IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE J.B.KOSHY & THE HONOURABLE MR. JUSTICE P.N.RAVINDRAN MONDAY, THE 9TH JUNE 2008 / 19TH JYAISHTA 1930 Arb.A.No. 13 of 2008() ---------------------- OP.421/2008 of I ADDL.DISTRICT COURT, ERNAKULAM .................... APPELLANTS/RESPONDENTS: --------------------------------------- 1. M/S.ELMAG WIRES LIMITED, 11/837, CHEMICAL INDUSTRIAL ESTATE, AROOR 688 534, REPRESENTED BY ITS MANAGING DIRECTOR, MR.JOSE THOMAS. 2. MR.JOSE THOMAS, G245, PANAMPILLY NAGAR, COCHIN - 682 036. 3. MR.JIMMY JOSE, G245, PANAMPILLY NAGAR, COCHIN - 682 036. 4. MRS.LEENA JOSE, W/O.JOSE THOMAS, G245, PANAMPILLY NAGAR, COCHIN - 682 036. 5. MR.BABY JOSE, G245, PANAMPILLY NAGAR, COCHIN - 682 036. 6. SOLVAR WIRES PVT.LTD., (FORMERLY SOUTHERN ELECTROMAG PRIVATE LIMITED) 11/538, CHEMICAL INDUSTRIAL ESTATE, AROOR 688 534, REPRESENTED BY ITS MANAGING DIRECTOR, MR.JOSE THOMAS. BY ADV. SRI.K.ANAND (A.201) SMT.LATHA KRISHNAN RESPONDENT/PETITIONER: ----------------------- M/S.STABLE MAGNET WIRE PVT.LTD., PLOT NO.4, COCHIN SPECIAL ECONOMIC ZONE, COCHIN - 682 037 REPRESENTED BY ITS MANAGER ADMINISTRATION & FINANCE & AUTHORISED REPRESENTATIVE MR.S.BALASUBRAMANIAN. BY ADV. SRI.JOSEPH KODIANTHARA FOR R1 SRI.MATHEWS K.UTHUPPACHAN FOR R1 THIS ARBITRATION APPEAL HAVING COME UP FOR ADMISSION ON 09/06/2008, THE COURT ON THE SAME DAY PASSED THE FOLLOWING: J.B.KOSHY & P.N.RAVINDRAN, JJ. ------------------------------- ARB.A.NO.13 OF 2008 (C) ----------------------------------- Dated this the 9th day of June, 2008 J U D G M E N T KOSHY,J. Appellant in this case sold a factory in the Cochin Special Economic Zone covered by CESZ's Rules 2006, to the respondent which envisages export of the entire goods manufactured in the SEZ. The business of the establishment was manufacture and sale of magnet wires and enamelled copper wires. The respondent purchased the above by agreement dated 30.3.2007 for a total consideration of 6.72 crores. As per the agreement, the purchased assets and liabilities were transferred to the respondent. Clause 15 of the Agreement reads as follows: 15. PROTECTION OF THE BUSINESS AND TRADE SECRETS 15.1 As further consideration for the Purchaser ARB.A.13/08 2 agreeing to purchase the Business on the terms contained in this Agreement, the sufficiency of which consideration the Seller and Seller's Guarantors acknowledge, the Seller and the Seller's Guarantors undertake that they shall not (and it and the Seller's Guarantor shall procure that no member of Jose Thomas's Family or Sellers Group companies shall) without the prior written consent of the Purchaser directly or indirectly: 15.1.1. until ten years after Completion carry on or be concerned or interested in the conduct of any business whether by themselves or by or through any others which competes with the Business as it is carried on at the Effective Date and/or carried on by the Purchaser after the Effective Date or enter into any joint venture or other collaborative agreements or to render any consultancy or advisory services for manufacture, sale marketing or distribution of any products manufactured by the Business. 15.1.2. at any time after Completion use as a trade or business name or mark, use as or include in a domain name for any web site, or carry on a business under a title containing the word(s), “Elmag Wire”, “Southern Electromag”, “Deepthi Insulated Cables” or any other word(s) colourably resembling such words together and separately.” ARB.A.13/08 3 The appellant (their group) has another establishment at Aroor called “Solvar Wires Private Limited, which was originally called “Southern Electromag Private Limited”. Contending that violating the above clause, appellant is manufacturing identical products from Aroor Factory, a petition was filed under Section 9 of the Arbitration and Conciliation Act for granting injunction as an interim measure as they are contemplating arbitration proceedings. It is not disputed that there is an arbitration clause in the agreement. 2. Clause 27 of the agreement reads as follows: 27. ARBITRATION 27.1 In the event any dispute or difference arises out of or in connection with the interpretation or implementation of this Agreement, or out of or in connection with the breach, or alleged breach of this Agreement the parties shall attempt in the first instance to resolve such dispute through friendly consultations. If the dispute is not resolved through friendly consultations within thirty (30) days after one party first informs the other party in writing of the existence of the dispute, then either of these parties may refer the dispute for ARB.A.13/08 4 resolution by arbitration. Such arbitration shall be governed by the provisions of the Indian Arbitration and Conciliation Act, 1996. The arbitration shall be held at Cochin in the following manner: 27.1.1 All proceedings in any such arbitration shall be conducted in English 27.1.2 There shall be three (3) arbitrators, all of whom shall be fluent in English. Within fifteen (15) days of the reference of this disputes to arbitration, Seller shall appoint one arbitrator and the Purchaser shall appoint one arbitrator. The third arbitrator shall be appointed by the two (2) appointed arbitrators. 