Bombay High Court
Indus Powertech Inc vs Echjay Industries Pvt Ltd on 17 October, 2024
Author: A. S. Chandurkar
Bench: A.S. Chandurkar
2024:BHC-OS:16749
BDP-SPS
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
COMMERCIAL APPEAL (LODGING) NO.26031 OF 2023
ALONG WITH
INTERIM APPLICATION (LODGING) NO.26098 OF 2023
SNEHA IN
ABHAY COMMERCIAL APPEAL (LODGING) NO.26031 OF 2023
DIXIT Indus Power Tech Inc. ]
Digitally signed Through its President ]
by SNEHA
ABHAY DIXIT 8331 Brandford Way, Suite#5, ]
Date: 2024.10.17
20:49:46 +0530 Raleigh, NC 27615 ] .. Appellant /
United States of America ] Original Respondent
Versus
M/s. Echjay Industries Pvt. Ltd. ]
83, Bajaj Bhavan, Nariman Point, ] .. Respondent /
Mumbai - 400021 ] Original Petitioner
Mr. Ravi Kadam, Senior Advocate, with Mr. Anoshak Davar, Mr. Bhavesh
Wadhwani, Ms. Kajal Gupta, Advocates, i/b M.V. Kini & Co., for the
Appellant-Applicant-Original Respondent.
Mr. Sharan Jagtiani, Senior Advocate, with Mr. Jehangir Jejeebhoy,
Mr. Rahul Dwarkadas, Mr. Areez Gazdar, Ms. Shireen Mistri and Mr. George
Reji, Advocates, i/b Veritas Legal, for the Respondent-Original Petitioner.
CORAM : A.S. CHANDURKAR & RAJESH S. PATIL, JJ
The date on which the arguments were heard : 22ND AUGUST 2024
The date on which the Judgment is pronounced : 17TH OCTOBER 2024
JUDGMENT :
(Per A. S. Chandurkar, J.)
1] Admit. The Commercial Appeal is taken up for final disposal.
2] This appeal filed under Section 37 of the Arbitration & Conciliation
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Act, 1996 (for short, "the Act of 1996") raises challenge to the judgment
dated 08/08/2023 passed by the learned Single Judge in exercise of
jurisdiction under Section 9 of the Act of 1996. By the said judgment, the
appellant has been restrained from sourcing forgings/parts or products from
an Indian entity, RKFL by granting an injunction in terms of prayer clause
(a) of the Interim Application. Being aggrieved by the aforesaid judgment,
the respondent in the proceedings under Section 9 has filed this appeal.
3] Facts that are relevant for considering challenge are that on
31/03/2015 a Master Supply Agreement - MSA came to be executed
between Indus Powertech Inc, the appellant, hereinafter referred to as "the
Company" and Echjay Industries Private Limited, the respondent,
hereinafter referred to as "the Supplier". Under this MSA, the Supplier
undertook to supply to the Company various products since the Company
was specializing in supplying engineering components to North American
manufacturers. Various terms and conditions were entered into. Clauses 3
and 15 to 17 being relevant are being reproduced hereunder:-
"3. Non-compete/Non-solicitation :
The Supplier agrees that the Company shall have exclusive
rights to deal with all customers or clients introduced to it by
the Company (hereinafter referred to as "Customers") from
within the geographical boundaries of United States of
America, Canada and Mexico (hereinafter "Territory"). The
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current list of such Customers is detailed in Annexure-I and
all transactions with the Customers in the Territory shall be
through and shall accrue to the benefit of the Company.
During the term of this Agreement and for a period of
twenty four (24) months after termination of this Agreement
for any reason, the Supplier shall not sell or solicit business
from, or conduct business with the Customers. Similarly, the
Company will also not source forgings from any other
forging Company from India unless pursuant to Supplier's
refusal to quote or supply such items."
"15. Termination for Cause :
Either party may terminate this Agreement prior to the
expiration of the initial or any renewal term of this
Agreement only for "cause" upon one hundred eighty (180)
days' prior written notice to the other Party setting forth the
breach complained of. The term "cause" shall for purposes of
the Agreement mean :
a) Existence of a force majeure or other circumstance
beyond a Party's reasonable control which hinders
that Party's performance of its obligations under this
Agreement for more than one hundred eighty (180)
days.
b) Breach of any material obligation under this
Agreement;
c) Conviction on a serious criminal offense."
