Companies Act Case Law M/S Gujarat Pottling CoLtd And Ors The Coca Cola Co And Ors

PETITIONER:
M/S GUJARAT POTTLING CO.LTD. & ORS.

Vs.

RESPONDENT:
THE COCA COLA CO. & ORS.

DATE OF JUDGMENT04/08/1995

BENCH:
AGRAWAL, S.C. (J)
BENCH:
AGRAWAL, S.C. (J)
AHMAD SAGHIR S. (J)

CITATION:
1995 AIR 2372 1995 SCC (5) 545
JT 1995 (6) 3 1995 SCALE (4)635
ACT:

 

HEADNOTE:

 

JUDGMENT:
J U D G M E N T
S.C. AGARWAL. J. :
Special leave granted.
In the past nations often went to war for the
protection and advancement of their economic interests.
Things have changed now. Under the international order
envisaged by the Charter of the United Nations war is no
longer an instrument of State policy. Now-a-days there are
wars between corporations, more particularly corporations
having multi-national operations, for the protection and
advancement of their economic interests. These wars are
fought on the economic plane but some of the battles spill
over to courts of law. The present case is one such legal
battle. The combatants are two American multi-national
corporations dominating the soft drink market having
operations in a number of countries. On the one side is Coca
Cola Company (respondent No. 1), hereinafter referred to as
“Coca Cola”, and on the other side is PEPSICO INC. (for
short “Pepsi”), and its subsidiaries and subsidiaries of the
subsidiaries which are under, direct or indirect, control of
Pepsi. There is a long history of trade rivalry between
these two multi-national corporations.
Coca Cola had been operating in this country till 1977
when on account of change of policy of the new Government
Coca Cola had to close its operations in India. After the
departure of Coca Cola the products of the domestic
manufactures filled the vacuum. A substantial share of the
market came to be controlled by the parle group of companies
owned and controlled by Mr. Ramesh Chauhan and Mr. Prakash
Chauhan, respondents Nos. 3 and 4. The said group was
manufacturing under trade marks bearing the names “Gold
Spot”, “Thums Up”, “Limca”, “Maaza”, “Rim Zim” and “Citra”
as well as “Bisleri” club soda. They had arrangements with
bottlers in different parts of the country whereunder the
bottlers prepared beverages from the essence/syrup supplied
by the Parle group and after bottling the same the beverages
were sold under the names for which trade marks were held by
the Parle group. In late 1980s Pepsi started operations in
India and introduced beverages under their trade marks. Coca
Cola followed suit thereafter. Under the Deed of Assignment
dated November 12,1993, the Parle group assigned their trade
marks in the beverages bearing the names “Gold Spot”, “Thums
Up”, “Limca”, “Maaza”, “Rim Zim” and “Citra” to Coca Cola.
On January 6, 1994, Coca Cola applied to the Registrar of
Trade Marks for being recorded as subsequent proprietor of
the trade marks which had been assigned to it by the various
Parle entities.
Gujarat Bottling Company Ltd., appellant No. 1,
(hereinafter referred to as `GBC’) is a company incorporated
under the Companies Act, 1956. 21% of its shares are held by
Ahmadebad Advertising and Marketing Consultants Ltd.,
respondent No. 7. The remaining 79% of shares were held by
Mr. Pinakin K. Shah, respondent No. 2 and his family members
and business associates and respondents Nos. 3 and 4 and
their family members and associates in the ratio of 78% and
22% respectively. The shares of respondent No. 7 were also
held by respondent No. 2 and his family members and
associates and respondent No.3 and 4 and their family
members and associates in the same ratio of 78% and 22%
respectively. GBC has bottling plants at Ahmedabad and
Rajkot in Gujarat. GBC was having an arrangement with
respondents Nos. 3 and 4 whereunder licence had been given
to GBC to prepare, bottle, sell and distribute beverages
under the trade marks “Thums-Up”, “Limca”, “Gold Spot”,
“Maaza”, “Citra”, “Rim Zim”, and “Bisleri” club soda. In
anticipation of the assignment of the rights in trade marks
by Parle group in its favour, Coca Cola, on September 20,
1993, entered into an agreement (hereinafter referred to as
the “1993 Agreement”) with GBC whereby Coca Cola permitted
and authorised GBC, upon the terms contained in the said
agreement, to bottle, sell and distribute the beverages
known and sold under the trade marks “Gold Spot”, “Thums
Up”, “Limca”, “Maaza” and “Rim Zim”. The trade mark “Citra”
was excluded from this agreement for the reason that a suit
for `passing off’ was pending against the Parle entity
concerned in the Delhi High Court and there was uncertainty
of the outcome of this litigation. The 1993 Agreement was to
come into effect on the date Coca Cola indicated in writing
to GBC that all trade marks related to the said agreement
have been assigned and transferred to Coca Cola. The 1993
Agreement is to operate till November 17, 1998 unless
earlier terminated as provided in the said agreement. Under
paragraphs 4(a), 6, 18, 19, 20 and 23 Coca Cola is empowered
to terminate the said agreement without notice and in
paragraph 21 provision is made for termination of the said
agreement by either side on giving one year’s written
notice. The said period of notice could be reduced by mutual
consent in writing between Coca Cola and GBC. Paragraph 14
of the 1993 Agreement contains a negative convenant by GBC
not to manufacture, bottle, sell, deal or otherwise be
concerned with the products, beverages of any other brands
or trade marks/ trade names during the subsistence of the
agreement including the period of one years’ notice as
contemplated in paragraph 21. Under paragraph 19 Coca Cola
has the right to dis-continue supplying to GBC with essence/
syrup and/ or other materials on the happening of any of the
events mentioned in clauses (a) to (e) of the said
paragraph. Clause (b) of paragraph 19 relates to transfer of
stock, share or interest or other indicia of ownership of
GBC resulting in effective transfer of control without the
prior express written consent of Coca Cola. The 1993
Agreement came into force on November 12, 1993 when the
trade marks related to the said agreement were assigned and
transferred to Coca Cola. Two such agreements were executed
– one pertaining to Ahmadabad town and other pertaining to
Rajkot town. In addition, Coca Cola also entered into two
separate agreements under letters dated September 20, 1993
in respect of permission to use the trade mark “Citra” by
GBC for Ahmedabad and Rajkot towns. Two other separate
agreements were entered by Coca Cola under letters dated
September 20, 1993 for Ahmedabad and Rajkot towns for the
use of the trade mark “Bisleri” club soda by GBC. All these
four letter agreements are operative for two years and can
be renewed by mutual consent. These agreements can be
terminated by giving three months notice by either side.
These agreements were also to come into effect from the date
indicated by Coca Cola in writing to GBC that all trade
marks related to the said agreements have been assigned and
transferred to Coca Cola.
On April 30, 1994 Coca Cola entered into another
agreement (hereinafter referred to as the “1994 Agreement”)
with GBC whereby Coca Cola granted to GBC a non-exclusive
licence to use the trade marks mentioned in the schedule to
the agreement, namely, “Gold Spot”, “Limca”, “Thums Up”,
“Maaza”, “Citra”, etc. in relation to goods prepared by or
for the licensee (GBC) from concentrates and/or syrup
supplied by the licensor (Coca Cola) and packaged or
dispensed in accordance with standards, specifications,
formulae, processes and instruction furnished or approved by
the licensor from time to time and only so long as such
goods are manufactured within such territory of India and
sold within such territory of India and in such bottles or
other containers as shall be approved by the licensor from
time to time. In the said agreement it is provided that both
the parties shall make application to the Registrar of Trade
Marks under the Trade & Merchandise Marks Act, 1958
(hereinafter referred to as `the Act’) or any statutory
modification or enactment thereto or thereof for the time
being in force to procure the registration of the Licensee
(GBC) as a registered user of the said trade marks as
aforesaid as soon as the said trade marks are registered and
shall sign and execute all such documents as are reasonably
proper and necessary to secure such registration and for any
change thereof in the future. The said agreement is not
limited to any particular period and is to continue in force
without limitation of period but can be terminated at any
time by either party upon giving ninety days’ notice in
writing to the other or by mutual consent. But in the event
of either party committing a breach of any of the provisions
of the said agreement it shall be lawful for the other
party, by giving thirty days’ notice in writing, to
terminate the agreement. In accordance with the 1994
Agreement an application was submitted by Coca Cola on July
12, 1994 under Section 48 and 49 of the Act to register the
said agreement as a Registered User Agreement.
