Full Text
HIGH COURT OF DELHI
Date of Decision: 01st JULY, 2025 IN THE MATTER OF:
M/S MGI (INDIA) PVT LTD. .....Appellant
Through: Mr. S. Ravishankar, Ms. Yamunah Nachiar, Ms. Ruhini Dey, Ms. Meghna Mukherjee, Advocates
PVT LTD . ....Respondent
Through: Mr. T. K. Ganju, Sr. Advocate
Khaliq, Mr. Pranay Lakhanpal Advocates
HON'BLE MR. JUSTICE AMIT BANSAL
JUDGMENT
1. The Appellant seeks to challenge the Judgment dated 13.08.2019 passed by the learned Single Judge who while exercising jurisdiction under 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:-
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:-
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:-
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 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 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 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:-
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 nonsolicitation clause/non-hire clause provided in the agreement can be made enforceable or not.
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:-
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:-
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. [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) “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.”
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