"16. Termination without Cause :
Either Party may terminate this Agreement without cause by
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giving an advance notice, in writing, to the other Party at-
least three hundred sixty-five (365) days prior to intended
date of such termination."
"17. Commission upon Termination: Upon termination of this
Agreement by the Supplier for any reason, the Supplier
agrees to continue to supply the Products and to pay any
commission due or earned to the Company on all orders
which are received by the Supplier for a period of two (2)
years from the date of such termination."
Parties acted in accordance with the MSA until the Supplier on
27/01/2023 exercised its right under Clause 15 of the MSA and served a
notice to terminate the MSA by furnishing various causes for termination
with which we are presently not concerned. The Supplier thereafter filed
Commercial Arbitration Petition (L) No.16800 of 2023 on 21/06/2023
seeking an order of injunction as per Clause 3 of the MSA so as to restrain
the Company from sourcing forgings/engineering components, etc from an
Indian entity, RKFL or its subsidiaries and from carrying out business either
directly or indirectly with RKFL and/or its subsidiaries. The learned Judge
on 30/06/2023 issued an interim direction requiring the Supplier to place
on record relevant details of quantities of supplies as indicated in various
purchase orders. The Company thereafter filed its affidavit in reply dated
11/07/2023 and opposed the grant of any interim relief to the Supplier as
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prayed for. It also referred to various documents and correspondence
exchanged between the paries. A further affidavit was also filed by the
Supplier in rejoinder.
4] While considering the Arbitration Petition filed under Section 9 of the
Act of 1996, the learned Judge found that the Company had taken steps to
source the concerned products from RKFL. Though Clause 3 which was the
non-compete/non-solicitation clause provided that for a period of 24
months after its termination such steps could not be taken, it was found that
the Company had proceeded to place orders on RKFL on the ground that the
Supplier had refused to make supplies. It was found that there was no basis
to hold that there was a failure on the part of the Supplier to supply
requisite parts to the Company which constrained the Company to turn to
another forging Company in India. Since Clause 3 contained reciprocal
obligations, it was found that sourcing of 542 parts of "Alloy Steel Forging
Machined Gear Pinion Semi-Finish" and 440 parts of "Alloy Steel Forging
Machined Gear Ring Semi-Finish" was in breach of Clause 3 of the MSA. On
that basis, the learned Judge proceeded to restrain the Company from
sourcing the said parts/products from RKFL. It was also directed that the
Company would not use 942 products as components in the automotive
process by supplying it to the end user.
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5] Mr. Ravi Kadam, learned Senior Advocate for the Company at the
outset submitted that Clause 3 of the MSA which was the non-compete and
non-solicitation clause would operate only during the period when the MSA
was in existence. The Supplier on 27/01/2023 having issued a termination
notice under Clause 15 and the notice period having come to an end on
28/07/2023, the said non-compete clause would not operate post
termination of the MSA. The impugned order passed under Section 9 of the
Act of 1996 was much subsequent to the issuance of the termination notice
as well as the expiry of the notice period of 180 days under Clause 15. It
was submitted that post termination of the MSA, such restraint clause would
fall foul of Section 27 of the Indian Contract Act, 1872 (for short "the Act of
1872) which resulted in the Company being restrained from undertaking
lawful trade or business after termination of the MSA. Though the Company
was a signatory to the MSA, Clause 3 which was the non-compete clause
could be treated as valid only during currency of the MSA and not after its
termination. He submitted that though the Company did not raise this plea
before the learned Judge while defending the proceedings under Section 9
of the Act of 1996, the said issue being a pure question of law based on
interpretation of the MSA itself, it was entitled to raise this ground in
appeal. To support this submission, the learned Senior Advocate placed
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reliance on the decision in Rajendra Shankar Shukla & Ors etc. vs. State of
Chattisgarh & Ors. Etc. 2015 INSC 532. According to him, no factual
adjudication would be required to consider this submission that was being
urged while challenging the order passed under Section 9 of the Act of
1996.
6] Inviting attention to the judgment in the case of Gujarat Bottling Co.
