Full Judgment Text
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* IN THE HIGH COURT OF DELHI AT NEW DELHI
Judgment reserved on: 22.05.2025
Judgment pronounced on: 11.08.2025
+ ARB. P. NO. 1860 OF 2024
NEOSKY INDIA LIMITED & ANR. .....Petitioners
Through: Mr. Tanmaya Mehta, Ms. Nupur
Kumar, Ms. Rashmi Gogoi, Mr. Ambuj
Tiwari, Mr. Arjun Nagrath, Advs.
versus
MR. NAGENDRAN KANDASAMY & ORS. .....Respondents
Through: Mr. J. Sai Deepak, Sr. Adv. with
Mr. Utkarsh Joshi, Mr. Anirudh Suresh,
Ms. Anjali Menon, Ms. Kanishka Sharma,
Advs.
Mr. Venkatesh Kumar, Adv. for R-4 and 5.
+ O.M.P.(I) (COMM.) 183/2024 & CCP(O) 57/2024,
CCP(O)93/2024, I.A. 42241/2024, I.A. 42243/2024, I.A.
42244/2024, I.A. 42839/2024, I.A. 42847/2024
NEOSKY INDIA LIMITED & ANR. .....Petitioners
Through: Mr. Tanmaya Mehta, Ms. Nupur
Kumar, Ms. Rashmi Gogoi, Mr. Ambuj
Tiwari, Mr. Arjun Nagrath, Advs.
versus
MR. NAGENDRAN KANDASAMY & ORS. .....Respondents
Through: Mr. J. Sai Deepak, Sr. Adv. with
ARB. P. NO. 1860 OF 2024 Page 1 of 44
Digitally Signed
By:DEEPANSHU MALASI
Signing Date:12.08.2025
17:15:03
Mr. Utkarsh Joshi, Mr. Anirudh Suresh,
Ms. Anjali Menon, Ms. Kanishka Sharma,
Advs.
Mr. Venkatesh Kumar, Adv. for R-4 and 5.
CORAM:
HON’BLE MR. JUSTICE JASMEET SINGH
JUDGMENT
1. The petitioners have filed the present petition under Sections 11(4)
and 11(6) of the Arbitration and Conciliation Act, 1996 ( “Act” ),
seeking the appointment of an Arbitrator due to the respondents‟
failure to nominate their Arbitrator within the prescribed 30-day
period from the notice dated 18.07.2024.
FACTUAL BACKGROUND
2. Petitioner No. 1 - Neosky India Limited ( “Neosky” ), is a public
limited company and subsidiary of Rattan India Enterprises Ltd.,
while petitioner No. 2 - Throttle Aerospace Systems Private Limited
( “TAS” ) is a private limited company in the space of civil drones in
which petitioner No. 1 has invested and in which respondent Nos. 1– 4
were employed, and respondent Nos. 1– 4 together have 40%
shareholding.
3. On 25.05.2022, the petitioners entered into a Share Subscription and
Shareholders Agreement ( “SSHA” ), a Non-Compete Agreement
( “NCA” ), and Employment Agreements with respondent No. 1 – Mr.
Nagendran Kandasamy, respondent No. 2 – Ms. Nischita Madhu,
respondent No. 3 – Mr. Shashi Kumar R, respondent no. 4 – Mr.
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Gunjur Munianjappa Girish Reddy, and respondent No. 5 – Pinkin
Consultancy Private Limited. The transaction involved a proposed
fund infusion of Rs. 40 crores, pursuant to which petitioner No. 1 was
to acquire a 60% equity stake in petitioner No. 2 company. As per the
SSHA, Rs. 20 crores were infused upfront by petitioner No. 1, and the
balance Rs. 20 crores were to be infused after a period of 18 months.
4. Under Clause 13.7 of the SSHA, respondent Nos. 1-5 were required to
serve for five years and were restrained from engaging in competing
businesses. Similarly, the NCA explicitly prohibited the above
respondents from engaging in any of the competing businesses for a
period of three years and further restricted them from soliciting any
employees, clients, contractors, or similar parties during the term of
the agreement and for up to one year following its expiry.
5. However, respondent Nos. 1, 2 and 3 resigned on 03.07.2023 and
allegedly incorporated respondent No. 6, Zulu Defence Systems Pvt.
Ltd., on 06.10.2023 to operate a competing drone venture, in violation
of the non-compete clause contained in SSHA and Employment
Agreements and appointed respondent Nos. 7 and 8 as the Directors of
respondent No. 6.
6. On 27.05.2024, a petition bearing O.M.P(I)(COMM.) 183/2024 under
Section 9 of the Act was filed before this Court, wherein the
respondent Nos. 1 - 4 were restricted from competing with or
disclosing information related to the petitioners vide an order dated
31.05.2024. Additionally, the petitioners also filed a contempt petition
alleging wilful disobedience of the interim order dated 31.05.2024
passed in OMP(I)(COMM.) 183/2024. The contempt petition was
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By:DEEPANSHU MALASI
Signing Date:12.08.2025
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primarily based on the respondent Nos. 1 – 4‟s alleged continued
engagement in competing business activities and violation of the non-
compete obligations despite the subsisting restraint order.
7. Subsequently, on 18.07.2024, the petitioners issued a notice invoking
arbitration under Clause 16.2 of SSHA and Clause 9(c) of NCA.
Despite receiving the notice, the respondents failed to appoint an
Arbitrator within the stipulated time of 30 days. Hence, the present
petition was filed.
SUBMISSIONS
On behalf of the petitioners
8. Mr. Tanmaya Mehta, learned counsel for the petitioners, submits that
the present dispute arises from breaches committed by respondent
Nos.1-5 under the SSHA, NCA, and the respective Employment
Agreements, all dated 25.05.2022.
9. He submits that respondent Nos. 1 - 3 abruptly resigned from their
respective positions on 03.07.2023 and subsequently, on 06.10.2023,
respondent No. 1 incorporated a private limited company, under the
name and style – „Zulu Defense Systems Pvt. Limited‟/ respondent
No. 6, operating in a directly competing business of drone
manufacturing, in direct breach of (a) Clause 13.7 of the SSHA, (b)
Clauses 3.2, 3.5, 5.4, 6.1 and 6.2 of the Employment Agreements, and
(c) Clauses 1.1 and 6.1 of the NCA. Further, respondent Nos. 2 - 4 are
working together with respondent No. 1 and carrying out competing
business through respondent No. 6.
10. It is further contended that respondents have participated in
Exhibitions to market their products (similar to the petitioners) at
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By:DEEPANSHU MALASI
Signing Date:12.08.2025
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public events through respondent No. 6, thereby violating the
restrictive covenants under the NCA and Employment Agreements.
Reference is made to orders passed by this Court in
O.M.P.(I)(COMM.) 183/2024, wherein a prima facie finding was
returned that the petitioners had made out a case for interim
injunction, and respondent Nos. 1 - 4 were accordingly restrained
from engaging in competing business or disclosing confidential
information.
11. Mr. Mehta, further submits that the breaches committed by respondent
Nos. 1 - 5 give rise to substantive disputes that fall squarely within the
scope of the Arbitration Clauses contained in Clause 16.2 of the
SSHA and Clause 9(c) of the NCA, both dated 25.05.2022. The
existence and validity of these Arbitration Clauses are not disputed by
respondent Nos. 1 - 5, all of whom are signatories to SSHA and NCA.
