Bombay High Court
Aakarshan Hitesh Harlalka vs Vikrant Ravikant Paraskar on 30 April, 2024
Author: Bharati Dangre
Bench: Bharati Dangre
2024:BHC-OS:8288
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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
ARBITRATION PETITION (L) NO. 15428 OF 2023
Aakarshan Hitesh Harlalka .. Petitioner
Versus
Vikrant Ravikant Paraskar .. Respondent
...
Mr. Anoshak Daver with Nishit Tana, Mr.Sujit Upadhyay i/b
Udaya Sankar Samudrala for the petitioner.
Ms.Gulnar Mistry with Lizum Wangdi and Anukul Seth for the
respondent.
CORAM: BHARATI DANGRE, J.
DATED : 30th APRIL, 2024
JUDGMENT:-
1 The present petition is filed under Section 37 of the Arbitration and Conciliation Act, 1996, by an adult individual, Indian Inhabitant of Bombay, who claims to possess goods knowledge in the Food Aggregator Industry, being aggrieved by the order dated 7/5/2023 passed by the Sole Arbitrator under Section 17 of the said Act.
By the impugned order, the Arbitrator has restrained the petitioner from commencing or continuing any business which is in direct or indirect competition with the business of Three Wise Meals LLP (hereinafter referred to as 'LLP') The Tilak ::: Uploaded on - 16/05/2024 ::: Downloaded on - 22/05/2024 12:22:05 ::: 2/25 ARBPL 15428-23.doc Arbitrator has also restrained the petitioner from using or disclosing for commercial purposes any business information or trade secrets pertaining to the LLP and also from poaching, soliciting the clients, customers or employees of Three Wise Meals LLP for business or commercial purposes.
2 I have heard Advocate Anoshak Daver along with Mr. Nishit Tana for the petitioner and Advocate Gulnar Mistry with Ms. Lizam Wangdu for the respondent.
In order to appreciate the rival contentions advanced, it is necessary to summarise the background facts, which has lead to the filing of the present proceedings.
3 Three Wise Meals LLP was incorporated by the respondent, Vikrant Ravikant Paraskar along with one Sushma Gaba and Dishank Arora as its designated partner, who executed a Limited Liability Partnership Agreement on 14/10/2017. According to the petitioner, it was a non-starter and dormant LLP, as it did not even open its account in any Bank or carried any business or acquired any assets or liabilities since its coming into existence.
The petitioner was working with a Food Aggregator Business Company, Zomato, in various capacities, as Accounts Manager, Campaign Manager, Business Analyst from November 2018 to December 2020. He was introduced to the respondent while he was running a restaurant at Dahisar and a bond of Tilak ::: Uploaded on - 16/05/2024 ::: Downloaded on - 22/05/2024 12:22:05 ::: 3/25 ARBPL 15428-23.doc friendship developed between the two, as they exchanged business ideas.
The respondent invited the petitioner to join him as a business partner but, this offer was not accepted by the petitioner as he was working with Zomato.
However, it is the pleaded case of the petitioner, that he continued to render his assistance to the respondent, who was by that time, conducting a business as a Sole Proprietor in the name of 'Apt Analytics', and for his valuable assistance rendered, some payments were also made.
4 On persuasion, the petitioner agreed to join the LLP as it's designated partner and on or about 1/3/2021, a Supplementary Agreement was executed and the petitioner was inducted in the LLP when Mr.Dishank Arora retired as a designated partner. According to the petitioner that though he joined the LLP, no business was being conducted and it remained dormant and the respondent continued to focus on his business Concern 'Apt Analytics' and all the invoices were issued by this entity and not by the LLP, as even employees were hired for Apt Analytics. As a result, when the petitioner joined as designated partner of LLP, he continued to work for the respondent/Apt Analytics and his remuneration was also paid through Apt Analytics and this arrangement continued till October 2021.
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Since the petitioner was dissatisfied with the conduct of the business operations of the respondent, he desired to walk out from the LLP, but the respondent once again persuaded the petitioner to re-consider his decision.
5 The petitioner was however, taken aback, when he received an email on 31/10/2021 from the respondent, which contained several false allegations and in fact, was addressed with a sinister design. Yet another email was also received, which was this time, accompanied with certain documents, including the disclosure under the MSME, Directorship details, financial statement for the year ending March 2021. The petitioner immediately thereafter received a notice, as the respondent had approached the High Court of Judicature at Bombay by filing a petition under Section 9 of the Arbitration and Conciliation Act, 1996.
