Essentials of an Employment Agreement

May 23, 2012 | Contracts, General

An employer-employee relationship is established, and the terms and conditions of employment are laid out in a legally binding contract known as an employment agreement. Although the Shops & Establishment Acts (“S&E Acts”) of a few Indian states, including Karnataka, mandate that an employer shall issue an appointment letter, neither the employment agreements nor the issuance of appointment letters is expressly required by the labour laws.  Typically, employers will write employment/appointment letters and complete employment contracts that explicitly state the terms and conditions of the employment. Important clauses of an Employment Agreement are as below:

1. Roles and Responsibilities

It is important to make sure that the employer and the employee are on the same page with regard to what is expected from the employee. All the roles and responsibilities of the employees shall be expressly defined by the employer and clearly written in the employment agreement.

2. Non-Disclosure and Confidentiality of the information

Employment Agreement typically includes a confidentiality clause to protect the employer’s proprietary information from the employee disclosure to or dissemination to third parties without authorization. An employee is required by this clause to take precautions to ensure that the information of the employer is kept confidential and is not disclosed to others, unless doing so is required by applicable law.  This provision safeguards the employer’s proprietary and confidential information and prohibits the employee from disclosing such information to any third party. These conditions might also stipulate that employee’s hand over all of their employer’s confidential documents and information when their employment ends.

A prohibition was imposed by the Delhi High Court in Burlington Home Shopping Pvt. Ltd. vs. Rajnish Chibber on the use of the client/customer list on any business, including the mail order business, which was included in the petitioner’s database.[1]

The defendant in Diljeet Titus v. Mr. Alfred A. Adebare and Others was an employee of the plaintiff’s company. The plaintiff’s client list and important confidential business information, including several proprietary drafts, were taken by the defendant after he was fired from his position as an attorney. The defendant argued that because he worked on the specific data while employed, he was the owner of the data and had copyright over it. The Delhi High Court rejected the defendant’s argument and determined that the plaintiff owned the information, which was unlawfully taken from the plaintiff, and which the defendant was prohibited from using. It should be noted that while the defendant was prohibited from using such confidential information, the Delhi High Court did not prevent the defendant from offering a comparable service.[2]

Penalties for confidentiality breaches and unauthorized disclosure are provided by the provisions of the Indian Penal Code, 1860, and the Information Technology Act, 2000. With regard to the employee’s breach of confidentiality and disclosure, employers may also pursue remedies under Sections 66 (hacking), 43 (damaging computer systems), 65 (tampering with computer source documents), and 66E (punishment for violation of privacy policy) of the Information Technology Act, 2000.

3. Non-Solicitation

To prevent current or former employees from engaging in any business activities that would be against the interests of the employer, non-solicitation clause is often incorporated into employment agreements. This clause limits and forbids employees from interacting with coworkers or clients/customers of the employer for personal gain, either while they are employed or after they leave their positions. This provision is included to safeguard the employer’s commercial interests.

In the case of Embee Software Private Limited vs. Samir Kumar Shaw the Calcutta High Court ruled that “acts of soliciting committed by former employees take such active form that it induces the customers of the former employer to break their contract with the former employer and enter into a contract with the former employee, or prevents other persons from entering into contracts with the former employer, cannot be permitted”.[3]

4. Non-Compete

In an employment contract, a non-compete clause is included to ensure that employees are prohibited from starting competing businesses both while they are employed and after their employment has ended. According to Section 27 of the Indian Contracts Act of 1872, “Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.” Additionally, every citizen of India has the freedom to engage in any profession, trade, or business, according to Article 19 (g) of the Indian Constitution. However, employers typically include this provision in employment contracts to safeguard the company’s trade secrets and confidential information. The question of how restrictions can be imposed on employees after their employment has ended arises because it is widely accepted that employees may be prohibited from starting businesses or engaging in activities that compete with the company’s operations while they are still employed.

The CEO of the company, Mr. Kumar Apurva, was prohibited by the court in Kumar Apurva v. Valuefirst Digital Media Pvt. Ltd. from engaging in any activity that is in competition with the company as well as from soliciting, interfering with, disturbing, or attempting to disturb the relationship between the company or subsidiary and third parties, including any customers or suppliers of the company or subsidiary.[4]

In Ozone Spa Pvt. Ltd. vs. Pure Fitness & Ors., the court barred the defendants from starting, operating, or establishing any rival businesses in any location that is within 4 kilometers of the plaintiff’s premises. However, Section 27 states that all agreements restricting the practice of any profession are void if they are made with the intent to defraud, mislead, or cause irreparable harm to the employer, trade, or business. Therefore, reasonable restrictions are allowed and do not invalidate the contract.[5]

As a result, the employers typically impose reasonable limitations on this clause to ensure the protection of both the company’s and the employee’s interests.

