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Issues: (i) Whether clause 14 of the shareholders agreement, containing the non-compete obligation, was unenforceable merely because it was not incorporated in the articles of association of the joint venture company; (ii) Whether the shareholders agreement had been validly terminated or had become frustrated on account of the petitioner's sickness and proceedings before BIFR so as to discharge the respondent from its contractual obligations; (iii) Whether interim protection under section 9 of the Arbitration and Conciliation Act, 1996 could be granted to restrain the respondent from setting up a wholly owned competing subsidiary pending arbitration.
Issue (i): Whether clause 14 of the shareholders agreement, containing the non-compete obligation, was unenforceable merely because it was not incorporated in the articles of association of the joint venture company.
Analysis: The covenant in clause 14 was a contractual restraint between the parties and was directed to their conduct during the currency of the agreement. It was distinct from restrictions on transfer of shares or internal management of the company. The fact that the clause was not separately embodied in the articles of association did not, by itself, render it void or unenforceable. The agreement could still bind the contracting parties so long as it was otherwise lawful and subsisting.
Conclusion: The clause was held to be binding and enforceable between the parties.
Issue (ii): Whether the shareholders agreement had been validly terminated or had become frustrated on account of the petitioner's sickness and proceedings before BIFR so as to discharge the respondent from its contractual obligations.
Analysis: Frustration under section 56 of the Indian Contract Act, 1872 requires supervening impossibility or illegality, not mere commercial difficulty, uncertainty, or inconvenience. The agreement contained a defined term and no contractual ground supported the unilateral termination asserted by the respondent. The petitioner continued to function, no breach by it was shown, and the joint venture itself remained profitable and operational. The circumstances relied upon by the respondent did not destroy the foundation of the bargain or make performance impossible. The termination letter was therefore not accepted as discharging the agreement.
Conclusion: The plea of frustration and the purported termination were rejected as a basis for ounding the respondent from the agreement.
Issue (iii): Whether interim protection under section 9 of the Arbitration and Conciliation Act, 1996 could be granted to restrain the respondent from setting up a wholly owned competing subsidiary pending arbitration.
Analysis: Section 9 empowers the Court to grant interim measures of protection to preserve the subject matter and prevent irreparable injury pending arbitration. The petitioner showed a prima facie right under the subsisting non-compete clause, a reasonable apprehension of loss of goodwill and market share, and a balance of convenience in its favour. The proposed subsidiary would manufacture the same product in the same field, while the respondent itself had sought arbitration over the validity of the termination. The Court also found that damages would not be an adequate remedy for the threatened harm to the joint venture's goodwill and business position.
Conclusion: Interim injunction was warranted and the petitioner was entitled to protection under section 9.
Final Conclusion: The dispute was finally disposed of by granting interim restraint against the respondent's competing venture and by preserving the contractual non-compete arrangement until the arbitral tribunal rendered its award, while leaving the connected writ-related issues to be decided separately.
Ratio Decidendi: A lawful negative covenant in a subsisting commercial joint venture agreement can be enforced between the contracting parties by interim relief under section 9 of the Arbitration and Conciliation Act, 1996, even if it is not replicated in the articles of association, and a mere allegation of sickness or commercial inconvenience does not amount to frustration under section 56 of the Indian Contract Act, 1872.
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