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2015 SCC OnLine Del 8360 : (2015) 3 Arb LR 286
In the High Court of Delhi
(BEFORE S. MURALIDHAR, J.)
Kumar Apurva .…. Appellant
Mr. Sandeep Sethi, Senior Advocate with Mr. Gaurav Gaur and Mr.
Adesh Kumar Sharma, Advocates.
Versus
Valuefirst Digital Media Pvt. Ltd. .…. Respondent
Mr. Rajiv Kumar Virmani, Senior Advocate with Mr. Khalid Arshad,
Mr. Mohit Chadha, Mr. Abhishek Bansal, Mr. Ishwar Upneja and Mr.
Sunny Bajaj, Advocates.
§
ARB. A. 2/2015
Decided on March 23, 2015
ORDER
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 15th 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.
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3. The Appellant was appointed as an Additional Director of the
th
Respondent with effect from 25 May 2010 and subsequently, as Chief
Executive Officer (‘CEO’) of the Respondent on 25th August 2011. On
th
25 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
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(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
th
with immediate effect. Within three days thereafter, i.e. on 26
September 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 5th 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
th
disposed of by the Court on 4 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.
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10. The said application has been since disposed of by the impugned
nd
order dated 22 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
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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
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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
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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.
———
§
2015:DHC:2775
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