Arbitrability of Negative Covenant Contained in Employment Contracts

The Delhi High Court, in the case of Lily Packers Pvt. Ltd. v. Vaishnavi Vijay Umak & Connected Matters (ARB. P 1210/2023), where the respondent was an employee of Lily Packers Pvt. Ltd., addressed the issue of the arbitrability of the lock-in period. The contract of employment had a lock in period of 3 years during which the employee cannot terminate the employment. The respondent abandoned the job and never returned. Petitioner concerned about potential breaches invoked arbitration clause to which respondent refused to submit to arbitration claiming it to be harassment and humiliation. The High Court relying on the decisions of the Supreme Court observed that negative covenants during the term of employment which require exclusive service are generally not contrary to law. Advancing further the High Court noted that these lock in periods are prevalent at executive levels in various industries and are essential for reducing employee attrition and ensuring organizational continuity. Therefore, the 3-year lock in period is a reasonable curtailment and employer is not seeking to restrain employee from employment with any competitor post termination hence the dispute is arbitrable under the Arbitration and Conciliation Act, 1996 and a sole arbitrator was appointed to adjudicate the dispute.