Kumar Apurva vs Valuefirst Digital Media Pvt. Ltd
2015 Latest Caselaw 2409 Del

*       IN THE HIGH COURT OF DELHI AT NEW DELHI
2.
+                        ARB.A. 2/2015
        KUMAR APURVA                               ..... Appellant
                         Through: Mr. Sandeep Sethi, Senior
                         Advocate with Mr. Gaurav Gaur and Mr.
                         Adesh Kumar Sharma, Advocates.


                         versus


        VALUEFIRST DIGITAL MEDIA PVT. LTD. ..... Respondent
                         Through: Mr. Rajiv Kumar Virmani, Senior
                         Advocate with Mr. Khalid Arshad, Mr.
                         Mohit Chadha, Mr. Abhishek Bansal, Mr.
                         Ishwar Upneja and Mr. Sunny Bajaj,
                         Advocates.
        CORAM: JUSTICE S. MURALIDHAR


                         ORDER

% 23.03.2015

1. This appeal is directed against an order dated 22nd November 2014

passed by the sole Arbitrator in an application filed by the Respondent

under Section 17 of the Arbitration and Conciliation Act, 1996

(„Act‟).

2. The backgrounds facts are that the Appellant was employed with

the Respondent, a leading digital media company

offeringcommunication, social interaction and content to its clients. It

is stated that the Respondent provides a platform to enable its clients

to interact on SMS, voice, GPRS/3G email etc. An agreement titled

„Employee Intellectual Property Protection Agreement‟ was

entered into between the Petitioner and the Respondent on 15 th

October 2008. Clause 13 of the said agreement dealt with 'non-

competition' and Clause 14 with 'non-solicitation'. Under Clause

13.1, during the term of the Appellant‟s employment with the

Respondent and for a period of two years thereafter, the

Appellant was directly or indirectly not to engage in, as an

employee, associate, consultant, proprietor, partner, director, or

otherwise, or have any ownership interest in or participate in any

business where such work involved the development or use of

similar or identical intellectual property or know-how/trade

secrets as that of the company. Under Clause 14 during the term

of employment and for a period of two years thereafter, the

Appellant was not to directly or indirectly, without prior written

consent of the Respondent, solicit, recruit, hire, encourage or

induce any employee, director, solicitor etc. to leave the

employment of the Respondent or negatively alter their

relationship with the Respondent.

3. The Appellant was appointed as an Additional Director of the

Respondent with effect from 25th May 2010 and subsequently, as

Chief Executive Officer („CEO‟) of the Respondent on 25th

August 2011. On 25th January 2011, a Shareholders Agreement

(„SHA‟) was executed between the Respondent (described as the

Company);it defined „Promoters‟ as a collective term which

described three parties i.e. (i) Mr. Gagan Chadha, (ii) the

Appellant and (iii) Mr. Vishwadeep Bajaj; and the 'Investors'

NEA FVCI Ltd. ('NEA Ltd.) and HAV3 Holdings (Mauritius)

Ltd. ('HAV3'). Both NEA Ltd. and HAV3 are companies

incorporated in Mauritius. It is not in dispute that in terms of the

said SHA, the Appellant subscribed to 2.6% of the equity

shareholding of the company. It is stated that as of today his share

holding has increased to 4.07%.

4. Under Clause 6.6 of the SHA, except as 'permitted' under

Clause 6.3 (dealing with 'permitted transfers‟) the Promoters

were not to transfer or pledge any equity securities until the

earlier of the QIP and the other liquidity event, without the prior

written consent of the investors. Clause 7 of the SHA dealt with

the „Investor right of first offer.‟ Clause 7.1 stated that subject to

Clause 6.6, if the Promoters and/or their affiliates proposed to

transfer any equity securities, then the Investors, which included

NEA, HAV3 and another Investor company Emergic Venture

Capital Private Ltd., would have a right of first offer (but no

obligation) with respect to such shares (called the Right Of First

Offer securities or ROFO securities). Clause 7.2 laid out the

detailed procedure for implementation of the ROFO. Inter alia, it

envisaged the Promoters sending a notice to the ROFO

transferees informing them of the number of shares(ROFO

securities) they wished to sell. Within 30 business days from the

date of receipt of the notice, the ROFO transferees had to inform

such Promoter of the price and the number of securities they were

willing to pay.