In addition, respondent Nos. 1 - 3 have already acknowledged the
Arbitration Agreement, as recorded in paragraph 10 of the order dated
20.09.2024 passed in OMP(I)(COMM) 183/2024, thereby estopping
them from disputing arbitration at this stage.
12. In view of the above, it is submitted that the matter is liable to be
referred to arbitration as it is well settled that, under Section 11 of the
Act, the scope of judicial scrutiny is limited to the prima facie
existence of a valid arbitration agreement. Reliance is placed on SBI
General Insurance Co. Ltd. v. Krish Spinning, 2024 SCC OnLine
SC 1754 and Interplay Between Arbitration Agreements under
Arbitration, 1996 & Stamp Act, 1899, In re, (2024) 6 SCC 1 , to
submit that any objections relating to the validity or enforceability of
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By:DEEPANSHU MALASI
Signing Date:12.08.2025
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the Agreements including the non-compete clause must be determined
by the Arbitral Tribunal under Section 16 of the Act, not this Court
under Section 11.
13. Mr. Mehta, learned counsel, has also relied on Section 16(1)(a) and
(b) of the Act, which affirm the doctrine of separability and
kompetenz-kompetenz , to reiterate that any challenge to the main
agreement does not affect the Arbitration Clause.
14. With regards to non-signatories, he submits that the settled position in
law is that the issue of whether a non-signatory is bound by an
Arbitration Agreement must be left to the Arbitral Tribunal to decide.
Reliance is placed on the judgments of the Hon‟ble Supreme Court in
Cox and Kings Ltd. v. SAP India Pvt. Ltd. (2024) 4 SCC 1, Suresh
Kumar Kakkar v. Ansal Properties & Infrastructure Ltd., 2024 SCC
OnLine Del 7735, and KKH Finvest (P) Ltd. v. Jonas Haggard, 2024
SCC OnLine Del 7254 , wherein this Court clarified that the
determining factor is primarily an assessment regarding the conduct,
role, and involvement of the non-signatory in the underlying contract.
In order to assess the same, this Court is required to consider factors
such as mutual intent, relationship between the signatories and non-
signatories, commonality of subject matter, composite nature of
transactions and performance of the contract.
15. It is further contended that respondent No. 6 was incorporated as the
primary vehicle for the breach of the non-compete obligations under
the SSHA and NCA, and that such breach continues through its
operations. Respondent Nos. 1 and 3, who are the original founders
and former key managerial persons of petitioner No. 2, incorporated
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respondent No. 6, and as recorded in the order dated 20.09.2024 in
O.M.P. (I)(COMM) 183/2024, together held 65% of the shares of
respondent No. 6 at that time. It is submitted that the alleged
divestment of shares by them, as disclosed in the affidavit dated
11.12.2024, is a sham. These facts and the continued operation of
respondent No. 6 in breach of the non-compete clause establish a
sufficient nexus to warrant its referral to Arbitration.
16. Further, it is submitted that respondent Nos. 7 and 8 are the present
Directors of respondent No. 6 and are alleged to be knowingly
facilitating the continuing breach of the non-compete obligations.
Their impleadment is necessary for the effective adjudication of the
dispute. Accordingly, the petitioners pray that respondent Nos. 6 - 8,
although non-signatories to the Arbitration Agreement, be referred to
Arbitration along with respondent Nos. 1 - 5, leaving open all
questions of jurisdiction, maintainability, and arbitrability for
determination by the Arbitral Tribunal.
On behalf of the respondent Nos. 1-3
17. Mr. J. Sai Deepak, learned senior counsel for respondent Nos. 1 - 3,
submits that the order dated 31.05.2024 passed by this Hon‟ble Court
in O.M.P. (I)(COMM) 183/2024, which forms the basis of the relief
sought in the present petition, is liable to be vacated. It is submitted
that even as per the petitioners‟ case, the non-compete Clause, which
is central to the dispute, expired on 25.05.2025, being three years from
the effective date of the agreement, i.e., 25.05.2022.
18. He further submits that the petitioners have failed to comply with the
mandatory requirement under Section 9(2) of the Act, which requires
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Signing Date:12.08.2025
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initiation of Arbitration Proceedings within 90 days of the grant of
interim relief. Merely issuing a notice invoking Arbitration is not
sufficient compliance. In the absence of actual commencement of
Arbitration proceedings, the interim order is liable to be vacated.
Reliance is placed on judicial precedents including Ezen Aviation Pty
Limited v. Big Charter Pvt. Ltd., 2021:DHC:4152-DB and Royal
Orchid Hotels Pvt. Ltd. v. Hotel Grand Centre Point,
2024:KHC:46323.
19. It is also submitted that the restraint imposed on them is in the nature
of a post-termination non-compete restriction, which is explicitly void
under Section 27 of the Indian Contract Act, 1872. The Employment
Agreements permit resignation by giving 90 days‟ notice (Clause 5.4),
and the SSHA further permits resignation for cause, including “wilful
misconduct” by the petitioners (Clause 13.4). It is submitted that they
acted in accordance with these Clauses and resigned on 03.07.2023
after learning of serious misconduct by the petitioners, including
alleged siphoning of intellectual property.
20. It is further argued that the non-compete clause, even if valid for the
period of employment, cannot survive post-resignation. Such clauses
are barred by law and violative of the fundamental rights of the
respondents to carry on their trade and profession under Article
19(1)(g) of the Constitution of India. The restraint effectively deprives
the respondents of their only source of livelihood and their right to life
under Article 21 of the Constitution of India.
21. Without prejudice to the above, Mr. Deepak, learned senior counsel,
submits that respondent Nos. 1- 3 do not oppose reference to
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Arbitration in principle. However, they oppose being forced into
Arbitration while continuing to be restrained by an interim order that
is legally untenable. The interim orders have placed them in an
inequitable position, since the petitioners have not complied with their
obligations. The ongoing contempt proceedings and the pendency of
alleged claims of Rs. 750 crores further worsen their ability to defend
themselves.
22. Lastly, he submits that the non-compete obligations, even if assumed
to be valid, are in any case set to expire on 25.05.2025. Hence, any
relief premised on the same cannot survive beyond that date.
On behalf of the respondent Nos. 4-5
23. Mr. Venkatesh Kumar, learned counsel for respondent Nos. 4 and 5
submits that no dispute or breach has been alleged against them in
relation to the SSHA or the NCA, both dated 25.05.2022. The
petitioners themselves have conceded that these respondents are
impleaded solely because they are signatories to the Agreements.
24. While not disputing the existence of the Arbitration Agreement under
Clause 16.2 of the SSHA, he contends that they should not be
compelled to participate in arbitration proceedings in the absence of
any genuine or specific claims against them. He relies on Goqii
Technologies (P) Ltd. v. Sokrati Technologies (P) Ltd., (2025) 2 SCC
192 , to submit that Section 11 jurisdiction should not be used to drag
parties into arbitration where no real dispute exists.
On behalf of the respondent Nos. 6-8
25. Learned counsel for respondent Nos. 6 - 8, submits that the Section 11
Petition is not maintainable against them, as they are neither
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signatories to the SSHA nor the NCA. These agreements were entered
into exclusively between petitioners and respondent Nos. 1 - 5. As
such, no Arbitration Agreement exists between the petitioners and
respondent Nos. 6 - 8.
