Delhi High Court Upholds Arbitrator's Order Restraining Former Directors from Competing: "No Question of Any Breach of Section 27 of the Indian Contract Act"
Safiya Malik
The High Court of Delhi Single Bench of Justice Jasmeet Singh dismissed an appeal challenging an interim arbitral award passed under Section 17 of the Arbitration and Conciliation Act, 1996. The Court upheld the arbitrator’s decision to restrain the appellants, former directors and minority shareholders of a logistics joint venture, from engaging in competing business activities. The appeal was filed under Section 37(2)(b) of the Act against the interim measures granted by the arbitral tribunal.
The Court held that the interim relief satisfied the established legal tests and was supported by material evidence on record. Justice Jasmeet Singh observed that the shareholders' agreement (SHA) remained valid and enforceable, and that "there can be no question of any breach of Section 27 of the Indian Contract Act". The arbitrator's direction was found to be proportionate, narrowly tailored, and aligned with Clause 15 of the SHA.
The Court concluded that the appellants failed to establish any perversity, arbitrariness, or legal infirmity in the interim award warranting interference under Section 37. Accordingly, the appeal was dismissed, and the impugned interim award was upheld.
The matter pertained to an appeal filed under Section 37(2)(b) of the Arbitration and Conciliation Act, 1996, challenging an interim award dated 16.12.2024 passed under Section 17 of the Act. The arbitration proceedings arose from a dispute between appellants, who were former directors and minority shareholders, and respondents, comprising a logistics joint venture company and its parent entity.
The appellants, Appellant No. 1 and Appellant No. 2, held a 12% equity share each in the respondent company under a shareholders' agreement dated 28.04.2018. They were terminated from their roles via notice dated 25.07.2023. Appellant No. 3 was a partnership firm formed by Appellant Nos. 1 and 2 on 18.07.2018, with the consent of respondents, to support expansion of the respondent company’s logistics business.
The respondents had approached the appellants in 2017 to form a joint venture. Based on oral promises of eventual increase in equity to 25% each and mutual trust, the appellants agreed to join. Although the SHA was executed on 28.04.2018, the appellants alleged they were not allowed to review the agreement prior to signing.
Appellant No. 3, the partnership firm, had engaged in logistical operations and raised invoices worth approximately Rs. 1.7 crores between 2018 and 2023. The respondents later disputed knowledge of Appellant No. 3 before 2019. However, board minutes and communications between 2019 and 2022 acknowledged the firm’s contributions and promised 10% net profits of respondent No. 1, which the appellants claimed was never honoured.
In 2023, the appellants demanded an increase in equity. They subsequently alleged misappropriation of funds by the respondents. A show-cause notice invoking the non-compete clause (Clause 15 of the SHA) was issued on 07.06.2023, followed by termination on 25.07.2023. Appellants challenged the invocation of Clause 15, arguing the SHA had been terminated.
Respondents filed a petition under Section 9 of the Act, seeking to restrain the appellants from engaging in competing business. On 03.08.2023, notice was issued on certain prayers. The respondents then invoked arbitration under Section 21, proposing a three-member tribunal, which the appellants objected to.
The High Court directed the appellants to disclose financial data related to Appellant No. 3. The respondents later filed a Section 17 application before the arbitral tribunal after the Section 9 petition was treated as such by a Division Bench of the High Court.
On 16.12.2024, the arbitrator issued an interim award restraining the appellants from engaging in any competing business related to international freight forwarding and logistics. The arbitrator recorded that the appellants would be entitled to seek recall or modification of the restraint upon disclosing the full details of their business operations.
The appellants challenged the interim award on several grounds, primarily that the SHA had been terminated, making Clause 15 unenforceable. They argued the restraint imposed violated Section 27 of the Indian Contract Act, 1882, and amounted to wrongful restriction of their right to livelihood. They further cited the Specific Relief Act, 1963, contending that specific performance of such a clause was impermissible.
Additionally, the appellants argued that the SHA provided for liquidated damages under Clause 15(3), and hence an injunctive relief was unwarranted. They claimed that enforcement of Clause 15 post-termination was contrary to public policy. The appellants submitted that they were no longer listed as directors and filed updated records from the Ministry of Corporate Affairs to support this claim.
The respondents opposed the appeal, asserting that the SHA remained valid and had not been lawfully terminated. They contended that the termination notice was not issued by the party competent under Clause 14 of the SHA. They also argued that appellants continued to act as directors and had not disclosed business activities as required.
The respondents further submitted that the appellants had misrepresented facts, shifted positions regarding the SHA's validity and failed to comply with court directions to disclose business details. They maintained that Clause 15 was enforceable during the subsistence of the SHA and necessary to protect their interests.
