Case BriefsDistrict Court

Tis Hazari Court, Delhi: While deciding the instant complaint filed under S. 138 of Negotiable Instruments Act, 1881, wherein the dispute revolved around the non-compliance of the clauses of Non-Competing Agreement (NCA) executed between the parties to the dispute; the accused company was acquitted from the charges levied under S. 138. Presiding over the matter, Devanshu Sajlan, D.J.S., while making detailed observations concerning S. 138 of NI Act and S. 27 of Contact Act and, held that the accused company has successfully raised a probable defence in its favour and the complainant has failed to prove his case beyond reasonable doubt.

Facts of the Case: The accused company  and complainant  had signed into a Non-Competing Agreement (NCA) stating that a compensation of Rs. 3,80,00,000 was required to be paid in 120 equal installments of Rs. 3, 16, 666 each to the complainant  for agreeing to resign from the accused company under clause 4.1 of the NCA. In partial discharge of the aforesaid liability, the accused company issued the cheque(s) in question thus giving the complainant the right to proceed under section 138 of the NI Act in the event of dishonour of the said cheques.

The parties  also signed a share purchase agreement (SPA) in violation of which both parties invoked arbitral proceedings, which they settled with a consent award which stated the requirement of furnishing fresh bank guarantee which would be considered valid till the payment of the last instalment. As a security for payment of monthly installments, cheques were given.

The case revolved around the non-compliance of the clauses of NCA due to which the accused  is not obligated to make any payment and possess no legal liability towards the complainant. The case also concerns with the arbitral award give liberty to the complainant in order to explore its legal remedies under the NCA. It is filed to pursue the remedies given under NCA.

The complainant further alleged that the present cheque(s) which were given to the complainant towards payment of the installment of the compensation contemplated under NCA, were returned dishonoured with remarks ‘Funds insufficient’. Thereafter, the complainant sent a legal demand notice to the accused persons, but the accused persons allegedly failed to pay the cheque amount and therefore, thus complainant was compelled to file the present complaint.

Issues:

  1. Whether the accused had committed breach of consent award by not paying the cheque amount as agreed upon in the NCA?
  2. Whether the liability has arisen if the requirements under S. 138 of NI Act are not met with?
  3. Whether a post-dated cheque is for “discharge of debt or liability” U/S 138 of NI Act depends on the nature of the transaction?
  4. Whether a mutually settled arbitral award demarcates the liability of payment signed under NCA?

Submissions: The submissions of the accused were centred around the second ingredient of S. 138 of NI Act i.e. “The cheque was drawn by the drawer for discharge of any legally enforceable debt or other liability”.

 

It was submitted that the cheque(s) were given as advance payment towards the monthly instalment amount pertaining to the total compensation under the non-compete agreement. The said cheque(s) were not issued in discharge of any existing/ subsisting debt.

Accused contended that payments were made regularly to the complainant until the breach of terms of contract came to their notice. It was submitted that the accused had no liability to pay non-competing fees to the complainant  as he  failed to  comply with statutory obligations.

It was further argued by the accused that since the complainant is being aptly compensated for not practicing the competing business, hence it cannot be said that NCA is in restraint of trade and is in violation of S.27 of Contract Act, 1872. It was also submitted that cheque(s) were suspended as advance payment constituting to total compensation procured under NCA.

 

Meanwhile, the complainant submitted that there can be no challenge for the validity of the NCA since the arbitral consent award under NCA is legally enforceable.  It was also submitted to the court that since the legal liability of giving payment liquidates due to non-performance of NCA, it does not matter if the issued cheque was dated for advance payment of a liability debt.