Feeling resentful with the approach and behaviour of the respondent, the petitioner tendered his resignation from the LLP on 29/11/2021.
It is in these proceedings by referring to the clause contained in the LLP Agreement, the Sole Arbitrator was nominated with liberty to convert the petition under Section 9 into an application under Section 17, to be decided by the Arbitrator.
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6 Pursuant to the nomination, the Sole Arbitrator
entered into the reference and commenced hearing of arbitral proceedings, when Section 9 petition filed by the respondent was treated as an application u/s.17 of the Act of 1996.
The petitioner filed sur-rejoinder and the respondent filed an affidavit along with compilation of documents and it is during these proceedings, the order was passed on an application filed u/s.17 on 7/5/2023 by the learned Arbitrator, recording that the claimant (respondent herein) had made out a case to restrain the petitioner in terms of the LLP Agreement from carrying out any business which is in direct or indirect competition with the business of the LLP by using its business information or its clients, customers, or employees. Further recording that sufficient material is placed on record establish that the petitioner is engaged with the clients/customers of LLP and that he had purportedly taken away the laptop of the existing LLP, the Arbitrator deemed it appropriate to restrain him from commencing or conducting any business which is in direct or indirect competition of business of Three Wise Meals LLP and from poaching/soliciting its clients.
7 The bone of contention between the parties revolve around the arrangement agreed between them, which was found to be recorded in the LLP Agreement dated 14/10/2017 along with Supplementary-cum-Amendment Agreement (collectively referred to as 'LLP Agreement'). It it by this Agreement the Tilak ::: Uploaded on - 16/05/2024 ::: Downloaded on - 22/05/2024 12:22:05 ::: 6/25 ARBPL 15428-23.doc petitioner was inducted as designated partner in LLP, and according to the petitioner, though the Agreement recorded that both were to contribute a sum of Rs.40,000/- for the corpus of the LLP, no contribution was in fact made by either of them and the prevailing scenario was, the LLP remained a dormant entity, an enterprise, only on paper and the existing business was run through Apt Analytics, of which the respondent is the proprietor and even then Income Tax returns were filed in the respondent's name and the Income Tax Return of the LLP/ TWM was shown to be 'nil'.
8 It is evident that the Petitioner, Aakarshan was not satisfied with the progress of the LLP, in which he was inducted as a Partner, as he could find no business being conducted by it and there were differences of opinion pertaining to the operating styles, coupled with the trust issues, concerning the impending restructuring of business. That is why the petitioner communicated his intention to stop working with the respondent.
Some meetings did take place to find out some solution and as per the petitioner, the respondent conveyed to him that he would not object to his exit and the respondent summarized the terms of severance verbally, but despite follow up from the petitioner, they were never reduced into writing and communicated, but on the other hand, the respondent attributed breach of the LLP Agreement, by the petitioner and in particular, clause nos. 6, 20, 29, 32 and 41.
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The petitioner tendered a formal letter of resignation on 29/11/2021, inter alia, stating that he shall resign from 30/11/2021 i.e. by giving one day notice.
9 According to Ms.Gulnar Mistry, the counsel for the respondent state that the resignation notice by the petitioner is not compliant with the requirement of Section 24 of the Limited Liability Partnership Act, 2008, (for short 'LLP Act') which contemplate 30 days notice period and the argument of Ms.Mistry hinges on this aspect to a large extent, whereas, according to Mr.Daver, this objection is raised as an after-thought, as the reply of the respondent dated 10/12/2021 to the resignation notice do not raise any such objection and in fact, by his email addressed to third parties on 6/1/2021, an intimation is already circulated that the petitioner was no longer the partner in the LLP, which according to Mr.Daver, amounts to an admission of 'acceptance of his resignation'.
10 When Vikrant Paraskar, the claimant, approached the Arbitrator with his application for interim relief, seeking injunction to restrain the petitioner from starting new business, which is in direct or indirect competition with the business of the LLP and for a restrain order for using the information or clients of LLP for any other business or venture in competition with the LLP, what was the focus point, was the negative covenant in the Agreement dated 1/3/2021. Though before the learned Arbitrator, arguments were also advanced about the binding effect Tilak ::: Uploaded on - 16/05/2024 ::: Downloaded on - 22/05/2024 12:22:05 ::: 8/25 ARBPL 15428-23.doc of the LLP Agreement and whether it amounted to a contract to be acted upon, I do not intend to shift my focus upon the said point, as Mr.Daver has also not seriously contended to that effect, as the LLP Agreement was acted upon by the parties, and at one point of time, the petitioner has received a sum of Rs.9,30,014.16 from the business of the LLP and this is not in dispute.