After the execution of these agreements steps for
upgradation of the plants of GBC at Ahmedabad and Rajkot
were taken and when the upgradation of the said two plants
was near completion Coca Cola advised GBC that it was
necessary for GBC to provide for aditional investments in
marketing arrangements, purchase of crates and other
equipments and trucks etc. GBC was, however, reluctant to
make further investment and respondent No. 2 requested Coca
Cola to give its consent in advance for transfer of interest
of respondent No. 2 in GBC. Coca Cola declined to give its
consent to such transfer in advance without being aware as
to who the prospective purchaser was and informed GBC and
respondent No. 2 that the transfer can be permitted provided
GBC does not lose controlling power or management in favour
of an outsider. On January 20, 1995, the share holding of
respondent No. 2 and his family members and associates as
well as respondent Nos. 3 and 4 and their family members and
associates in GBC and respondent No.7 were transferred to
appellants Nos. 2 to 5 which are concerns closely associated
and connected or affiliated to subsidiaries of Pepsi,
respondent No. 6, and Pepsi Foods Limited, respondent No. 5,
a subsidiary of Pepsi. As a result Pepsi acquired control
over GBC. On January 25, 1995 GBC gave a notice to Coca Cola
under clause 7 of the 1994 Agreement whereby the said
agreement was terminated. In the said notice it is also
stated that without prejudice to the contentions of GBC that
the 1993 Agreement stands replaced by the 1994 Agreement
and/or that the termination period under the 1993 Agreement
in any event stands reduced to 90 days and that the said
letter dated January 25, 1995 be treated, as a matter of
abundant caution, as termination notice also under clause 21
of the 1993 Agreement. On January 25, 1995 GBC also
addressed a letter to Coca Cola informing them that shares
representing 70.6% approximately of the paid up equity
capital of GBC had been acquired by and transferred in
favour of appellants Nos. 2 to 5. On January 31, 1995 GBC
addressed a letter to the Director (F&VP), Ministry of Food
Processing Industries, Government of India, for approval of
crown cap designs pertaining to beverages of which the trade
marks are held by Pepsi.
On January 30, 1995 Coca Cola filed a suit (Suit No.
400 of 1995) in the Bombay High Court seeking various
reliefs. In the said suit Coca Cola took out Notice of
Motion No. 316 of 1995 seeking interim relief. During the
course of hearing on the said Notice of Motion before the
learned single Judge of the High Court (Dhanuka J.) the
learned counsel for Coca Cola sought interim relief in terms
of prayers (a)(i), (a) (ii), (a)(iii) and (a)(viii) of the
Notice of Motion. By his order dated February 22, 1995 the
learned single Judge declined the application for grant of
interim relief in terms of prayers (a)(i), (a)(iii) and
(a)(viii) but issued an interim injunction restraining GBC
from manufacturing, bottling or selling or dealing with the
products, beverages of any brand or trade mark owned by
respondents Nos. 5 and 6 or any one else other than Coca
Cola. GBC was permitted to pursue its application dated
January 31, 1995 pending before the Director (F&VP),
Ministry of Food Processing Industries, in accordance with
law but GBC was directed not to act upon the permission of
the said authority or any other authority, if granted,
without obtaining prior leave of the court. Two appeals
(Appeals Nos. 183 and 191 of 1995) were filed against the
said order of the learned single Judge before the Division
Bench of the High Court – one was by GBC abd the other was
by Coca Cola. During the course of hearing of the said
appeals the parties, through their counsel, submitted that
as decision in the appeals would have impact on the Motion
pending before the learned single Judge, it was desirable
that Notice of Motion No. 316 of 1995 should be taken up on
board and disposed of finally by the Division Bench so as to
avoid one more appeal. In view of the said submission and by
consent of the parties the Motion was heard and disposed of
finally by the Division Bench by the impugned judgment dated
March 31, 1995. By the said judgment Notice of Motion No.
316 of 1995 was made absolute in terms of prayer Nos.
(a)(ii) and (a)(iii) as modified. Prayer (a)(ii) was for an
injunction restraining respondent No. 1 (GBC) either
directly or indirectly by itself or through its shareholders
from concerning itself with the products, beverages of any
other brand or trade mark of the plaintiffs (Coca Cola).
Under prayer (a)(iii) as modified an injunction has been
granted in the following terms:
“That in the event of the sale of shares
having taken place before the
institution of the suit, the deponent
No.1 and those to whom the shares have
been sold and also subsequent
transferees, their servants, agents,
nominees, employees, subsidiary
companies, controlled companies,
affiliates or associate companies or any
person acting for and on their behalf
are restrained by an interim injunction
from using the plants of respondent No.
1 at Ahmedabad and Rajkot for
manufacturing, bottling or selling or
dealing with or concerning themselves in
any manner whatsoever with the beverages
of any person till January 25, 1996.”
Feeling aggrieved by the said judgment of the Division
Bench of the High Court dated March 31, 1995, GBC (defendant
No.1) and the four transferees of the shares of GBC
(defendants Nos.7 to 10) have filed these appeals.
By the said interim order the High Court has given
effect to the negative stipulation contained in paragraph 14
of the 1993 Agreement which is in the following terms:-
“As such the Bottler covenants that the
Bottler will not manufacture, bottle,
sell, deal or otherwise be concerned
with the products, beverages of any
other brands or trade marks/trade names
during the subsistenance of this
Agreement including the period of one
year’s notice as contemplated in
paragraph 21.”
On behalf of the appellants submissions have been made
assailing the validity of the said negative covenant. For
that purpose it is necessary to determine whether the 1993
Agreement subsists or has been legally terminated. The case
of GBC, in this regard, is that the 1993 Agreement is no
longer in operation since it has been superseded by the 1994
Agreement and the 1994 Agreement has been terminated by
notice dated january 25, 1995 and that, in the alternative,
the requirement regarding giving of one year’s written
notice for terminating the 1993 Agreement as contained in
paragraph 21 of the said agreement was reduced by mutual
consent by the parties by the 1994 Agreement wherein under
clause 7 the period of such notice for terminating the
agreement is 90 days and that by notice dated January 25,
1995 the 1993 Agreement stands terminated on the expiry of
90 days from the date of the said notice. These submissions
require an examination of the nature and contents of the
1993 and 1994 Agreements but before we proceed to do so we
may briefly refer to the relevant law governing the use of
trade marks in India.
The first enactment whereby the machinery for
registration and statutory protection of trade marks was
introduced in this country was the Trade Marks Act, 1940.
Prior to the said enactment the law relating to trade marks
in India was based on common law which was substantially the
same as was applied in England before the passing of the
Trade Marks Registration Act, 1875. At common law the right
to property in a trade mark was in the nature of monopoly
enabling the holder of the said right to restrain other
person from using the mark. For being capable of being the
subject matter of property a trade mark had to be
distinctive. This right was an adjunct of the goodwill of a
business and was incapable of separate existence dissociated
from that goodwill. [See: General Electric Co. V. General
Electric Co. Ltd., 1972 (2) All E R 507]. The Trade Marks
Act, 1940, which was based on the Trade Marks Act, 1938 of
U.K., has now been replaced by the Act. The Act has codified
the law relating to Trade and Merchandise Marks and is a
comprehensive piece of legislation dealing with the
registration and protection of trade marks and criminal
offences relating to trade marks and other markings in
merchandise. Under the Act registration of trade marks is
not compulsory and as regards unregistered trade marks, some
aspects are governed by the Act while others are still based
on common law. In respect of a trade mark registered under
the provisions of the Act certain statutory rights have been
conferred on the registered proprietor which enable him to
sue for the infringement of the trade mark irrespective of
whether or not that mark is used. The Act also makes
provisions whereunder registered proprietor of a trade mark
can permit any person to use the mark as a registered user
and for that purpose provision are made in Sections 48 to 54
of the Act. In clause (m) of Section 2 the expression
“permitted use” in relation to a registered trade mark by a
registered user of the trade mark in relation to goods- (a)
with which he is connected in the course of trade; and (b)
in respect of which the trade mark remains registered for
the time bing; and (c) for which he is registered as
registered user; and (ii) which complies with any conditions
or restrictions to which the registeration of the trade mark
is subject”. In sub-section (i) of Section 48 it is provided
that a person other than a registered proprietor of a trade
mark may be registered as the registered user thereof in
respect of any or all of the goods in respect of which the
trade mark is registered otherwise than as a defensive trade
mark and in the said Section the Central Government has been
empowered to make rules providing that no application for
registration as such shall be entertained unless the
agreement between the parties complies with the conditions
laid down in the rules for preventing trafficking in trade
marks. Under sub-section (2) the permitted use of a trade
mark shall be deemed to be use by the propriter thereof and
shall be deemed not to by used by a person other than the
proprietor, for the purpose of Section 46 or for any other
purpose for which such use is material under the Act or any
other law. Section 49 makes provision for submission of
application for registration of trade mark as a registred
user and one of the requirements is that the said
application shall be accompanied by the agreement in writing
or a duly authenticated copy thereof entered into between
the registered proprietor and the proposed registered user
with respect to permitted use of the trade mark and it is
further required that the registered proprietor or some
person authorised to the satisfaction of the Registrar to
act on his behalf give an affidavit in respect of the
matters set out in sub-clauses (a) to (d) of clause (ii) of
sub-section (1) of Section 49. Section 51 empowers a
registered user of a trade mark to call upon the proprietor
to take proceeding to prevent infringement of the trade mark
and if the proprietor refuses or neglects to do so within
three months after being so called upon, the registered user
may institute proceedings for infringement in his own name
as if he were the proprietor, making the proprietor a
defendent. Section 52 deals with power of Registrar to very
or cancel registration as registered user. Under Section 53
a registered user does not have the right of assignment or
transmission of the right to use the trade mark. Further
provisions relating to registered user are contained in
Chapter V (Rules 82 to 93) of the Trade and Merchandise
Marks Rules, 1959 (hereinafter refered to as “the Rules”).
Rules 83 provides the particulars which are required to be
stated in the agreement between the registered proprietor
and the proposed registered user with respect to the
permitted use of the trade mark. The said particulars
include “the particulars specified in sub-clauses (a) to (d)
of clause (ii) of sub-section (1) of Section 49″ and a
provision about ‘means for bringing the permitted use to an
end when the relationship between the parties or the control
by the registered propretor over the permitted user ceases.”