5. Term and Termination

The nature of the establishment, its location, and the category of employees, are all relevant considerations when it comes to India’s labor laws regarding termination.  The Industrial Disputes Act of 1947 governs the dismissal of employees, and the S&E Acts of the relevant states govern the dismissal of non-employees.  The length of the notice period to be given upon termination of employment and the severance payments that would be due to an employee upon termination are set forth in the state-specific S&E Acts.

By tendering his or her resignation, an employee may voluntarily end the Agreement.  The clause specifically states the conditions and obligations that must be met by both the employer and the employee upon termination, as well as the length of notice that the employee must provide upon termination. A breach of the terms of the agreement, a false representation, fraud, misconduct, a failure to perform obligations and duties, among other things, may be grounds for such a termination of employment. A domestic investigation using natural justice principles should be conducted before any such termination. The employer will be required to complete a full and final settlement by paying the employee all statutory and contractual obligations.

Conclusion

Given the foregoing, it is advised that employment agreements be made between the employer and the employee and contain clauses outlining the terms and conditions of employment, both for the duration of employment as well as after termination of employment. The roles and responsibilities of the employees are outlined in employment agreements, giving the employees a clear understanding of what is expected of him or her both during the employment relationship and after it has ended.  Most importantly, an employment agreement protects the company by including provisions like confidentiality, non-compete, and non-solicitation. These restrictive covenants are crucial in protecting against unauthorized information disclosure, the solicitation of existing employees, and clients, and the establishment of any rival businesses that might harm the employer’s business. Typically, employers will give probationary employees an appointment letter to cover the duration of their employment, and once they are hired permanently, they will enter into an employment agreement with them.

REFERENCES:

[1] 61 (1995) DLT 6.

[2] 2006 (32) PTC 609 (Del).

[3] 2012(3)CHN250.

[4] 2015 SCC Online Del 8360.

[5] 2015 222 DLT 372.

Author: Adyasha Das, Symbiosis Law School, Hyderabad

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Indemnity Clause: Purpose, Commercial relevance

Feb 12, 2012 | Contracts, General

The phrase “Indemnity” may be described as a form of financial security or protection. In an indemnity claim, one party (“Indemnifier”) agrees to protect another party (“Indemnity Holder”) from any loss, expenditure, cost, damage, or other legal consequences resulting from the Indemnifier’s or any third party’s or event’s act or omission [1]. The essential premise of an indemnification provision in a contract is to transfer obligation from one party to another, in whole or in part [2].

An indemnification clause in a business contract is heavily disputed and negotiated. It is one of the mandatory provisions since it guarantees that the Indemnity Holder will be compensated for any damages incurred. The notion of indemnity is codified in Indian law under section 124 of the Indian Contract Act, 1872, which defines it as “a contract by which one party promises to save the other from damage caused by the promisor’s or any other person’s action.”

Purpose of Indemnity Clause

According to Section 124 of the Indian Contract Act, the claim of indemnity arises when a person (indemnifier) agrees or gives assurance to another person (indemnity holder) to save them from any form of loss or damage that has been caused to them by any action of the indemnifier promising such indemnification, or the acts/omissions of any third party who may not be a party to the contract. The provision of indemnity comes into application only when a previous guarantee is made to safeguard a party from the loss, as shown by the preceding definition. Only when there was an expectation of loss and a guarantee was made to suffer the loss does the issue of compensation emerge [3].

When a suit is filed against the indemnity holder or the indemnified, they may be forced to pay damages, fees, or other expenses. Similarly, if the indemnifier has promised to repay or indemnify the indemnity holder for damages, fees, or other expenses paid by the indemnity holder himself, he might file such suit against the indemnifier.

The court decided in Gajan Moreshwar Parelkar vs. Moreshwar Madan Mantri that if the indemnity-holder has incurred a responsibility that is absolute, he may ask the indemnifier to cover it.[4]

Relevance of Indemnity Clause

In a commercial contract, an indemnity is somewhat different than in common law. The indemnity clause is a typical feature in commercial contracts. The goal of including an indemnification provision in a contract is to transfer risk or expense from one party to the other. More specifically, it may protect a commercial transaction between two parties by requiring one side to pay the other sides expenditures in certain conditions.