Ltd and Others vs. Coca Cola Co. and Others, 1995 INSC 441, it was
submitted that such a negative stipulation in the MSA could operate only till
the time the MSA was in force and not after its termination. He also
referred to the judgments of learned Single Judges of this Court in Taprogge
Gesellschaft MBH vs. IAEC India Ltd., AIR 1988 Bom 157 and VFS Global
Services Pvt. Ltd. vs. Surrit Roy, 2008(3) Mh.L.J. 266. He therefore
submitted that it was impermissible to grant injunction against the
Company post-termination of the MSA on the basis of Clause 3 and that the
same resulted in restraining the Company from carrying out its trade and
business despite the fact that the Supplier had terminated the MSA. He also
referred to Clause 17 of the MSA. It was thus submitted that the order of
injunction as granted was liable to be set aside.
7] Mr. Sharan Jagtiani, learned Senior Advocate for the Supplier opposed
the aforesaid submissions. According to him, the Company having failed to
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raise the plea of alleged voidness of Clause 3 of the MSA after its
termination, it could not be now permitted to raise the same in appeal
having failed to raise this ground before the learned Judge. There was no
occasion for the learned Judge to have gone into the said aspect and the the
Company could not be permitted to attack the impugned order on a ground
that was never urged in the said proceedings. He referred to the grounds
raised in the memorandum of appeal prior to its amendment to urge that
the Company had proceeded on the premise that the MSA was still in
subsistence. A plea opposite to the one taken in the proceedings under
Section 9 of the Act of 1996 was now being taken. He therefore submitted
that the Company ought not to be permitted to raise this plea in appeal.
It was then submitted that the material on record indicated that even
after expiry of 180 days as stipulated in Clause 15 of the MSA, various
purchase orders had been placed by the Company and the Supplier had
undertaken supplies accordingly. Reference was made to Clause 17 of the
MSA to indicate that parties continued to have business with each other
notwithstanding the notice of termination. Drawing attention to the
submissions made on behalf of the Company before the learned Judge, it
was submitted that its conduct was contrary to the stand now taken. After
noticing that the Company had solicited forgings from RKFL, the order of
injunction came to be passed. It had not been demonstrated by the
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Company that the impugned order was contrary to law. Hence there was no
reason to interfere with the impugned order since it had been passed on the
basis of material available on record. In the absence of any legal perversity
interference under Section 37 of the Act of 1996 was not warranted.
Inviting attention to the judgment of the Delhi High Court in Wipro Ltd vs.
Beckman Coulter International S.A., (2006) 3 Arb LR 118, it was submitted
that Clause 3 did not amount to any restraint of trade, business or
profession so as to be hit by the provisions of Section 27 of the Act of 1872.
He sought to distinguish the decisions relied upon by the learned Senior
Advocate for the Company and submitted that in these facts no interference
with the impugned order was called for.
8] We have heard the learned counsel for the parties at length and we
have also perused the relevant documents on record. It is not in dispute that
the plea based on voidness of Clause 3 of the MSA being in violation of
Section 27 of the Act of 1872 had not been raised before the learned Judge
in proceedings under Section 9 of the Act of 1996. The same is being raised
in this appeal under Section 37 of the Act of 1996 on the premise that the
same goes to the root of the matter and it is a pure question of law based on
interpretation of the MSA that has been signed by the parties. It is urged
that no factual adjudication is required to be undertaken. In this regard, we
may refer to the observations in paragraph 21 of the judgment of the
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Supreme Court in Rajendra Shankar Shukla & Ors (supra). The same read
as under:-
"21. We are not able to agree with the contention of the
respondent that a ground raised before this Court for the
first time is not maintainable because it has been raised
before us for the first time and has not been raised before
the courts below. Though the said legal plea is raised for
the first time in these proceedings, the learned senior
counsel on behalf of the appellants placed reliance upon
the judgment of the Privy Council In Connecticut Fire
Insurance Co. v. Kavanagh, (1892) A.C. 473, 480 (Privy
Council) wherein, Lord Watson has observed as under :
"when a question of law is raised for the first
time in a court of last resort, upon the
construction of a document, or upon facts either
admitted or proved beyond controversy, it is not
only competent but expedient, in the interests of
justice, to entertain the plea."