The abovementioned provisions contained in the Act and
the Rules indicate that the use of registered trade mark by
a registered user is subject to fulfilment of certain
conditions and for the purpose of registration of a
registered user it is necessary for the registerd proprietor
of the trade mark and the proposed registered user to
execute an agreement which must contain the prescribed
particulars and must be submitted alongwith the application
for registration as a registered user. The registration as
registered user enables the use of the trade mark by the
registered user as being treated as use by the proprieter of
the trade mark and enables a registered user to take
proceedings in his own name to prevent infringement of the
trade mark.
Apart from the said provisions relating to registered
users, it is permissible for the registerd proprited of a
trade mark to permit a person to use his registerd trade
mark. Such licensing of trade mark is governed by common law
and is permissible provided (i) the licensing does not
result in causing confusion or deception among the public;
(ii)it does not destroy the distinctiveness of the trade
mark, that is to say, the trade mark, before the public
eye,continues to distinguish the goods connected with
others; and (iii) a connection in the course of trade
cosistent with the definition of trade mark continues to
exist between the goods and the propriter of the mark. [see
: P. Narayanan = Law of Trade Marks and passisng-Off, 4th
Ed., para 20.16,p.335]. It would thus appear that use of a
registered trade mark can be permitted to a registered user
in accordance with provisions of the Act and for that
purpose the registered proprietor has to enter into an
agreement with the proposed registered user. The use of the
trade mark can also be permitted dehors the provisions of
the Act by grant of licence by the registered proprietor to
the proposed user. Such a licence is governed by common
law.
We may now examine the two agreements, viz., the
1993 Agreement and 1994 Agreement. In the 1993 Agreement, in
paragraph 2, Coca Cola has agreed to permit and authorise
GBC, upon the terms contained in the said agreement, to
bottle, sell and distribute the beverages known as and sold
under the trade marks set forth in Annexure ii to the
agreement. Under paragraph 3 it is required that beverages
shall be manufactured in a plant approved by Coca Cola in
accordance with the formula and procedure provided by Coca
Cola. In clause (a) of paragraph 4 GBC expressly covenants
to consistently maintain the quality of the sid beverages in
all respects and to strictly adhere and conform to the
technical specification and standards as provided, using
only such ingredients and of such quality as provided by
Coca Cola. GBC also undertakes to exercise great care and
caution to see that sub-standard, inferior or unwholesome
beverages will not be manufactured/marketed by GBC or its
agents directly or indirectly and if Coca Cola observes that
the quality of the beverages is not maintained consistently,
and/or there are persistent complaints from the market,
dealers, outlets, consumers, etc., concerning the low
standard or inferior quality of the beverages
manufactured/marketed by GBC, Coca Cola retains the right to
forthwith terminate the agreement. In clause (b) of
paragraph 4, in order to assure compliance by GBC with the
above requirments, it is permissible for the representatives
and/or agents of Coca Cola to inspect at any time the
premisesof GBC, the finished beverages, the methods of
preparation there of and the bottling process, and full
cooperation in this regard is to be extended by GBC. GBC has
also agreed to submit samples of the finished beverages to
Coca Cola every month for analysis and approval by Coca Cola
who is the sole judge to determine and certify the quality
of the said beverages as fit for marketing . Paragraph 5
relates to keeping by GBC of complete records of all
chemical tests carried out as specified by Coca Cola and of
production, sale and distribution of the beverages and
furnishing of monthly reports about the same to Coca Cola.
Under clause (a) of paragraph 6 GBC undertakes to buy only
from Coca Cola or a manufacturer approved by Coca Cola
essences and beverages bases (ingredients for making the
said beverages). Under clause (b) of paragraph 6 GBC
undertakes to buy bottles,crowns lables and other
ingredients of the quality, standard and specifications laid
down by Coca Cola preferably from the suppliers approved by
Coca Cola and in case GBC chooses to buy the above items
from a supplier/suppliers other than the one approved by
Coca Cola, GBC is required to submit the itens so procured
to Coca Cola to determine the quality, standard and
specifications before they are put to use to manufacture,
bottle or sale of the said beverages. Under clause (c) of
paragraph 6 GBC has agreed to use only bottles, lables and
crowns for the said beverages of a type, style, size and
design approved by Coca Cola. The breach of clauses (a), (b)
and (c) of paragraph 6 would constitute an infringement of
the agreement for which Coca Cola reserves its right to
terminate the agreement. Under pragraph 7 GBC has agreed to
vigorously and deligently promote and solicit the sale of
the said beverages and assure full and complete distribution
of the said beverages to meet the market demand for the
said beverages. Under clause (a) of paragraph 8 GBC
covenants and agrees not to manufacture, bottle, sell,deal
in or otherwise be concerned with any product under any get
up or container used by Coca Cola or which is likely to be
confused or used in unfair competition therewith or passed-
off therefor. Under clause (b) of pragraph 8 GBC covenants
and agrees not to manufacture, bottle , sell, deal in or
otherwise be concerned with any product under any trade mark
or other cdesignation which is an imitation or
infringement of these trade marks or is likely to cause
passings-off of any product which is calculated to lead the
public to believe that it originates from Coca Cola because
of GBC’s association with the business of bottling,
distributing and selling the beverages. In the said
clause,it is provided that the use of the said trade marks
in any form or fashion or any words graphically or
phonetically similar thereto or in imitation thereof on any
product other than that of Coca Cola. would constitiute an
infringement of the trade marks or be likely to cause
passing-off. Under clause (c) of paragraph 8 GBC covenants
and agrees that during the continuance of the agreement it
will not manufacturer, bottle, sell deal in or otherwise be
concerned with any beverages put out under any trade mark or
name or style being same or deceptively similar to the trade
marks owned by Coca Cola or having similar or near similar
phonetic rendering and any beverages put out under the said
trade marks or otherwise which is an imitation of the
essence, syrup or beverages or is likely to be a substitute
thereof. In paragraph 9 it has been provided that the
decision of Coca Cola on all matters concerning the said
trade mark shall be final and conclusive and not subject to
question by GBC and Coco Cola in the defenc above trade
marks at its sole cost and expenses and GBC will co-operate
fully with Coca Cola in the defence and protection of the
said trade marks in use in the territory infringing Coca
Cola’s trade marks. In paragraph 10 GBC has assured Coca
Cola that it will safeguard that no spurious beverages are
manufactured, marketed, sold or otherwise dealt with in the
bottles registered with Coca Cola’s trade name or trade
marks and GBC has further undertaken to take all necessary
steps to prevent any spurious or imitation beverages being
filled in the bottles registerd under Coca Cola’s trade name
or trade marks. In pragraph 11 GBC has recognised Coca
Cola’s ownership of the trade marks and has agred to only
use the said trade marks in the manner lawfully permitted
and not to take any action which would cause breach or harm
the trade marks or Coca Cola’s ownership thereof in manner.
In paragraph 12 it is provided that nothing contained in the
Agreement shall be construed as conferring upon GBC any
right, title or interest in the above trade marks, or in
their registration or in any designs, copy rights, patents,
trade names, signs, emblems, insignia, symbols, slogans, or
other marks or devices used in connection with the said
beverages. In paragraph 13 GBC has agreed to sell and
distribute the said beverages under Coca Cola’s trade marks
strictly on its own merits, and make only such
representation concerning the said beverages as shall have
been previously authorized in writing by Coca Cola and that
GBC will not use coca Cola’s trade marks or any other such
name/names which are deceptively similar or have phonetic
resemblance or can be confused with Coca Cola’s trade mark,
as part of its name, nor will GBC use in connecetion with
any drink any trade marks or design which is deceptively
similar to Coca Cola’s trade marks or any other trade marks
which Coca Cola may acquire.In paragraph 14 GBC recognises
that Coca Cola has awarded the territory on the assurance of
GBC, that it will work vigorously and deligently to promote
and solicit the sale of the products/beverages produced
under the trade marks of Coca Cola and has further assured
full and complete distribution of Coca Cola’s
products/beverages to meet the demand from the consumers
because of the goodwill enjoyed by Coca Cola and its
products/beverages and GBC also recognises that Coca Cola
has incurred heavy expenditure by way of advertisements,
periodic training of the sales, marketing and technical
staff of GBC as well as the protection of its goodwill and
GBC recognises that it is imperative that it must maintain
with full vigour the continuity of the supply of Coca Cola’s
products/beverages for safeguarding the interest of the
consuming public and thus maintaining the goodwill of Coca
Cola. At the end of paragraph 14 there is the negative
stipulation which has already been set out earlier. In
paragraph 15 GBC has agreed that it will not sell the said
beverages to the retailers in the territory on prices higher
than the price agreed to or recommended by Coca Cola in
writing. In paragraph 16 Coca Cola reserves its rights to
grant at any time one or more additional licence near the
area where GBC plant is located, if in the judgement of Coca
Cola situation warrants commissioning of further/additional
licence. In paragraph 17 it is provided that nothing in the
agreement shall create or be deemed to create any
relationship of agency, partnership or joint venture between
Coca Cola and GBC and further that GBC will assume full
responsibility or liability for and will hold Coca Cola
harmless from any loss, injury, claims or damages resulting
from or claimed to result from acts of commisions or
omissions on the part of the GBC. In paragraph 18 GBC has
agreed not to sell, assign, transfer, pledge, mortgage,
lease, licence or in any other way or manner encumber or
dispose of, in whole or in part, the agreement or any
interest herein, either directly or indirectly, nor to pass
by operation of law or in any other manner without Coca
Cola’s prior written consent. Under paragraph 19 Coca Cola
has to right to cancel and terminate the agreement forthwith
by written notice to GBC upon the happening of any one or
more of the events mentioned in clauses (a) to (e) of the
said paragraph. The said power is in addition to all other
rights and remedies which Coca Cola may have. In the
concluding part of paragraph 19 it is provided that upon the
happening of any one or more of the foregoing events, Coca
Cola shall also have the right to discontinue supplying GBC
with essence/syrup and/or other materials for such length of
time as Coca Cola may in its sole judgment deem necessary
without thereby cancelling or prejudicing Coca Cola’s right
to cancel or terminate the agreement for the said cause or
for any one or more other cause or causes. In paragraph 20
it is prescribed that the said agreement shall expire,
without notice, on November 17, 1998 unless it has been
earlier terminated as provided in the agreement. Paragraph
21 makes provision for termination of the agreement by
either side on giving one year’s written notice which period
may be reduced by mutual consent in writing between Coca
Cola and GBC. Paragraph 23 deals with partial invalidity
resulting from any of the provisions of the agreement being
held invalid for whatever reason by any of court,
governmental agency, body or tribunal. In paragraph 25
provision is made for supersession of all prior contracts,
agreements or commitments, either written or oral, which are
rendered mull and void and of no effect. Paragraph 29
provides that the agreement shall come into effect at the
date on which Coca Cola indicates in writing to GBC that all
trade marks related to the said agreement have been assigned
and transferred to Coca Cola, provided that if such notice
is not issued by the first anniversary of the agreement,
then the agreement shall be void ab initio and of no effect.
