Full Judgment Text
* IN THE HIGH COURT OF DELHI AT NEW DELHI
st
Date of decision: 01 JULY, 2025
IN THE MATTER OF:
+ FAO(OS) (COMM) 305/2019
+ FAO(OS) (COMM) 306/2019
+ FAO(OS) (COMM) 307/2019
+ FAO(OS) (COMM) 308/2019
+ FAO(OS) (COMM) 309/2019
+ FAO(OS) (COMM) 310/2019
M/S MGI (INDIA) PVT LTD. .....Appellant
Through: Mr. S. Ravishankar, Ms. Yamunah
Nachiar, Ms. Ruhini Dey, Ms.
Meghna Mukherjee, Advocates
versus
M/S INTERNATIONAL DESIGN & ENGINEERING SOLUTIONS
PVT LTD . ....Respondent
Through: Mr. T. K. Ganju, Sr. Advocate with
Mr. Aquib Ali, Mr. Anish Lakhanpal,
Ms. Anupriya Nigam, Ms Amreen
Khaliq, Mr. Pranay Lakhanpal
Advocates
CORAM:
HON'BLE MR. JUSTICE SUBRAMONIUM PRASAD
HON'BLE MR. JUSTICE AMIT BANSAL
JUDGMENT
SUBRAMONIUM PRASAD, J.
1. The Appellant seeks to challenge the Judgment dated 13.08.2019
passed by the learned Single Judge who while exercising jurisdiction under
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Section 34 of the Arbitration & Conciliation Act has set aside the award
leaving it open to the Respondent herein to adjudicate its claims in
accordance with law.
2. Shorn of unnecessary details, the facts leading to the present appeals
are that the Appellant and the Respondent entered into Structural
Engineering Consulting Agreements for various construction projects of the
Appellant. Under the said agreement, the Respondent herein was to provide
services for the purpose of architectural design, drafting, engineering
drawings and other consultancy related services to the Appellant herein.
Clause 4 of the Architectural and Engineering Consulting Agreement
provided for “non-hire clause”. The same is reproduced as under:-
“4. MGI hereby warrants that it will not recruit, hire,
engage, cause and/or encourage other persons or
entitles to recruit hire and/or engage any staff, directly
or indirectly, nor contact, nor conduct any business
with any (current or former) staff during
implementation of this agreement and for a period of
two years after termination/cessation/revocation of this
agreement. In the event of a breach of this clause IDES
shall be entitled to a legal monetary compensation
equal to Rs.9,000/- per day per staff for each calendar
day if MGI uses staff/consultants without knowledge or
concurrence of IDES directly or indirectly plus any
and all expenses, including attorney fees, incurred to
enforce this provision. MGI specifically admits such
compensation payable immediately on occurrence of
breach. No exception to this provision shall be
recognized unless it shall be reduced to writing and
signed by both parties for each and every staff for
which a exception is sought. The provisions of this
paragraph govern current, future and former staff. ”
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3. The case of the Respondent is that the Appellant company
incorporated a new offshoot company, namely, MGI Infra Private Limited
and the Appellant induced the employees of the Respondent to leave the
services of the Respondent and join MGI Infra Private Limited which is in
violation of “non-hire clause”. The Respondent therefore claimed a
monetary compensation from the Appellant herein.
4. The learned Arbitrator after considering the material on record came
to the conclusion that the Appellant had significant influence on MGI Infra
Private Limited and is an associate company of the Appellant. However, the
Arbitrator held that the negative covenant contained in the contract
pertaining to the period post termination restricting the employee’s right to
seek employment and/or to do business in the same field as the employer
would be a restraint of trade, and therefore, a stipulation to this effect to the
contract would be void. The Arbitrator, in view of the said reasoning as
given in the award, held that the claim as sought for by the Respondent
herein is not maintainable in law. The learned Arbitrator vide Award dated
22.02.2019 has observed as under:-
“ 25 . The Claimant has claimed compensation for the
post discharge period of two years of the contract from
the Respondent for its employees, who left the
Company and floated a new Company i.e. M/s. MGI
Infra (P) Ltd. Ld. Counsel for the Claimant has argued
that he has claimed damages from the Respondent and
not from the employees, who left its services. This
argument, as per settled law is deprived of any merits
and is not acceptable. Clause-4 of the covenant is void
and unenforceable against the Respondent. If enforced,
it would curtail the rights of the employees to go for
better employment. Hence, this question is partly
decided against the Claimant.”
