-1- IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION Arbitration Petition (Ld) No. 528 of 2007 Fractal Analytics Ltd. ) a company incorporated ) and registered under the) provisions of the ) Companies Act,1956,having) its registered office at) 602A, 6th floor,Olympia ) Hiranandani Business ) Park, Powai, Mumbai ) 400 076 and its Corporate) Office at Corporate ) Enclave Level 4 and 5 ) B.D.Sawant Marg, Mumbai ) ..Petitioner vs. 1. Ramkrishna Reddy ) Desari of Mumbai, ) Indian Inhabitant, ) residing at Flat No. ) 2603, Wing A, 26th ) floor, Avalon CHS Ltd) Hiranandani Gardens, ) Powai, Mumbai 400 076) 2. Pradeep Suryanarayan ) of Mumbai, Indian ) Inhabitant, presently) residing at 2, River ) Valley Close #05-02 ) the Regalia,Singapore) 238428 ) ..Respondents Mr.R.A.Dada, Sr.Counsel with Mr.F.Dubhash i/b M/s Federal and Rashmikant for petitioners. Mr.Virag Tulzapurkar, Sr.Counsel with Ms.Sammya Srikrishna and Ms.Ritambhare Bahati i/b Wadia Ghandhy and Co. for respondents. Judgment Reserved on: 29.10.2007 Judgment delivered on 20.11.2007 CORAM: S.C.DHARMADHIKARI J. CORAM: S.C.DHARMADHIKARI J. CORAM: S.C.DHARMADHIKARI J. 20th November, 2007 20th November, 2007 20th November, 2007 -2- J U D G M E N T: J U D G M E N T: J U D G M E N T: 1. This is a petition under section 9 of the Arbitration and Conciliation Act, 1996. The petitioners claim restraint order against the respondents in terms of prayer clauses (A) to (C) of the petition, however, the arguments were advanced principally with regard to prayer (C) of the petition which reads as under: "(C) This Hon’ble Court be pleased to restrain the respondents from soliciting/poaching the employees of the Petitioner company and their existing client/clients with whom petitioner company have already initiated projects on pilot basis by using the confidential information, trade secrets, etc. of the petitioner company which they were privy to in their capacity as Directors/key Employees of the petitioner company." 2. Mr.Dada, learned Senior Counsel appearing for the petitioner submits that the petitioner was -3- incorporated by 5 persons who were undergoing studies at the Indian Institute of Management (Ahmedabad). These persons are initial subscribers of the petitioner. He has invited my attention to the process by which the name of the petitioner has undergone a change. Presently the petitioner is known by the name set out in cause title of this petition. 3. It is contended before me that the petitioner enjoys high reputation and standing in the field of business consultantcy, domestically as well as internationally. The clientel of the petitioner included some leading private sector Banks. With a view to expand the infrastructure and capitalize on the market share, on 21st January, 2004 the petitioner and its five founder members/promoters entered into the shareholders Agreement with one Gulu Mirchandani and Geeta Mirchandani, pursuant to which they made investments in the petitioner company. Mirchandanis were allotted equity shares of the petitioner company. The amount which was invested by these persons was to be utilized for expanding the base of the petitioner company. The parties to the arrangement agreed upon their respective rights and liabilities in relation to -4- day to day management of the company. In the mean while, the petitioner made its Singapore and USA subsidiaries operational. It was contended that in May, 2005, Mr.V.Shrikanth was appointed as Chief Executive Officer unanimously. However, in later half of 2007 differences arose between the promoters. The promoters continued on the Board of the petitioner company. There were several suggestions during the discussion. The Board meeting of the petitioner was held on 16th February, 2007. The investors exercised their right under the shareholders agreement and nominated four directors. Mr.Gulu Mirchandani unanimously came to be appointed as Chairman. Another Board meeting was held on 29th March, 2007. However, in May, 2007, the Chief Executive Officer made a detailed report with regard to the differences between the petitioner and respondents. This report was submitted to the Board. 4. It is alleged that on 22nd May, 2007, the respondents addressed e-mail to the three founder members/promoters and employees of the petitioner making false and baseless allegations. They incited the employees and urged them not to report to the Board. This e-mail was replied by the Chief -5- Executive Officer of the petitioner. They were informed that each of them is acting contrary to the interest of the company. However, a suggestion was given with regard to a meeting to personally sort out the differences. 