The aforesaid views of the Court of Appeal have been
relied upon by this Court in Gurcharan Singh v. Kamla
Singh, (1976) 2 SCC 152. The above mentioned aspect of
Article 243ZD, although is being raised before this Court
for the first time, we are of the view that the same is
based on admitted facts. The legal submission made on
behalf of the appellants under Article 243ZD of the
Constitution has to be accepted by this Court in view of
the similar view that a new ground raising a pure
question of law can be raised at any stage before this
Court as laid down by this Court in V.L.S. Finance Limited
v. Union of India & Ors., (2013) 6 SCC 278, which reads
thus :-
"7. Mr. Shankaranarayanan has taken an extreme stand
before this Court and contends that the Company Law
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Board has no jurisdiction to compound an offence
punishable under Section 211(7) of the Act as the
punishment provided is imprisonment also. Mr Bhushan,
however, submits that imprisonment is not a mandatory
punishment under Section 211(7) of the Act and, hence,
the Company Law Board has the authority to compound
the same. He also points out that this submission was not
at all advanced before the Company Law Board and,
therefore, the appellant cannot be permitted to raise this
question for the first time before this Court. We are not in
agreement with Mr Bhushan in regard to his plea that
this question cannot be gone into by this Court at the first
instance. In our opinion, in a case in which the facts
pleaded give rise to a pure question of law going to the
root of the matter, this Court possesses discretion to go
into that. The position would have been different had the
appellant for the first time prayed before this Court for
adjudication on an issue of fact and then to apply the law
and hold that the Company Law Board had no
jurisdiction to compound the offence."
Further, this Court in Greater Mohali Area Development
Authority & Ors. v. Manju Jain & Ors., (2010) 9 SCC 157 held as
under :-
"26. Respondent 1 raised the plea of non-receipt of the letter
of allotment first time before the High Court. Even if it is
assumed that it is correct, the question does arise as to
whether such a new plea on facts could be agitated
before the writ court. It is settled legal proposition that
pure question of law can be raised at any time of the
proceedings but a question of fact which requires
investigation and inquiry, and for which no factual
foundation has been laid by a party before the court or
tribunal below, cannot be allowed to be agitated in the
writ petition. If the writ court for some compelling
COMA(L)-26031-23 & IA(L)-26098-2023-Judgment.doc 11/20
circumstances desires to entertain a new factual plea the
court must give due opportunity to the opposite party to
controvert the same and adduce the evidence to
substantiate its pleadings. Thus, it is not permissible for
the High Court to consider a new case on facts or mixed
question of fact and law which was not the case of the
parties before the court or tribunal below. [Vide State of
U.P. v. Dr. Anupam Gupta, Ram Kumar Agarwal v. Thawar
Das, Vasantha Viswanathan v. V.K. Elayalwar, Anup
Kumar Kundu v. Sudip Charan Chakraborty, Tirupati Jute
Industries (P) Ltd. v. State of W.B. and Sanghvi
Reconditioners (P) Ltd. v. Union of India.]
27. In the instant case, as the new plea on fact has been
raised first time before the High Court it could not have
been entertained, particularly in the manner the High
Court has dealt with as no opportunity of controverting
the same had been given to the appellants. More so, the
High Court, instead of examining the case in the correct
perspective, proceeded in haste, which itself amounts to
arbitrariness. (Vide Fuljit Kaur v. State of Punjab.)"
In National Textile Corporation Ltd. v. Naresh Kumar Badrikumar
Jagad, (2011) 12 SCC 695, it was held as under:-
"19. There is no quarrel to the settled legal proposition that a
new plea cannot be taken in respect of any factual
controversy whatsoever, however, a new ground raising a
pure legal issue for which no inquiry/proof is required
can be permitted to be raised by the court at any stage of
the proceedings. [See Sanghvi Reconditioners (P) Ltd. v.
Union of India and Greater Mohali Area Development
Authority v. Manju Jain.]""
The aforesaid would indicate that if a question of law is sought to be
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raised based on the construction of a document or on the basis of admitted
facts, it would be open for the appellate Court to consider the same
notwithstanding the fact that said aspect was not raised in the Court of first
instance. If however a question of fact that requires investigation and
inquiry for which no factual foundation has been laid in the pleadings, it
would not be permissible for the Court to consider the same when it was not
raised before the Court whose order is under challenge.
