Dispute Over Non-Compete Clause Post-Termination. Validity of Restraint Clauses Beyond Termination Under Arbitration and Contract Law


Summary of Judgement

The Bombay High Court addressed a dispute between Indus Power Tech Inc. (Appellant) and Echjay Industries Pvt. Ltd. (Respondent) over a non-compete clause within a Master Supply Agreement (MSA). The Court ruled that while such clauses may be enforceable during the agreement's duration, they cannot extend beyond the contract's termination as it violates Section 27 of the Indian Contract Act, 1872. The Court set aside the lower court's order of injunction, emphasizing that post-termination restrictions on trade are invalid.

1. Background of the Case:

  • Parties Involved: Indus Power Tech Inc. and Echjay Industries Pvt. Ltd. entered into an MSA on 31/03/2015 for the supply of engineering components.
  • Clause Overview: The MSA included a non-compete clause (Clause 3) that restricted Echjay from engaging with clients or customers introduced by Indus Power Tech for 24 months post-termination.

2. Termination of MSA:

  • On 27/01/2023, Echjay exercised its right to terminate the MSA under Clause 15 for cause, providing a 180-day notice period.
  • Dispute arose when Echjay filed for an injunction under Section 9 of the Arbitration & Conciliation Act, 1996, to prevent Indus Power Tech from sourcing products from another Indian entity (RKFL).

3. Argument Before the Single Judge:

  • The Single Judge found that Indus Power Tech breached Clause 3 by sourcing parts from RKFL without Echjay's refusal to supply.
  • An interim injunction was issued, restraining Indus Power Tech from dealing with RKFL.

4. Appeal Under Section 37:

  • Appellant’s Argument: Indus Power Tech argued that Clause 3's enforcement post-termination violated Section 27 of the Indian Contract Act, 1872, as it constituted an unlawful restraint of trade.
  • Respondent’s Counter: Echjay contended that the appellant did not raise this issue before the lower court, thus, should not be allowed to bring it up in appeal.

Legal Provisions Discussed:

  • Arbitration & Conciliation Act, 1996:

    • Section 9: Provides for interim measures by courts during arbitration.
    • Section 37: Allows appeals against certain orders made under the Arbitration & Conciliation Act.
  • Indian Contract Act, 1872:

    • Section 27: Declares agreements restraining lawful trade or business void unless it falls under specific exceptions.

Court's Ratio and Decision:

5. Examination of Clause 3:

  • The Court observed that the non-compete clause was valid only during the MSA's term and could not extend post-termination.
  • The Court referenced precedents, including Gujarat Bottling Co. Ltd. v. Coca-Cola Co. and Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan, confirming that restraint of trade clauses beyond the term of an agreement violates Section 27.

6. Applicability of Legal Arguments Raised in Appeal:

  • The Court noted that purely legal arguments, even if not raised earlier, could be entertained if they pertain to the interpretation of documents or laws without factual controversy.

7. Conclusion and Judgment:

  • The Court ruled that the interim injunction based on Clause 3 post-termination was invalid. The appeal was allowed, and the injunction was set aside. The Court also clarified that parties could resolve their issues through arbitration, keeping all other rights open for adjudication.

Subjects:

  • Commercial Arbitration, Contract Law, Non-Compete Clause, Indian Contract Act, Arbitration Appeal, Restraint of Trade, Section 27 Indian Contract Act, MSA, Interim Injunction

The Judgement

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

Citation: 2024 LawText (BOM) (10) 173

Case Number: COMMERCIAL APPEAL (LODGING) NO.26031 OF 2023 ALONG WITH INTERIM APPLICATION (LODGING) NO.26098 OF 2023 IN COMMERCIAL APPEAL (LODGING) NO.26031 OF 2023

Date of Decision: 2024-10-17