Section 9 Arbitration Act | Non-Signatory Group Entities Can Be Restrained If They Are Used To Indirectly Defeat Negative Covenants: Bombay High Court

"The Court should not interpret the covenant in a way which allows the same competing business to be carried on through such entity merely by changing the name under which the business is conducted." Bombay High Court, in a significant ruling, held that a non-signatory group entity can be restrained under Section 9 of the Arbitration and Conciliation Act, 1996, if it is being used as a vehicle to indirectly breach a negative covenant (non-compete) contained in a franchise agreement signed by a signatory group entity.

A bench of Justice Amit Borkar observed that when an agreement explicitly prohibits a franchisee from carrying out competing activities "directly or indirectly through any associate or sister concern," the court must look beyond separate corporate identities to give effect to the parties' true contractual intent.

The petitioner, Parle Agro Private Limited (PAPL), had long-standing franchise arrangements with the 'KL Group' entities, specifically Respondent No. 1 (Udayak) and Respondent No. 2 (KL Beverages). While the Udayak Franchise Agreement (2014) contained strict non-compete and non-disclosure clauses, PAPL discovered during a 2026 audit that Respondent No. 2—a sister concern—had begun manufacturing a competing packaged drinking water brand, "SURE," using shared infrastructure and personnel within the same industrial estate. PAPL moved the court under Section 9, seeking interim relief to protect its proprietary know-how and market exclusivity.

The primary question before the court was whether the non-compete obligations under the 2014 Franchise Agreement could be extended to a non-signatory sister concern (Respondent No. 2) based on the "indirect" competition clause. The court was also called upon to determine whether the existence of a separate, later franchise agreement (2018) between the petitioner and Respondent No. 2 permitted the latter to disregard the restrictive covenants binding the group.

Scope of "Indirect" Competition Clauses

The Court emphasized that restrictive covenants must be interpreted in a manner that gives effect to their commercial purpose. Rejecting a narrow reading of the franchise agreement, the bench held that the inclusion of terms like "indirectly through any associate/sister concern" indicates that the parties intended to prevent the franchisee from circumventing the non-compete obligation through related entities.

Corporate Identity vs. Contractual Intent

While acknowledging the separate legal personality of the Respondents, the Court clarified that this does not provide a cloak for breaching specific contractual promises. The bench noted that the "separate identity" of a group entity cannot be used as a shield to defeat a restriction that explicitly prohibits carrying on competing activities through an associate.

Court Explains Duty To Give Effect To Negative Covenants

The Court observed that if the clause were interpreted as permitting a sister concern to carry on the very business the franchisee was prohibited from doing, it would render a substantial portion of the agreement redundant. The court's duty is to interpret such clauses to prevent the circumvention of the agreement's core object.

Impact of Shared Infrastructure and Personnel

The Court placed significant weight on the audit report, which highlighted the use of common business premises, shared mailboxes, and overlapping personnel between the two Respondents. These factors, in combination with the financial records describing the Respondents as "associates," created a strong prima facie case that the entities were functioning as a single economic unit for the purpose of the competing activity.

Injunction Against Non-Signatory Entities

The bench reaffirmed the principle from Girish Mulchand Mehta v. Mahesh S. Mehta, holding that Section 9 does not limit the court's power to pass orders only against signatories to an arbitration agreement. If a third party is acting as an instrument for a signatory to violate a contract, the court can grant protective measures to preserve the subject matter of the arbitration.

Protection of Proprietary Know-How

The Court underscored that the non-compete was not merely about trademark protection but also about preventing the misuse of "facilities, know-how, procedures, and distribution networks." Given the history of technical support provided by PAPL, allowing the competing activity to continue would cause irreparable harm that could not be adequately addressed by monetary damages alone.

The Court partly allowed the petition, restraining the Respondents—and their affiliates or group companies—from manufacturing, marketing, or dealing in competing "SURE" water products pending the arbitral proceedings. The Court further directed the Respondents to disclose on affidavit the particulars of their competing activities since 2014. Importantly, the Court clarified that this restraint does not prohibit Respondent No. 2 from carrying on independent, lawful business activities that do not involve the prohibited competing product or the misuse of PAPL's proprietary information.

Date of Decision: 23 September 2026