5. It is urged that in June/July 2007, the respondents along with certain employees of the petitioner associated themselves with the competitor of the petitioner, namely, Adventity B.P.O. (India) Pvt. Ltd. This compelled the petitioner to convey the board meeting on short notice. On 25th June, 2007, a Board meeting was convened and a Resolution was passed to suspend the services of the respondents with immediate effect. However, prior thereto the respondents dispatched their resignations. Another board meeting was convened to discuss these resignations and even the respondents were invited to the same. However, for this Board meeting of 29th June, 2007, the respondents did not turn up. Thereupon, a resolution was passed by the Board not to accept the resignations which were sent on the previous day but to initiate legal proceedings against the respondents. This was duly intimated to the respondents but by their e-mail of 3rd July, 2007, -6- the respondents reiterated that they had resigned with effect from 28th June, 2007. The respondents clarified that after the said date they remained as only shareholders of the petitioner company. Correspondence thereafter followed between the Advocate leading to the filing of this petition. 6. Mr.Dada, learned Senior Counsel appearing in support of this petition, submits that the shareholders agreement, a copy of which is annexed to the petition as Annexure A, clearly states that the respondents are parties to the same. The respondents are governed by this agreement. After inviting my attention to various definitions and recitals, Mr.Dada submits that clause 2.1.3 of this agreement makes it clear that all the key employees of the petitioner have agreed to be employed, with the conditions laid down in the agreement, including that of confidentiality and non competition. He submits that the key employees agreed for the life time confidentiality. They also agreed not to join or start a competing business till the period set out in Schedule 4 to the Agreement. He submits that the consequences are also prescribed in the agreement. -7- 7. Mr.Dada lays special emphasis on clause 6 of the agreement which states that each of the promoters undertook to remain employed with the petitioner and so long as a promoter held any executive position in the petitioner he has further agreed to abide by clause 6.4. Mr.Dada submits that once these clauses read with Schedule 4 have been agreed to and the execution of the agreement also not being denied so also there being a dispute resolution mechanism provided under the agreement itself, then, a case is made out for interim measures. Mr.Dada relies upon the correspondence between the parties and the Board Resolutions. He submits that from the correspondence, copies of which are annexed to the petition, it is apparent that the respondents have been approaching the clients of the petitioner and soliciting business from them. These clients in turn have been corresponding with the petitioner pointing out to them that they have been approached by the respondents. In such circumstances all that is necessary to be provided at this stage is protection against the respondents’ soliciting business from the existing clients of the petitioner. In this behalf he has invited my attention to the Board Resolution and the -8- correspondence between the Advocates as well. 8. Mr.Dada has also handed with a compilation of documents which, according to him, would demonstrate the clients of the petition who have been approached by the respondents and at the instance of the respondents, the clients have started doing business with M/s Adventity. M .Dada has also placed reliance upon a decision of the learned Single Judge of the Hon’ble Delhi High Court rendered on 8th May, 2006 and reported in 130(2006) Delhi Law Times page 330 (Mr.Diljeet Titus, Advocate Vs.Mr.Alfred A.Adebare and others). He submits that this was a case of lawyer’s firm. The Hon’ble Delhi High Court has restrained the defendants before it from in any manner utilizing the material of the plaintiff before it and from disseminating or otherwise exploiting the same including the data for their own benefit. He has relied upon paras 75, 85 and 86 of the said decision. 9. Mr.Dada submits that a prima facie case is thus made out and until the Arbitral Tribunal decides the matter finally, this Court should pass appropriate interim measures so that interest of -9- the petitioner is sufficiently protected. Mr.Dada was at pains to point out that he is not insisting upon any restraint against the respondents from pursuing their right of livelihood guaranteed to them but at the same time they must not solicit or approach the existing clients of the petitioner or take away them in any manner from the petitioner. He submits that grave and irreparable harm and injury will be caused which later on cannot be compensated in terms of money. For all these reasons, the interim order be passed as prayed. 