26. It is submitted that respondent No. 6 - Zulu Defense Systems Pvt.
Ltd., (“ Zulu ”) was incorporated by respondent Nos. 1 and 3 to pursue
a business distinct from that of TAS. While TAS focused on civil,
medical, and survey drones, Zulu intended to manufacture tactical and
kamikaze drones for military use, a domain not covered under the
business of TAS.
27. It is further submitted that in compliance with the interim order passed
by this Court on 31.05.2024, respondent Nos. 1 and 3 resigned from
Zulu on 03.07.2024. Thereafter, respondent Nos. 7 and 8 were
appointed as Directors to ensure the continuity of Zulu‟s operations. It
is further submitted that respondent nos. 1 and 3, who previously held
69.5% of the shares in Zulu, have fully divested their shareholding.
Form SH-4 was submitted on 26.11.2024, and pursuant to a resolution
of Zulu, the original share certificates were cancelled, and fresh share
certificates were issued to the transferees. Learned counsel for
respondent Nos. 6-8 also states that the shareholding certificate dated
02.12.2024 has also been placed on record to demonstrate that
respondent Nos. 1 and 3 are no longer shareholders or associated with
Zulu in any manner.
28. It is further submitted that mere past association of respondent Nos. 1
and 3 with respondent No. 6 is insufficient to bind them to the
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Arbitration proceedings and impleading them amounts to misuse of
the Arbitration process.
ANALYSIS AND FINDINGS
29. I have heard the learned counsel appearing for the parties and have
gone through the materials placed on record.
30. The question that falls for my consideration is whether a valid
Arbitration Agreement exists between the parties.
31. Before answering the question, it is important to first set out the scope
of judicial interference at the stage of a Section 11 petition.
In Interplay (supra) , the Hon‟ble Supreme Court considered the scope
of judicial interference by a referral court in a Section 11 petition. At
paragraph 81, the Court observed:-
“ 81. One of the main objectives behind the enactment of the
Arbitration Act was to minimise the supervisory role of
Courts in the arbitral process by confining it only to the
circumstances stipulated by the legislature. For instance,
Section 16 of the Arbitration Act provides that the Arbitral
Tribunal may rule on its own jurisdiction „including ruling
on any objection with respect to the existence or validity of
the arbitration agreement‟. The effect of Section 16, bearing
in view the principle of minimum judicial interference, is
that judicial authorities cannot intervene in matters dealing
with the jurisdiction of the Arbitral Tribunal. Although
Sections 8 and 11 allow Courts to refer parties to
arbitration or appoint Arbitrators, Section 5 limits the
Courts from dealing with substantive objections pertaining
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to the existence and validity of arbitration agreements at the
referral or appointment stage. A referral court at Section 8
or Section 11 stage can only enter into a prima facie
determination. The legislative mandate of prima facie
determination ensures that the referral courts do not
trammel the Arbitral Tribunal‟s authority to rule on its own
jurisdiction.”
(Emphasis added)
32. A similar position was reiterated in SBI General Insurance Co.
Ltd. (supra) where the Hon‟ble Supreme Court observed that the
Arbitral Tribunal is the preferred first authority to look into the
questions of arbitrability and jurisdiction, and the courts at the referral
stage should not venture into contested questions involving complex
facts. The operative part reads as follows:-
“114. In view of the observations made by this Court in
Interplay between Arbitration Agreements under A&C Act,
1996 & Stamp Act, 1899, In re [ Interplay between
Arbitration Agreements under A&C Act, 1996 & Stamp Act,
1899, In re , (2024) 6 SCC 1 : 2023 INSC 1066] , it is clear
that the scope of enquiry at the stage of appointment of
Arbitrator is limited to the scrutiny of prima facie existence
of the arbitration agreement, and nothing else . …
*
125. We are also of the view that ex facie frivolity and
dishonesty in litigation is an aspect which the Arbitral
Tribunal is equally, if not more, capable to decide upon the
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appreciation of the evidence adduced by the parties. We say
so because the Arbitral Tribunal has the benefit of going
through all the relevant evidence and pleadings in much
more detail than the referral court. If the referral court is
able to see the frivolity in the litigation on the basis of bare
minimum pleadings, then it would be incorrect to doubt that
the Arbitral Tribunal would not be able to arrive at the
same inference, most likely in the first few hearings itself,
with the benefit of extensive pleadings and evidentiary
material .”
(Emphasis added)
33. Thus, it is quite clear that the scope of inquiry before the referral court
under Section 11 of the Act is narrowly circumscribed. The Court is
required only to ascertain the existence of a valid Arbitration
Agreement and to reject reference only where such an Agreement is
either non-existent, or where the subject matter of the dispute is non-
arbitrable in law. This limited scrutiny is designed to uphold the
principle of party autonomy and to respect the arbitral process.
34. It is neither appropriate nor permissible for this Hon‟ble Court to enter
into an adjudication of the merits of the underlying dispute, nor to
consider or allow production of detailed evidence at this stage. The
rationale behind this approach is to ensure that preliminary objections
or complex factual disputes regarding the validity or scope of the
arbitration clause especially where intertwined with the main contract,
are appropriately considered by the Arbitral Tribunal itself under the
doctrine of kompetenz-kompetenz . Accordingly, unless the Arbitration
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Agreement is found to be manifestly non-existent or unenforceable on
the face of the record, the matter must be referred to Arbitration for a
full and fair determination by the Tribunal.
Existence of a Valid and Enforceable Arbitration Agreement
35. In the present case, the SSHA and NCA both dated 25.05.2022,
contain arbitration clauses (Clause 16.2 and Clause 9(c), respectively)
which are reproduced below:
Clause 16 of the SSHA:
“ 16. Arbitration, Governing Law and Jurisdiction:
16.1 This Agreement shall be governed by the laws of India
and the courts of New Delhi shall have exclusive
jurisdiction over this Agreement.
16.2 In the event of any dispute, controversy, claim or
conflict between the Parties arising out of or relating to this
Agreement (including issues relating to the performance or
non-performance of the obligations set om herein or the
breach, termination or invalidity thereof) (a “Dispute‟‟),
such Dispute shall be referred to an arbitral tribunal
consisting of three Arbitrators. One Arbitrator shall be
appointed by the Party serving the notice of dispute, the
other Arbitrator shall be appointed by the respondent Party
and the third Arbitrator shall be appointed by the two
Arbitrators so appointed. The arbitration proceedings shall
be convened under the provisions of the Arbitration and
Conciliation Act, 1996 (as amended from to lime time) and
the award so granted by the arbitral tribunal shall be final
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and binding on the Parties.
16.3 The seat of the arbitration shall be New Delhi and the
language of the arbitration shall be English. The Parties
shall continue to adhere to their obligations under this
Agreement pending the adjudication of the dispute by
arbitration .”
Clause 9 of the NCA:
“9. GOVERNING LAW, ARBITRATION AND
JURISDICTION
(a) This Agreement shall be governed by and interpreted in
accordance with the laws India;
(b) The Parties hereto unconditionally submit to the
exclusive jurisdiction of the courts of New Delhi for the
determination of any matters arising out of or under this
Agreement.