The Tribunal stressed upon the objection of the claimant that the respondent's resignation from LLP is contrary to Section 24 of the LLP Act and though the learned Arbitrator record that the LLP Agreement is silent on the aspect of resignation of a Partner, he record that the second part of Section 24 of the LLP is attracted, wherein the partner intending to resign, must give a notice of not less than 30 days to other partner, indicating his intention to resign as a partner of LLP, and by referring to the letter issued by Aakarshan, by which he purportedly resigned as partner from LLP, the Arbitrator concluded that it is patently contrary to Section 24 of the LLP Act, as it failed to adhere to the mandate of the provisions.
11 Another point which drew the attention of the Arbitrator, was clause 32 of the original LLP Agreement dated 14/10/2017, which prohibit a partner of LLP from engaging in any other business which is in direct or indirect competition with the business of the LLP.
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The counsel for the claimant has alternatively submitted that assuming without admitting that the respondent's resignation from LLP is valid as per clause 29 of the original LLP Agreement, still there is a restraint on the retiring partner from carrying on a competing business, as that of the LLP, for a period of two years in State of Maharashtra.
This argument is met by the retiring partner, by contending that imposition of such restraint of trade is void as per Section 27 of the Indian Contract Act, 1872.
By placing reliance upon the decision of the Apex Court in case of Niranjan Shankar Golikari Vs. Century Spinning and Manufacturing Co.Ltd,1 it was concluded by the learned Arbitrator that since the petitioner had voluntarily entered into LLP Agreement with the Claimant, thereby agreeing to the subject clause, which is in fact, designed to preserve and protect the business of the LLP, it cannot be said to be oppressive on any partner.
By further placing reliance upon the decision in case of M/s.Gujarat Bottling Co. Ltd. Vs. The Coca Cola Co. and ors 2, where the Supreme Court has held that a restrain in carrying out trade can be permissible if it is shown to be reasonable, and in that view, the restrain on not competing business as that of LLP for two years, within the State of Maharashtra, was a reasonable 1 AIR 1967 SC 1098 2 1995 SCC (5) 545 Tilak ::: Uploaded on - 16/05/2024 ::: Downloaded on - 22/05/2024 12:22:05 ::: 10/25 ARBPL 15428-23.doc restraint, and the same being not absolute, did not fall foul of Section 27 of the Contract Act, 1872, is the conclusion recorded by the learned Arbitrator.
The pertinent observation by the learned Arbitrator is relevant and is reproduced:
"The respondent being a person from the world of commerce while executing the LLP Agreement was cognizant of its clauses and implications. Having accepted the restraint imposed by Clause 29 (which in my view is not contrary to Section 27 of the Contract Act), it is not open to the respondent to wriggle out of this bargain."
12 It is for the aforesaid reasoning, the learned Arbitrator concluded that the Claimant had made out a case for restraining the respondent (Akarshan), in terms of the LLP Agreement from carrying out any business, which is in direct or indirect competition with the business of LLP, or using the business information of LLP or using the clients/customers or employees of LLP and a restraint order was passed against him, accordingly.
13 Mr.Daver while assailing the order, would submit that his case is of a negative covenant, which imposed a restraint for a limited duration after he severed his ties with the partner in the LLP and definitely this restraint was never intended to operate in infinity, and this is precisely what the learned Arbitrator has done while passing the injunction order, which has the effect of the restraint being imposed forever, upon his client from commencing or continuing any business, which is in direct or Tilak ::: Uploaded on - 16/05/2024 ::: Downloaded on - 22/05/2024 12:22:05 ::: 11/25 ARBPL 15428-23.doc indirect competition with the business of Three Wise Meals LLP. This order accordingly to him, has completely strangulated him, by directing that he shall not poach/solicit the clients/customers or employees of the LLP for business or commercial purpose and a young man like the petitioner, is expected to sit idle, despite his expertise in the food business and this is even though the restriction imposed for period of two years, as contemplated under the LLP Agreement has expired, but the effect of the order is, negative covenant which is continued, despite the existing contract, by his resignation has come to an end.
As far as the finding rendered by the Arbitrator about the resignation notice not being complied with Section 24 of the LLP Act, it is his submission that there can be no injunction granted if the notice is found to be faulty as there can be no declaration that he shall continue to remain in the LLP despite his resignation because the notice was not compliant with the statutory provision, but what remedy is available, is a claim in damages.