Observations – Upon perusal of the contentions, the Court made the following salient observations:

  • The liability had crystallised/ matured when the cheque(s) in question were presented. The monthly liability to pay non-compete fee arose in the present matter upon performing of non-competing service by the complainant for the said month. Thus, the cheque(s) in question cannot be held to be not for a subsisting liability.
  • It was further observed that the NCA clearly stipulated that in case the consent award is breached, the complainant can file a complaint under S. 138 of NI Act. It was noted that there was not even a shred of evidence available on record to support the assertion of the accused no. 2 that complainant breached the terms of the NCA. Therefore, the burden of proof placed upon the accused persons have not been discharged as regards the contention of breach of NCA.
  • The Court also referred to Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Ltd., (2016) 10 SCC 458, which held that the crucial test for applicability of S. 138 of NI Act is that such liability should have arisen on the date mentioned on the post-date cheque or the date when the cheque is handed over in order for it to constitute as an offence under S. 138 of NI Act.
  • The Court made detailed observations regarding the NCA being voidable in light of S. 27 of the Indian Contract Act. It was stated that the NCA in the present case is a simplicitor contract of restraint of trade by which the complainant has been refrained from involving in a trade of similar domain for a period of 10 years after he files his resignation. The Court pointed out that this case does not fall within the ambit of the exception of sale of goodwill of business. The NCA or the connected SPA between the same parties nowhere mentions that the complainant is transferring goodwill of the business of the accused company to the new management. Thus, such non-compete agreements such as the NCA in question, squarely falls within the mischief prohibited under S. 27 of Indian Contract Act, 1872. Thus, the instant NCA is void agreement under S. 27. It was observed that the right against restraint of trade cannot be waived off by the conduct of the parties. The court cannot enforce a void contract based on the waiver of the respective parties, especially in a case when a clause is based on the public policy of India.

 

Decision: It was held that since the NCA is void pursuant to S. 27 of the Indian Contract Act, the cheque(s) in question given to discharge the liability under the NCA cannot be held to be issued in discharge of a legally enforceable liability. In the present case, since the complainant’s promise (to not do competing business) is unlawful, there is no legal reciprocal consideration to make the NCA a valid binding contract. Regarding the validity of NCA vis-a-vis the arbitral consent award, the Court held that while it is correct that the arbitral consent award was passed to settle the disputes under the NCA and SPA, there is no specific undertaking that the cheques in question, which were issued prior to the arbitral award, will be used to secure the consent arbitral award. “It would have been a different case if the cheques in question would have been issued pursuant to the arbitral award since the same would then have been considered to have been issued to enforce the consent award (which is akin to a consent decree), and hence enforceable”. [Anil Thakur v. Blazeflash Courier Ltd., 2022 SCC OnLine Dis Crt (Del) 23, decided on 31-05-2022]

Counsel for Complainant: S.K. Gupta

                                          Vikas Gupta

Counsel for Accused: S N Gupta

                                    Sanjay Goel


*Sucheta Sarkar, Editorial Assistant has reported this brief.

High Court Round UpLegal RoundUpTribunals/Regulatory Bodies/Commissions Monthly Roundup

“For a contract to be enforceable, the restraint of trade clause must be reasonable.”

[Rajesh Kumar Gandhi v. Mukesh Dutt]


Read the interesting picks from the stories eported in first week of February.


Delhi High Court


Baazi v. WinZo| Trademark is used by a manufacturer or service provider to distinguish products from those of competitors: Here’s how Winzo appeared dishonest and unfair in adopting Baazi

Explaining the significance of a trademark, Asha Menon, J., observed that,

When people are satisfied with the products supplied by a manufacturer or service provider, they buy them on the basis of the trade mark and over time it becomes popular and well known. Thus, the use of a similar or identical trademark by a competitor in the same product would lead unwary customers to believe that it originates from the same source.

Read full report here…

Whether a ‘blade’ would be covered under S. 397 IPC as a deadly weapon? Del HC explains in view of settled position of law

Mukta Gupta, J., explained under what circumstances would Section 397 of penal Code, 1860 would be attracted.

Rae full report here…

Court under maintenance proceedings under S. 125 of CrPC, can usurp jurisdiction of Civil Courts? Del HC decides

Chandra Dhari Singh, J., decided a maintenance case wherein the marital status of the parties was the crux of the matter and expressed that,

“…there is no straight jacket formula for judging the validity of the marriage between the parties.”