(c) In the event of any dispute, controversy, claim or conflict
between the Parties arising out of or relating to this
Agreement (including issues relating to the performance or
non-performance of the obligations set out herein or the
breach, termination or invalidity thereof) (a “Dispute”),
such Dispute shall be referred to a tribunal consisting of
three Arbitrators: one Arbitrator shall be appointed by the
Party serving the notice of dispute and the other Arbitrator
shall be appointed by the respondent Party and the two
Arbitrators so appointed shall appoint the third member of
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the arbitral tribunal. The arbitration proceedings shall be
convened under the provisions of the Arbitration and
Conciliation Act, 1996 and the award so granted by 18 the
arbitral tribunal shall be final and binding on the Parties.
The language of the arbitration shall be English, and the
seat of arbitration shall be in New Delhi, India.”
36. These clauses clearly indicate the presence of an Arbitration
Agreement between the petitioners and the respondent Nos. 1-5. In the
present case, the respondent Nos. 1-5 have not disputed the existence
of Arbitration Agreement and have even conceded to Arbitration in
their replies as well as the Order dated 20.09.2024.
37. However, without prejudice to the above, the respondent Nos. 1-3
have contended that the non-compete clause is contrary to public
policy and hence unenforceable. They have relied on the decision of
the Hon‟ble Supreme Court in Magic Eye Developers (P) Ltd. v.
Green Edge Infrastructure (P) Ltd., (2023) 8 SCC 50 , to argue that
this Court must conclusively determine the legality of the non-
compete obligations and the alleged misuse of confidential
information, rather than leaving these issues for the Arbitral Tribunal.
It is stated that since these disputes go to the root of the matter, they
fall within the domain of the referral court. The paragraph relied upon
reads as under:-
“13……if the dispute/issue with respect to the existence and
validity of an Arbitration Agreement is not conclusively and
finally decided by the referral court while exercising the
pre-referral jurisdiction under Section 11(6) and it is left to
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the arbitral tribunal, it will be contrary to Section 11(6A) of
the Arbitration Act. It is the duty of the referral court to
decide the said issue first conclusively to protect the parties
from being forced to arbitrate when there does not exist any
Arbitration Agreement and/or when there is no valid
Arbitration Agreement at all.”
38. I am unable to agree with the said submission.
39. A careful reading of Magic Eye (supra) makes it evident that the
Hon‟ble Supreme Court distinguished between two types of inquiries
at the pre-referral stage under Section 11(6):-
i. A primary inquiry regarding the existence and validity of
the arbitration agreement, which may be conclusively
decided by the referral court if disputed; and
ii. A secondary inquiry regarding non-arbitrability of the
claims, which may only be examined on a prima facie basis,
especially when dismissal is manifestly warranted.
40. In the present case, the existence of Arbitration Agreements under
Clause 16.2 of the SSHA and Clause 9(c) of the NCA is not disputed
by respondent Nos. 1 to 5. On the contrary, they have participated in
proceedings under Section 9 of the Act, and respondent Nos. 1 – 3
agreed to arbitration, as recorded in the Order dated 20.09.2024. The
contention that the non-compete clause is void or that confidential
information was misused requires a detailed factual examination based
on documents and statements of witnesses, in addition to legal
examination. These issues do not pertain to the validity of the
arbitration clause itself, but rather to the merits of the dispute.
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41. The legal position in this regard is well-settled. In Aslam Ismail Khan
Deshmukh v. ASAP Fluids Pvt. Ltd . (2025) 1 SCC 502 , the Hon‟ble
Supreme Court held that at the Section 11 stage, a Court must refrain
from conducting a mini-trial or entering into disputed factual
questions that fall within the arbitral domain. The operative portion
reads as under:-
“ 51. It is now well settled law that, at the stage of Section 11
application, the referral Courts need only to examine
whether the Arbitration Agreement exists – nothing more,
nothing less. This approach upholds the intention of the
parties, at the time of entering into the agreement, to refer
all disputes arising between themselves to arbitration.
However, some parties might take undue advantage of such
a limited scope of judicial interference of the referral courts
and force other parties to the agreement into participating
in a time consuming and costly arbitration process.
52. In order to balance such a limited scope of judicial
interference with the interests of the parties who might be
constrained to participate in the arbitration proceedings,
the Arbitral Tribunal may direct that the costs of the
arbitration shall be borne by the party which the Tribunal
ultimately finds to have abused the process of law and
caused unnecessary harassment to the other party to the
arbitration.”
42. Even in the Section 9 proceedings, OMP (I) (COMM) 183 of 2024,
vide Order dated 31.05.2024, this Court observed that the non-
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compete clause was for a reasonable duration and that detailed
adjudication was better suited for the arbitral forum. The relevant
observation reads:-
“15. Similarly, Mr. Suresh raises the contention that the
non-Compete Agreement itself is void, but I am not inclined
to accept this submission at this stage, as these matters are
to be adjudicated in arbitration. I find prima facie that the
Non-Compete Agreement was for a reasonable period of
three years, which fell within the period during which the
respondents were bound to provide services to petitioner
No.2. ”
43. Accordingly, I find no basis to entertain the respondents‟ request for
adjudication on breach of contract, unfair trade practices, or validity of
the non-compete at this stage. These claims are substantive in nature,
fall within the scope of the Arbitration Clause, and are to be
adjudicated by the Arbitrator. This is consistent with the limited remit
of this Court under Section 11(6) read with Section 11(6A) of the Act.
44. In view of the above, I find that the Arbitration Agreement between
the parties is valid, enforceable, and binding. The disputes in the
present case fall squarely within the scope of the Arbitration Clauses,
and no ground has been made out to refuse reference under Section 11
of the Act.
45. Even if the respondents‟ contention regarding the invalidity of the
non-compete clause is taken at face value, the law is well settled that
an arbitration clause is autonomous and survives independently of the
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underlying agreement. This principle flows directly from Section
16(1) of the Act, which embodies the doctrine of severability.
46. In M/s Kuldeep Kumar Contractor v. Hindustan Prefab Limited,
2023 SCC OnLine Del 1088 , the Hon‟ble Delhi High Court held as
under:-
“35. Doctrine of Severability hails from the statutory
provisions laid under Section 16(1) of the Act, 1996. The
doctrine emphasizes on the principle that the arbitration
clause in a contract is treated separately from the main
contract and it continues to be in effect even if the main
contract is invalidated, vitiated, or terminated for any
reason. It is crystal clear that an arbitration clause is
independent of the underlying contract. It makes sure that if
one party alleges that the other breached the terms of the
agreement, the agreement will remain in effect for the
purposes of quantifying the claims arising from such
breach .”
47. In view of the above position, it is clear that even where the validity of
the underlying contract is under challenge, the Arbitration Clause
embedded within it is not rendered inoperative. The Arbitration
Agreement, being a separate and severable component, continues to
operate for the purposes of adjudicating disputes arising out of or in
connection with the said Agreement.
Impleadment of Non-Signatories (Respondent Nos. 6, 7 And 8) to
Arbitration Proceedings
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48. The petitioners have also sought to implead respondent Nos. 6 - 8
namely, Zulu Defence Systems Pvt. Ltd. (respondent No. 6) and its
directors (respondent Nos. 7 and 8), who are admittedly not
signatories to the Arbitration Agreements contained in the SSHA and
NCA.
49. The petitioners have argued that these respondents are alter egos of
the signatories (respondent Nos. 1 and 3) and are deeply involved in
the alleged contractual breaches and misuse of proprietary
information, and are therefore necessary parties to the Arbitration.