5. The SHA also contained a non-compete and non-solicit clause.

Clause 14.1 stated that for a period beginning from the date of the

SHA and ending two years after,(a) the Promoters and/or their

affiliates ceasing to hold any equity securities or (b) the

Promoters ceasing to be employed by the company, whichever is

later, the Promoters and their affiliates would not engage in,

invest, advise or participate in any business similar to or

competing with the business of the Company or any of its

subsidiaries. Clause 23 was the arbitration clause. Under Clause

21.1 of the SHA, the SHA would continue until the earlier of:

(a) termination of the Agreement by the consent of each of the Investors, the Company and the Promoters in writing;

(b) all of the Investors and their affiliates ceasing to hold any equity securities; or

(c) QIPO taking place.

6. On 23rd September 2012, a letter was written by the Chairman

and Managing Director of the Respondent to the Appellant

informing him that his employment with the Respondent as CEO

was terminated with immediate effect. Within three days

thereafter, i.e. on 26thSeptember 2012, the Respondent also had a

first information report („FIR‟) registered against the Appellant,

inter alia, under Sections 406/408/420 of the IPC in connection

with the sale of shares of Way2Online Interactive India Pvt. Ltd.,

another internet-based company offering services similar to the

Respondent. The allegation by the Respondent was that in 2011,

it had proposed to acquire Way2Online for a sum of Rs.40 crores,

which was payable to the Promoters of Way2Online and at that

stage, the Appellant had persuaded the Respondent not to go

ahead with the acquisition. The allegation was that after

becoming CEO of the Respondent, the Appellant induced the

Respondent to acquire Way2Online for a consideration of Rs.150

crores, and for which, an agreement was entered into on 5 th May

2012, with the Respondent paying approximately Rs.21 crores to

the Promoters of Way2Online upfront. The Respondent claimed

that out of this initial amount, a sum of Rs.7 crores found its way

to the bank account of the Appellant.

7. A counter FIR (FIR 384/12) registered against the Respondent

by the promoters of Way2Online on 1st October 2012 and both

FIRs have since been quashed by the High Court of Andhra

Pradesh on the basis of a settlement reached between the

Respondent and the Promoters of Way2Online.

8. It is the further case of the Respondent that immediately after

the termination of the Appellant‟s employment with the

Respondent, the Appellant had accepted employment with

Way2Online, which was directly in competition with the

Respondent. The case of the Respondent was that even while

continuing to remain a shareholder of the Respondent (to the

extent of 4.07%), the Appellant was involved in a business which

was in competition with the Respondent and thus violated the

SHA.

9. The Respondent invoked the arbitration clause by issuing

notices dated 19th September 2013 and 26th November 2013 to

the Appellant. The Respondent also filed OMP No. 386/2014

under Section 9 of the Act as well as Arbitration Petition No.

178/2014. Both petitions were disposed of by the Court on 4 th

April 2014 appointing the sole Arbitrator and directing that the

Respondent‟s petition under Section 9 of the Act be treated as an

application under Section 17 of the Act to be heard and disposed

of by the learned Arbitrator.

10. The said application has been since disposed of by the

impugned order dated 22nd November 2014 by the sole Arbitrator

by issuing the following directions:

a. The Appellant was restrained directly or indirectly from carrying activities which are competitive to that of the Company and also from soliciting, interfering with, disrupting or attempting to disrupt the relationship between the Company or any Subsidiary and any third party, including without limitation, any customer or supplier of the Company or any Subsidiary, till the pendency of the present proceedings.

b. Further, the Appellant was restrained directly or indirectly to solicit the employment of any officer, director, or employee of the Company or its Subsidiary, or solicit or entice away or attempt to solicit or entice away from the Company and its Subsidiaries, any customer who shall at any time have been a customer, client, agent or correspondent of the Company, during the pendency of the arbitral proceedings.

c. The Appellant was also restrained from transferring, assigning or in any way creating third party interest in shares of the Company held in his name during the pendency of the arbitral proceedings.