In paragraph 30 GBC represents and warrants to Coca Cola
that GBC acknowledges that the trade marks listed on
Annexure II will be, as of the effective date of this
agreement, the property of Coca Cola, that GBC has no right,
title or interest to such trade marks, except pursuant to
the licence granted by the agreement and the GBC has no
existing claims or basis for claims against parle (Exports)
Limited or any of its affiliates which would affect the
rights of Coca Cola under the agreement.
A perusal of the various provisions contained in the
1993 Agreement shows that by this agreement Coca Cola has
agreed to grant a licence to GBC for the use of the trade
marks in respect of beverages mentioned in Annexure II to
the agreement which were to be acquired shortly by Coca
Cola. A number of provisions in the agreement relate to the
use of the said trade marks by GBC so as to ensure that such
user of the trade marks by GBC is strictly in accordance
with the common law governing user of trade marks. The 1993
Agreement was, therefore,an agreement for grant of licence
under common law for user by GBC of the trade marks which
were to be acquired by Coca Cola. The 1993 Agreement also
contains various provisions governing preparation, bottling
and sale of the beverages covered by the said trade marks.
In that sense the 1993 Agreement can be regarded as an
agreement for grant of a franchisee, whereunder GBC has been
permitted to manufacture, bottle and sell the beverages
covered by the trade marks referred to and mentioned in the
agrement in the area covered by the agreement subject to the
conditions laid down in the agreement.
We would now come to the 1994 Agreement. In this
agreement Coca Cola has been described as the Licensor and
GBC as the Licensee. In clause (a) of the preamble to the
agreement it is stated that the licensor has acquired the
trade marks specified in the schedule to the agreement by
virture of Deeds of Assignment dated November 12, 1993 in
respect of the goods specified in the said schedule. In
clause (b) of the preamble reference is made to the 1993
Agreement and it is stated that the parties have arranged
for the prepration, packaging and sale of the goods by the
Licensee and for the use of the said trade marks in relation
thereto, and may enter into further arrangements in the
future, within the scope of the 1994 Agreement. In clause
(c) of the preamble it is stated that the Licensor holds no
equity interest in the Licensee and wishes to enter into an
agreement for the use of the said trade marks on a purely
contractual basis. Thereafter, the agreement provides in
paragraph 1 for grant of a non-exclusive license by the
Licensor to the Licensee to use the said trade marks in
relation to goods prepared by or for the Licensee from
concentrate and/or syrup supplied by the Licensor or its
nominee and prepared and packaged or dispensed in accordance
with standards, specifications, formulae, processes and
instruction, furnished or approved by the Licensor from time
to time and so long as such goods are manufactured within
such territory of India and in such bottles or other
containers as shall be approved by the Licensor from time to
time. In paragraph 2 of the agreement it is provided that
the Licensor and the Licensee shall make application to the
Registrar of Trade Marks under the Act or any statutory
modification on enactment thereto or thereof for the time
being in force to procure the registration of the Licensee
as a registered user of the said trade marks as aforesaid as
soon as the said trade marks are registered and shall sign
and execute all such documents as are reasonably proper and
necessary to secure such registration and for any change
thereof in the future. In paragraph 3 the License has
undertaken to prepare and package or dispense the said goods
strictly in accordance with standars, specifications,
formulae, processes and instructions furnished or approved
by the Licensor from time to time to use the said trade
marks in relation only to such goods so prepared and
packaged or dispensed and also agreed to permit the Licensor
or its authorised representative at all reasonable times to
inspect at the Licensee’s premises and elsewhere as the
Licensor may consider appropriate to implement these
convenants to ensure quality control of the said goods and
the methods of preparing, packaging or dispensing the said
goods and the Licensee will, if called upon by the Licensor
to do so, submit samples of the said goods, including
packages and the markings thereon, for the inspection,
analysis and approval of the licensor. Paragraph 4 records
the undertaking that the licensee shall not be the sole
licensee/permitted user of the said trade marks. In
paragraph 5 the Licensee has agreed that whenever the said
trade marks are used by the Licensee in relation to the
said goods, the marks shall be so described as to clearly
indicate that the trade marks are being used only by way of
permitted use. In paragraph 6 the Licensee recognises the
Licensor’s title to the said trade marks and the Licensee
agrees that it shall not at any time do or suffer to be done
any act or thing which will in any way impair the rights of
the Licensor in and to the said trade marks and the
Licensee shall not acquire and shall not claim any right,
title or interest in and to the said trade marks adverse to
the Licensor by virture of the licence granted under the
agreement to the Licensee or through the Licensee’s use of
the trade marks. In paragraph 7 it is provided that the
agreement shall continue in force without limit of period
but may be terminated at any time by either party upon
giving 90 days notice in writing to the other or by mutual
consent and further that in the event of either party
committing a breach of any of the provisions of the
agreement it shall be lawful for the other party by giving
30 days’ notice in writing to terminate the agreement. In
paragraph 8 the Licensee convenants that upon any amendments
that the Licensor may request the Licensee to execute for
the purpose of applying for variation or cancellation of the
entry of the Licensee as a registered user of the said trade
marks and that in the event of cancellation, the Licensee
will not make any further use of the said trade marks.
A perusal of the provisions contained in the 1994
Agreement, more particularly paragraph 2 and 8, indicates
that the said agreement has been executed with a view to
comply with the requirements of the Act and the Rules for
registration of GBC as the registered user of the trade
marks specified in the Schedule to the agreement which had
been acquired by Coca Cola. This agreement has been executed
as per the requirements of Rule 83 of the Rules read with
sub-clauses (a) to (d) of clauses (ii) of sub-section (1) of
section 49. This is evident from paragraphs 1, 3, 4, 5, and
6 which contain partculars referable to sub-clauses (a), (b)
and (c) and paragraph 7 which contains partculars referable
to sub-clause (d) of clause (ii) of sub-section (1) of
section 49. The 1994 Agreement must, therefore, be treated
as an agreement for registration of GBC as a registered user
as contemplated by Section 49 of the Act. In other word’s
1994 Agreement is a statutory agreement which is required to
be executed under Section 49 of the Act read with Rule 83 of
the Rules for registration of GBC as a registered user of
the trade marks held by Coca Cola. It is true that
provisions similiar to these contained in 1994 Agreement are
also contained in the 1993 Agreement. But that is so because
a licence to use a trade mark in common law can only be
granted subject to certain limitations which are akin to the
requirements for an agreement for registered user under the
Act. But, at the same time, the 1993 Agreement is much wider
in its amplitude than the 1994 Agreement in the sense that
the 1993 Agreement includes various terms regulating the
exercise of the right of franchise that has been granted by
Coca Cola to GBC in the matter of the manufacturing,
bottling and selling of the beverages which provisions are
not found in the 1994 Agreement. The 1994 Agreement canot be
construed as wiping out the said terms and conditions
regarding exercise of franchise granted by Coca Cola to GBC
as contained in the 1993 Agreement. In this context,
reference may also be made to paragraph 25 of the 1993
Agreement which contains an express provisions for
superseding all prior contracts/agreements or commitments
either written or oral. No similar provision regarding the
supersession of the 1993 Agreement is contained in the 1994
Agreement. We are, therefore, of the opinion that the 1994
Agreement cannot be construed as supersending the 1993
Agreement and the learned single Judge and the Division
Bench of the High Court have rightly rejected the contention
urged on behalf of GBC that 1993 Agreement was superseded by
the 1994 Agreement.