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5. The said Award was challenged by the Respondent herein by filing a
petition under Section 34 of the Arbitration & Conciliation Act. The learned
Single Judge held that the Award dated 22.02.2019 is directly contrary to the
law laid down by this Court in Wipro Limited v. Beckman Coulter
International S.A., 2006 SCC OnLine Del 743 . The learned Single Judge
has reproduced Paragraphs 59 and 60 of the Judgment passed in Wipro
Limited (supra), which is again being reproduced for easy reference:-
“ 59 . In the light of these principles which have been
culled out from the decisions with regard to the scope
and ambit of the provisions of Section 27 of the Indian
Contract Act, it remains to be considered as to whether
the non-solicitation clause in question amounts to a
restraint of trade, business or profession. Two things
are material. First of all, the contract in which the
non-solicitation clause appears is a contract between
the petitioner and the respondent whereby the
petitioner was appointed as the sole and exclusive
Canvassing Representative/Distributor of the
respondent for its products in India. Secondly, it is not
a contract between an employer and an employee. If
one considers the non-solicitation Clause, it becomes
apparent that the parties are restrained for a period of
two years from the date of termination of the
agreement, from soliciting, inducing or encouraging
any employees of the other party to terminate his
employment with or to accept employment with any
competitor, supplier or customer of the other party. It
is a covenant which essentially prohibits either party
from enticing and/or alluring each other's employees
away from their respective employments. It is a
restriction cast upon the contracting parties and not on
the employees. The later part of the non-solicitation
which deals with the exception with regard to general
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advertising of positions makes it clear that there is no
bar on the employees of the petitioner leaving its
employment and joining the respondent and vice versa.
The bar or restriction is on the petitioner and the
respondent from offering inducements to the other's
employees to give up employment and join them.
Therefore, the clause by itself does not put any
restriction on the employees. The restriction is put on
the petitioner and the respondent and, therefore, has to
be viewed more liberally than a restriction in an
employer-employee contract. In my view, therefore, the
non-solicitation clause does not amount to a restraint
of trade, business or profession and would not be hit by
Section 27 of the Indian Contract Act, 1872 as being
void.
60. However, the question that arises is what happens
when the respondent has solicited and/or induced or
encouraged employees of the petitioner to leave and/or
resign from such employment and join the respondent.
Can an injunction be granted restraining the
respondent from giving employment to such
employees? There are only two possible situations. The
first is that an injunction is granted and, the second is
that an injunction is not granted. If an injunction is
granted, it would imply that the respondent cannot
employ such employees who have responded to the
advertisement which I have already held to be a
solicitation. But it would also mean that employees
who did not have any such restrictive covenant in their
employment contracts, would be barred from taking up
employment with the respondent. In other words, we
would be reading into their employment contracts a
negative covenant that they would not seek employment
after termination of their present employment, with the
respondent. If such a term were to be introduced in
their employment contracts, then, it, in view of the
settled legal principles indicated above, would be void
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being in restraint of trade. Consequently, when such
employees cannot be restrained from directly seeking
the employment of the respondent, they cannot be
restrained indirectly by preventing the respondent from
employing them. Therefore, an injunction cannot be
granted restraining the respondent from employing
even those employees of the petitioner company who
were allured by the solicitation held out by the
respondent in the said advertisement. But, the
respondent can be injuncted and restrained from
making any such or other solicitation in future during
the period of two years w.e.f. 31.12.2005 to any other
employees of the petitioner. As regards the solicitation
already made by the respondent in the advertisement,
the petitioner, if it is able to substantiate this in the
arbitration proceedings, would be entitled to be
compensated by the grant of damages. So, it is not as if
a breach of the non-solicitation clause would leave the
petitioner without a remedy. The remedy lies in the
claim for damages and an injunction against
solicitation in future. It does not lie in the grant of an
injunction preventing its employees from resigning and
taking up employment with the respondent.
Accordingly, this application under Section 9 of the
Arbitration and Conciliation Act, 1996 is disposed of
with the following directions:
(1) the respondent is restrained during the pendency
of the arbitration proceedings from taking out any
other or further advertisements or to do anything to
solicit, induce or encourage the employees of the
petitioner to leave the petitioner's employment and
take up employment of the respondent and/or its
agents and/or representatives and/or competitors;
(2) the employees of the petitioner would, however,
be free to take up employment with the respondent,
even in response to the said advertisement which has
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prima facie been held to be solicitation, but, the
respondent would be liable to compensate the
petitioner for such breach of the non-solicitation
clause, if so established in the pending arbitration
proceedings.
Application disposed of”
6. The learned Single Judge set aside the Award dated 22.02.2019
leaving it open to the Respondent herein, i.e., Petitioner before the learned
Single Judge, to agitate its claim in accordance with law. The said Judgment
dated 13.08.2019 passed by the learned Single Judge is under challenge in
the present appeals.
