Beyond Termination: Delhi High Court Affirms Enforceability of Non-Compete Clauses in Ongoing Partnerships

In a significant ruling for corporate governance and contractual integrity, the Delhi High Court has upheld an interim award enforcing non-compete and non-solicit obligations upon minority shareholders who claimed their contractual ties were severed. Justice Jasmeet Singh dismissed the appeal, reinforcing the principle that parties to a Shareholders’ Agreement (SHA) cannot unilaterally evade restrictive covenants while the corporate relationship—and their status as directors—technically subsists.

The Conflict: A Tug-of-War Over Commercial Bounds

The dispute emerged from a joint venture logistics company, Surgeport Logistics Private Limited. The appellants, two senior professionals, served as directors and minority shareholders with a 12% stake each. After a fallout characterized by allegations of fund siphoning, criminal complaints, and a purported "termination notice," the appellants began operating their own firm, Accel Transport and Logistics, in direct competition with the respondents.

The respondents invoked the arbitration clause under their 2018 Shareholders’ Agreement, seeking to restrain the appellants from competing in the international freight forwarding domain. The arbitrator granted the interim injunction, a decision the appellants challenged in the High Court under Section 37(2)(b) of the Arbitration and Conciliation Act, 1996, arguing that the restrictive covenants were a "corporate death sentence" violating Section 27 of the Indian Contract Act.

Arguments from the Trenches

The appellants contended that their removal from internal systems and cessation of remuneration effectively terminated the contract, rendering the non-compete clause (Clause 15) void for being in restraint of trade. They emphasized that post-termination, such restrictions violate the fundamental right to earn a livelihood.

Conversely, the respondents argued that the appellants remained directors on the Ministry of Corporate Affairs’ records long after their alleged termination. They asserted that the appellants’ attempts to flip-flop on the existence of the SHA—first denying it, then claiming it was terminated—demonstrated a clear lack of bona fide intent to avoid, rather than comply with, contractual obligations.

Judicial Analysis: The "Subsistence" Doctrine

Justice Jasmeet Singh’s bench centered its analysis on the principle that the scope for judicial interference in arbitral interim orders is exceptionally narrow. The Court held that the appellants’ status as directors, confirmed by court records, underscored the ongoing legal relationship. Addressing the Section 27 argument, the court distinguished between post-contractual restraints and those operative during the subsistence of a contract, citing the Supreme Court’s stance that the latter do not constitute a restraint of trade.

"The mere cessation of managerial roles or non-participation in operational affairs does not absolve a party from the continuing legal and contractual obligations flowing from the SHA," the court noted, emphasizing that commercial agreements are founded on trust, cooperation, and the prevention of rival business conduct.

Key Observations

• On the nature of contractual obligations: "The SHA is a commercial agreement entered into between equity holders, establishing rights and obligations in the capacity of shareholders, not as employees or executives."
• On the burden of conduct: "The fact that weighs with me is that the material on record does not support the contention of the appellants that the SHA stood terminated pursuant to the termination notice."
• On proportionality: "The injunction is also capable of being recalled or modified upon the disclosure of the appellants of the details of their ongoing business activities... This carve-out ensures that the interim relief remains proportionate."
• On the scope of intervention: "The appellate court is not required to substitute its views with the view taken by the Arbitral Tribunal which is a reasonable or a plausible view except where the discretion is exercised arbitrarily."

The Verdict and Its Ripple Effect

The High Court ultimately dismissed the petition, affirming that the interim injunction was a reasonable and necessary measure to preserve the subject matter of the dispute. By favoring the sanctity of the Shareholders’ Agreement, the ruling serves as a stern reminder to business partners: a formal "termination" notice does not automatically dissolve legal and fiduciary duties if the underlying corporate structure—and the designation of the parties—remains officially active. This judgment fortifies arbitration as a robust mechanism for enforcing professional conduct within high-stakes joint ventures, ensuring that commercial trust holds firm even when personal relations dissolve.