Mr.Daver has also invited my attention to sub-section (6) of Section 25 of the LLP Act and Section 36(1) and (2) of the Partnership Act and he has attempted to bring forth the contradictions in the statute.
Opposing Mr. Daver, Ms.Mistry, has highlighted the malafide conduct of the petitioner in submitting the resignation Tilak ::: Uploaded on - 16/05/2024 ::: Downloaded on - 22/05/2024 12:22:05 ::: 12/25 ARBPL 15428-23.doc letter, after being served with the Petition filed by the respondent u/s.9 of the Arbitration and Conciliation Act, 1996. It is her contention that the petitioner was working as an employee with Zomato and he was clandestinely carrying on business with the respondent through LLP firm by keeping Zomato in dark, and after becoming partner of the LLP firm, is now again attempting to jump the ship to some other venture, by using the information and clientale of the LLP.
According to her, the email dated 5/12/2021 and the attached Service Agreement clearly reflect that the entity known was Good Flippin Foods Pvt Ltd, was a client of LLP and the petitioner had candidly admitted in his statement of defence, that he undertook project for the said client around October 2022 i.e. during pendency of the application u/s.17.
She also submits that the petitioner has taken away the laptop which was purchased for the LLP while he exited.
She has also placed reliance upon Section 36 of the Partnership Act, by raising an issue, whether the resignation tendered by him is valid.
14 I must turn my attention to the LLP Agreement entered between the parties and refer to its relevant clauses.
Clause 6 of the Agreement has imposed a bar against admission of a partner and a person who has any business interest in conflict with the business of the LLP.
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The agreement set out the rights of the partners of the LLP other than the designated partners and it also provide for the consequences, when the partner either retires voluntarily or on his demise. The agreement also comprise of clause for expulsion of the partner.
The present dispute revolves around Clause no.29 of the Agreement, which reads thus :-
"29 Retiring Partner not to carry on competing business - An outgoing or retiring Partner, whose dues have been settled and paid off in accordance with the covenants in this Agreement, shall not during the period of two(2) years from the date of his exit as Partner carry on or engage or be interested directly or indirectly in any business competing with the LLP anywhere in the State where the LLP's registered office is situated."
Another restriction is also found to be contained in Clause no.30, which provide for contracting on behalf of the LLP and a restriction exist in giving credit and having any dealings on behalf of LLP, with any person by a designated partner in form of clause no.31. Clause 32 forbids certain acts, while a partner continue to act as such, and this include his indulgence into any act that may conflict his interest with the interest of LLP or any of its partners or transferring, assigning, encumbering his share in the assets or profits of the LLP or engaging or be concerned or interested in any other business, directly or indirectly, as competing with the LLP etc. Tilak ::: Uploaded on - 16/05/2024 ::: Downloaded on - 22/05/2024 12:22:05 ::: 14/25 ARBPL 15428-23.doc The Supplementary cum Amendment Agreement dated 17/9/2020 which has introduced the applicant, clearly specify that all terms of the LLP Agreement dated 14/10/2017 shall be read as a part of this Agreement, as a result of which Clause no.29 to 32 in the original LLP, admittedly, also bind the petitioner.
15 Clause no.29, quoted above, operate as a negative covenant which restricts an outgoing or retiring partner from carrying on, or being engaged in or be interested, directly or indirectly, in any business competing with the LLP anywhere in the State, where the LLP's registered office is situated, during the period of two years from the date of his exit as a partner.
It is an accepted position that such a covenant in an agreement and particularly, a partnership agreement, if included, will not be contrary to Section 27 of the Indian Contract Act, 1872 as sub-section (2) of Section 36 of the Partnership Act, 1932, sub-section (2) specifically provide to the following effect:-
"(2) A partner may make an agreement with his partners that on ceasing to be a partner he will not carry on any business similar to that of the firm within a specified period or within a specified local limits; and, notwithstanding anything contained in Section 27 of the Indian Contract Act, 1872 (9 of 1872), such agreement shall be valid if the restrictions imposed are reasonable.
15 It is a trite position of law that the doctrine of restraint of trade does not render all post contractual covenants void under Section 27 of the Indian Contract Act, and it has Tilak ::: Uploaded on - 16/05/2024 ::: Downloaded on - 22/05/2024 12:22:05 ::: 15/25 ARBPL 15428-23.doc received a recognition including by the Apex Court in its decision in Gujarat Bottling (supra), that while the negative covenants between the employer and employee, will be viewed more strictly, a partnership agreement will stand on a slightly different footing.