50. On the other hand, the respondent Nos. 6-8 have argued that they are
non-signatories to the Arbitration Agreement contained in SSHA and
NCA, and that they no longer share any substantial interest with
respondent Nos. 1 and 3 that may make respondent Nos. 6 - 8 a
necessary party to the Arbitration.
51. The law on impleadment of non-signatories in arbitration proceedings
is well settled. In Cox & Kings Ltd. (supra) , the Hon‟ble Supreme
Court held as under:-
“ 163. Section 16 of the Arbitration Act enshrines the
principle of competence-competence in Indian arbitration
law. The provision empowers the Arbitral Tribunal to rule
on its own jurisdiction, including any ruling on any
objections with respect to the existence or validity of
arbitration agreement. Section 16 is an inclusive provision
which comprehends all preliminary issues touching upon
the jurisdiction of the Arbitral Tribunal. [Uttarakhand Purv
Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd.,
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(2020) 2 SCC 455 : (2020) 1 SCC (Civ) 570] The doctrine
of competence-competence is intended to minimise judicial
intervention at the threshold stage. The issue of determining
parties to an Arbitration Agreement goes to the very root of
the jurisdictional competence of the Arbitral Tribunal.
*
169. In case of joinder of non-signatory parties to an
arbitration agreement, the following two scenarios will
prominently emerge : first, where a signatory party to an
Arbitration Agreement seeks joinder of a non-signatory
party to the arbitration agreement; and second, where a
non-signatory party itself seeks invocation of an arbitration
agreement. In both the scenarios, the referral court will be
required to prima facie rule on the existence of the
Arbitration Agreement and whether the non-signatory is a
veritable party to the arbitration agreement. In view of the
complexity of such a determination, the referral court
should leave it for the Arbitral Tribunal to decide whether
the non-signatory party is indeed a party to the Arbitration
Agreement on the basis of the factual evidence and
application of legal doctrine. The Tribunal can delve into
the factual, circumstantial, and legal aspects of the matter
to decide whether its jurisdiction extends to the non-
signatory party . In the process, the Tribunal should comply
with the requirements of principles of natural justice such
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as giving opportunity to the non-signatory to raise
objections with regard to the jurisdiction of the Arbitral
Tribunal. This interpretation also gives true effect to the
doctrine of competence-competence by leaving the issue of
determination of true parties to an Arbitration Agreement to
be decided by the Arbitral Tribunal under Section 16.
*
170.12. At the referral stage, the referral court should leave
it for the Arbitral Tribunal to decide whether the non-
signatory is bound by the arbitration agreement .”
(Emphasis added)
52. Similarly in Adavya Projects (P) Ltd. v. Vishal Structurals (P) Ltd.,
2025 SCC OnLine SC 806 , the Hon‟ble Supreme Court reiterated that
the question of who is a party to the arbitration agreement lies within
the Tribunal‟s domain. The relevant paragraph reads as under:-
“24…..the determination of who is a party to the
arbitration agreement falls within the domain of the
arbitral tribunal as per Section 16 of the ACA. Section 16
embodies the doctrine of kompetenz-kompetenz, i.e., that
the arbitral tribunal can determine its own jurisdiction. The
provision is inclusive and covers all jurisdictional
questions, including the existence and validity of the
arbitration agreement, who is a party to the arbitration
agreement, and the scope of disputes referrable to
arbitration under the agreement. Considering that the
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arbitral tribunal's power to make an award that binds the
parties is derived from the arbitration agreement, these
jurisdictional issues must necessarily be decided through
an interpretation of the arbitration agreement itself.
Therefore, the arbitral tribunal's jurisdiction must be
determined against the touchstone of the arbitration
agreement.”
(Emphasis added)
53. Further, the test of veritable party has been explained by this Court in
KKH Finvest (P) Ltd. (supra). The operative portion of the said
judgment reads as under:-
“80. Thus, the assessment required to be undertaken by this
Court - to give prima facie observations on whether the
respondents are veritable parties or not - is primarily an
assessment regarding the conduct, role, and involvement of
the non-signatory in the underlying contract i.e. the MoS. At
the outset, it is to be noted that the term “veritable parties”
applies to both persons and entities [refer to Cox &
Kings (supra), para 96]. In order to assess the same, this
Court is required to consider factors such as mutual intent,
relationship between the signatories and non-signatories,
commonality of subject matter, composite nature of
transactions and performance of the contract.
81. The intention of the parties to be bound by an
Arbitration Agreement is to be gathered from the
circumstances surrounding the involvement of a non-
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signatory party in the negotiation, performance, and
termination of the underlying contract containing the
agreement. If the non-signatory's actions align with those of
the signatories, it could reasonably lead the signatories to
believe that the non-signatory was a veritable party to the
contract containing the arbitration clause. To infer the non-
signatory's consent, its participation/involvement in the
negotiation or performance of the contract must be positive,
direct, and substantial, rather than merely incidental. The
burden of proof to establish the same lies on the party
seeking to implead the non-signatories to the arbitration
proceedings, in this case, the petitioners.”
54. In essence, the concept of a veritable party to an Arbitration
Agreement refers to a non-signatory who, though not formally a party
to the written Arbitration Clause, has such a close legal or factual
relationship with the signatories and the underlying contract that it
would be unjust or improper to exclude them from the arbitral
proceedings.
55. With this being the position in law, I am of the view that at this
preliminary stage, it would be inappropriate to make a conclusive
determination as to whether respondent Nos. 6 - 8 are also parties to
the arbitral dispute. The petitioners have alleged that respondent No. 6
was created solely for the purpose of transferring the petitioners'
business, and that respondent Nos. 1 - 3 have transferred such
business to respondent No. 6 with the active connivance and
involvement of respondent Nos. 7 and 8. These allegations involve
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complex factual assertions that merit detailed consideration after
affording an opportunity of hearing to all parties. Given the limited
scope of scrutiny by this Court under the present proceedings, it
cannot be definitively held at this stage that respondent Nos. 6 - 8 are
not veritable parties to the arbitral dispute. The resolution of this issue
necessarily requires the appreciation of evidence. Accordingly, the
determination of whether respondent Nos. 6 - 8 are amenable to the
Arbitration Proceedings is best left to the Arbitrator.
CONCLUSION
56. As discussed above, the respondents have raised a number of
objections against the present petition, however, none of the objections
raised question or deny the existence of the Arbitration Agreement
under which the arbitration has been invoked by the petitioner in the
present case. Thus, the requirement of prima facie existence of an
arbitration agreement, as stipulated under Section 11 of the Act, is
satisfied.
57. In view of the aforesaid, the present petition is allowed and the
following directions are issued: -
i. Mr. Justice S.K. Kaul (Retired Supreme Court Judge) (Mob.
No. 9818000370) is appointed as the Sole Arbitrator to
adjudicate the disputes between the parties.
ii. The learned Arbitrator shall fix his own fee.
iii. The learned Arbitrator is requested to furnish a declaration
in terms of Section 12 of the Act prior to entering into the
reference.
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iv. It is made clear that all the rights and contentions of the
parties, including as to the arbitrability of any of the claims,
any other preliminary objections, as well as claims/counter-
claims, deletion of any of the respondents and merits of the
dispute of either of the parties, are left open for adjudication
by the learned Arbitrator.
v. The parties shall approach the learned Arbitrator within two
weeks from today.