10. On the other hand Mr.Tulzapurkar, learned Senior Counsel appearing for the respondents, vehemently submits that the petition itself is not maintainable. He submits that the petition proceeds on the basis that there is arbitration agreement, however, there is no arbitration agreement. The clause which was emphasized by Mr.Dada, does not apply to the relationship between the petitioner and the respondents. He submits that pre-requisites for the application under sec.9 of the Arbitration and Conciliation Act are that there must be a valid arbitration Agreement. Unless there is a valid arbitration agreement, the petition itself is not maintainable. -10- Alternatively, it is submitted by Mr.Tulzapurkar that assuming without admitting that the shareholders agreement, copy of which is relied upon, is consisting of arbitration agreement, yet, the said agreement read as a whole, would indicate that the same does not apply to the respondents any more. He submits that the arbitration agreement which is relied upon so also the confidentiality clause would apply within the limits specified therein. The moment the period prescribed expires there is nothing in the agreement which would bind the respondents. Without prejudice to the above, he further submits that the purported provisions of the shareholders agreement which are sought to be enforced against the respondents are null, void and not binding as they are unreasonable and in restraint of a trade. Mr.Tulzapurkar submits that the present petition has been filed at the instance of Mr.Mirchandani and other founder members. However, the agreement, the copy of which is annexed cannot be invoked in as much as the resignations have been tendered by the respondents on account of the treatment that is meted out to them. Mr.Tulzapurkar invited my attention to the correspondence and contended that the resignations have been forced upon the respondents by the -11- petitioner. The respondents are compelled to tender their resignations due to their ouster and with a view to preserve their self respect. He submits that the petitioners have not approached the court with clean hands. They have suppressed vital material from this Court. The entire correspondence is not annexed. Further, it is suppressed from this Court that several other employees of the petitioners have left their services. Each one of them have resigned and in sofar as these employees are concerned, no grievances are forthcoming. He invites my attention to the affidavit in reply and annexures thereto and more particularly Exhibit D to V to the same. 11. In the submission of Mr.Tulzapurkar for the reasons aforestated, this petition, deserves to be dismissed. Mr.Tulzapurkar has relied upon the following Judgments: 1. Zaheer Khan Vs.Percept D’Mark (India) Private Limited and another (AIR 2004 Bombay 362). 2. M/s Sanmar Speciality Chemicals Ltd. Vs.Dr.Biswajit Roy (AIR 2007 Madras 237). -12- 3. M/s Gujarat Bottlsing Co.Ltd. and others Vs. Coca Cola Company and others (AIR 1995 S.C.2372) 12. In rejoinder, Mr.Dada has invited my attention to several paragraphs of the affidavit in rejoinder and sur rejoinder. He submits that there is enough material on record to hold that the respondents have breached and violated the share holders agreement. It is false to allege that the respondents have been advising M/s Adventity as consultants. He submits that no employer would ever undertake to provide residential accommodation to a consultant. Thus, false and misleading statements are made and in effect the respondents are the employees of the competitor of the petitioner. He submits that the respondents have clearly been approaching the petitioners’ clients and soliciting business from them. He has also invited my attention to statements in paragraphs 48 and 49 of the rejoinder affidavit. In huis submission, the interim measures need to be provided so that the Arbitral Reference is not rendered futile and meaningless. 13. With the able assistance of Mr.Dada and -13- Mr.Tulzapurkar I have perused the petition and annexures thereto so also the affidavit in reply, rejoinder and sur-rejoinder. I have perused the agreement, copy of which is annexed as Annexure A. Before proceeding further, it would be appropriate to refer to the settled principles which are to be applied in considering the request as made. In a latest decision reported in A.I.R.2007 Supreme Court 2563, (Adhunik Steels Ltd. Vs.Orissal Manganese and Minerals Pvt.Ltd.)the Hon’ble Supreme Court has observed thus: "10. It is true that Section 9 of the Act speaks of the court by way of an interim measure passing an order for protection, for the preservation, interim custody or sale of any goods, which are the subject matter of the arbitration agreement and such interim measure of protection as may appear to the Court to be just and convenient. The grant of an interim prohibitory injunction or an interim prohibitory injunction or interim mandatory injunction are governed by well