Non-Compete Clause Is Invalid Post-Termination Of Contract As It Results In Restraint Of Trade: Bombay High Court Sets Aside Injunction

Additionally, the court noted that it is required to consider the legal effect of Clause 3 of the MSA after its termination. This can be examined in appeal under Section 37 of the Arbitration and Conciliation Act, 1996 notwithstanding the fact that such a plea was not raised earlier in proceedings under Section 9 of the Act.

Brief Facts:

The dispute arose between Indus Powertech Inc-the appellant, (“the Company”) and Echjay Industries Private Limited-the respondent (“the Supplier”) with respect to a Master Supply Agreement (“MSA”). As per the MSA, the Supplier agreed to supply various products to the Company and the Company was specialized in supplying engineering components to North American manufacturer. There was one key clause, i.e., Clause 3, which is a non-compete/non-solicitation clause, which restricted both parties from engaging with certain customers or suppliers independently for a period of 24 months after termination of the MSA.

On 27.02.2023, the Supplier terminated the MSA by exercising its right under Clause 15 of the MSA. Thereafter, the Supplier filed a Commercial Arbitration Petition seeking an order of injunction provided in Clause 3 of the MSA to restrain the Company from sourcing forgings/engineering components, etc. from an Indian entity, RKFL. Then, the Single Judge granted the order of injunction restraining the Company from sourcing the parts/products from RKFL.

The Company aggrieved by the decision of the Single Judge filed an appeal under Section 37 of the Arbitration and Conciliation Act, 1996.

Submissions made by the parties:

The contention of the appellant was that Clause 3 of the MSA would operate only during the period when the MSA was in existence. It will become inoperative after termination and such clause will fall foul of Section 27 of the Indian Contract Act, 1872. Moreover, the impugned injunction order has restricted the Company's lawful business activities. Although the Company did not raise this issue earlier while defending the proceedings under Section 9, the said issue being a pure question of law based on interpretation of the MSA itself, allowing it to be raised in appeal. The appellant also relied on the decision in Rajendra Shankar Shukla & Ors etc. vs. State of Chattisgarh & Ors. Etc. 2015 INSC 532. Thereafter, the appellant contented that the order of the injunction was liable to be set aside because it restrained the Company from carrying out its trade and business despite the termination of the MSA.

The respondent opposed the submissions made by the Company, arguing that the Company failed to raise the issue earlier regarding the voidness of Clause 3 of the MSA. So, the Company cannot be permitted to raise this issue in appeal. Also, the respondent argued that the Company has placed various purchase orders with the Supplier even after the expiry of 180 days. It indicates that the business between the parties has persisted.

Observation of the court:

The court held that if a question of law is raised, 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. However, a question of fact that requires investigation and inquiry, it would not be permissible for the Court to consider the same when it was not raised before the Court earlier. Additionally, the court referred to the judgment of the Supreme Court in Rajendra Shankar Shukla & Ors etc. vs. State of Chattisgarh & Ors. Etc. and Greater Mohali Area Development Authority & Ors. v. Manju Jain & Ors.

The court observed that since the court has to examine 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.

Further, the court held that a non-compete clause that can operate validly during the term of the agreement but it would not be valid post-termination of the agreement. Since, it would result in restraint of trade prohibited under Section 27 of the Indian Contract Act, 1872.

The court noted that such a non-compete clause cannot be the basis to grant relief of injunction post-termination of the agreement. That's why interference under Section 37 of the act is warranted. Finally, the court set aside the impugned judgment in Commercial Arbitration Petition and dismissed the Arbitration Petition, allowing the Commercial Appeal.

Case Title: Indus Power Tech Inc. v. M/s. Echjay Industries Pvt. Ltd.

Case Number: 2024:BHC-OS:16749

Counsel for the Petitioners: Mr. Ravi Kadam, Senior Advocate, with Mr. Anoshak Davar, Mr. Bhavesh Wadhwani, Ms. Kajal Gupta, Advocates, i/b M.V. Kini & Co.

Counsel for the Respondents: 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

Date of Judgment: 17.10.2024