7. To complete the narration of facts, it is pertinent to mention that in the
interregnum of the first appeal, since the first appeals were pending before
this Court for a period of four years, on 21.08.2024, the learned Counsel for
the Respondent stated that pursuant to the decision rendered by the learned
Single Judge, the Respondent herein had not taken any steps to initiate fresh
arbitration proceedings. Learned Counsel for the Appellant herein had also
stated that no fresh steps have been taken by the Appellant herein to initiate
fresh claims.
8. A question was put to the learned Counsel for the Appellant that since
the Respondent has not taken any steps towards initiation of arbitration
proceedings even though there is no stay of the operation of the impugned
Judgment passed by the learned Single Judge, both sides could figuratively
consider for burying the hatchet. The learned Counsel for the parties
submitted in Court that they have no objection, given the lapse of time, if the
Court observes that the disputes between the parties stand closed and the
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first appeals were disposed of.
9. It is also pertinent to mention that while closing the first appeal, the
Division Bench had also noted that it is in agreement with the view taken by
the learned Single Judge which does not require any interference. The
relevant portion of the said Order reads as under:-
“ 18 . We are in agreement with the view taken by the
learned Single Judge. According to us, it requires no
interference.”
10. A review petition was filed by the Respondent herein stating that the
Respondent had not given any instructions to the erstwhile learned Counsel
appearing on behalf of the Respondent to make such a submission. An
affidavit was also filed by the erstwhile learned Counsel for the Respondent.
The Respondent also gave an affidavit that such concession which was made
in the Court on 21.08.2024 was without any instructions from the
Respondent.
11. In view of the said affidavit and in view of the fact that there was no
reasoning given by the Division Bench in its Order dated 21.08.2024, the
review petitions were allowed vide Order dated 09.04.2025 and the appeals
were restored to their original numbers.
12. Heard learned Counsel for the parties and perused the material on
record.
13. The short question which arises for consideration is as to whether the
Judgment passed the learned Single Judge setting aside the Awards passed
by the learned Arbitrator requires any interference and whether the non-
solicitation clause/non-hire clause provided in the agreement can be made
enforceable or not.
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14. The said question is no longer res integra . Way back in the year 1967,
the Apex Court in Niranjan Shankar Golikari v. Century Spinning and
Manufacturing Co. Ltd., 1967 SCC OnLine SC 72 , has observed as under:-
“ 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
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 as in
the case of W.H. Milsted & Son Ltd. Both the trial
court and the High Court have found, and in our view,
rightly, that the negative covenant in the present case
restricted as it is to the period of employment and to
work similar or substantially similar to the one carried
on by the appellant when he was in the employ of the
respondent Company was reasonable and necessary
for the protection of the company's interests and not
such as the court would refuse to enforce. There is
therefore no validity in the contention that the negative
covenant contained in clause 17 amounted to a
restraint of trade and therefore against public policy.”
15. The said Judgment has been referred to and followed by the Apex
Court in Gujarat Bottling Co. Ltd. & Ors. v. Coca Cola Co. & Ors., (1995) 5
SCC 545 , wherein the Apex Court has observed as under:-
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“ 21 . Under the common law in England a man is
entitled to exercise any lawful trade or calling as and
where he wills. The law has always regarded zealously
any interference with trade, even at the risk of
interference with freedom of contract, as it is public
policy to oppose all restraints upon liberty of
individual action which are injurious to the interests of
the State. A person may be restrained from carrying on
his trade by reason of an agreement voluntarily
entered into by him with that object and in such a case
the general principle of freedom of trade must be
applied with due regard to the principles that public
policy requires for persons of full age and
understanding the utmost freedom to contract.