9] The execution of the MSA dated 31/03/2015 and existence of Clause
3 therein is not in dispute. The Supplier has proceeded to terminate the
MSA on 27/01/2023. The only exercise to be undertaken, if the plea sought
to be raised as regards its voidness is to be examined, is consideration of a
purely a legal issue not requiring any factual adjudication to be undertaken.
The legal issue to be considered is, whether after termination of the MSA the
operation of the non-compete/non-solicitation clause would result in breach
of the provisions of Section 27 of the Act of 1872. In our view, since the
Court is required to consider the legal effect of Clause 3 of the MSA after its
termination, the same can be examined in appeal notwithstanding the fact
that such a plea was not raised for consideration in proceedings under
Section 9 of the Act of 1996. No pleadings are required to be gone into and
it is only the legal effect of what has been provided in Clause 3 of the MSA
that is required to be examined.
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In that view of the matter, on admitted facts, we are inclined to
examine the effect of the non-compete clause operating post termination of
the MSA being a pure question of law.
10] On a plain reading of Clause 3 of the MSA, it can be seen that the
Supplier had agreed that the Company would have exclusive right to deal
with all customers or clients introduced to the Suppliers by the Company
within the territories of the United States of America, Canada and Mexico.
The said clause is to operate during the term of the MSA and for a period of
24 months after termination of the MSA whereby the parties have agreed
that the Supplier would not sell or solicit business from or conduct business
with the customers and the Company would not source forgings from any
other Forging Company from India unless the Supplier refuses to quote or
supply such items. The MSA has been terminated by the Supplier by its
notice dated 27/01/2023 after invoking Clause 15 being the termination
clause of the MSA for cause. That clause requires prior written notice of one
hundred eighty days setting forth the breach complained. The period of
one hundred eighty days in terms of Clause 15 has come to an end on
28/07/2023. Since the MSA has been terminated by the Supplier on
27/01/2023, the only issue to be considered is whether post termination of
the MSA, the non-compete/non-solicitation clause would operate. In this
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regard, it may be noted that the consequence of such non-compete clause
during the period when the agreement is in force and its operation post-
termination has different connotations. While operation of such non-
compete clause has been held to be valid and reasonable during currency of
the agreement, same has been treated as a restraint prohibited by Section 27
of the Act of 1872 after the termination of the agreement itself. We may in
this regard refer to the decision in Percept D'Mark (India) Pvt. Ltd. vs.
Zaheer Khan & Anr in 2006 INSC 161 which considers the distinction
between a negative covenant operating during the period of agreement and
its effect after termination of such agreement. Therein the Supreme Court
has observed as under:
"The legal position with regard to post-contractual covenants or
restrictions has been consistent, unchanging and completely
settled in our country. The legal position clearly crystallised in
our country is that while construing the provisions of Section 27
of the Contract Act, neither the test of reasonableness nor the
principle of restraint being partial is applicable, unless it falls
within the express exception engrafted in Section 27. Section
27 of the Indian Contract Act, 1872 provides as follows:-
"27. Agreement in restraint of trade, void.- Every
agreement by which any one is restrained from
exercising a lawful profession, trade or business of
any kind is to that extent void.
Exception 1.- Saving of agreement is not to carry on
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business of which goodwill is sold.- One who sells the
goodwill of a business may agree with the buyer to
refrain from carrying on a similar business, within
specified local limits, so long as the buyer, or any
person deriving title to the goodwill from him, carries
on a like business therein, provided that such limits
appear to the Court reasonable, regard being had to
the nature of the business."
11] The learned Single Judge in VFS Global Services Pvt. Ltd. (supra) has
after considering the decision of the Supreme Court in Percept D'Mark
(India) Pvt. Ltd. (supra) held in clear terms that operation of such restraint
beyond terms of the agreement resulted in an unlawful restraint of trade. In
the said case, the Garden Leave clause prohibited the employee from taking
up any employment during the period of three months of the cessation of his
employment. The learned Single Judge refused to grant relief to the
employer on that basis by holding that the said clause resulted in restraint of
trade and was hit by Section 27 of the Act of 1872.