58. In light of the above directions, the present petition is disposed of.
OMP (I) COMM 183 of 2024
59. This is a petition filed under Section 9 of the Act seeking interim
relief against the respondents.
60. For the sake of brevity, the facts already set out above are not being
repeated herein. For adjudication, it is sufficient to state that
respondent Nos. 1 - 3 resigned from petitioner No. 2 on 03.07.2023
and shortly thereafter incorporated respondent No. 6 on 06.10.2023, to
run a competing business in violation of their contractual obligations
as alleged by the petitioners. Further, it is the case of the petitioners
that respondent Nos. 7 and 8, being the directors, are also actively
involved in the competing venture, i.e. respondent No. 6.
61. The scope and object of Section 9 of the Act have been elucidated by
the Hon‟ble Supreme Court in Arcelormittal Nippon Steel (India)
Ltd. v. Essar Bulk Terminal Ltd., (2022) 1 SCC 712. The Court held
that interim relief under Section 9 is intended to protect the subject
matter of Arbitration and ensure that Arbitral Proceedings do not
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become infructuous or the eventual award is rendered meaningless.
The relevant paragraphs read as under: -
“88. Applications for interim relief are inherently
applications which are required to be disposed of urgently.
Interim relief is granted in aid of final relief. The object is to
ensure protection of the property being the subject-matter of
arbitration and/or otherwise ensure that the arbitration
proceedings do not become infructuous and the arbitral
award does not become an award on paper, of no real
value.
89. The principles for grant of interim relief are (i) good
prima facie case, (ii) balance of convenience in favour of
grant of interim relief and (iii) irreparable injury or loss to
the applicant for interim relief. Unless applications for
interim measures are decided expeditiously, irreparable
injury or prejudice may be caused to the party seeking
interim relief.
90. It could, therefore, never have been the legislative intent
that even after an application under Section 9 is finally
heard, relief would have to be declined and the parties be
remitted to their remedy under Section 17.
91. When an application has already been taken up for
consideration and is in the process of consideration or has
already been considered, the question of examining whether
remedy under Section 17 is efficacious or not would not
arise. The requirement to conduct the exercise arises only
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when the application is being entertained and/or taken up
for consideration. As observed above, there could be
numerous reasons which render the remedy under Section
17 inefficacious. To cite an example, the different
Arbitrators constituting an Arbitral Tribunal could be
located at far away places and not in a position to assemble
immediately. In such a case, an application for urgent
interim relief may have to be entertained by the Court under
Section 9(1).”
62. In the present case, the reliefs sought are in the nature of injunctive
reliefs aimed at preventing the frustration of rights arising from the
contractual relationship between the parties. It is well settled that the
scope of enquiry under Section 9 is confined to a prima facie
assessment of the disputes and preservation of the subject matter of
Arbitration. Issues such as the interpretation of contract terms and the
scope of the underlying agreements fall squarely within the
jurisdiction of the Arbitral Tribunal. The Court, at this stage, is only to
determine whether the petitioner has made out a prima facie case,
whether the balance of convenience lies in favour of grant of interim
relief, and whether the petitioner would suffer irreparable harm in the
absence of such relief.
63. The petitioners have sought injunctive relief to prevent frustration of
rights under the NCA dated 25.05.2022. On 31.05.2024, this Court
had granted an interim injunction in favour of the petitioners,
restraining respondent Nos. 1 - 4 from engaging in any competing
business. The relevant portion of that order reads as under:-
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“15. Similarly, Mr. Suresh raises the contention that the
Non-Compete Agreement itself is void, but I am not inclined
to accept this submission at this stage, as these matters are
to be adjudicated in arbitration. I find prima facie that the
Non-Compete Agreement was for a reasonable period of
three years, which fell within the period during which the
respondents were bound to provide services to petitioner
No.2.
16. These issues will ultimately have to be adjudicated
between the parties in arbitration proceedings. However,
having regard to the specific clauses of the SSHA,
Employment Agreements, and Non-Compete Agreement,
which form part of the transaction documents to which
respondent Nos.1 to 4 were all parties, I am of the view that
the petitioners have made out a prima facie case for grant
of an ad interim order. The balance of convenience is also
in favour of such an order being passed. I am satisfied that
the petitioners would suffer irreparable loss if ad interim
orders are not granted in their favour.
17. For the aforesaid reasons, respondent Nos. 1 to 4 are
restrained until the next date of hearing from engaging,
directly or indirectly, in any business competing with the
business of petitioner No.2 company.”
64. The issue that arises at this stage is whether the said interim relief
ought to be continued or vacated.
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65. It is submitted by the respondent Nos. 1-3 that respondent Nos. 1 - 3
have already resigned from the petitioner No. 2. Therefore, Clause 1.1
of the NCA is unenforceable against them, being in violation of
Section 27 of the Indian Contract Act, 1872, which prohibits
agreements in restraint of trade, particularly in relation to ex-
employees. It has further been contended that the term of the NCA
expired on 25.05.2025. In view of the same, they submit that the
interim injunction granted by this Hon‟ble Court on 31.05.2024 is no
longer sustainable and ought to be vacated.
66. The petitioners, however, dispute this contention and submit that the
breach of the NCA by the respondents commenced on 06.10.2023,
which is the date on which respondent No. 6 - an allegedly competing
company was incorporated. This breach was well within the
contractual three-year period of the NCA, which commenced from the
effective date of 25.05.2022. The competing business initiated by the
respondents on 06.10.2023 has continued uninterrupted and unabated
till date. Therefore, the petitioners contend that the breach is a
continuing one, and the rights under the NCA continue to subsist in
law until such breach ceases.
67. In support of their submission, the petitioners rely on the settled
principle that no person can be permitted to take advantage of their
own wrong. It is stated that in the present case, the respondents,
having breached the non-compete obligations prior to their expiry,
cannot now claim protection under the expired clause while
continuing to violate the agreement.
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68. Further, it is submitted that where the contractual right in favour of a
party is time-bound, but such right is unlawfully obstructed or
interfered with by the other party, the period of breach is liable to be
excluded while computing the original duration of that right.
Accordingly, the petitioners submit that the period during which
respondents have been in breach of the non-compete clause starting
from 06.10.2023 till such breach ceases, ought to be added to the
original contractual period of three years. Reliance is placed on Beg
Raj Singh v. State of U.P. & Ors., (2003) 1 SCC 726 and more
particularly on paragraph 7 which reads as under:-
“7. Having heard the learned counsel for the petitioner, as
also the learned counsel for the State and the private
respondent, we are satisfied that the petition deserves to be
allowed. The ordinary rule of litigation is that the rights of
the parties stand crystallized on the date of commencement
of litigation and the right to relief should be decided by
reference to the date on which the petitioner entered the
portals of the court. A petitioner, though entitled to relief in
law, may yet be denied relief in equity because of
subsequent or intervening events i.e. the events between the
commencement of litigation and the date of decision. The
relief to which the petitioner is held entitled may have been
rendered redundant by lapse of time or may have been
rendered incapable of being granted by change in law.
