In a recent judgment titled “Lily Packers Private Limited Vs. Vaishnavi Vijay Umak & Ors. [1] ”, the Delhi High Court has delivered a significant judgment for employers, validating the enforceability of lock-in periods in employment contracts as well as arbitrability of employment disputes.
As per the facts of the case, the Petitioner Company Lily packers was engaged in the business of manufacturing and trading of corrugated packaging, sourcing and outsourcing of materials by way of hiring and/or contracting with third-parties to perform tasks, handle operations, or provide services for various companies worldwide.
The Petitioner in the year 2022 employed the Respondent- Ms. Vaishnavi Vijay Umak as a fashion designer in its division called ‘De Belle’ (hereinafter, ‘division company’). Similarly, two other employees namely Meetkumar Patel and Rahul Sharma were employed under separate Service Employment Agreements (Executive) in the years 2021 and 2022. Clause 5 of the said Employment Agreements provided for a lock-in period, as per which, the three employees were bound to serve the employer i.e., the Petitioner company for a period of 3 years from the date of joining. The Service Agreements also provided for a dispute resolution clause, as per which, disputes between the parties shall be adjudicated through arbitration in terms of the Arbitration and Conciliation Act, 1996 (hereinafter, the ‘Arbitration Act’).
It was alleged by the Petitioner Company that the employees went on leave and never came back, thereby, working only for a period of one year and two months as opposed to the agreed lock-in period of 3 years. In view of the disputes that arose between the parties, the Petitioner Company issued separate notices of demand and invocation of arbitration under Section 21 of the Arbitration Act, in terms of Clause 17 of the Employment Agreements. However, in reply to said notice, the employees stated that they were subjected to harassment and humiliation and that none of the allegations contained in the notice were made out. In the said reply, the Employees did not agree to submit to arbitration as per the Arbitration Act. Hence, the Petitioner Company filed petitions before Delhi High Court seeking appointment of an arbitrator under Section 11(6) of the Arbitration Act in employment contracts.
The said application was opposed by the counsel for employees on the ground that disputes raised in the present cases were not arbitrable as per the Arbitration Act for the reason that the employment agreement provided for a lock-in period as per which the employee was bound to serve the employer for a period of 3 years from the date of joining. It was argued that said clause would be contrary to law and in violation of the fundamental rights of life and employment of the Respondent employee, as provided in Article 19 and 21 of the Constitution of India. It was further argued that the disputes involving violation of fundamental rights are not arbitrable and hence the present dispute is not liable to be adjudicated by an Arbitral Tribunal.
After hearing the submissions, the Delhi High Court framed two legal questions for determination as under:
i. 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?
ii.Whether disputes relating to a lock-in period in employment contracts are arbitrable in terms of the Arbitration Act?
In response to the query no. 1, the Court held that such a lock in period in valid in India because the fixation or prescription of a lock-in period in employment contracts, merely means that the employee would serve the employer for a certain period. In employment contracts, the terms which the employees agree to, such as, the lock-in period provided herein, pay fixation, emolument benefits, etc. are usually the subject matter of negotiation. Such clauses in an agreement are usually decided upon voluntarily, as also such employment contracts are entered into by the parties by their own individual consent and volition. It was also noted that such clauses in employment contracts may in fact be necessary for the health of the employer institution as it provides the required stability and strength to the employer institution and its framework. Lock-in periods in employment contracts are especially prevalent at the executive levels in the trade and industry and are considered necessary for the purpose of stability and continuance of the employer organization. It also reduces the employee attrition
levels.
The Court further held that principles with regard to the validity of covenants in employment contracts are well settled. Any reasonable covenant operating during the term of the employment agreement would be valid and lawful. It cannot, therefore, be argued that in the present cases there is a violation of any Fundamental Right as enshrined in the Constitution of India. It was further observed that employment contracts in general are contractual disputes and not disputes which raise issues of violation of fundamental rights, in such fact situations. 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.
In response to the query no. 2, the Court held that in the cases at hand, the employer is not seeking to restrain the employees from seeking employment with any competitor of the employer, post termination of the employment agreements. Rather, the covenants in the present employment agreements are only operative during the subsistence of the employment agreements. Basis the exchange of communications between the Petitioner employer and the Respondent employees, the Court further observed that the employer was interested in protecting its confidential information as also wished to seek damages from the employees. As the same are disputes within the four-corners of the respective employment agreements entered into between the parties, the Court held that the disputes raised herein were clearly arbitrable in terms of the Arbitration Act and thus appointed an Arbitrator to adjudicate the disputes that had arisen between the employer and the employees.
Anhad Law’s Perspective
The Delhi High Court’s judgment is significant as it brings clarity to the enforceability of lock-in periods in employment contracts. The Court's decision clarifies that lock-in periods, which restrict an employee’s ability to leave a company for a set period after joining, are legal and do not infringe upon fundamental rights enshrined in the Indian Constitution. This provides employers with greater stability and protection against the costs associated with high employee turnover, particularly for those who invest heavily in training new hires. This decision offers benefits to both employers and employees by promoting stability for businesses while ensuring transparency and informed consent from workers.
This judgment offers employers greater flexibility in structuring their employment contracts. By including a well-defined lock-in period, they can ensure a degree of commitment from newly hired employees, especially for those in critical roles. However, employers should ensure such clauses are reasonable in duration and clearly explained to prospective employees during the recruitment process. For employees, the decision underscores the importance of carefully reviewing employment contracts before signing.
The judgment goes a step further by stating that disputes arising from lock-in clauses are arbitrable as per the Arbitration Act. This means that disagreements surrounding the validity or application of such clauses can be settled through a private arbitration process, bypassing the often-lengthy court system. This offers a faster and potentially more cost-effective means of resolving such conflicts.