The legal standard enunciated in the two English decisions in Price Water House Coopers (PWC) LLP Vs Nicholas Carmichael, (2019) EWHC 824, and Robin M. Bridge Vs Deacons (1984) 2 WLR 837, on which Ms.Mistry has placed reliance, is, that a Court must ascertain as to what was the legitimate interest of the parties involved and then to see whether the restraints imposed were adequate for the purpose and though it is held that restraint may be imposed to protect its confidential information, business and goodwill, as such, restraint is a stipulation for advancement of the partnership trade.
In PWC vs. Carmichael (supra), PWC sought to restrain the defendant from breaching a post termination covenant that required not to be employed with the competitor, for a period of six months after termination. It was the case of PWC that Nicholas Carmichael i.e. the defendant, had access to significant confidential information, while he was a partner, including the pricing structure, strategies and information about his high value projects, all market intelligence, which he had access to, and that was retained in his mind and if available to the competitor, would act to its detriment and to the benefit of the competitor.
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When the competing firm sought to acquire a
division under PWC, acquisition having failed and it attempted to recruit some partners from PWC including Nicholas Carmichael, PWC sought an injunction in the backdrop of Clause 13.10, which imposed a restriction for a period of six months from becoming a member or partner in or provide services to, or on behalf of any business, which is, or about to be in the reasonable opinion of the management in competition with the business of the LLP or any related firm or overseas firm.
Taking note of the materially different approach to restrictive covenants contained in contracts of employment from that, adopted to covenants contained in contract for the sale of business as well as covenant contained in the partnership deeds, observation from the decision in case of Bridge Vs. Deacons, was quoted with approval:-
"The agreement in the present case, being one between partners, does not conform exactly to either of the types to which reference has just been made, although it had some resemblance to both. Their Lordships are of opinion that a decision on whether the restrictions in this agreement are enforceable or not cannot be reached by attempting to place the agreement in any particular category, or by seeking for the category to which it is most closely analogous. The proper approach is that adopted by Lord Reid in the Esso Petroleum case (1968) AC 269, where he said at p.301:
'I think it better to ascertain what were the legitimate interests of the appellants which they were entitled to protect and then to see whether these restraints were more than adequate for that purpose. What were the respondent's legitimate interests will depend largely on the nature of their business, and on the position of the appellant in the firm"
Tilak ::: Uploaded on - 16/05/2024 ::: Downloaded on - 22/05/2024 12:22:05 ::: 17/25 ARBPL 15428-23.doc 16 Holding that PWC is entitled to protect its confidential information, business and goodwill by a non- compete clause, which is the appropriate method for protection for the reasons given by Lord Denning in his judgment in case of Littlewoods Vs. Harris [1977] 1 WLR 1472, the quote was reproduced in the decision :
"Experience has shown that it is not satisfactory to have simply a covenant against disclosing confidential information. The reason is because it is so difficult to draw the line between information which is confidential and information which is not; and it is very difficult to prove a breach when the information is of such a character that a servant carry it away in his head. The difficulties are such that the only practicable solution is to take a covenant from the servant by which he is not to go to work for a rival in trade. Such a covenant may well be held to be reasonable if limited to a short period. This appears in the judgment of Cross, J in Printers and Finishers Vs. Holloway [1965] 1 WLR at 6..."
At end of the discussions, though Nicholas Carmichael claimed that the effects of the order of injunction would be draconian, PWC was granted injunctoin as sought for, as it was held entitled to enforce the post-termination covenants contained in the agreemenet, though if and to the extend that PWC has acted unlawfully in taking steps referred to, by Nicholas Carmichael, were left open to be resolved in arbitration if a reference is made.
17 The position in England being clearly laid down in Robin Bridge Vs. Deacons in 1984, continue till date, as the covenant in restraint of trade is enforced as being reasonable, both in interest of the parties and in public interest, provided the Tilak ::: Uploaded on - 16/05/2024 ::: Downloaded on - 22/05/2024 12:22:05 ::: 18/25 ARBPL 15428-23.doc duration of the restrictions were assumed to be reasonable and the reasonableness of the covenant to be judged, at the date when the arrangement was entered into and not when the party left the firm.