11. Before the learned Arbitrator, and before this Court, it was

urged that insofar as there was a clause in the employment

contract as well as the SHA restraining the Appellant from

"exercising a lawful profession, trade or business of any kind"

which operated beyond the termination of the contract of

employment, such clause would be void in terms of Section 27 of

the Contract Act, 1872 and would not be saved by Exception 1.

Reliance was placed on a series of decisions including Niranjan

Shankar Golikari v. The Century Spinning [1967] 2 S.C.R. 378,

Superintendence Company of India (P) Ltd. v. Krishan Murgai

(1981) 2 SCC 246, Gujarat Bottling Co. Ltd. v. Coca Cola

Company AIR 1995 SC 2372 and Percept D' Mark (India) Pvt.

Ltd. v. Zaheer Khan AIR 2006 SC 3426 to urge that the

Respondent could not fall back on Clause 14.1 of the SHA or the

corresponding clause of the employment contract to seek to

injunct the Appellant from being employed with Way2online. It

is not in dispute that the Appellant, after ceasing to be CEO of the

Respondent, has been employed as CEO of Way2Online.

12. The Respondent Company, on the other hand, maintained that

as long as the SHA was still in operation and the Appellant

continued to be a shareholder of the Respondent, the Appellant

was bound by Clause 14.1 of the SHA. During the subsistence of

the SHA there was no question of the restraint clause being hit by

Section 27 of the Contract Act. The Respondent placed reliance

on the decision of this Court in Wipro Ltd. v. Beckman Coulter

International 131 (2006) DLT 681.

13. The learned Arbitrator has correctly observed in the

impugned order that the SHA is not to be construed as a contract

between the employer and the employee but a contract between

the Respondent its promoters and investors. Nevertheless, as

explained by the Supreme Court in the Gujarat Bottling Co. Ltd.

v. Coca Cola Company (supra), the manufacturer was not

permitted to deal with products of any other brand during the

subsistence of the said agreement. In that case, it was argued on

behalf of the Appellant that the observations in the Niranjan

Shankar Golikari case and the Superintendence Company of

India (P) Ltd. v. Krishan Murgai case to the extent that the

doctrine of restraint of trade only applies after termination of the

contract, should be confined only to contracts of employment.

Negativing the said submission, the Supreme Court observed "the

underlying principle governing contracts is the same and as a

matter of fact the Court takes a more restricted and less

favourable view in respect of covenants entered into between an

employer and an employee as compared to a covenant between a

vendor or purchaser or partnership agreements."

14. The legal position was summarised by this Court in Wipro

Ltd. (supra) which concerned a Canvassing Agreement between

the distributor and a principal which contained a negative

covenant concerning non-solicitation of employees. The legal

position that was culled out was "negative covenants tied up with

positive covenants during the subsistence of a contract be it of

employment, partnership, commerce, agency or the like, would

not normally be regarded as being in restraint of trade, business

of profession unless the same are unconscionable or wholly one-

sided." It was further emphasised that as far as the employer and

employee contracts are concerned, a negative covenant

"restricting an employee‟s right to seek employment and/or to do

business in the same field as the employer would be in restraint

of trade and, therefore, a stipulation to this effect in the contract

would be void. In other words, no employee can be confronted

with the situation where he has to either work for the present

employer or be forced to idleness." Further the question of

reasonableness of the restraint is not to be considered when an

issue arises as to whether a particular term of a contract is or is

not restraint of trade, business or profession.

