Restraining Breaching Party From Activities Barred By Shareholders' Agreement Is Not Prohibited U/S 27 Of Contract Act: Delhi High Court

The Delhi High Court bench of Justice Jasmeet Singh has held that restraining a breaching party through an interim award passed under Section 17 of the Arbitration and Conciliation Act from engaging in certain activities, as per the terms of Shareholders' Agreement (SHA), to prevent the subject matter of arbitration from being rendered futile, is not barred under Section 27 of the Indian Contract Act, especially when the contract remains valid and has not been lawfully terminated. The present appeal has been filed under section 37 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) against an impugned interim award passed under section 17 of the Arbitration Act. The Appellants submitted that enforcing a negative covenant from a terminated agreement deprives them of their right to earn a livelihood and amounts to compelling performance of a personal service contract and determinable contract, which is legally unenforceable in view of Sections 14(c) and 14(d) read with 41(e) of the Specific Relief Act, 1963 (SRA). It was further submitted that the updated MCA Master Data as of 19.05.2025 confirms that both appellants are no longer listed as Directors of respondent No. 1 since 25.07.2023. Per contra, the Respondents submitted that the impugned interim award merely enforces the non-compete obligations under Clause 15 of the valid and subsisting SHA. The learned arbitrator had already considered and rejected the argument of the appellants that the SHA had been terminated. Therefore, the present appeal amounts to a re-litigation of issues that were fully argued and addressed in the Section 17 hearing. The court noted that the materials on record show that the SHA was not terminated following the termination notice issued on 25.07.2023. Notably, as per the order of this court passed on 16.05.2024, the Appellants continued to hold the position of directors in the Respondent No. 1 company as on that date. This finding of the co-ordinate bench of this court directly questions the Appellants' claims that all legal and contractual relationships between the Appellants and the Respondent ceased on 25.07.2023. Having perused all the relevant materials, the court held that the Appellants' continued recognition as directors after the alleged termination, their delayed assertion of termination and contradictory positions taken as to the existence of the SHA show lack of bona fides on their part. While agreeing with the conclusion of the Arbitrator, it was held that the SHA remains valid as it was not lawfully terminated. Coming to the next issue, the court held that 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. Any attempt to circumvent or disclaim such obligations by citing managerial disengagement is legally unsustainable. It further observed that the Appellants' claims that the impugned interim award violates section 27 of the Indian Contract Act as they are being forced to perform restrictive covenants from a terminated agreement are meritless. While rejecting these contentions, it held that they are not barred from following any lawful trade and profession instead they are just prohibited from international logistics and freight forwarding under clause 15 of the SHA. The court further held that existence of a liquidated damages clause does not bar issuance of injunctive reliefs when the damages caused due to the conduct of the breaching party cannot be quantified. The interim reliefs under section 17 of the Arbitration Act were essential to protect the subject matter of the Arbitration and to prevent the arbitration from being rendered futile. Denial of such reliefs would allow the Appellants to cause irreparable harm to the Respondent's business abroad. Furthermore, the interim award is neither punitive nor final rather it was passed to maintain the contractual status quo. The court concluded that the interim award satisfies the triple test for granting interim relief, is well-reasoned and is essential to make the arbitration proceedings effective and equitable. Accordingly, the present appeal was dismissed. Case Title: PAUL DEEPAK RAJARATNAM & ORS. versus SURGEPORT LOGISTICS PRIVATE LIMITED & ANR.Citation: 2025 LiveLaw (Del) 943 Case Number: ARB. A. (COMM.) 5/2025, I.A. 1730/2025 & I.A. 1731/2025 Judgment Date: 28/07/2025 For Appellants: Mr. Vivek Kohli, Sr. Adv. with Mr. S. Santanam Swaminadhan, Mr. Anindit Mandal, Mr. Kartik Malhotra, Ms. Vasudha Chadha, Advs. For Respondents: Ms. Rimali Batra, Mr. Abhishek Lalwani, Mr. K. Kumar, Advs. Click Here To Download Order/Judgement

Restraining Breaching Party From Activities Barred By Shareholders' Agreement Is Not Prohibited U/S 27 Of Contract Act: Delhi High Court

Mohd Malik Chauhan

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Restraining Breaching Party From Activities Barred By Shareholders' Agreement Is Not Prohibited U/S 27 Of Contract Act: Delhi High Court

Mohd Malik Chauhan

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