As far as India is concerned, the doctrine of restraint of trade has been evolved through catena of decisions and it is in case of Gujarat Bottling (supra) it is held that a negative covenant contained in an agreement is capable of being enforced, and it being juxta posed against Section 27 of the Contract Act, the scope of the said rule, in England and in India, is compared by recording that in India, agreemenets in restraint of trade are governed by Section 27 of the Contract Act, and the question of reasonableness of restraint is outside the purview of Section 27 and need not be gone into and the Courts in India will have to consider the question whether the contract is, or not in restraint of trade. In paragraph no.29, the distinction was noted between a stipulation in a contract which is intended for advancement of trade and the one in restraint of trade in the following words:-
"29 These observations indicate that a stipulation in a contract which is intended for advancement of trade shall not be regarded as being in restraint of trade. In Esso Petroleum Co.Ltd. (supra) the question whether the agreement under consideration was a mere agreement for the promotion of trade and not an agreement in restraint of it, was thus answered by Lord Pearce:
Somewhere there must be a line between those contracts which are in restraint of trade and whose reasonableness can, therefore, be considered by the courts and those contracts which merely regulate the normal commercial realations between the parties and are, therefore, free from doctrine." [p.327] "The doctrine does not apply to ordinary commercial contracts for the regulation and promotion of trade during the existence of Tilak ::: Uploaded on - 16/05/2024 ::: Downloaded on - 22/05/2024 12:22:05 ::: 19/25 ARBPL 15428-23.doc the contract, provided that any prevention of work outside the contract, viewed as a whole, is directed towards the absorption of the parties' servives and not their sterilisation. Sole agencies are a normal and necessary incident of commerce and those who desire the benefits of a sole agency must deny themselves the opportunities of other agencies."[p.328] In the same case, lord wilberforce has observed:
It is not to be supposed, or encouraged, that a bare allegation that a contract limits a trader's freedom of action exposes a party suing on it to the burden of justification. There will always be certain general categories of contracts as to which it can be said, with some degree of certaintly, that the 'doctrine' does or does not apply to them. Positively, there are likely to be certain sensitive areas as to which the law will require in every case the test or reasonableness to be passed : such an area has long been and still is that of contracts between employer and employee as regards the period after the employment has ceased. Negatively, and it is this that concerns us here, there will be types of contract as to which the law should be prepared to say with some confidence that they do not enter into the field of restraint of trade at all." [p.332] "How, then, can such contracts be defined or at least identified? No exhaustive test can be stated-probably np precise non- exhaustive test. But the development of the law does seem to show that judge have been able to dispense from the necessity of justification under a public p[olicy test of reasonableness such contracts or provisions of contracts as, under contemporary conditions, may be found to have passed into the accepted and normal currency of commercial or contractual or conveyancing relations."
18 The argument that the law evolved that the doctrine of restraint of trade never applies during continuance of a contract employment and it applies only when a contract comes to an end and it must apply to only contracts of employment and not to other contracts, was specifically rejected, by holding that the underlying principle governing the contracts and restraint of trade remain the same. One more pertinent observation in paragraph no.42 must be taken note of;
"42 In the matter of grant of injuction, the p[ractice in Enland is that where a contract is negative in nature, or contains an express nagative stipulation, breach of it may be restrained by injuction and injuction is normally granted as a matter of course, even though the redy is equitable and thus in principle a discretionary one and a defendant Tilak ::: Uploaded on - 16/05/2024 ::: Downloaded on - 22/05/2024 12:22:05 ::: 20/25 ARBPL 15428-23.doc cannot resist an injuction simply on the ground that observance of the contract is burdensome to him and its breach would cause little or no prejudice to the plaintiff and that breach of an express negative stipulation can be restrained even though the plaintiff cannot show that the breach will cause him any loss. [See : Chitty on Contracts, 27th Edn., Vol.1, General Principles, para 27-040 at p.1310; Halsbury's laws of England, 4th Edn. Vol. 24, para 992]. In India Section 42 of the specific Relief Act, 1963 prescribes that notwithstanding anything contained in cluse (e) of Section 41, where a contract copmptises an affirmative agreement, express or implied, not to do a certain act, the circumstances that the court is unable to compel specific performance of the affirmative agreeement shall not preclude it from granting an injuction to perform the negative agreement. This is subject to the proviso that the plantiff has not failed to perform the contract so far as it is binding on him. The Court is, however, not bound to grant an injuction in every case and an injuction to enforce a negative covenant would be refused if it would indirectly compel the employee either to idleness or to serve the employer."