Shri Shanti Bhushan, the learned senior counsel
appering for the appellants, however, laid emphasis on the
alternative submission that the period of notice for
terminating the agreement as contained in paragraph 21 of
the 1993 Agreement was reduced by mutual consent from one
year to 90 days’by paragraph 7 of the 1994 Agreement. We
find it difficult to accept this contention. It is no doubt
true that pragraph 21 of the 1993 Agreement enables the
termination period to be reduced by mutual consent in
writing between.Coca Cola and GBC. There is, howecer, no
such agreemdnt which expressly reduces the daid termination
period under paragraph 21 of the 1993 Agreement. What is
suggested is that paragraph 7 of the 1994 Agreement. What is
suggested is that poaragraph 7 of the 1994 Agreement is such
an agreement which, by implication, reduces the termination
period prescribed in paragraph 21 of the 1993 Agreement.
Since we are of the view that the nature and scope of the
two agreements , i.e., 1993 Agreement and 1994 Agreement,
are not the same and that while the 1993 Agreement is an
Agreement for grant of licence in common law and the 1994
Agreement is executed as per the reguirements of the Act
and the Rules for the purpose of registration of user, GBC
as registered user of the trade marks under the Act, clause7
of the 1994 Agreement has to be confined tin its application
to that agreement only and it cannot be construed as having
modified the termination period contained in paragraph 21 of
the 1993 Agreement. Moreover, papragraph 21 of the 1993
Agreement requires that reduction of the termination period
has to be by mutual consent of both the parties, viz., Coca
Cola and GBC. Mutual consent postulates consensus ad idem
between the parties. There is no material on record to show
that there was such a consensus ad idem between Coca Cola
and GBC regarding reducing the termination period for the
notice under paragraph 21 of the 1993 Agreement. The notice
dated January 25, 1995 that was given by GBC to Coca Cola
does not lend support to the case of the appellants. In the
said notice it is stated:
“without prejudice to our contentions
that the so called Licence Agreement
dated September 20, 1993 (herein `the
Livense Agreement’) stands replaced by
the Trade Mark License Agreement and/or
that the temination period under the
License Agreement in any event stands
reduced to 90 days ‘ please treat
termination notice also under clause 21
of the License Agreement.”
In the said notice, it is not stated that the parties
had mutually agreed to reduce the termination period from
one year to 90 days by the 1994 Agreement. What is stated in
the notice is the contention of GBC that the 1993 Agreement
is replaced by the 1994 Agreement and that in any event the
limitation period had been reduced to 90 days. If it was
mutualy agreed by Coca Cola and GBC that the termination
period for notice under paragraph 21 of the 1993 Agreement
is being reduced from one year tp 90 days by the 1994
Agreement, there was no reason why GBC would not have
mentioned about the said mutual understanding in the notice
dated January 25, 1995. The fact that there is no mention
about such mutual understanding in the notice dated January
25, 1995. and what is stated in the said notice about
reduction of the termination period of thenotice is by way
of contention of GBC negatives the case put forward by the
appellants that the termination period for the notice under
paragraph 21 of the 1993 Agreement had been reduced from one
year to 90 days. it must, therefore, be held that the 1993
Agreement can be terminated only by giving a notice of one
year as required by paragraph 21 of the said agreement. The
Question whether the notice dated january 25, 1995 can be
treated as a notice terminating the 1993 Agreement on the
expiry of period of one year from the date the said notice
has not been examined by the High Court. we do not proposes
to go into the same and leave it to the High Court to deal
with it, if raised. For the present, we will proceed on the
basis that the 1993 Agreement subsists and it does not stand
terminated on the expiry of 90 days from the date of notice
dated January 25, 1995.
We may now examine the submission of Shri Shanti
Bhushan that the negative stipulation contained in paragraoh
14 of the 1993 Agreement, being in restraint of trade, is
void in view of the provisions of Section 27 of the Indian
Contract Act, 1872. For that purpose, it is necessary to
consider whether and, if so, to what extent the law in India
differs from trhe common law in England.
Under the common law in England a man is entitled to
exercise any lawful trade or calling as and where he wills.
The law has always regarded jealoulay any interference with
trade, even at the risk of interference with freedom of
contract, as it is public policy to opposse all restraints
uopn liberty of individual action which are injurious to the
interests oif the State. A person may be restrained from
carrying in his trade by reason of an agreement voluntarilu
entered into by him with that object and in such a case tha
general principle of freedom of trade must be applied with
due regard to the principles that public policy requires for
persons of full age and understanding the utmost freedom to
contract. Traditionally the doctrine of restraint of trade
applied to covenants whereby an employee undertakes not to
compete with his employer after leaving the employer’s
service and covenants by which a trader who has sold his
business agrees not thereafter to compete with the purchaser
of the business. The doctrine is, however, not confined in
its application to these two categories but covenants
falling in these two categories are always aubjected to the
test or reasonableness. Since the doctrine of restrint of
trade is based on public policy its application has been
influenced by changing views of what is desirable in the
public interest. The decisions on public policy are subject
to change and development with the change and development
of trade and the means of communications and the evolution
of enconimic thought. The general principle once applicable
to agreements in restraint of trade has consequently been
considerbly modified by later decisions in England. In the
earliest times all contracts in restraint of trade, whether
general or partial, were void. The severity of this
principle was gradually relaxed, and it became the rule that
a partial restraint might be good if reasonable, although a
general restraint was of necessity void. The distinction
between general and partial restraint was subsequently
repudiated and the rule now is that the restraints, whether
general or partial, may be good if they are reasonable and
any restraint on the freedom of contact must be shown to be
reasonably necessary for the purpose of freedom of trade. A
covenant in restraint of trade must be reasonable with
reference to the public policy and it must also be
reasonably necerssary for the protection of the interest of
the covenantee and regard must be had to the interests of
the covenantee and regard must be had to the interests of
the covenantor. Contracts in restraint of trade are prima
facie void and the onus of proof is on the party supporting
the contract to shoe that the restraint goes no further than
is reasonably necesary top rpotect the interest of the
covenantee and if this onus is discharged the onus of
showing that the restraint is nevertheless injurieous to the
public is on the party attacking the contract. The court has
to decide, as a matter of law, (i) whether a contract is or
is not in restraint of trader, and (ii) whether, if in
restraint of trade, it is reasonable. The court takes a far
stricter and less favourable view of covenants entered into
between employer and employee than it does of similar
covenants between vendor and purchaser or in partnership
agreements, and accordingly a restraint may be unreasonable
as between employer and employee which would be reasonable
as between the vendor and purchaser of a business. [See :
Halsbury’s Laws of England, 4th ?Edn., Vol. 47, paragraphs 9
to 26; N.S. Golikari V. Century Spuinning Co., 1967 (2) SCR
378 at PP. 384_85]. Instead of segregating two questions,
(i) whether the contract is in restraint of trade,(ii)
whether, if so, it is “reasonable,” the courts have often
fused the two by asking whether the contract is in “undue
restraint of trade” or by a compound finding that it is not
satisfied that this contract is really in restraint of trade
at all but, if it is, it is reasonable. [See: Esso Petroleum
Co. Ltd. V. Harper’s Garage (Stourport)Ltd., 1968 Ac 269 at
p. 331 Lord Wilberforcel].
In India agreements in restraint of trade are govrned
by Section 27 of the Indian Contract Act which provides as
follows:
“Section 27. Every agreement by which
any one is restrained from exercising a
lawful profession, trade or business of
any kind, is to that extent void.
Exception 1.- One who sells the goodwill
of a business may agree with the buyer
to refrain from carrying on a similar
business, within specified local limits,
so long as the buyer, or any person
deriving title to the goodwill from him,
carries on a like business therein:
Provided that such limits appear to the
Court reasonable, regard being had to
the nature of the business.”
The said provision was lifted from Hon.David D. Field’s
Draft Code for New York which was based upon the old English
doctrine of restraint of trade, as prevailing in ancient
times. The said provision wa, however, never applied times.
The said provision was, however, never applied in New York.
The adoption of this provision has been severly criticised
by Sir Frederick Pollock who has observed that “the law of
India is tied down by the language of the section to the
principle, now exploded in England, of a hard and fast rule
qualified by strictly limited exceptions.” While construing
the provisions of Section 27 the High Courts in India have
held that neither the test of reasonableness not the
principle that the restraint beoing partial or reasobale are
applicable to a case governed by section 27 of the Contract
Act, unless it falls within the exception. The Law
Commission in its Thirteenth Report has recommended that the
provision should be suitably amended to allow such
restrictions and all contracts in restraint or trade,
generaql or partial, as were reasonablke, in the interest of
the parties as well as of the public. No action has,
however, been taken by Parliament on the said
recommendation. [See: Superintendence Company of India (P)
Ltd. V. Krishan Murgai, 1980 (3) SCR 1278, at pp.1291, 1296-
98, per A.P.Sen J.J.
We do not propose to go into the question whether
reasonableness of restraqint is outside the purview of
section 27 of the Contract Act and for the purpose of the
present case we will proceed on the basis that an enquiry
into reasonableness of the restraint is not envisaged by
Section 27. On that view instead of being required to
consider two questions as in England, the courts in India
have only to consider the question whether the contract is
or is not in restraint of trade. It is, therefore, necessary
to examine whether the negative stipulation contained in
paragraph 14 of the 1993 Agreement can be regarded as in
restraint of trade. This involves the question, what is
meant by a contract in restraint of trade?