Traditionally the doctrine of restraint of trade applied
to covenants whereby an employee undertakes not to
compete with his employer after leaving the employer's
service and covenants by which a trader who has sold
his business agrees not thereafter to compete with the
purchaser of the business. The doctrine is, however,
not confined in its application to these two categories
but covenants falling in these two categories are
always subjected to the test of reasonableness. Since
the doctrine of restraint of trade is based on public
policy its application has been influenced by changing
views of what is desirable in the public interest. The
decisions on public policy are subject to change and
development with the change and development of trade
and the means of communication and the evolution of
economic thought. The general principle once
applicable to agreements in restraint of trade has
consequently been considerably modified by later
decisions in England. In the earliest times all contracts
in restraint of trade, whether general or partial, were
void. The severity of this principle was gradually
relaxed, and it became the rule that a partial restraint
might be good if reasonable, although a general
restraint was of necessity void. The distinction between
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general and partial restraint was subsequently
repudiated and the rule now is that restraints, whether
general or partial, may be good if they are reasonable
and any restraint on the freedom of contract must be
shown to be reasonably necessary for the purpose of
freedom of trade. A covenant in restraint of trade must
be reasonable with reference to the public policy and it
must also be reasonably necessary for the protection of
the interest of the covenantee and regard must be had
to the interests of the covenantor. Contracts in
restraint of trade are prima facie void and the onus of
proof is on the party supporting the contract to show
that the restraint goes no further than is reasonably
necessary to protect the interest of the covenantee and
if this onus is discharged the onus of showing that the
restraint is nevertheless injurious to the public is on
the party attacking the contract. The court has to
decide, as a matter of law, (i) whether a contract is or
is not in restraint of trade, and (ii) whether, if in
restraint of trade, it is reasonable. The court takes a
far stricter and less favourable view of covenants
entered into between employer and employee than it
does of similar covenants between vendor and
purchaser or in partnership agreements, and
accordingly a restraint may be unreasonable as
between employer and employee which would be
reasonable as between the vendor and purchaser of a
business. [See: Halsbury's Laws of England, 4th Edn.,
Vol. 47, paragraphs 9 to 26; Niranjan Shankar
Golikari v. Century Spg. and Mfg. Co. Ltd. [(1967) 2
SCR 378 : AIR 1967 SC 1098 : (1967) 1 LLJ 740] ,
(SCR at pp. 384-85.) Instead of segregating two
questions, (i) whether the contract is in restraint of
trade, (ii) whether, if so, it is “reasonable”, the courts
have often fused the two by asking whether the contract
is in “undue restraint of trade” or by a compound
finding that it is not satisfied that this contract is really
in restraint of trade at all but, if it is, it is reasonable.
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[See : Esso Petroleum Co. Ltd. v. Harper's Garage
(Stourport) Ltd. [1968 AC 269 : (1967) 1 All ER 699 :
(1967) 2 WLR 871] , (AC at p. 331) per Lord
Wilberforce.]
xxx
31 . If the negative stipulation contained in paragraph
14 of the 1993 Agreement is considered in the light of
the observations in Esso Petroleum Co. Ltd. [1968 AC
269 : (1967) 1 All ER 699 : (1967) 2 WLR 871] , it will
be found that the 1993 Agreement is an agreement for
grant of franchise by Coca Cola to GBC to
manufacture, bottle, sell and distribute the various
beverages for which the trade marks were acquired by
Coca Cola. The 1993 Agreement is thus a commercial
agreement whereunder both the parties have
undertaken obligations for promoting the trade in
beverages for their mutual benefit. The purpose
underlying paragraph 14 of the said agreement is to
promote the trade and the negative stipulation under
challenge seeks to achieve the said purpose by
requiring GBC to wholeheartedly apply to promoting
the sale of the products of Coca Cola. In that context, it
is also relevant to mention that the said negative
stipulation operates only during the period the
agreement is in operation because of the express use of
the words “during the subsistence of this agreement
including the period of one year as contemplated in
paragraph 21” in paragraph 14. Except in cases where
the contract is wholly one sided, normally the doctrine
of restraint of trade is not attracted in cases where the
restriction is to operate during the period the contract
is subsisting and it applies in respect of a restriction
which operates after the termination of the contract. It
has been so held by this Court in N.S. Golikari [(1967)
2 SCR 378 : AIR 1967 SC 1098 : (1967) 1 LLJ 740]
wherein it has been said: (SCR p. 389)
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“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 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 as in
the case of W.H. Milsted and Son Ltd. [W.H. Milsted
and Son Ltd. v. Hamp and Ross and Glendinning
Ltd., 1927 WN 233] ”
xxx
34 . Since the negative stipulation in paragraph 14 of
the 1993 Agreement is confined in its application to the
period of subsistence of the agreement and the
restriction imposed therein is operative only during the
period the 1993 Agreement is subsisting, the said
stipulation cannot be held to be in restraint of trade so
as to attract the bar of Section 27 of the Contract Act.
We are, therefore, unable to uphold the contention of
Shri Shanti Bhushan that the negative stipulation
contained in paragraph 14 of the 1993 Agreement,
being in restraint of trade, is void under Section 27 of
the Contract Act.”
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16. As rightly pointed out by the learned Single Judge in the impugned
Judgment, another learned Single Judge of this Court in Wipro Limited
(supra) had also held to the same effect. The finding of the learned
Arbitrator that the said clause is void and unenforceable is therefore not
sustainable. It is for the Respondent herein to initiate fresh steps in
accordance with law, lead evidence to demonstrate that the said clause has
been violated during the subsistence of the agreement or that the employees
have been induced to resign to form the new company which is an associate
company of the Appellant herein, thereby entitling the Respondent to claim
damages.
17. Viewed in this light, there is no merit in the appeals. The appeals
stand dismissed along with pending application(s), if any.
SUBRAMONIUM PRASAD, J
AMIT BANSAL, J
JULY 01, 2025
hsk
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