27.1.3 The arbitration award made by all or majority of the arbitrators shall be final and binding on the Parties and the Parties agree to be bound thereby and to act accordingly. The award shall be enforceable in any competent court of law. 27.1.4 The award shall be in writing and shall be a reasoned award.” Section 9 petition was considered by the Court and injunction was granted. The prayer in the injunction petition is as follows: (i) Restrain the respondents by an ad interim injunction from carrying on or conducting any business, by themselves or through others, which competes with the Business of manufacture and sale of magnet wires and ARB.A.13/08 5 enameled copper wires carried on by the Petitioner and particularly from carrying on or conducting any such business in the 6th respondent's factory at II/538, Chemical Industrial Estate, Aroor-688 534 and in the factory of Deepthi Insulated Cables Pvt. Ltd. At Chemical Industrial Estate, Aroor – 688 534 till arbitration proceedings are concluded and award is passed. The above prayer was fully granted by the impugned order. According to the appellant, they sold the business in the Special Economic Zone only. Intention of the agreement was that they will not do business in competition with the respondent establishment either through themselves or their sister companies and not that they will not conduct any business at all. It is contended that the factory sold is in the CESZ area, respondent can only export goods. Even if the final products are sold in the local area, it will be deemed export and procedure should be complied with and appellants are not doing any business in competition with the business of the respondent. They are not manufacturing or selling any goods for export or deemed export. It is further contended that they are not selling the products to any of the customers of the respondent. It is also further contended that no effective ARB.A.13/08 6 steps were so far taken for arbitration even though petition was filed in March, and therefore, interim protection cannot be given. Relief can be granted as an interim protection pending contemplation of arbitration for which no steps are taken so far. Finally it was contended that a reading of the petition shows that main dispute with the petitioner is regarding interpretation of Clause 15. According to the respondent, petitioner seller cannot do any business at all whereas according to the appellant, they can do similar business except in competition with the business of the respondent buyer of that establishment in CESZ area. That is a matter to be decided by the arbitrator but by the impugned order civil court has decided the matter taking away the functions of the Arbitrator. In the above circumstances, considering all these aspects, interim protection order should not have been made. 3. We have gone through the contentions of both sides. Section 9 of the Arbitration and Conciliation Act reads as follows: ARB.A.13/08 7 9. Interim measures, etc. by Court:- A party may, before or during arbitral proceedings or at any time after the making of the arbitral award but before it is enforced in accordance with Section 36, apply to a Court:- (i) for the appointment of a guardian for a minor or a person of unsound mind for the purpose of arbitral proceedings; or (ii) for an interim measure of protection in respect of any of the following matters, namely:- (a) the preservation, interim custody or sale of any goods which are the subject-matter of the arbitration agreement; (b) securing the amount in dispute in the arbitration; (c) the detention, preservation or inspection of any property or thing which is the subject-matter of the dispute in arbitration, or as to which any question may arise therein and authorising for any of the aforesaid purposes any person to enter upon any land or building in the possession of any party, or authorising any samples to be taken or any observation to be made, or experiment to be tried, which may be necessary or expedient for the purpose of obtaining full information or evidence; (d) interim injunction or the appointment of a receiver; (e) such other interim measure of protection as may appear to the ARB.A.13/08 8 Court to be just and convenient, and the Court shall have the same power for making orders as it has for the purpose of, and in relation to, any proceedings before it. As held by the Apex Court in M/s.Sundaram