15. In the impugned order, the learned Arbitrator has, following

the decision in Wipro Ltd., held that non-competing or non-

soliciting clauses in the SHA do not amount to restraint of trade,

business or profession and would not be hit by Section 27 of the

Contract Act. Although it has not been expressly stated in the

impugned order it must be held that the above observations have

been made in the context of construing whether any relief ought

to be granted in the application under Section 17 of the Act. The

distinction that the learned Arbitrator sought to draw between the

type of agreement between an employer and employee and one

like the SHA was valid but it does not follow that the legal

principles that would apply in either case would not be the same.

In other words, as long as the SHA continues, the restrictive

covenants in the SHA would continue to bind the parties.

16. It was argued by Mr. Sandeep Sethi, learned Senior counsel

appearing for the Appellant, that to the extent the negative

covenant in the SHA was in restraint of the Appellant‟s right to

seek employment elsewhere, it would certainly be hit by Section

27 of the Contract Act notwithstanding that the SHA continued. It

was submitted that the Respondent had itself terminated the

employment contract of the Appellant and was now using the

negative covenant in the SHA to restrain the Appellant from

seeking employment.

17. The above submission is, however, not factually borne out

from the impugned order. In the first place, it requires to be

noticed that the sole Arbitrator has observed that with the

Appellant already having joined Way2Online as CEO, no

injunction could be granted against the Appellant continuing as

such. The learned Arbitrator also held that the question whether

the Appellant violated non-compete Clause 14.1 and non-solicit

Clauses 14.2 and 14.3 of the SHA, particularly with the Appellant

denying that the business of Way2online and the Respondent

were not similar, were disputed questions of fact which required

to be determined only after evidence was led.

18. Mr. Rajiv Kumar Virmani, learned Senior counsel appearing

for the Respondent, also pointed out that inasmuch as the

Respondent has not filed any appeal against the impugned order,

the Respondent is at present not seeking to injuct the Appellant

from continuing as CEO to Way2Online.

19. Mr. Sandeep Sethi, learned Senior counsel for the Appellant, then

submitted that there was an observation in the impugned order which

will prejudice the Appellant. This was to the effect that if ultimately

the Respondent was able to prove that the Appellant had indulged in

competing activities in violation of Clause 14.1 then in that case the

Company would be entitled to be compensated by grant of damages

"as also injunction restraining the Respondent (the Appellant herein)

to continue in employment of Way2online." It is submitted that the

above observations of the sole Arbitrator have caused severe prejudice

since the present employer of the Appellant has, in view of the

impugned order, also expressed its apprehension about the

continuation of the Appellant‟s employment with Way2online. He

further submitted that the impugned order was being circulated widely

in the trade and might prejudice the Appellant‟s future chances of

getting further employment.

20. The observations of the sole Arbitrator in the impugned order

indicate that no final view has been taken on whether the Appellant

had in fact violated Clauses 14.1 or 14.2 or 14.3 of the SHA. What

should be the consequential reliefs granted as a result thereof has also

been left open for decision. It is not possible to view the impugned

order as finally determining the issues one way or the other.

21. Mr. Virmani further points out that if indeed the Appellant wanted

to be relieved of the negative covenants in the SHA, then it was open

to the Appellant to adopt the procedure under Clause 7 of the SHA

and issue a notice offering the Appellant‟s shares for sale in the first

instance to the Investors. He states that till date the Appellant

continues to hold 4.07% shares in the Company and has not made any

effort to invoke the above procedure.

22. The above submissions point to the fact that the Appellant, if he so

chooses, could seek an exit by off-loading his shares in the

Respondent. It appears that at one stage the parties did attempt

mediation. But on this aspect they were unable to arrive at any

amicable settlement. It is, therefore, not as if the Appellant is under

compulsion as regards being restrained by the negative covenants in

the SHA indefinitely. The apprehensions of the Appellant, not stated

on affidavit, do not persuade the Court. In any event, these are not

valid grounds for interfering with the impugned order passed by the

learned Arbitrator which appears to be one that balances the rights and

interests of both the parties.

23. Consequently the Court is not inclined to interfere with the

impugned order passed by the learned Arbitrator. The appeal is

dismissed but in the circumstances with no order as to costs.

S. MURALIDHAR, J MARCH 23, 2015 dn