Read full report here…


Kerala High Court


Is not taking treatment for mental illness to bring out a peaceful family atmosphere a form of cruelty and thus, a ground for divorce? Kerala HC answers

In an interesting case the Division Bench of A.Muhamed Mustaque and C.R. Sophy Thomas, JJ., held that not taking treatment for mental illness in order to bring out a peaceful and harmonious family atmosphere can also be counted as cruelty to the persons at the receiving end. Upholding the Family Court’s order granting divorce on the ground of cruelty, the Bench remarked,

“There is no merit in preserving intact a marriage, when the marital tie becomes injurious to the parties. When there is no rose, and only thorns left, and there is no scope for the plant to sprout again, there is no meaning in watering the same, knowing that it is dead forever.”

Read full report here…


Andhra Pradesh High Court


LGBTQ+ community’s right to reservation; Can a transgender claim to be appointed by reservation in spite of failure to secure minimum cut off marks in screening test? AP HC answers 

In a significant case wherein, a transgender had approached the Court seeking benefit of reservation for appointment in police department, M. Satyanarayana Murthy, J., denied to issue direction to the State in favour of the petitioner. The Bench, however, remarked,

“The State is unconscious of the directions issued by NALSA and failed to provide a specific column meant for gender identity for transgender in the proforma of application in the Notification dated 01.11.2018 and did not provide any reservation to transgenders, as they are socially and educationally backward and not in a position to compete with ordinary men and women.”

Read full report here…


National Company Law Tribunal


Operational Creditor is under obligation to recover money from its client and not agent: NCLT decides while dismissing a petition filed under S. 9 IBC

The Coram of H.V. Subba Rao (Judicial Member) and Chandra Bhan Singh (Technical Member) dismissed a petition filed under Section 9 of the IBC while noting that no operational debt existed under Section 5(8) and expressed that,

“Operational Creditor being the principal was always under obligation to recover the money from the client and not from his agent unless the agent failed to perform his duties.”

Read full report here…


Tis Hazari Court


For a contract to be enforceable, restraint of trade clause must be reasonable: Post-termination non-compete clauses are permissible in employment contracts under S. 27 of Contract Act? District Court explains

Holding that, post-termination non-compete clauses in employment contracts are “restraint of trade” and it is impermissible under Section 27 of the Act, Richika Tyagi, C.J-02, expressed that such agreements of restraint are vid because of being unfair and depriving an individual of his or her fundamental right to earn a living.

Read full report here…


Information Commissioner’ Office


Unsolicited marketing calls causing distress to people and disregard to their privacy rights: Would it lead to imposition of monetary penalty? Detailed decision of Information Commissioner’s Office

Andy Curry, Head of Investigations, on noting serious contravention of regulations 21 and 24 of the Privacy and Electronic Communication Regulations 2003 (PECR) has issued Home2sense Limited with a monetary penalty under Section 55A of the Data Protection Act, 1998.

“Home2sense’s dismissive and troubling response, coupled with its failure to disclose any details of its CDRs or any other information which might assist the Commissioner’s investigation shows, in the Commissioner’s view, a complete disregard for the privacy rights of the individuals whom it sought to contact.”

Read full report here…

Tis-hazari
Case BriefsDistrict Court

Tis Hazari Court, Delhi: Holding that, post-termination non-compete clauses in employment contracts are “restraint of trade” and it is impermissible under Section 27 of the Act, Richika Tyagi, C.J-02, expressed that such agreements of restraint are vid because of being unfair and depriving an individual of his or her fundamental right to earn a living.

Plaintiff filed the present application to restrain the defendants and his legal heirs/attorney/assignees/executors/representatives/nominees/servants/employees or any other person on their behalf restraining them permanently from establishing/approaching/making contact with the customers of the plaintiff till the pendency of the suit.

Plaintiff’s plea was based on a memorandum executed between the plaintiff and defendant. It was stated that the defendant was an employee of the plaintiff and ceased working at the plaintiff’s firm on 28-1-2021.