There may be other circumstances which render it
inequitable to grant the petitioner any relief over the
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respondents because of the balance tilting against the
petitioner on weighing inequities pitted against equities on
the date of judgment. Third-party interests may have been
created or allowing relief to the claimant may result in
unjust enrichment on account of events happening in-
between. Else the relief may not be denied solely on account
of time lost in prosecuting proceedings in judicial or quasi-
judicial forum and for no fault of the petitioner. A plaintiff
or petitioner having been found entitled to a right to relief,
the court would as an ordinary rule try to place the
successful party in the same position in which he would
have been if the wrong complained against would not have
been done to him. The present one is such a case. The delay
in final decision cannot, in any manner, be attributed to the
appellant. No auction has taken place. No third-party
interest has been created. The sand mine has remained
unoperated for the period for which the period of operation
falls short of three years. The operation had to be stopped
because of the order of the State Government intervening
which order has been found unsustainable in accordance
with stipulations contained in the mining lease consistently
with GO issued by the State of Uttar Pradesh. Merely
because a little higher revenue can be earned by the State
Government that cannot be a ground for not enforcing the
obligation of the State Government which it has incurred in
accordance with its own policy decision.”
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69. Therefore, the petitioners argue that the non-compete obligations of
the respondents must be deemed to continue until a period equivalent
to the original term is observed in full, excluding the period of
unlawful breach . If a party is entitled to a right for a particular period,
and the said period is unlawfully interrupted by the breach of the other
party, the period of unlawful interruption is liable to be added to the
period of the original right. Reliance is placed on Dharam Veer v.
Union of India, AIR 1989 Del 227 and more particularly on
paragraph 40 which reads as under:-
“40. The next question, that arises, is to what relief is the
petitioner entitled? By virtue of an illegal order his
enjoyment of the lease and possession thereof has been
unlawfully interrupted through circumstances beyond his
control. Is he entitled to exclusion of the period of unlawful
interruption? It would appear to us he is. Not to exclude the
period from 14th July, 1986 till the petitioner is put back in
possession would amount to perpetuating the illegal order
of termination by virtue of which the respondents have taken
possession, the result would be that the lease period of three
years would stand unlawfully reduced to less than a year.”
70. Reliance is also placed on Avtar Singh v. Union of India, 1992 SCC
OnLine Del 539 and more particularly on paragraphs 69 and 70, which
read as under:
“69. Consequently, the Division Bench issued a writ of
mandamus to the respondents to restore possession to the
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petitioner immediately. It was further directed that the period of
unlawful interruption shall be excluded in computing the three
year term of the lease.
70. Following this judgment, I am of the opinion, that the
petitioner shall be entitled to be restored possession of the lease
granted to him and he shall also be entitled to exclusion of the
period of unlawful interruption in computing the ten year term of
the lease.”
71. This Court is unable to accept the reliance placed by the petitioners on
the judgments in Beg Raj Singh (supra), Dharam Veer (supra) and
Avtar Singh (supra) . These decisions pertain to disputes involving
premature or wrongful interference with leasehold rights, where the
courts granted equitable relief by excluding the period of interruption
in computing the tenure of a subsisting lease. In Beg Raj Singh
(supra) , the Hon‟ble Supreme Court held that the lessee, who was
deprived of enjoyment of a mining lease due to State interference,
could not be denied the full benefit of the lease term merely on
account of the time lost to litigation. Likewise, in Dharam Veer
(supra) and Avtar Singh (supra) , the High Court directed restoration
of possession and allowed for the exclusion of the period during
which the petitioner was unlawfully prevented from exercising his
leasehold rights. These judgments were rendered in the context of
proprietary interests and operate within a different legal framework.
72. Even reliance on Paul Deepak Rajaratnam v. Surgeport Logistics (P)
Ltd., 2025 SCC OnLine Del 5062 does not aid the petitioners‟ case. In
this case, although a termination notice had been issued by one of the
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parties, the conduct of the respondent indicated that they continued to
act in accordance with the terms of the SHA even after the purported
termination. In fact, formal acceptance of the termination came
significantly later, after Arbitral Proceedings had already been
initiated. This Court found that the delayed assertion of the
termination was an afterthought, especially since it was raised only in
response to the arbitration. As a result, the Court held that the SHA
continued to subsist and that the restrictive covenants therein,
including the non-compete clause, were enforceable, as they operated
during the term of a valid Agreement and did not amount to a restraint
of trade under Section 27 of the Indian Contract Act, 1872. The
operative paragraph reads as under:-
“83. It is well settled that restrictive covenants during the
term of a valid contract are not considered in restraint of
trade under Section 27 of the ICA. Since the learned
Arbitrator has found that the SHA is still in force, to which I
agree, Clause 15 of the SHA is not in restraint of trade and
remains enforceable.”
73. I have considered the submissions advanced on behalf of the
petitioners. While I note their contention that the respondents‟ breach
commenced during the currency of the NCA and that the period of
breach should be excluded in computing the contractual term, I am
unable to accept this argument in the present circumstances.
74. In the present case, it is an admitted position that respondent Nos. 1 -
3 have tendered their resignations from the petitioner No. 2 company
on 03.07.2023 and have since stepped down from their respective
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positions as CEO, COO, and CTO. In terms of Clause 5.4 of the
Employment Agreements, the resignation is to be effective upon
completion of a 90-day notice period, which concluded on
01.10.2023. It is further not in dispute that respondent No. 5 company
- Zulu Defence Systems Pvt. Ltd. was incorporated only thereafter, on
06.10.2023. Consequently, it is evident that respondent Nos. 1 - 3
ceased to be employees of petitioner No. 2 company as on the said
date, and no employment relationship continues to subsist between the
parties.
75. Turning to Clause 1.1 of the NCA, it states that
“ 1.1For a period of three years from the Effective Date of
this Agreement (the "Non-Compete Term") t he promoters
shall not, for a period of three years from the effective date
of the agreement, directly or indirectly: (a) be employed or
provide services to a competing entity; (b) act as an agent,
representative, contractor or consultant with any competing
entity; (c) acquire or retain any beneficial ownership
interest in a competing entity; or (d) engage in a business
that directly or indirectly competes with the business of the
petitioners .”
76. A plain reading of Clause 1.1 of the NCA reveals that the restraint
therein was intended to operate only during the term of the agreement
and was applicable to the individuals in their capacity as “Promoters.”
It is not disputed that respondents Nos. 1 - 3 resigned from their
respective positions on 03.07.2023 and thereby ceased to be
promoters/employees of petitioner No. 2.
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77. It is now well settled that post-service restrictive covenants in
employment contracts, which operate after cessation of employment,
are unenforceable under Indian law.
78. Recently, the Hon‟ble Supreme Court in Vijaya Bank v. Prashant B
Narnaware, 2025 SCC OnLine SC 1107 examined the scope of
Section 27 of the Indian Contract Act, 1872. The relevant paragraphs
read as under:
“12…..Though the Contract Act does not profess to be a
complete code, Act is exhaustive with regard to the subject
matter contained therein. That is to say, validity of a
restrictive covenant in an agreement including an
employment agreement in regard to restraint in exercise of
lawful profession, trade or business has to be tested on the
touchstone of Section 27 of the Contract Act.