In commercial contracts, indemnification provisions are structured broadly to include third parties whose activity, action, or carelessness may result in a loss or unexpected situations that are outside the standard conditions of breach actionable at common law. Even if there has been no violation of contract, indemnification provisions may apply in certain particular events or circumstances. In such instances, indemnities extend to unanticipated responsibilities that the common law may not otherwise impose.

IP and Indemnification

Given the high expenses of litigation, an indemnity agreement or provision for intellectual property (IP) may be quite beneficial. IP indemnification agreements assist to restrict a party’s risk and liabilities if infringement concerns come into fruition. In agreements between parties that want to transfer the risk of loss, IP indemnification clauses are prevalent. An existing indemnity provision in an IP agreement establishes which party bears the weight of the infringement risk in IP indemnification. The responsibility to “defend” and/or “hold harmless” the other party may also be included in an IP indemnification clause. In general, an indemnification agreement for IP requires one party to reimburse the other for losses or damages covered by the indemnity provision.

Intellectual property agreements may take many different forms. To minimise indemnity conflicts, it is important to specify the exact kind of IP rights when designing IP indemnification agreements, like Patents, trademarks, copyrights, trade dress, and other related IP rights. The kind of IP rights, as well as the exact conditions under which a party is not responsible for certain losses, should be clearly stated in indemnification agreements. Parties may wind themselves in indemnity disputes or, worse, fighting one other in IP indemnification action if there is no explicit indemnity term. IP indemnification provisions or IP hold harmless agreements that are well-drafted may shield one from the actions of the other party’s workers. They may also defend one against third-party allegations of IP infringement of different kinds. In a lawsuit initiated against a seller of infringing products, for example, an indemnified seller may move the defence of the lawsuit to the supplier. As a result, IP indemnity provisions are often included in agreements concerning IP rights.

Other major variables that impact IP Indemnification Clause coverage and liability include:

1. Limitations of use: When a buyer or licensee mixes or changes a product or technology in such a manner that it exposes the buyer to infringement claims, additional concerns emerge. Sellers often try to lessen this risk by restricting responsibility for combinations and changes, as well as the parties’ compliance or non-compliance with specifications or directions for usage.
2. Limitations on liability: Sellers are increasingly attempting to mitigate at least some of the buyer’s legal risk. To reduce this risk, sellers often use deductibles, liability limitations, co-payments, and proportional caps, among other responsibility restriction measures.
3. Geographic restrictions: These may be used to limit the types of IP that might result in an indemnity claim and to exclude coverage for claims that occur outside of the intended or anticipated area of use or sale. These are particularly crucial when a contract calls for sub-licensees or downstream buyers/sellers to be indemnified.
4. Multiple Indemnitors: Patent infringement cases often include complicated systems made up of several, separate goods or technologies. Recognizing and resolving concerns such as the responsibility of defence, the responsibility of bearing costs involved in such litigation process, etc. before a disagreement starts, may assist to prevent future conflict.
5. Remedial measures: These clauses enable the seller to lessen damages by supplying the customer with non-infringing replacement products or services that perform similarly. Buyers and sellers alike benefit from remedial actions clauses.
6. Pre-existing lawsuit threats: Sellers may seek to have any pre-existing litigation threats excluded from coverage unless they are disclosed to the seller before the underlying agreement is signed.

Conclusion

In most cases, indemnification provisions are derived from business agreements and are intended to safeguard particular commercial risks. Indemnity provisions are sometimes appropriate for the contract’s conditions or even required for the parties to fulfil their obligations. Before including an indemnity provision in a contract, it must be carefully drafted. A badly written indemnification provision might have serious implications. Due to ambiguity in the drafting of an indemnity clause, the indemnifier may not be held liable for losses that they expected it to cover. It’s critical to write the indemnification terms correctly and accurately. They are significant because they move the loss from one party to another, which may have been caused by the former’s carelessness. A well-written intellectual property indemnification agreement helps to distribute the legal risk associated with claimed IP rights violation. A successful IP indemnification clause will address the parties, their duties, and the mechanisms for commencing and satisfying those obligations, while no “magic words” are necessary. Both parties may decrease ambiguity and prevent possible disputes and lawsuits by addressing these problems during contract discussions in a product manufacturer/customer relationship.

Author: Sumedha Vadhulas, Symbiosis Law School Hyderabad.

REFERENCES:

[1] Keshwar Sao v. Guni Singh, AIR 1938 Pat 275.

[2] Daw Nyun v. Maung Nyi Pu, AIR 1938 Rang 359.

[3] Krishnaswani Iyer v. Thathia Raghavian chetty, AIR 1928 Mad 43.

[4] (1942) 44 BomLR 703.

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