Icons like Trehan not 'coerced employees'

LEGAL EYE

With an amicable settlement, the spat involving Escorts Heart Institute (EHIRC), the hottest corporate news of the season, has been ostensibly put to rest. But given the backdrop, any resolution has to necessarily replace the existing understandings, which are clearly inadequate to address the complexities involved.

Thanks to wide media coverage, the facts are well known. Fortis' acquisition of EHIRC from the Escorts' Group itself is under litigation, challenged by Anil Nanda, a family member and stakeholder.

The court is required to determine whether the charitable purpose for which land was allotted to EHIRC at a concessional price, had been breached and the corpus of charity effectively appropriated for personal gain. The DDA has cancelled the lease, and the transfer to Fortis is subject to the outcome of the case.

The fallout between the 10 per cent shareholder, Dr Naresh Trehan and Fortis from inception, is occasioned by his involvement in his Medicity Project. Trehan's thousand-crore super specialty project in Gurgaon, is expected to be operational next year.

Clearly Fortis conceived this as a situation giving arise to conflict of interest, which would result in denudation of the knowledge and skill capital that Trehan represents, and other critical resources as well, ultimately eroding the existing and potential client base.

Media sensation apart, the controversy throws up certain material issues relating to such joint ventures, involving the knowledge capital of one party on the one hand, and the financial capital on the other. Trehan holds 10 per cent per equity, which makes him a minority shareholder under law. Trehan is also an employee of EHIRC.

Both parties therefore wear essentially two hats, which implies two distinct contractual relationships and parallel documentation. There would necessarily have to be a shareholders agreement, which would define corporate governance, exit options, voting patterns etc.

The employment agreement would provide for mutual responsibilities and obligations, duration, remuneration etc. It was Trehan's employment contract, terminable in 2110, which was revoked by the management.

One can conjecture what conditions for premature termination are contemplated in the employment agreement, as also if any negative covenants such as non-compete were provided in both agreements.

Presumably, in 1988, when EHIRC was conceptualised and established, the Escorts group had a long-term perspective and did not contemplate any exit, as items such as non-compete, non-solicitation, confidentiality had not assumed the current critical proportions.

Increasing competitiveness and a complete reorientation of business ethics have necessitated incorporation of stringent negative covenants between companies and employees, and wherever possible, with potential competitors.

In several jurisdictions, laws have evolved to recognise such covenants, subject to the test of reasonableness.

In India, such agreements are governed under the Indian Contract Act, whereby any restraint on a person from exercising a lawful profession, trade or business is void. Indian law holds the right to earn one's livelihood as fundamental and proceeds on the basis that in most employment contracts, the employee does not possess equal bargaining power.

Therefore Indian courts will never countenance a situation compelling an employee to continue to render service, or be forced into idleness. Nor will they grant specific performance of an employment contract, except in matters where restraint is imperative for protection of trade secrets, etc.

Between joint venture partners, restrictions of non-compete and/or post-termination solicitation are considered reasonable, unless established as induced by duress. It appears the contract documents did not restrain Trehan from engaging in any competitive project, though his stake and worth must have been factored in by Fortis in the acquisition valuation. And icons such as Trehan are not in the category of coerced employees.

Indian courts have consistently held during the term of an employment contract, all reasonable negative covenants are valid and enforceable. If an employee's services are utilised elsewhere, particularly in competitive activity, he is liable to be dismissed without notice.

No right thinking employer can condone a situation, where a key employee sets up a competing establishment in his turf, which is a potential threat to the employer organisation, and ultimately the clientele. Its another matter that Trehan's knowledge capital is of such unique and sensitive nature, that the High Court permitted unrestricted access on humanitarian grounds.

The matter took an ugly turn with the FIR on vandalism charges, which reportedly the parties have applied to the Court for quashing. However, the issues are fundamental - Trehan will not give up his Medicity Project, it is worth speculating whether this can remain out of the law courts in the long run.

Kumkum Sen is a partner at Rajinder Narain & Co., and can be reached at kumkumsen@rnclegal.com