13. Whether Section 27 operates as a bar to a restrictive
covenant during the subsistence of an employment contract
fell for decision in Niranjan Shankar Golikari v. Century
Spinning and Manufacturing Co. After an illuminating
discussion on the subject, the Bench made a distinction
between restrictive covenants operating during the
subsistence of an employment contract and those operating
after its termination. The Bench held as follows:-
“17. The result of the above discussion is that
considerations against restrictive covenants are
different in cases where the restriction is to apply
during the period after the termination of the contract
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than those in cases where it is to operate during the
period of the contract. Negative covenants operative
during the period of the contract of employment when
the employee is bound to serve his employer
exclusively are generally not regarded as restraint of
trade and therefore do not fall under Section 27 of the
Contract Act. A negative covenant that the employee
would not engage himself in a trade or business or
would not get himself employed by any other master
for whom he would perform similar or substantially
similar duties is not therefore a restraint of trade
unless the contract as aforesaid is unconscionable or
excessively harsh or unreasonable or one-sided..”
14. This view was reiterated in the concurrent opinion of
A.P. Sen, J. in Superintendence Company (P) Ltd. v.
Krishan Murgai. Endorsing the ratio in Golikari (supra)
with regard to validity of restrictive covenants during the
subsistence of a contract, A.P. Sen, J. held:-
“18. Agreements of service, containing a negative
covenant preventing the employee from working
elsewhere during the term covered by the agreement,
are not void under Section 27 of the Contract Act, on
the ground that they are in restraint of trade. Such
agreements are enforceable. The reason is obvious.
The doctrine of restraint of trade never applies during
the continuance of a contract of employment; it applies
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only when the contract comes to an end. While during
the period of employment, the courts undoubtedly
would not grant any specific performance of a contract
of personal service, nevertheless Section 57 of the
Specific Relief Act clearly provides for the grant of an
injunction to restrain the breach of such a covenant, as
it is not in restraint of, but in furtherance of trade.
19. In Niranjan Shankar Golikari case this Court drew
a distinction between a restriction in a contract of
employment which is operative during the period of
employment and one which is to operate after the
termination of employment. After referring to certain
English cases where such distinction had been drawn,
the Court observed: “A similar distinction has also
been drawn by courts in India and a restraint by which
a person binds himself during the term of his
agreement directly or indirectly not to take service with
any other employer or be engaged by a third party has
been held not to be void and not against Section 27 of
the Contract Act.”
15. In view of these authoritative pronouncements, it can be
safely concluded law is well settled that a restrictive
covenant operating during the subsistence of an
employment contract does not put a clog on the freedom of
a contracting party to trade or employment.”
(Emphasis added)
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79. Similarly, in Percept D'Mark (India) (P) Ltd. v. Zaheer Khan, (2006)
4 SCC 227 , the Hon‟ble Supreme Court held as under:-
“ 60. We have perused the contract in detail. The terms of
the contract were expressly limited to 3 years from 30-10-
2000 to 29-10-2003, unless extended by mutual agreement,
and all obligations and services under the contract were to
be performed during the term.
61. Clause 31(b) was also to operate only during the term
i.e. from the conclusion of the first negotiation period under
clause 31(a) on 29-7-2003 till 29-10-2003. This respondent
1 has scrupulously complied with. So long as clause 31(b) is
read as being operative during the term of the agreement
i.e. during the period from 29-7-2003 till 29-10-2003, it may
be valid and enforceable. However, the moment it is sought
to be enforced beyond the term and expiry of the agreement,
it becomes prima facie void, as rightly held by the Division
Bench.
62. If the negative covenant or obligation under clause
31(b) is sought to be enforced beyond the term i.e. if it is
enforced as against a contract entered into on 20-11-2003
which came into effect on 1-12-2003, then it constitutes an
unlawful restriction on respondent 1's freedom to enter into
fiduciary relationships with persons of his choice, and a
compulsion on him to forcibly enter into a fresh contract
with the appellant even though he has fully performed the
previous contract, and is, therefore, a restraint of trade
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which is void under Section 27 of the Contract Act.
63. Under Section 27 of the Contract Act: (a) a restrictive
covenant extending beyond the term of the contract is void
and not enforceable, (b) the doctrine of restraint of trade
does not apply during the continuance of the contract for
employment and it applies only when the contract comes to
an end, (c) as held by this Court in Gujarat
Bottling v. Coca-Cola [(1995) 5 SCC 545] this doctrine is
not confined only to contracts of employment, but is also
applicable to all other contracts .”
(Emphasis added)
80. Thus, the position that emerges is that the doctrine of restraint of
trade, as embodied under Section 27 of the Indian Contract Act, 1872,
applies when the contract comes to an end. A clear distinction exists
between a non-compete clause that operates during the subsistence of
employment or an Agreement, and one that is sought to be enforced
post-termination. While a restrictive covenant during the term of
employment may be legally permissible, any such restraint operating
after the termination of employment or expiry of the agreement is
subject to the rigours of Section 27. Once the NCA has come to an
end by efflux of time, or ceases to apply due to the termination of
employment, it cannot be enforced post expiry of the Contract.
81. Accordingly, in the present case, the NCA ceased to apply to the
respondent Nos. 1-3 from the date of their resignations. Furthermore,
the non-compete clause was contractually limited to a fixed duration
of three years from the effective date, which expired by efflux of time
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on 25.05.2025. In view of this, the restraint cannot now be sought to
be enforced post-expiry, as it would be in the nature of a post-
termination restraint.
82. If the contention of the petitioners is accepted, it would give rise to an
anomalous and legally untenable situation. To illustrate, consider a
scenario where an NCA is contractually limited to a duration of three
years. If one party alleges a breach from day one of the agreement,
and such an allegation results in an interim injunction, then following
the petitioners‟ line of reasoning, the non-compete would need to be
enforced for an additional three years. This would, in effect, double
the agreed restraint period and extend the NCA beyond its original
term, despite the fact that the parties never intended such an extension.
83. Moreover, if upon conclusion of trial it is found that the alleged
breach never occurred, the respondents would have nevertheless been
subjected to a restraint for a period longer than contractually agreed,
solely due to an unproven allegation. Such an outcome is not only
inequitable but also contrary to settled legal principles. Non-compete
clauses, by their very nature, must be subject to strict scrutiny, as
these can turn into post-contractual restraint and would amount to
rewriting the contract in a manner that extends the restraint beyond
what was mutually agreed.
84. Allowing them to be extended based on prima facie observations
would violate Section 27 of the Indian Contract Act, 1872, and would
amount to imposing an unreasonable restriction on the respondents‟
right to practice their trade or profession, which is protected under
Article 19(1)(g) of the Constitution of India.
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85. For the reasons noted above, the interim injunction granted by this
Court on 31.05.2024 under Section 9 of the Act, which restrained the
respondents from engaging in competing business, is no longer
sustainable and needs to be vacated. Clause 1.1 of the NCA
categorically provides that the restriction would subsist for a period of
three years from the Effective Date, which has now lapsed. The
contractual right having been extinguished by efflux of time, there is
no continuing obligation that may now be preserved through the
interim relief. Hence, the interim injunction stands vacated.
86. As the Arbitrator is being appointed, the present petition shall be
treated as an application under Section 17 of the Act and shall be
decided by the Arbitrator in accordance with law, insofar as the other
reliefs are concerned.
87. Since the Contempt Petitions being CCP(O) 57/2024 and CCP(O)
93/2024 are raising disputed questions of facts, the petitioners are at
liberty to revive the same after the opinion of the Arbitrator in
accordance with Section 27(5) of the Act.
88. In view of the above, the present petition stands disposed of.
89. Pending applications, if any, also stand disposed of.
JASMEET SINGH, J
th
AUGUST 11 , 2025/DE
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