The arbitrator found that the relationship under the SHA had not been severed, and appellants were still entitled to dividends and remuneration. The arbitrator observed that enforcement of Clause 15 did not violate Section 27 since the agreement was ongoing.
Justice Jasmeet Singh first examined the limited scope of judicial review under Section 37(2)(b) of the Act. He recorded that "judicial intervention is warranted only when the order is (A) perverse, arbitrary or unreasonable, (B) contrary to the fundamental policy of Indian law, (C) the arbitral tribunal has exceeded or failed to exercise its jurisdiction, and/or (D) it results in a miscarriage of justice."
Referring to prior judgments, the Court stated that appellate courts under Section 37 must maintain "due circumspection and restraint" and not substitute their own views for that of the arbitral tribunal. The Court noted that interim orders by arbitrators must satisfy the triple test of "prima facie case, irreparable injury and balance of convenience."
On the central issue of whether the SHA was validly terminated, the Court concurred with the arbitrator's finding that "the relationship of the Respondents ... has not been severed". It recorded that appellants continued to appear as directors on official records at least till 16.05.2024 and had not conclusively severed ties. The Court stated, "the mere act of updating statutory records cannot override or substitute the mutual obligations contemplated under the SHA."
The Court found that the appellants' shifting stand regarding the SHA, including initially denying its existence and later relying on it for termination, undermined their credibility. "Such conduct reinforces the inference that the plea is opportunistic and designed to evade contractual obligations", the Court recorded.
Addressing the contention that the termination was effective due to cessation of managerial roles and denial of access to infrastructure, the Court held that "disengagement from management or operational responsibilities does not bring about the cessation of contractual obligations imposed under the SHA."
On the applicability of Section 27 of the Indian Contract Act, the Court stated, "restrictive covenants during the term of a valid contract are not considered in restraint of trade". Citing binding precedents, the Court affirmed that "Clause 15 ... is not in restraint of trade and remains enforceable."
Further, the Court observed that "the appellants are not barred from engaging in any lawful trade, business or profession, except from international logistics and freight forwarding, in view of Clause 15 of the SHA." It also recorded that the appellants could seek "recall and/or modification ... consequent upon ... disclosing the entire business activities".
Regarding irreparable harm, the Court quoted the arbitrator's finding that "it is 'not' possible to expect, that the Claimants will ever be in a position to ascertain the business activities of the Respondents ... no matter how hard they may try to dig out the same". In this context, the interim relief was held necessary.
The Court rejected the argument that the existence of a liquidated damages clause precluded injunctive relief. It stated that "where quantification of loss is not possible due to the conduct of the breaching party ... interim protection was essential to preserve the subject matter of the dispute."
The Court concluded that "the impugned interim award is a well-reasoned and proportionate exercise" and that the arbitrator had "applied his mind to the pleadings, documentary evidence and the surrounding circumstances".
The Court upheld the impugned interim award dated 16.12.2024 passed by the learned arbitrator under Section 17 of the Act in the arbitration proceedings titled "Surgeport Logistics Private Limited & Anr. v. Paul Deepak Rajaratnam & Ors."
The Court stated: "For the said reasons, the impugned interim award dated 16.12.2024 passed by the learned arbitrator ... is upheld. Accordingly, the petition is dismissed."
Justice Jasmeet Singh recorded that the appeal under Section 37(2)(b) failed to establish any valid ground for interference. He observed: "The impugned interim award does not suffer from any such infirmity ... The learned arbitrator has applied his mind to the pleadings, documentary evidence and the surrounding circumstances."
The Court held that the interim award satisfied all requirements for interim relief under the Act. It concluded that "the impugned interim award is not only legally sustainable but essential in this factual backdrop to ensure that the arbitral proceedings remain meaningful, efficacious and equitable."
The Court reaffirmed the arbitrator’s liberty to entertain future applications for recall or modification upon disclosure by the appellants. It observed that "the Respondents would be entitled to seek a recall and/or modification ... consequent upon ... disclosing the entire business activities".
Accordingly, no relief was granted to the appellants, and the directions passed in the interim award continue to operate.
Advocates Representing the Parties:
For the Petitioners: Mr. Vivek Kohli, Senior Advocate with Mr. S. Santanam Swaminadhan, Mr. Anindit Mandal, Mr. Kartik Malhotra, Ms. Vasudha Chadha, Advocates
For the Respondents: Ms. Rimali Batra, Mr. Abhishek Lalwani, Mr. K. Kumar, Advocates
Case Title: Paul Deepak Rajaratnam & Ors. v. Surgeport Logistics Private Limited & Anr.
Neutral Citation: 2025: DHC:6137
Case Number: ARB. A. (COMM.) 5/2025
Bench: Justice Jasmeet Singh