19 Mr.Daver has placed reliance upon a further decision of the Apex Court in case of Percept D'Mark (India) Vs. Zaheer Khan and anr,3 (2006) 4 SCC 227, which pronounced upon the bar on post contractual covenants or restrictions under a contract entered, in relation to the game of cricket. Holding that the legal position with regard to post contractual covenants or restrictions has been consistent, unchanging and completely settled in our country, the legal position having been crystallised to the effect that while construing the provisions of Section 27 of the Contract Act, neither the test of reasonablness nor the principle of restraint being partial is applicable, unless it falls within the exception engrafted in Section 27 of the Contract Act, which provides that a restrictive covenant extending beyond the term of the contract is void and not enforceable and the doctrine of restraint of trade 3 (2006) 4 SCC 227 Tilak ::: Uploaded on - 16/05/2024 ::: Downloaded on - 22/05/2024 12:22:05 ::: 21/25 ARBPL 15428-23.doc does not apply during continuance of the contract of employment but it applies only when the contract comes to an end.
This principle is specifically found to be highlighted in paragraph no.63 and 64 of the Law Report, which reads to the following effect:-
"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 applied only when the contract comes to an end. (c) As held by this Court in Gujarat Bottling vs. Coca Cola (supra), this doctrine is not confined only to contracts of employment, but is also applicable to all other contracts.
64 Assuming without admitting that the negative covenant in Clause 31(b) is not void and is enforceable, it was nevertheless inappropriate, if not impermissible, for the single Judge to grant an injunction to enforce it at the interim stage, for the following reasons:
i) Firstly, grant of this injunction resulted in compelling specific perfor-
mance of a contract of personal, confidential and fiduciary service, which is barred by Clauses (b) and (d) of Section 14(1) of the Specific Relief Act, 1963;
ii) Secondly, it is not only barred by Clause (a) of Section 14(1) of the Spe- cific Relief Act, but this Court has consistently held that there shall be no spe- cific performance of contracts for personal services;
(iii) Thirdly, this amounted to granting the whole or entire relief which may be claimed at the conclusion of trial, which is impermissible. (Bank of Maharashtra v. Race Shipping, (1995) 3 SCC 257 (Paras 10-12).
(iv) Fourthly, the single Judge's order completely overlooked the principles of balance of convenience and irreparable injury. Whereas Percept (appellant) could be fully compensated in monetary terms if they finally succeeded at trial, respondent No.1 could never be compensated for being forced to enter into a contract with a party he did not desire to deal with, if the trial results in rejec- tion of Percept's claim. (Hindustan Petroleum v. Sriman Narayan, (2002) 5 SCC 760
(v) The principles which govern injunctive reliefs in such cases of contracts of a personal or fiduciary nature, such as management and agency contracts for sportsmen or performing artistes, are excellently summarised in a Judg- ment of the Chancery Division reported in Page Once Records vs. Britton, (1968) 1 W.L.R. 157. In this case it was held that, although the appellant had established a prima facie case of breach of contract entitling them to damages, it did not follow that entire of them was entitled to the injunction sought; that the totality of the obligations between the parties gave rise to the fiduciary re- lationship and the injunction would not be granted, first, because the perfor- mance of the duties imposed on the appellant could not be enforced at the in-
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stance of the defendants and, second, because enforcements of the negative covenants would be tantamount to ordering specific performance of this con- tract of personal services by the appellant on pain of the group remaining idle and it would be wrong to put pressure on the defendants to continue to employ in the fiduciary capacity of a manager and agent someone in whom he had lost confidence.
20 The above decision therefore, clearly has made the position of law clear, that even an order of injunction passed in compelleing specific performance of contract of personal service, then it is barred under Section 14 of the Specific Relief Act, 1963.
21 Section 24 of the LLP Act read thus :-
"24 (1) A person may cease to be a partner of a limited liability partnership in accordance with an agreement with the other partners or, in the absence of agreement with the other partners as to cessation of being a partner, by giving a notice in writing of not less than thirty days to the other partners of his intention to resign as partner. (2) A person shall cease to be a partner of a limited liability partnership-
(a) on his death or dissolution of the limited liability partnership; or
(b) if he is declared to be of unsound mind by a competent court; or
(c) if he has applied to be adjudged as an insolvent or declared as an insolvent.
(3) Where a person has ceased to be a partner of a limited liability partnership (hereinafter referred to as "former partner"), the former partner is to be regarded (in relation to any person dealing with the limited liability partnership) as still being a partner of the limited liability partnership unless-
(a) the person has notice that the former partner has ceased to be a partner of the limited liability partnership; or
(b) notice that the former partner has ceased to be a partner of the limited liability partnership has been delivered to the Registrar. (4) The cessation of a partner from the limited liability partnership does not by itself discharge the partner from any obligation to the limited liability partnership or to the other partners or to any other person which he incurred while being a partner.
