since this required
sharing of confidential information and trade

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 secrets with the respondent, the appellant entered into a Non-Disclosure Agreement
dated 22.05.2006. This agreement prohibited the respondent from either soliciting the
appellant’s customers or sharing the appellant’s trade secrets during the duration of the
Agreement and five years after that. This Agreement was to end on 22.05.2011 if neither
party wanted to opt out of it at any time before this date.

On 11.11.2011, the appellant sent a legal notice asking the respondent to furnish a list
of its customers/clients with whom it had shared the appellant’s confidential information.
Upon being sent another notice on 25.01.2012, the respondent conceded that it had directly
approached Madras Cements, a leading customer of the appellant. Hence, the appellant filed a
suit seeking interim injunction along with a suit for damages. The relief sought by the
appellant was the enforcement of the Non-Disclosure Agreement dated 22.05.2006 while the
respondent argued that the Agreement was void for being contrary to Sec. 27 of the Contract
Act. The single Judge of the Madras High Court dismissed the application and aggrieved, the
appellant preferred the appeal being analysed in this project.

QUESTIONS BEFORE THE COURT:

At Para. 10, the learned Judges culled out the questions for consideration. The first
question being whether the Agreement amounted to restraint of trade prohibited under Sec.
27 of the Act; and the second question being whether the appellant is entitled to invoke the
provisions of the Agreement even after the period of expiry of the agreement. However, with
due respect to the learned Bench, the questions are logically inconsistent. There is no
requirement to delve into the first question if the answer to the second question is in the
negative. If the appellants could not invoke the provisions of the Agreement after its period of
expiry, then there was no need for the Court to find out whether the Agreement amounted to
restraint of trade because the appeal was to be dismissed in any case.

ANALYSIS:

The non-compete clause under dispute was Clause 6 of the Agreement. The Court
began by delving into the interpretation that needed to be given to Sec. 27. The judges noted
that while upon a literal construction, Sec. 27 invalidated every agreement imposing a bar on
the exercise of lawful business, in practical business circumstances, such an absolute bar
could not be made applicable. Giving an evolutive perspective to the interpretation of the

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provision (much like the one suggested by William N. Eskridge Jr.), the judges noted that
“the attitude towards public policy is always subject to change in tandem with the change and
development in trade and economic developments”. As such, the learned Bench took note of
important judicial pronouncements from the past to list out the restrictions which could be
placed on the absolute bar placed by the literal meaning of Sec. 27. 1 Suitable distance,
reasonable time limit and restriction on sharing of trade secrets were among the restrictions
mentioned in such precedents apart from the restriction on distribution of goodwill given in
the exception to the provision. It can be safely said that the evolutive construction of Sec. 27
developed in these judgments has received the express recognition of the legislature which
has time and again amended many provisions of the Act but let Sec. 27 remain the same.

Having given an interpretation to the main provision pertaining to the case, the Bench
proceeded to make a clear distinction between restraints imposed by a contract during the
subsistence of the contract and after the expiry of such contract. The difference between the
treatments of these two situations is well settled in law and it is not necessary to delve into
the precedents noted by the Court2 for the purposes of this case analysis. In a nutshell,
covenants restricting trade during the term of the trade are valid and not in derogation of Sec.
27 of the Contract Act as they are designed to further the purposes of the contract. On the
other hand, restraints operative after the termination of the contract are hit by Sec. 27 of the
Contract Act, unless reasonable. The Court rightly reproduced the paragraph from Madhub
Chander v. Rajcoomar Doss3 which notes that any degree of restraints on trade are void
under Sec. 27 and they need not be absolute restraints. Where the legislature intended to
make only absolute restraints void, they used the word ‘absolutely’ within the provision
itself, for e.g. in Sec. 28. This word was not used in Sec. 27.

The Court refused to apply the guidelines in the Wipro case,4 a landmark precedent
cited by the appellants which is applicable on agreements for non-solicitation. It reasons that
the Agreement in the present case is actually a non-disclosure agreement coupled with non-
solicitation, and hence the precedent is not applicable. It is difficult to understand why the
Court created such a differentiation. A non-disclosure coupled with non-solicitation still has
an element of non-solicitation, and the judicial precedent relating to the non-solicitation

1
Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. Ltd., AIR 1967 SC 1098; Gujarat
Bottling Co. Ltd. & Ors. v. Coca Cola Company & Ors., AIR 1995 SC 2372.
2
See, e.g., Superintendence Company of India Pvt. Ltd. v. Krishana Murgai, AIR 1980 SC 1717; Taprogge
Gesellschaft MBH v. IAEC India Ltd., AIR 1988 Bom 157.
3
(1874) 14 Beng. L.R. 76.
4
Wipro Limited v. Beckman Coulter International S.A., 2006 (3) ARBLR 118 (Delhi).