Conditions to be satisfied before granting temporary injunction:

  • Prima facie case in the favour of the plaintiff and against the

Prima facie case does not mean that the plaintiff should have a cent percent case which will in all probability succeed in trial. Prima facie case means that the contentions which the plaintiff is raising, require consideration in merit and are not liable to be rejected summarily.

  • Balance of convenience in favour of the plaintiff.

To see balance of convenience, it is necessary to compare case of parties, comparative mischief or inconvenience which is likely to sue from withholding the injunction will be greater than which is likely to arrive from granting it. 

  • Irreparable Injury likely to be caused to the plaintiff which cannot be compensated in terms of money.

Ordinarily injury is irreparable when without fair and reasonable address of Court, it would be denial of justice. Very often an injury is irreparable where it is continuous and repeated or where it is remediable at law only by a multiplicity of suits. Sometime the term irreparable damage refers to the difficulty of measuring the amount of damages inflicted.

Mere proof of one of the above conditions would not entitle a person to an order of temporary injunction.

Section 27 of the Indian Contract Act, 1872 has to be delved in by the Court since in the present application the restraint sought by the plaintiff is with regard to right to trade, business and profession of the defendant.

What does Section 27 of the Indian Contract Act, 1872 state?

“…every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind is to that extend void. There is one exception to this rule-that if the goodwill of a business has been sold, an agreement to refrain from carrying on similar business, if it appears to the Court to be reasonable, would be protected and would be enforced.”

In Supreme Court’s decision of Superintendence Company of India v. Krishna Murgai, (1981) 2 SCC 246, the Supreme Court while discussing the objective behind Section 27 of the Act analyzed the difference of negative covenant between an employer-employee and a seller-purchaser and stated that a negative covenant between the employer – employee, pertains to performance of personal service which is altogether different in substance from purchase and will have vastly different social and economic implications. The essential line of distinction is that the purchaser is entitled to protect himself against competition on the part of his vendor, while the employer is not entitled to protection against mere competition on the part of his servant. A restrictive covenant ancillary to a contract of employment is likely to affect the employee’s means or procuring a livelihood for himself and his family to a greater degree than that of a seller, who usually receive ample consideration for the sale of the goodwill of his business.

Rationale for Rule against Restraint of Trade

An employment contract generally includes restraint of trade clause to protect the interest of the employer after an employee leaves their organization or business for the following reasons:

  • Non-compete clause prevents the employees from competing with their former employer for a reasonable period of time the employees can compete by opening a similar business or working with a rival business.
  • Non-solicitation clause prevents the employee to solicit his former employer’s clients for a reasonable period of time.
  • Non-recruitment clause prevents the employee to hire the former employer’s employee for a reasonable period of time.
  • Confidentiality clause prevents the employee from disclosing the former employer’s confidential information.

Significantly, for a contract to be enforceable, the restraint of trade clause must be reasonable.

Supreme Court in Gujarat Bottling Co. Ltd. v. Coca Cola, (1995) 5 SCC 545, held that courts in India have only to consider the question whether the contract is or not in restraint of trade.

In another case of Independent News Service (P) Ltd. v. Sucherita Kukreti, 2019 SCC OnLine Del 6756, in the context of Section 27 of the Contract Act, it was held that the right saved thereby to be a facet of Article 21 of the Constitution of India.

In the present case, Court held that the restraint cannot be allowed in such a form whereby it violates the fundamental right of the defendant to carry on his trade, business or profession.

Adding to the above, Bench expressed that it cannot restrain the defendant from using his own acumen or skills to compete with the plaintiff in the same kind of business.

“…the plaintiff entered into this agreement of restraint with the defendant when the defendant was not the employee of the plaintiff.”

Noting that the restriction being sought was unreasonable, plaintiffs’ application was dismissed.

Matter to be put up for further proceedings on 13-4-2022. [Rajesh Kumar Gandhi v. Mukesh Dutt, Suit No. 901 of 2021, decided on 27-1-2022]


Advocates before the Court:

Trilok Chand, Counsel for defendant