Post-employment restraints are void under Section 27 Contract Act: Delhi High Court

General
1

Case Note

Case: Neosky India Limited & Anr. v. Mr. Nagendran Kandasamy & Ors.
Court: High Court of Delhi at New Delhi
Coram: Hon’ble Mr. Justice Jasmeet Singh
Judgment Reserved: 22.05.2025
Pronounced: 11.08.2025
Citation: ARB. P. No. 1860 of 2024 & connected matters

Facts

  • Neosky India Ltd. (Petitioner No.1, subsidiary of Rattan India Enterprises) invested in Throttle Aerospace Systems Pvt. Ltd. (Petitioner No.2, “TAS”), a drone company.
  • A Share Subscription and Shareholders Agreement (SSHA), Non-Compete Agreement (NCA), and Employment Agreements were signed on 25.05.2022. Neosky was to acquire a 60% stake (₹40 crore infusion; ₹20 crore upfront, balance after 18 months).
  • Respondents 1–4 were key promoters/employees, holding 40% shares collectively.
  • On 03.07.2023, Respondents 1–3 resigned, and on 06.10.2023 incorporated Zulu Defence Systems Pvt. Ltd. (Respondent No.6), allegedly a competing drone venture, violating non-compete covenants.
  • On 31.05.2024, the Court granted an interim injunction under Section 9, restraining Respondents 1–4 from competing. Petitioners also filed contempt alleging breach.
  • Arbitration was invoked on 18.07.2024 under SSHA and NCA. Respondents failed to appoint arbitrator → Petition under Section 11(4) & 11(6) of the Arbitration and Conciliation Act, 1996.

Issues

  1. Whether a valid and enforceable arbitration agreement exists between the parties.
  2. Whether disputes, including alleged breach of non-compete, are arbitrable.
  3. Whether non-signatories (Respondents 6–8, i.e., Zulu Defence and its directors) can be impleaded in arbitration.
  4. Whether interim injunction under Section 9 (against competition) should continue despite expiry of NCA (25.05.2025).

Arguments

Petitioners:

  • Respondents breached SSHA, NCA, and Employment Agreements by forming and operating Zulu.
  • Arbitration clauses exist in both SSHA (Clause 16.2) and NCA (Clause 9(c)).
  • Non-signatories (R-6 to 8) are alter egos of signatories, hence bound.
  • Validity of non-compete clause is for Arbitral Tribunal to decide (kompetenz-kompetenz).

Respondents 1–3:

  • Non-compete expired on 25.05.2025; post-termination restraints are void under Section 27, Contract Act.
  • Petitioners did not commence arbitration within 90 days of interim order (Sec. 9(2)).
  • Restriction violates fundamental right under Article 19(1)(g).
  • Do not oppose arbitration, but oppose continuation of injunction.

Respondents 4–5:

  • No breach alleged against them; impleaded only as signatories; should not be dragged into arbitration.

Respondents 6–8:

  • Not signatories to arbitration agreements; Zulu was distinct (military drones vs TAS civil drones).
  • Respondents 1 & 3 resigned/divested shares from Zulu in July–Dec 2024.

Court’s Findings

  1. Existence of Arbitration Agreement:

    • SSHA & NCA contain valid arbitration clauses. Respondents 1–5 have not disputed this.
    • Issues like enforceability of non-compete are for Tribunal, not Court, at Sec. 11 stage.

  2. Doctrine of Severability & Kompetenz-Kompetenz:

    • Even if non-compete is challenged, arbitration clause survives independently (Sec.16 ACA).

  3. Non-signatories (R-6 to 8):

    • Law permits consideration of “veritable parties” (Cox & Kings).
    • Their involvement cannot be conclusively decided at this stage → to be determined by Tribunal.

  4. Section 9 – Interim Relief:

    • Non-compete covenant (3 years from 25.05.2022) expired on 25.05.2025.
    • Post-employment restraints are void under Section 27 Contract Act (citing Golikari, Percept D’Mark, Vijaya Bank v. Prashant Narnaware).
    • Court refused to extend injunction beyond contractual period. Interim order dated 31.05.2024 vacated.

Decision

  • Petition under Section 11 allowed.
  • Justice S.K. Kaul (Retd. SC Judge) appointed as Sole Arbitrator.
  • All objections (jurisdiction, arbitrability, impleadment of non-signatories) left open for Arbitrator.
  • Interim injunction under Section 9 not continued post 25.05.2025, as non-compete expired.

Significance

  • Reaffirms limited scope of Sec. 11: Court only checks prima facie existence of arbitration agreement.
  • Clarifies non-compete clauses in employment/SHAs → enforceable only during subsistence; unenforceable post-termination/expiry (Sec. 27, Contract Act).
  • Non-signatories can be referred to arbitration if shown to be “veritable parties,” but decision lies with Tribunal.
  • Balances party autonomy in arbitration with constitutional protection of right to trade.