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agreement can be applied on the present Agreement’s non-solicitation part. More so, because
in the Agreement between the two parties, the non-solicitation and non-disclosure parts were
very easily separable and not intertwined too closely.

Starting here, the reasoning of the Court goes into muddy waters. For the sake of
argument, the Court assumes that the Agreement is indeed a non-solicitation agreement and
says that even then the respondent has not solicited any customers of the appellant. To justify
this stance, the Court goes into defining what solicitation means. The judges set a very high
threshold for solicitation: the appellant should prove that the respondent approached his
customers and only on account of such approach, customers placed orders with the
respondent, merely giving quotation to the customers or approaching them is not enough.
Now this high threshold is difficult to digest. According to the Merriam Webster’s dictionary,
soliciting is an attempt to persuade.5 The key word here is attempt. Solicitation requires only
an attempt by a person, it does not require that attempt to be successful. The fact that the
respondent approached the customers of the appellant and quoted his prices to them is an
attempt, the fact that they did not ultimately buy his products is the failure of that attempt.
Unfortunately, the Court decided on the basis of the failure of the attempt rather than the
attempt itself. In the view of the author of this case analysis, this was an incorrect
appreciation of the meaning of the word “solicitation”.

The appellant tries another means to convince the Court and cites Sec. 36 and 54 of
the Indian Partnership Act, 1930 to argue that both the statutes are in pari materia. It is
contended that since non-solicitation by exiting partners is allowed under the Partnership Act,
non-solicitation should also stand outside the purview of Sec. 27 of the Contract Act.
However the Court dismisses this reasoning on the grounds that the Agreement between the
appellant and respondent was not in the nature of a partnership. This reasoning is sound.

At Para. 42, the Court comes to two conclusions. First, that the materials produced by
the appellant are insufficient to show solicitation by the respondent. Second, that in view of
the expiry of the Agreement, the case is prima facie not in favour of the appellant. As argued
above, the first conclusion is a result of the lack of appreciation on the part of the Bench of
the word “solicitation”. The appellants had indeed produced enough evidence to show that
the respondents had approached their customers and given quotations to them. In fact, the
respondents had themselves conceded to this fact. This in itself amounted to solicitation.
5
MERRIAM WEBSTER’S DICTIONARY, available at http://www.merriam-webster.com/dictionary/soliciting (last
accessed Oct. 1, 2016.

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However, even when it did amount to solicitation, the most critical question before the Court
was whether Clause 6 of the Agreement preventing solicitation for five years after the expiry
of the Agreement was valid. It is very surprising that this crucial question was not analysed
by the Court at all. The second conclusion mentioned above is testimony to this proposition.

Where there is settled law that covenants restricting trade beyond the period of the
contract are prima facie violative of Sec. 27 and one such covenant is under question, then
should the Court not first look into whether this prima facie assumption is actually true? In
this case, the Court should have at the outset itself looked into whether the appellant’s
requirement of non-solicitation five years after the contract ended was reasonable or violative
of Sec. 27. Instead, the Court spent practically the entire 44 paragraphs of the judgment to
come to the conclusion that there was no solicitation. By looking into whether there was
solicitation, the Court tacitly accepted that the non-solicitation clause was not violative of
Sec. 27. The approach of the Court should have been the opposite. If the clause was violative,
the appeal should have been dismissed then and there and there was no requirement of going
into the substantive obligations given under the clause.

With due respect, the non-appreciation of the meaning of the word “solicitation”, the
refusal to apply the Wipro case precedent, as well as the inherent logical error in the structure
of the questions culled out by the Bench shows that the Court’s reasoning is imperfect and
flawed. While the judges ultimately dismissed the appeal on grounds of there being a lack of
solicitation, the reasoning for this dismissal is not justified. Therefore, in conclusion, the
dictum of the Madras High Court in this case led to a fair result by means of a flawed
reasoning.

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