The Division Bench of the Bombay High Court in the case of Indus Power Tech Inc  v. Echjay Industries Private Limited, [Commercial Appeal (Lodging) No. 26031 of 2023], decided on October 17, 2024, inter alia held that a non-compete clause can only be valid during the term of the agreement. The Court went on to hold that such a non-compete clause shall not operate post-termination of the agreement, owing to a restraint in trade being barred by Section 27 of the Indian Contract Act,1872.

Facts in Brief

1. On March 31,2015, a Master Supply Agreement (“MSA”) was executed between Indus Powertech Inc (“Company”) and Echjay Industries Private Limited (“Supplier”).

2. Clause 3 of the MSA inter alia provided as under

“3 .  Non-compete/Non-solicitation :…… 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.”

3. On January 27, 2023, Supplier served a termination notice of 180 days. The Supplier thereafter filed Arbitration Petition under section 9 of the Arbitration and Conciliation Act, 1996 (“A&C Act”) 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 i.e., RKFL or its subsidiaries and from carrying out business either directly or indirectly with RKFL and/or its subsidiaries. 

4. The Learned Single Judge found that the Company had taken steps to source the concerned products from RKFL, and such conduct was violative of contrary to the Clause 3 of MSA. On that basis, vide order/judgment dated August 8, 2023 the Learned Single Judge proceeded to restrain the Company from sourcing the said parts/products from RKFL (“Impugned Order”).

Challenge

1. The Company challenged the Impugned Order before the Division Bench under Section 37 of A&C Act, inter alia on following grounds:

1.1. Clause 3 of the MSA i.e., the non-compete and non-solicitation clause would operate only during the period when the MSA was in existence.

1.2. The Impugned Order was passed much after the termination notice and as well as the expiry of the notice period of 180 days under Clause 15 of the said MSA.

1.3. Post termination of the MSA, such restraint clause would fall foul of Section 27 of the Indian Contract Act, 1872  which resulted in the Company being restrained from undertaking lawful trade or business after termination of the MSA.

2. The Supplier opposed the aforesaid submissions inter alia on following grounds:

2.1. The Company, having failed to raise the plea of the alleged voidness of Clause 3 of the MSA after its termination before the Learned Single Judge, cannot be permitted to raise the same in the appeal.

2.2. 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 Indian Contract Act, 1872.

2.3. The Company and the Supplier continued to engage in certain transactions, despite the termination of the said MSA.

Decision

1. On the issue of raising new grounds in appeal

1.1. The Division Bench expounded that if a question of law is sought to be 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.

1.2. It is undisputed that: (i) the MSA was executed on March 31, 2015, with Clause 3 included therein; and (ii) the Supplier terminated the contract on January 27, 2023. The plea concerning the voidness of Clause 3 is solely a legal matter that does not necessitate factual adjudication.

1.3. The legal effect of Clause 3 of the MSA following its termination may still be examined on appeal, notwithstanding that this plea was not raised during the proceedings before the Learned Single Judge.

1.4. The Division Bench relied on the following judgments: -

(i) Rajendra Shankar Shukla v. State of Chattisgarh (2015 INSC 532)

(ii) Greater Mohali Area Development Authority v. Manju Jain ((2010) 9 SCC 157)

(iii) National Textile Corporation Limited v. Naresh Kumar Badrikumar Jagad  ((2011) 12 SCC 695).

2. On the issue of validity of non-compete clause after termination

2.1. The consequences of a non-compete clause differ depending on whether it applies during the term of the agreement or after its termination. While such clauses have been deemed valid and reasonable during the duration of the agreement, they are generally considered restraints of trade prohibited under Section 27 of the Indian Contract Act, 1872, once the agreement is terminated.

2.2. Thus, a non-compete clause that is valid during the term of the agreement cannot remain valid after the agreement’s termination, as it would then amount to a restraint of trade, which is prohibited under Section 27 of the Indian Contract Act, 1872.

2.3. Since the MSA was terminated on January 27,2023 by the Supplier and the notice period of 180 days had already expired, the Company cannot be restrained from undertaking its business after the termination of the agreement.

2.4. In view of the already settled legal position, it is categorical that such non-compete clause cannot be the basis for grant of relief of injunction post-termination of the agreement. Moreover, it is already well established that a plea of estoppel cannot be raised to defeat the provisions of a statute.

2.5. The Division Bench relied on following judgments: -

(i) Percept D’Mark (India) Private Limited v. Zaheer Khan (2006 INSC 161)

(ii) VFS Global Services Private Limited v. Surrit Roy (2008(3) Mh.L.J. 266) 

(iii) Gujarat Bottling Company Limited v. Coca Cola Company (1995 INSC 441)

(iv) Messrs. Mathra Prashad and Sons v. State of Punjab (1961 INSC 338) 

With above observations, the Hon’ble Division Bench allowed the appeal and set aside the Impugned Order.

Please find a copy of the Judgement here.

This update has been contributed by Ranjit Shetty (Senior Partner) and Tejas Gokhale (Senior Associate).

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