Delhi High Court Denies Enforcement of Negative Covenant in Arbitration Dispute

Court Rules No Exclusivity Between Dreamfolks and Its Clients, Monetary Compensation as Remedy for Breach

News Report: 

In a significant judgment delivered on September 16, 2025, the Delhi High Court, presided over by Justice Amit Bansal, addressed the enforcement of a negative covenant under Section 9 of the Arbitration and Conciliation Act, 1996. The case involved Dreamfolks Services Ltd., a company providing travel and lifestyle services, and Encalm Hospitality Pvt. Ltd., an operator of airport lounges.

Dreamfolks Services Ltd. sought interim relief to restrain Encalm Hospitality from engaging directly with Dreamfolks' clients during a notice period following a termination notice issued by Encalm. The petitioner argued that the respondent breached the agreement by dealing directly with Dreamfolks' clients, resulting in a decline in business volumes.

Upon examining the case, the court noted several key points in its judgment:

• 1. Non-Exclusivity: The court determined that no exclusivity existed between Dreamfolks and its clients, as the petitioner failed to demonstrate that its clients had exclusive agreements with Dreamfolks. The agreement allowed Encalm Hospitality to enter into arrangements with third-party service providers, and no explicit restriction barred the respondent from doing business with Dreamfolks' clients through third parties.
• 2. Negative Covenant: Dreamfolks relied on Clause 4.4 of the agreement, which restricted Encalm from directly engaging with Dreamfolks' clients during the agreement's subsistence. However, the court found that third-party service providers were not representatives of Encalm as per the agreement, thus not breaching the negative covenant.
• 3. Remedy for Breach: The court emphasized that the agreement contained a termination clause, allowing either party to terminate the contract with a 90-day notice. It concluded that even if the termination by Encalm was unlawful, the remedy for Dreamfolks would be monetary compensation as stipulated in Clauses 11.1 and 11.2 of the agreement.
• 4. Interim Relief: The court upheld its previous order directing Encalm to maintain records of transactions with Dreamfolks' clients, considering it an adequate interim measure to protect the petitioner's interests.

The judgment clarified that the observations made were specific to the interim petition and would not impact the final arbitration proceedings. The decision underscores the importance of explicit contractual provisions in enforcing negative covenants and highlights monetary compensation as a remedy for breach in the absence of exclusivity.

Bottom Line:

Arbitration - Enforcement of a negative covenant under Section 9 of the Arbitration and Conciliation Act, 1996 - Court held that prima facie, no exclusivity existed between the petitioner and its clients, and the negative covenant could not be enforced as the agreement allowed for termination and only monetary compensation was the remedy for unlawful termination. 

Statutory provision(s): Arbitration and Conciliation Act, 1996

Dreamfolks Services Ltd. v. Encalm Hospitality Pvt. Ltd., (Delhi) : Law Finder Doc Id # 2779438