known rules and it is difficult to imagine that the legislature while enacting Section -14- 9 of the Act intended to make a provision which was dehors the accepted principles that governed the grant of an interim injunction. Same is the position regarding the appointment of a receiver since the section itself brings in, the concept of "just and convenient" while speaking of passing any interim measure of protection. The concluding words of the Section, "and the Court shall have the same power for makaing orders as it has for the purpose and in relation to any proceedings before it" also suggest that the normal rules that govern the court in the grant of interim orders is not sought to be jettisoned by the provision. Moreover, when a party is given a right to approach an ordinary court of the country without providing a special procedure or a special set of rules in that behalf, the ordinary rules followed by that court would govern the exercise of power conferred by the Act. On that basis also, it is not possible to keep out the concept of balance of convenience, prima facie case, irreparable injury and the concept of just and convenient while passing interim -15- measures under section 9 of the Act. 11. The power and jurisdiction of courts in arbitral matters has been the subject of much discussion. The relationshuip between courts and arbitral tribunals have been said to swing between forced cohabitation and true partnership. The process of arbitration is dependent on the underlying support of the courts who alone have the power to rescue the system when one party seeks to sabotage it. The position was stated by Lord Mustil in Coppee Levalin NV v.Ken-Ren Fertilisersl and Chemicals (1994(2) Lloyd’s Report 109 at 116): "there is plainly a tension here. On the one hand the concept of arbitration as a consensual process reinforced by the ideas of transnationalism leans against the involvement of the mechanisums of State through the medium of a municipal Court and on the other side there is a plain fact, palatable or not, that it is only a -16- Court possessing coercive powers which could rescue the arbitration if it is in danger of foundering." In Conservatory and Provisional measures in International Arbitration, 9th Joint Colloquium, Lord Mustill in "Comments and Conclusions" described the relationship further: "Ideally, the handing of arbitral disputes should resemble a relay race. In the initial stages, before the arbitrators are seized of the dispute, the baton is in the grasp of the court; for at that stage there is no other organisation which could take steps to prevent the arbitration agreement from being ineffectual. When the arbitrators take charge they take over the baton and retain it until they have made an award. At this point, having no longer any function to fulfil, the arbitrators hand back the baton so that the court can in case of need lend its coercive powers to the enforcement of the award". -17- It is in the above background that one has to consider the power of the Court approached under the Arbitration Act for interim relief or interim protection." 13. Injunction is a form of specific relief. It is an order of a court requiring a party either to do a specific act or acts or to refrain from doing a specific act or acts either for a limited period or without limit of time. In relation to a breach of contract, the proper remedy against a defendant who acts in breach of his obligations under a contract, is either damages or specific relief. The two principal varieties of specific relief are, decree of specific performance and the injunction (See David Bean on injunctions). The Specific Relief Act, 1963 was intended to be "An Act to define and amend the law relating to certain kinds of specific reliefs." Specific Relief is relief in specie. It is a remedy which aims at the exact fulfilment of an obligation. According to Dr.Banerjee in his Tagor Law Lectures on Specific Relief, the remedy for -18- the non performance of a duty are (1) compensatory, (2) specific. In the former, the court awards damages for breach of the obligation.d In the latter, it directs the party in default to do or forbear from doing the very thing, which he is bound to do or forbear from doing. The law of specific relief is said to be, in its essence, a part of the law of procedure, for, specific relief is a form of judicial redress. Thus, the Specific Relief Act, 1963 purports to define and amend the law relating to certain kinds of specific reliefs obtainable in civil courts. It does not deal with the remedies connected with compensatory reliefs except as incidental and to a limited extent. The right to relief of injunctions is contained in part III of the Specific Relief Act. Section 36 provides that preventive relief may be granted at the discretion of the court by injunction temporary or perpetual. Section 38 