In Attorney-General of the Commonwealth of Australia v.
Adelaids Steamship Co.Ltd., 1913 Ac 781, Lord Parker has
said:
“Monopolies and contracts in restraint
of trade have this in common, that they
both, if enforcved, involve a derogation
from the common law right in virtue of
which any member of the Community may
exercise any trade or business he
pleases and in such manner as he thinks
best in his own interests.” [p.794]
Referring to these observations Lord Reid in Esso Petroleum
Co. Ltd. (supra) has said:
“But that cannot have been intended to
be a definition : all contracts in
restraint of trade involve such a
derogation but not all contracts
involving such a derogation are
contracts in restraint of trade.
Whenever a man agrees to do something
over a period he thereby puts it wholly
or partly out of his power to ‘exercise
any trade or business he pleases’ during
that period. He may enter into a
contract of service or may agree to give
his exclusive service to another: then
during the period of the contract he is
not entitled to engage in other business
activities. But no one has ever
suggested that such contracts are in
restraint of trade except in very
unusual circumstances.”[p.294]
In McEllistrim v. Ballymacelligott co-operative
Agricultural and Dairy Society Ltd., 1919 Ac 548, Lord
Finlay after referring to the principle enumerated in
Herbert Morris Ltd v. Saxelby, 1916 (1) Ac 688, that public
policy requires that every man shall be at liberty to work
for himself and shall not be at liberty to deprive himself
or the State of his labour, skill or talent by every
contract that he enters into, had stated “This is equally
aplicabl;e to the right to sell his goods.” Douibting the
correctness of this statement Lord Reid in Esso POetroleum
Co. Ltd. (supra) has said:
“It would seem to mean that every
contract by which a man (or a company)
agrees to sell his whole output (or even
half of it) for any future period to the
other party to the contract is a
contract in restraint of trade because
it restricts his liberty to sell as he
pleases, and is therefore unenforceable
unless his agreement can be justified as
being reasonable. There must have been
many ordinary commercial contracts of
that kind in the past but no one has
ever suggersted that they were in
restraint of trade.” [p.296]
In Petrfina (Great Britain) Ltd. v. Martin, 1966 ch.
146, Diplock L.J. (as the learned Law Lord then was), in the
Court of Appeal, has said:
“A contract in restraint of trade is one
in which a party (the convenantor)
agrees with any other party (the
convenantee) to restrict his lberty in
the future to carry on trade with other
persons not parties to the contract in
such manner as he cjhooses.”[p.180]
In the same case, Lord denning M.R. has
said:
“Every member of the community is
entitled to carry on any trade or
business be chooses and in such manner
as he thinks most desirable in his own
interests, so long as he does nothing
unlawful: with the consequence that any
contract which interferes with the free
exercise of his trade or business, by
restricting him in the work he may do
for others, or the arrangements which he
may make with others, is a contract in
restraint or tyrade. It is invalid
unless it is reasonable as between the
parties and not injurious to the public
interest.”
After referring to these observations,
Lord Morris in Esso Petroleum Co. Ltd.
(supra) has said:
These are helpful expositions provided
they are used reationally and not too
literally. Thus if A made a contract
under which he willingly agreed to serve
B on reasonable terms for a few years
and to give his whole working time to B,
it would be surprising inmdeed if it
were sought to descrisbe the contract as
being in restaint of trade. In fact such
a contract would likely be for the
advancement of the trade.” [p.307]
These observations indicate that a
stipulation in a contract which is
intended for advancement of trade shall
not be regarded as being in restraint of
trade. In Esso Petroleum Co.Ltd. (supra)
the question whether the agreement under
consideration was a mere agreement for
the promotion of trade and not an
agreement in restraint of it, was thus
answered by Lord Pearce:
Somewhere there must be a line between
those contracts which are in restraint
of trade and whose reasonableness can,
therefore, be considered by the courts
and those contracts which merely
regulate the normal commercial
realations between the parties and are,
therefore, free from doctrine.” [p.327]
“The doctrine does not apply to ordinary
commercial contracts for the regulation
and promotion of trade during the
existence of the contract, provided that
any prevention of work outside the
contract, viewed as a whole, is directed
towards the absorption of the parties’
servives and not their sterilisation.
Sole agencies are a normal and necessary
incident of commerce and those who
desire the benefits of a sole agency
must deny themselves the opportunities
of other agencies.”[p.328]
In the same case, lord wilberforce has
observed:
“It is not to be supposed, or
encouraged, that a bare allegation that
a contract limits a trader’s freedom of
action exposes a party suing on it to
the burden of justification. There will
always be certain general categories of
contracts as to which it can be said,
with some degree of certaintly, that the
‘doctrine’ does or does not apply to
them. Positively, there are likely to be
certain sensitive areas as to which the
law will require in every case the test
or reasonableness to be passed : such an
area has long been and still is that of
contracts between employer and employee
as regards the period after the
employment has ceased. Negatively, and
it is this that concerns us here, there
will be types of contract as to which
the law should be prepared to say with
some confidence that they do not enter
into the field of restraint of trade at
all.” [p.332]
“How, then, can such contracts be defined or at least
identified? No exhaustive test can be stated-probably np
precise non-exhaustive test. But the development of the law
does seem to show that judge have been able to dispense from
the necessity of justification under a public p[olicy test
of reasonableness such contracts or provisions of contracts
as, under contemporary conditions, may be found to have
passed into the accepted and normal currency of commercial
or contractual or conveyancing relations.”[pp.332-33]
There is a growing trend to regulate distribution of
goods and services through franchise agreements providing
for grant of franchies by the franchiser on certain terms
and conditions to the franchiseee. Such agreements often
incorp;orate a conditionm that the francxhisee shall not
deal with competing goods. Such a condition restricting the
right of the franchisee to deal with competing goods is for
facilitating the distribution of the goods of the franchiser
and it cannot be regarded as in restraint of trade.
If the negative stipulation contained in paragraph 14
of the 1993 Agreement is considered in the light of the
observations in Esso Petroleum Co. Ltd. (supra), it will be
found that the 1993 Agreement is an agreement for grant of
franchise by Coca Cola to GBC to manufacture, bottle, sell
and distribute the various beverages for which the trade
marks were acquired by Coca Cola. The 1993 Agreement is thus
a commercial agreement whereunder both the parties have
undertaken obligations for promoting the trade in beverages
for their mutual benefit. The purpose underlying paragraph
14 of the said agreement is to promote the trade and the
negative stipulation under challenge seeks to achieve the
said purpose by requiring GBC to wholeheartedlky apply to
promoting the sale of the products of Coca /Cola. In that
contextr, it is also relevant to mention that the said
negative stipulation operates only during the period the
agreement is in operation because of the express use of the
words “during the subsistenance of this agreement including
the period of one year as contemplated in paragraph 21,” in
paragraph 14. Except in cases where the contact is wholly
one sided, normally the doctrine of restrain of trade is not
attracted in cases where therestriction is to operate during
the period the contract is substriction is to operate during
the period the contract is subsisting and it applies in
respect of a restriction which operates after the
termination of the contract. it has been so held by this
Court in N.S. Golikari (supra) wherein it has been said:
“The result of the above discussion is
that considerations against restrictive
covenants are different in cases where
the restriction is to apply during the
period after the termination of the
contract than those in cases where it is
to operate during the period of the
contracts. Negative covenants operative
during the period of the contract of
employment when the employee is bound to
serve his employer exclusively are
generally not regarded as restraint of
trade and therefore do not fall under
Section 27 of the Contract Act. A
negative covenant that the employee
would not engage himself employed by any
other master for whom he would perform
similar or substantially similar duties
is not therefore a restraint of trade
unless the contract as aforesaid is
unconscionable opr excessively harsh or
unreasonable or one sided as in the case
of W.H. Milsted and Son Ltd.” [p.389]
Similarly, in Superintendence Company (supra) A.P. Sen
J., in his concurring judgement, has said that “the doctrine
of restraint of trade never applied during the continuance
of a contract of employment; it applies only when the
contract comes to an end.”(p.1289)
Shri Shanti Bhushan has submitted that these
observations must be confined only to contracts of
employment and that this principle does not apply to other
contracts. We are unable to agree. We find no rational basis
for confining this principle to a contract for employment
and excluding its application to other contracts. The
undelying principle governing contracxts in restraint of
trade is the same and as a matter of fact the courts take a
more restricted and less favourable view in respect of a
covenant entered into between an employer and an employee as
compared to a covenant between a vendor and a purchaser or
partnership agreements. We may refer to the following
observations of Lord Pearce in Esso Petroleum (supra);
“We a contract only ties the parties
during the continuance of the contract,
and the negative ties are only those
which are incidental and normal to the
positive commercial arrangements at
which the contract aims, even though
those ties exclude all dealings with
others, there is no restrine and no
question of reasonablness arises. If ,
however, the contract ties the trading
activities od either party after its
question of reasonablness arises.”