Finance Ltd. v. M/s.NEPC India Ltd. (AIR 1999 SC 565), interim order under Section 9 by court can be passed even before the commencement of Arbitration proceedings. But arbitration should be in contemplation. This decision was further explained by the Supreme Court in Firm Ashok Traders and another etc. v. Gurumukh Das Saluja and others (AIR 2004 SC 1433), wherein, Supreme Court held as follows “Section 9 permits application being filed in the Court before the commencement of the arbitral proceedings but the provision does not give any indication of how much before. The word 'before' means, inter alia, ahead of; in presence or sight of; under the consideration or cognizance of.' The two events sought to be interconnected by use of the term 'before' must have proximity of relationship by reference to occurrence; the later event proximately following the preceding event as a foreseeable or 'within sight' certainty. The party invoking Section 9 may not have actually commenced the arbitral proceedings but must be able to satisfy the Court that the arbitral proceedings are actually contemplated or ARB.A.13/08 9 manifestly intended (as M/s. Sundaram Finance Ltd. Puts it) and are positively going to commence within a reasonable time. What is a reasonable time will depend on the facts and circumstances of each case and the nature of interim relief sought for would itself give an indication thereof. The distance of time must not be such as would destroy the proximity of relationship of the two events between which it exists and elapses. The purpose of enacting S.9, read in the light of the Model Law and UNCITRAL Rules is to provide 'interim measures of protection.' The order passed by the Court should fall within the meaning of the expression 'an interim measure of protection' as distinguished from an all-time or permanent protection.” It is further held as follows: “The Court, approached by a party with an application under S.9, is justified in asking the party and being told how and when the party approaching the Court proposes to commence the arbitral proceedings. Rather, the scheme in which S.9 is placed obligates the Court to do so. The Court may also while passing an order under S.9 put the party on terms and may recall the order if the party commits breach of the terms.” It is also held that one party need not wait for orders under Section 9 to initiate arbitration. Even though a petition under Section 9 was filed in March, so far no arbitration notice was ARB.A.13/08 10 served on the respondent. However, that itself cannot be a reason for rejecting the petition under Section 9 as it is stated that they are going to arbitration. But we make it clear that the interim order will not be of any effect if steps are not taken within two months from today. 4. With regard to the contention that no business at all can be conducted by the appellant in view of the agreement, it is contended that competition will be with the petitioner. In competition means competition of export business or deemed export which can be done by the establishment sold in CESZ zone. Complete closure of all type of business by the appellant, colleagues, sister companies etc. will be a restraint on trade agreement. We are not expressing any opinion as these matters has to be decided by the arbitrators if the matter is referred for arbitration. It is not appropriate for the court to decide these issues pending contemplation of arbitration proceedings. But on a plain reading of Section 15 (C), we are of the opinion that the appellant shall not manufacture any products by name “Elmag Wires”, “Deepthi Wires” or any other words resembling such names. They also ARB.A.13/08 11 shall not sell Magnet wires/Copper wires in the export business including deemed export business either jointly or in collaboration with others in competition with the business of the respondent. But they can do the business, engage in the manufacture and sale of products in domestic market other than export or deemed export sales. Even in such sales, they shall not have their products resembling to the trade names mentioned in Clause 15.1.2 of the agreement. The order passed under Section 9 is altered to that effect. We are not expressing any opinion on the real issue regarding interpretation of Clause 15 as the matter has to be decided by the arbitrator. That interim order will be automatically vacated if the arbitration proceedings are not initiated within two months from today. This appeal is disposed of accordingly. J.B.KOSHY, JUDGE P.N.RAVINDRAN, JUDGE prp ARB.A.13/08 12 J.B.KOSHY & P.N.RAVINDRAN, JJ. -------------------------------------------------------- M.F.A.NO. OF 2006 () --------------------------------------------------------- J U D G M E N T --------------------------------------------------------- 26th May, 2008