indicates when perpetual injunctions are granted and Section 39 indicates when mandatory injunctions are granted. Section 40 provides that damages may be awarded -19- either in lieu of or in addition to injunctions. Section 41 provides for contingencies when an injunction cannot be granted. Section 42 enables, notwithstanding anything contained in Section 41, particularly clause (e) providing that no injunction can be granted to prevent the breach of a contract the performance of which would not be specifically enforced, the granting of an injunction to perform a negative covenant. Thus, the power to grant injunctions by way of specific relief is covered by the Specific Relief Act, 1963." In para 14 of this decision, the Hon’ble Supreme Court observed that the substantive law relating to interim relief cannot be kept out of consideration while deciding the application of the present nature. It is pointed out that power under sec.9 of the Act is not to be exercised by keeping out well known principles governing grant of interim injunction. Thus, the tests that are to be applied while considering the application for interim injunction by a Court together with the provision of substantive law would govern the decision on -20- such an application. 14. To my mind, therefore, section 27 of the Indian Contract Act cannot be kept out of consideration. That section fell for consideration of a Division Bench of this Court in the case of Zaheer Khan Vs.Percept D’Mark (India) Private Limited and another reported in A.I.R.2004 Bombay page 362. The Division Bench referred to all the decisions in the field and ultimately held thus: "The legal position that appears to be fairly crystalised in India is that while construing the provisions of Section 27 of the Contract Act, neither the test of reasonableness nor the principle of restraint being partial is applicable unless it falls within the Exception appended to Section 27. The resonableness of the restraint is not envisaged by Section 27. Under Section 27 of the Contract Act restrictive covenant extending beyond the terms of the contract is void and not enforceable. That the doctrine of restraint of trade does not apply during the continuance of -21- the contract of employment and it applies only when the contract comes to an end, is not confined to a contract for employment, but is also applicable to other contracts. In other words, the doctrine of restraint of trade is the same for the contracts for employment as well as the other contracts and the restrictive covenant in the agreement to operate beyond the contract period is void and hit by section 27 of the Contract Act. Restrictive covenant is to apply during the period of contract but shall fall under section 27 of the Contract Act where it is to operate after the contract has ended." 15. Thus, while considering the request of Mr.Dada for grant of temporary injunction in terms of prayer clause (C), it would not be permissible to ignore the mandate of section 27 of the Indian Contract Act, 1872. It is not proper to compartmentalize or restrict the request as urged by Mr.Dada. Even if the petitioner prays that the respondents be restrained from soliciting/poaching the Employees and their existing clients and -22- solicit business from them, still, this request will have to be considered by applying the well settled principles referred to above. One would have to take into account the nature of restriction and period for which the same is to remain in force. A prima facie case will have to be made out and which case has to be considered in the backdrop of section 27 of the Contract Act. So called negative covenant and its validity would have to be prima facie tested on the touch stone of these principles. 16. By applying the same to the facts and circumstances of the present case, it is apparent to me that Schedule 4 of the agreement which is annexed to Annexure A provides that the key employees of the petitioner would not indulge in competing activities for a period of 6 months from the termination of their employment agreement. Thus, the period covered is post termination of the contract of Employmenmt without entering into the larger controversy about the mode of termination of the Employement of the respondents, it is apparent that the restriction under this Schedule operates after the contract comes to an end. -23- 17. Apart from the fact that there is a serious dispute as to whether the rights of the petitioners and respondents as Master and Servants are governed by the shareholders agreement, yet, it is apparent from a reading thereof that the same is between the petitioners and first time investors namely, Mirchandanis, so also the respondents in their capacity as promoters and shareholders. While setting out their respective rights and liabilities it is clear that the promoters have agreed to remain employed