[p.328]
Since the negatice stipulation in paragraph 14 of the
1993 Agreement is confined in its application to the period
of subsistence of the agreement and the restriction imposed
therein is operative only during the period the 1993
Agreement is subsisting, the said stipulation cannot be held
to be in restraint of trade so as to attract the bar of
section 27 of the Contract Act. We are, therefore, unable to
uphold the contention of Shri Shanti Bhushan that the
negative stipulation contained in paragraph 14 of the 1993
Agreement, being in restraint of trade, is void under
Section 27 of the Contract Act.
Shri Shanti Bhushan has urged that even if the negative
stipulation contained in paragraph 14 of the 1993 Agreement
is found to be valid it is confined in is application to the
preceding part of paragraph 14 which reads as under:
“The Bottlker recognises that is is
imperative that the Bottler must
maintain with full mvigion the
products/beverages for safeguarding the
interest of the consuming public and
thus maintaining the goodwill of the
company.”
Laying emphasis on the wpord”As such” in the negative
stipulation, Shri Shanti Bhushan has contended that the
negative stipulation must be read as relatable to this part
of paragraph 14 which means that the said stipulation can be
invoked only if GBC is not able to maintain the continued
supply of the products and beverages to Coca Cola. According
to Shri Shanti Bhushan such an eventuality has not arisen in
view of the fact Coca Cola has refused tosupply to GBC
essence/syrups and/or other materials which are required for
preparing the products and beverages. The submission of Shri
Shanti Bhushan is that in these circumstances the negative
stipulation contained in paragraph 14 cannot be invoked by
coca Cola.
Shri T.R. Andhyarujina, the learned senior counsel
appearing for Coca Cola, has, on the other hand, pointed out
that in paragraph 14 the part commencing with the words “As
such” is independent of the preceding sub-paragraph and is
not a part of the preceding sub-paragraph referred to above
and that the negative stipulation must be read with all the
earlier sub-paragraphs contained in paragraph 14 and its
application cannot be confined to the sub-paragraph
immediately preceding the wqord “As such” as contended by
Shri shanti Bhushan. We are in agreement with the said
submission of Shri andhyarujina. In our opinion, the
negative stipulation contained at the end of paragraph 14
must be read as applicable to all the sub-oparagraphs of
paragrpah 14 preceding the said stipulation and, if it is
thus read. it is apparent that the purpose of the negative
stipulation in paragraph 14 is that GBC will work vigorously
and deligently to promoite and solicit the sale of the
products/beverages produced under the trade marks of Coca
Cola as mentioned in the first sub-paragraph of paragraph
14. This would not be possible if GBC were to manufacture,
bottle, sell, deal or otherwqise be concerned with the
products, beverages or any other brands or trade marks/trade
names.
We are, therefore, unable to agree with Shri Shanti
Bhushan that the negative stipulation contained in paragraph
14 of the 1`993 Agreement must be confined in its
application to the immediately preceding sub-paragraph of
paragraph 14 of the 1993 Agreement.
Shri Shanti Bhushan has next contended that clause (b)
of paragraph 19 of the 1993 Agreement wqhich imposes a
restraint in the matter of transfer of the shares of GBC is
void inasmuch as transfer of shares of a company registere
under the Companie\s Act is governed by Section 82 of the
said right to transfer the shares of a company. Shri Shanti
Bhushan has placed reliance on the decision of this Court in
V.B. Rangaraj v. V.B. Gopalakrishnan & Ors., 1992 (1) SCC
160, and has submitted that if clause (b) of paragraph 19 is
held to be void then Coca Cola cannot invoke the concluding
part of paragraph 19 and dis-continue the supply of
essences/syrup and/or other materials to GBC while the 1993
Agreement susbsiste. The relevant part of paragraph 19 is as
under:
“Paragraph 19. Upon the happening of any
one or more of the folloowing events in
additon to all have the right to cancel
and terminate this Agreement forthwith
by written notice to the Bottler.
(a) x x x x
(b) Should Bottler be other than a
natural person, no charge shall be m,ade
in its structure nor shall any transfer
be made of any of its stock, share or
interest or other indicia of ownership
which would result in an effective
transfer of control without the prior
express written consent of the Company.
The Company reserves the right to
terminate this Agreement at eill for
failure to notify it of suchj change or
transfer.
(c) x x x
(d) x x x
(e) x x x
Upon the happening of any one or more of
the foregoing events, the Company shall
also have the right to discontinue
suplying the Bottler with essence/syrup
and/or other materials for such length
of time as the Company may in its sole
judgm,ent deem necessaary without
thereby cancelling or prejudicing the
Company’s right to cancel or terminate
the AGReement for the said cause or for
any one or more other cause or causes.”
Clause (b) does not appear to be very happily worded.
Since the parties to the 1993 Agreement were Coca Cola and
GBC only and the shareholders of GBC were not parties to the
agreement, it cannot have any binding force on the
shareholders of GBC. Clause (b) of paragraph 19 cannot,
therefore, be constructed as placing any restraint on the
right of the shareholders to transfer their shares. It can
only be construed to mean that in the event of the
shareholders of GBC. Clause (b) of paragraph 19 cannot,
therefore, be construed as placing any restraint on the
right of the shareholders to transfer their shares. It can
only be construed to mean that in the even of the
shareholders of GBC transferring their shares and such
transfer resulting in an effective transfer of control of
GBC, Coca Cola has a right to terminate the agreement and
even without terminating the agreement Coca Cola has the
additional right to dis-continue supplying GBC with
essence/syrup and/or other materials for such length of time
as Coca Cola may in its sole judgment deem necessary without
thereby cancelling or pejudicing Coca Cola’s right to cancel
or terminate the Agreement for the said cause or for any one
or more other cause or causes. In other words, in the event
of effective transfer of control of GBC as a result of
transfer of shares by the shareholders, apart from its right
to cancel the agreement Coca Cola has also been goiven the
right to cancel the agreement Coca Cola has also been given
the right to dis-continue the supply of essences/syrup
and/or other materials to GBC. This clause governs the
relationship between Coca Cola and GBC inter se and it
cannot be constued as placing a restraint on the right of
the shareholders to transfer their shares. V.B. Rangaraj
(Supra) on which reliance has been placed by Shri Shanti
Bhushan has, therefore, nop application.
Shri Shanti Bhushan has next urged that in the facts
and circumstances of the case the High Court was not
justified, in law, in issuing an interim injuction enforcing
the negative stipulation contained in paragraph 14 of the
1993 Agreement. The submission of Shri Shanti Bhushan is
that as a result of the said injuction and dis-continuance
by Coca Cola of the supply of essence/syrup and/or other
materials by exercising oits right under paragraph 19 of the
1993 Agreement, the plants of GBC at Ahmedabad and Rajkot
would remain idle and a large number of workers who are
employed in those plants would be rendered unemployed and
GBC would be saddled with heavy liabilities leading to its
closure and therby resulting in irreparable loss which
cannot be compenbsated in the event of suit filed by Coca
Cola being dismissed. Shri Shanti Bhushan has also submitted
the on the other hand Coca Cola would not suffer any loss
because it has already made alternative arrangements for
supply of its products in areas covered by both the
Agreements between GBC and Coca Cola by arranging supply of
their products from other licensees in the neighbouring
areas. Shri Shanti Bhushan has placed reliance on the
decisions of Gujarat high Court in M/s Lalbhai Dalpatbhai &
Co. v. Chittaranjan Chandulal Pandya, AIR 1966 Guj. 189,and
that of Delhi High Court in Modern food Industries India
Ltd. v. M/s Shri Krishna Bottlers(p) Ltd, AIR 1984 Delhi
119, as well as on the observations of Lord Diplock in
Amrican cynamid Co. v. Ethicon Ltd., 1975 Ac 396.
In the matter of grant of injuction, the p[ractice in
Enland is that where a contract is negative in nature, or
contains an express nagative stipulation, breach of it may
be restrained by injuction and injuction is normally granted
as a matter of course, even though the redy is equitable and
thus in principle a discretionary one and a defendant cannot
resist an injuction simply on the ground that observance of
the contract is burdensome to him and its breach would cause
little or no prejudice to the plaintiff and that breach of
an express negative stipulation can be restrained even
though the plaintiff cannot show that the breach will cause
him any loss. [See : Chitty on Contracts, 27th Edn., Vol.1,
General Principles, para 27-040 at p.1310; Halsbury’s laws
of England, 4th Edn. Vol. 24, para 992]. In India section 42
of the specific Relief Act, 1963 prescribes that
notwithstanding anything contained in cluse (e) of Section
41, where a contract copmptises an affirmative agreement,
express or implied, not to do a certain act, the
circumstances that the court is unable to compel specific
performance of the affirmative agreeement shall not preclude
it from granting an injuction to perform the negative
agreement. This is subject to the proviso that the plantiff
has not failed to perform the contract so far as it is
binding on him. The Court is, however, not bound to grant an
injuction in every case and an injuction to enforce a
negative covenant would be refused if it would indirectly
compel the employee either to idleness or to serve the
employer. [See: Ethrman v. Bartholomew. (1927) W.N. 233;
N.S.Golikari (supra) at p. 389].