12] In Gujarat Bottling Co. and Others (supra) the effect of a negative
covenant operating during the subsistence of an agreement and after its
termination has been considered. It has been observed as under :
"In that context, it is also relevant to mention that the said
negative stipulation operates only during the period the
agreement is in operation because of the express use of the
words "during the subsistence of this agreement including
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the period of one year as contemplated in paragraph 21" in
paragraph 14. Except in cases where the contract is wholly
one sided, normally the doctrine of restraint of trade is not
attracted in cases where the restriction is to operate during
the period the contract is subsisting and it applies in respect
of a restriction which operates after the termination of the
contract. It has been so held by this Court in N.S. Golikari
[(1967) 2 SCR 378] wherein it has been said:
"The result of the above discussion is that
considerations against restrictive covenants are
different in cases where the restriction is to apply
during the period after the termination of the
contract than those in cases where it is to operate
during the period of the contracts. Negative
covenants operative during the period of the
contract of employment when the employee is
bound to serve his employer exclusively are
generally not regarded as restraint of trade and
therefore do not fall under Section 27 of the
Contract Act. A negative covenant that the
employee would not engage himself in a trade or
business or would not get himself employed by
any other master for whom he would perform
similar or substantially similar duties is not
therefore a restraint of trade unless the contract
as aforesaid is unconscionable or excessively
harsh or unreasonable or one sided as in the case
of W.H. Milsted and Son Ltd. [1927 WN 233]"
Similarly, in Superintendence Co. [(1981) 2 SCC
246] A.P. Sen J., in his concurring judgment, has
said that "the doctrine of restraint of trade never
applied during the continuance of a contract of
employment; it applies only when the contract
comes to an end". (SCR p. 1289: SCC p.255,
paragraph 18)"
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The contention that such a negative covenant must be confined only
to a contract of employment and not to other contracts was not accepted by
observing that there was no rational basis for restricting the application of
that principle only to a contract for employment.
13] Assuming that the parties to the MSA had engaged in some
transactions post termination, that by itself would not be sufficient to
compel the Company to continue such arrangement in the face of Section 27
of the Act of 1872. It is well settled that a plea of estoppel cannot be raised
to defeat the provisions of a statute as held in 1961 INSC 338, M/S. Mathra
Prashad and Sons Vs. State of Punjab.
14] It thus becomes clear from the aforesaid that though a non-compete
clause that can operate validly during the term of the agreement, it would
not be valid post-termination of the agreement as it would result in
restraint of trade prohibited by Section 27 of the Act of 1872. In the present
case, since the MSA was terminated on 27/01/2023 by the Supplier and the
notice period of one hundred eighty days had already expired prior to the
passing of the impugned order of injunction, we are of the view that the
Company cannot be restrained from undertaking its business after
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termination of the agreement.
15] It is true that this aspect was not urged before the learned Judge in
proceedings under Section 9 of the Act of 1996 and hence the learned Judge
had no occasion to consider the same. However, considering the settled
legal position referred to hereinabove, it is obvious that such non-compete
clause cannot be the basis for grant of relief of injunction post-termination
of the agreement. It is for this reason that interference under Section 37 of
the Act of 1996 is warranted.
Hence for the aforesaid reasons, it is held that Clause 3 of the MSA to
the extent it operates beyond the termination of the MSA cannot be the
basis for grant of an order of prohibitory injunction against the Company.
The impugned judgment dated 08/08/2023 in Commercial Arbitration
Petition (L) No.16800 of 2023 is set aside and the Arbitration Petition stands
dismissed. It is however clarified that observations made in this judgment
are only for considering the prayers made under Section 9 of the Act of 1996
and parties are free to seek adjudication of all their rights in the arbitration
proceedings. All contentions of parties are kept expressly open. The
Commercial Appeal is allowed in aforesaid terms leaving the parties to bear
their own costs. In view thereof, pending Interim Application (Lodging)
No.26098 of 2023 is disposed of.
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16] At this stage, the learned Senior Advocate for the respondent seeks
continuation of the interim relief/order that was operating during pendency
of the proceedings. This request is opposed by the learned counsel for the
appellant. In the facts of the case, the judgment would operate after a
period of four weeks from today.
[ RAJESH S. PATIL, J. ] [ A.S. CHANDURKAR, J.]
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