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(a) an amount equal to the capital contribution of the former partner actually made to the limited liability partnership; and
(b) his right to share in the accumulated profits of the limited liability partnership, after the deduction of accumulated losses of the limited liability partnership, determined as at the date the former partner ceased to be a partner.
(6) A former partner or a person entitled to his share in consequence of the death or insolvency of the former partner shall not have any right to interfere in the management of the limited liability partnership.
22 Though it contemplate giving of 30 days notice failure to give notice for this period in no way, can be construed to be fatal which would not result into the notice itself be rendered invalid, as it is an irregularity which can always be removed by furnishing a second notice. Hence, the finding rendered by the Arbitral Tribunal on the poinf of the resignation notice, being foul of Section 24 of the LLP Act, in any case, would not result in a consequence of setting aside of that notice. On failure to comply with the requirement of Section 24, the consequences to fall upon, shall be in form of penalty and a personal liability and definitely, not amounting to declaring the notice itself invalid.
23 In Indian Oil Corporation Ltd. Vs. Amritsar Gas Service and ors,4, on an argument being advanced that the relief of restoration of a contract granted by the Arbitrator is contrary to the law being against the express prohibition in Section 14 and 4 (1991) 1 SCC 533 Tilak ::: Uploaded on - 16/05/2024 ::: Downloaded on - 22/05/2024 12:22:05 ::: 24/25 ARBPL 15428-23.doc 16 of the Specific Relief Act, 1963, the contract being admittedly revocable at the instance of either party in accordance with clause 28 of the Agreement, it is held that the only relief which can be granted on finding the breach of the contract by the appellant Corporation is damages for the notice period of 30 days and no more. It is thus clearly held that where a contract contemplate it being put to an end by giving a notice of 30 days, and if the notice period is not adhered to, in that case, the cesation / resignation notice do not become invalid as upon failure to adhere to the same, the relief can be granted is only of compensation instead of restoration of the distributorship and paragraph no.13 of the said decision provides an answer to the argument of Ms. Mistry and to the finding of the learned arbitrator, in the impugned order, at an interim stage that the resignation notice given by the petitioner is invalid.
"13 The question now is of the relief which could be granted by the arbitrator on its finding that termination of the distributorship was not validly made under Clause 27 of the Agreement. No doubt, the notice of termination of distributorship dated 11/3/21983 specified the several acts of the distributor on which the termination was based and there were complaints to that effect made against the distributor which had the effect of prejudicing the reputation of the appellant-Corporation; and such acts would permit exersie of the right of termination of distributorship under Clause 27. However, the arbitrator having held that Clause 27 was not available to the appellant-Corporation, the question of grant of relief on that finding has to proceed on that basis. In such a situation, the Agreement being revokable by either party in accordance with Clause 28 by giving thirdy days' notice, the only relief which could be granted was the award of compensation for the period of noticie, that is, 30 days. The plaintiff- respondent no.1 is, therefore, entitled to compensation being the loss of earnings for the notice period of thirty days instead of restoration of the distributorship. The award has, therefore, to be modified accordingly. The compensation for thirty days notice period from 11.3.1983 is to be calculated on the basis of earnings during that period disclosed from the records of the Indian Oil Corporation Limited."
Tilak ::: Uploaded on - 16/05/2024 ::: Downloaded on - 22/05/2024 12:22:05 ::: 25/25 ARBPL 15428-23.doc 24 What the learned Arbitrator has ultimately done is, he has enforced the negative covenant beyond the prescribed timelines only by recording a finding that since there was no compliance of Section 24 of the LLP Act, when the petitioner tendered his resignation letter dated 29/11/2021 and sought to resign at a day's notice, the learned Arbitrator has extended the negative covenant beyond the period of two years, which in my considered opinion, is impermissible for him. The contract is between the parties and it is not permissible either for the Arbitrator or to any Court to re-write the contract. If the consequence of non- compliance of Section 24 of the LLP Act do not result in its restoration, the negative covenant cannot be enforced indefinitely by stretching it beyond the period of two years as specified in clause no.29 of the LLP Agreement.
The finding rendered by the Arbitral Tribunal, is thus perverse as it has failed to take into account the legal position of law and also the fact that the negative covenant cannot travel beyond the contract, and hence, cannot be sustained.
In exercise of power under Section 34, the impugned order is therefore, liable to be quashed and set aside, on account of its unsustainability on the ground of perversity.
( SMT. BHARATI DANGRE, J.) Tilak ::: Uploaded on - 16/05/2024 ::: Downloaded on - 22/05/2024 12:22:05 :::