The grant of an interlocutory injuction during the
perdency of legal proceedings is a matter requiring the
exercise of discretion of the court. While exercising the
descretion the court. While exercising the discretion the
court applies the following tests – (i) whether the
plaintiff has a prima facie case; (ii) whether the balance
of convenience is in favour of the plaintiff; and (iii)
whether the pliantiff would suffer an irreparable injury if
his prayer for interlocutory injuction is disallowed. The
decision whether or not to grant an onterlocutory injuction
has to be taken at a time when the existence of the leagal
right assailed by the plaintiff and its alleged violation
are both contested and uncertain and its alleged violation
are both contested and uncertain and remain uncertain till
they are established at the trial on evidence. Relief by way
of interlocutory injuction is granted to mitigate the risk
of injustice to the plaintiff during the period before that
uncertainty could be resolved. The object of the
interlocutory injuction is to protect the plaintiff against
injury by violation of his right for which he could not be
adequately compensated in damages recoverable in the action
if the uncertainty were resolved in his favour at the trial.
The need for such protection has, however, to be weghed
against the corresponding need of the defendant to be
protected against injury resulting from his having been
prevented from exercisising his own legal rights for which
he could not be adequately compensated. The court must weigh
one need against another and determine where the ‘balance of
convenience’ lies. [see:Wander Ltd.& Anr. v,. Antox India P.
Ltd., 1990 (suoo) Scc 727 at pp. 731-32]. In order to
protect the defendent whiloe granting an interlocutory
injuction in his favour the Court can require the plaintiff
to furnish an undertaking so that the defendent can be
adequately compensated if the uncertainty were resolved in
his favour at the trial.
Shri Shanti Bhushan has contended that Coca Cola can be
adequately compensated for the loss caused to it by award of
damages in the event of it succeeding in the suit and that
if the impugned injuction granted by the High Court is not
reversed the loss suffered by GBC would be irreparable and
incalculable inasmuch as the plants at Ahmedabad and Rajkot
would remain idle and large number of workmen employed in
those plants would be rendered unemployed and it may lead to
closere of the undertaking of GBC. Shri Nariman and Shri
Andhyarujina, on the other hand, have submitted that Pepsi
in taking over GBC, took a calculated commercial risk
knowing fully well the effect of negative convenant
contained in the 1993 Agreement and that if GBC is not
restrained from manufacturing and selling Pepsi products for
the stipulated period of one year, the goodwill and the
market share which Coca Cola has for its own products would
be effectively destroyed by a rival which has captured GBC
and that damages would not be an adequate compensation for
the injury which would be irreparable and that in respect of
the loss that may be sustained by it, GBC would be protected
by the undertaking that is required to be given by Coca Cola
under Rule 148 of the Bombay High Court (Original Side)
Rules, 1980.
We are inclined to agree with the submission of Shrki
nariman and Shri Andhyarujina. Having regard to the negative
covenant contained in paragraph 14 of the 1993 Agrreement
which is subsisting, Coca Cola has made out a prima facie
case for grant of an injuction. As regards the other two
requirements for grant of interlocutory injuction, viz.,
balance of convenience and orreparable injury, we find that
as a result of the transfer of shares of GBC and respondent
No.7 in favour of the appellants Nos, 2 5, the plants of GBC
at Ahmedabad and Rajkot are now under the control of Pepsi.
The 1993 Agreements were entered into by Coca Cola to ensure
that the plants of GBC at Ahmedabad and Rajkot are available
for manufacture of the beverages bearing the trade marks
that were acquired by Coca Cola. The negative stipulation in
p[aragraph 14 was inserted in order to preclude the said
plants being used for manufacture of products of opther
manufacturers during the period the 1993 Agreements were
subsisting. Pepsi by taking control over GBC sought to
achievce a dual purpose, viz., reduce the production
capacity of beverage bearing the trade marks held by Coca
Cola by denying use of the plants of GBC at Ahmedabad and
Rajkot for manufacture of those products and to increase the
production capacity of Pepsi products by making available
these plants for manufacture of Pepsi products. As a result
of the interim injuction granted by the High Court the two
plants of GBC cannot be used for manufacture of Pepsi
products till January 25, 1996 and the effort of Pepsi to
gain an advantage over Coca Cola by reducing the
availability of products of Coca Cola and increasing the
availability of Pepsi products in the areas covered by the
1993 Agreement has been frustrated to a certain extent
inasmuch as the increase in the availability of Pepsi
products has been prevented. In the absence of such an order
Pepsi would have been free to use the plants of GBC at
Ahmedabad and Rajkot for the manufacture of their products.
This wqouild have resulted in reduction of the share of Coca
Cola in the Beverages m,aket and the resultant loss in
goodwill and profits could not be adequately compensated by
damages. In so far as loss that may be caused to GBC as a
result of grant of interim injuction, we are of the view
that the loss that may be sustained by GBC can be assessed
and GBC can be compensated by award of damages which can be
recovered from coca Cola in view of the undertaking that
Coca Cola is required to give under Rule 148 of the Bombay
High Court (Original Side) Rules, 1980. It has not been
suggested that Coca Cola do not have the financial capacity
to pay the amount that is found payable.
The interim injuction granted by the High Court has
been assailed by the appellants on the ground that as a
result of refusal by Coca Cola to continue with the supply
of essence/syrup and/or materials the bottling plants of GBC
at Ahmedabad and Rajkot would remain idle and a large number
of workmen who were employed in the said plants would be
rendered unemployed. We cannot lose sight of the fact that
this complaint is being made by Pepsi through the mouth of
the appellants. it is difficult to appreciate how Pepsi can
ask coca Cola to Part with oits trade secrets to its
business rival by supplying the essence.syrup etc. for which
Coca Cola holds the trade marks to
GBC which is under effective control of Pepsi. Pepsi took a
deliberate decision yto take over GBCX with the full
knowledge of the terms of the 1993 Agreement. It did so with
a view to paralyse the operations of Coca Cola in that
region and promote its products . In view of the negative
stipulation contained in paragraph 14 of the 1993 Agreement
which has been enforced by the High Court, Pepsi has not
succeeded in this effort and it cannot assail the interim
injuction granted by the High Court by invoking the plight
of the workmen who are employed in the bottling plants of
GBC.
In this context, it would be relevant to mention that
in the instant case GBCX had approached the High Court for
the injuction order, granted earlier, to be vacanted. UNder
order 39 of the Code of Civil Procedure, jurisdiction of the
Court to interfere with an order of interlocutory or
temporary injuction is purely equitable and, therefore, the
Court, on being approached, will, apart from other
considerations, also look to the conduct of the party
invoking the jurisdiction of the Court, and may refuse to
interfere unless his conduct was free from blame. Since the
relkief is sholly equitable in nature, the party invoking
the jurisdictionb of the court has tro show that he himselff
was not at fault and that he himself was not responsible for
bringing about the state of things complained of and that he
was not unfair or inequitable in his dealings with the
partyh against whom he was seeking relief. His conduct
should be fair and honest. These considerations will arise
not only in respect of the person who seeks an order of
injuction under order 39 Rule 1 or Rule 2 of the Code of
Civil Procedure, but also in respect of the party
approaching the Court for vocating the ad-interim or
temporary injuction order already granted in the pending
suit or proceedings.
Analysing the conduct of the GBC in the light of the
above principles, it will be seen that GBC, who was a party
to the 1993 Agreement, has not acted in conformity with the
terns set out in the said agreement. It was itself, Prima
facie, resposible for the breach of the agreement, as would
be evidenmt from the facts set out earlier. neither the
consent of Coca Cola was obtained for transfer of shares of
GBC not Coca Cola informed of the names of persons to whom
the shares were proposed to be transferred. coca Cola,
therefore, had the right to terminate the agreement but it
did not do so. On the contrary, GBC itself issued the notice
for terminating the agreements by giving three months notice
It is contended by Shri nariman And, in our opinion,
rightly, that the GBC, having itself acted in violation of
the terms of agreement and ahaving breached the contract,
cannot legally claim that the order or injuction be vocated
particularly as th GBC itself is primarily reponsible for
having brought about the state of things complained of by
it. Since GBC has acted in an unfair and inequitable m,anner
in its dealings with Coca Cola, there was hardly and any
occasion to vacant the injuction order and the order passed
by the Bombay High Court cannot be interferred with not even
on the ground of closure of factory, as the party
responsible, prima facie, for breach of contract cannot be
permitted to raise this grievance.
Shri Shanti bhushan has lastly urged that the interim
injuction granted by the High Court is in very wide terms
because not only GBC but also those to whom the shares have
been sold and also subsewquent trnasferees, their servants,
agents nominees, employees, subsidiary companies. controlled
companies. affiliates or associte companies or any person
acting for and on their behalfd are restrained by the
interim injuction from using the plants of GBC. It is no
doubt true that the interim injuction is widely worded to
cover the persons aforementioned but in its operation the
order only restrains them from using the plants of GBC at
Ahmedabad anbd RAjkot for manufacturing, bottling or selling
or dealing with or concerning in any manner whatsoever with
the beverages of any person till January 25, 1996, the
expiry of the period of one year from the date of notice
dated January 25, 1995. The interim injuction is thus
confined to the use of the plants at Ahmedabad and Rajkot by
any of these persons and it is in consonance with the
negative stipulation contained in paragraph 14 of the
agreement dated September 20, 1993.
For the reasons aforementioned we do not find any
infirmity in the impugned order of the high Court dated
March 31, 1995 granting an interim injuction in terms of
prayers (a) (ii) and (a) (iii) of the Notice of motion as
amended. The appeals, therefore, fail and are accordingly
dismissed. No costs.

 

 

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