2023 (9) TMI 1739 - HC - Indian Laws

Interim injunction to enforce commercial addendum's negative covenant after unilateral termination upheld; damages held inadequate, Section 42 applies

The dominant issue was whether an interim injunction could enforce a negative covenant in a commercial addendum despite unilateral termination and ... Dismissal of application filed by the Appellant/ Plaintiff under Order XXXIX Rules 1 and 2 CPC, 1908 - vacation of ex- parte ad interim order - seeking the reliefs of permanent injunction, rendition of accounts as well as damages in view of alleged infringement of the copyright owned by the Appellant/ Plaintiff in certain literary works, musical works, cinematographic films and sound recordings by the Respondents/ Defendants - HELD THAT:- This Court is of the view that the Amendment Act, 2018 introduces a paradigm shift in law regarding contractual enforcement in India. A glaring instance of the legislative shift is the amendment of Section 14 of Act, 1963 which deletes the earlier sub-clause (a) which prescribed that the contracts for the non-performance of which compensation in money was an adequate relief would not be specifically enforced, meaning thereby that the plea that a party could be compensated in monetary terms as damages for breach of the contract and resultant refusal of interim injunction on the said ground, is no longer a ground to refuse specific performance of the contract. Consequently, the Amendment Act, 2018 does away with the primacy given to damages as a relief over specific performance. It shifts the focus from the previous default remedy of award of damages for breach of contract to enforcing specific performance of contracts. This Court is of the view that by virtue of the changes brought about by the Amendment Act, 2018, the Courts will now grant specific performance unless the claim for relief is barred under limited grounds prescribed in the statute. This change is aimed at providing greater protection of contractual expectations by ensuring that a non-defaulting party can obtain the performance it bargained for. The Amendment Act, 2018 intends to discourage errant parties who may deem it more viable to breach a contract than perform it, as the cost of damages may still be less than the cost of the performance - The Amendment Act, 2018 has also brought the Indian Specific Performance Act in line with the UNIDROIT Principles of International Commercial Contracts, as it aspires to achieve harmonization in international law governing commercial contracts. In the present case there is a negative covenant (Clause 3.5) in the Addendum executed between the parties and the Appellant/ Plaintiff by way of the present appeal seeks to enforce the said negative covenant alone. Accordingly, Section 14 is inapplicable to the present case as the Appellant/ Plaintiff is not seeking specific performance of any agreement, as erroneously assumed by the learned Single Judge, but is only seeking to enforce a negative covenant - the basic fallacy underlying the impugned judgment is that the learned Single Judge took the Appellant/ Plaintiff's case to be for specific performance of either the Original Agreement or the Addendum. This Court is of the view that neither the Agreement nor the Addendum between the Appellant/ Plaintiff and Respondent No.1/ Defendant No.6 is barred by Section 27 of the Indian Contract Act, 1872 as the said Section applies to restrictions in post contract period i.e. in the present case the period after the promised term (till 30th September, 2025) of the Addendum and not after unilateral termination of a contract by one of the parties. Section 42 of Act, 1963 will be rendered nugatory if it is held that because a party has unilaterally terminated a contract prematurely, Courts cannot enforce a negative covenant - this Court is of the view that the learned Single Judge has erred in holding that since the Respondent No.1/ Defendant No.6 had terminated the contract, the negative covenant cannot be enforced. This Court is in agreement with learned Senior counsel for the Appellant/ Plaintiff that it is difficult, if not impossible, to determine the revenue from the songs that were to be sung by the Respondent No.1/Defendant No.6 under the Addendum. One song may be a super hit, whereas the other may not do well at all. Consequently, no definite amount of revenue earned from the songs can be readily ascertained. Thus rendering it impossible for this Court to ascertain the quantum of damages - this Court is of the view that both the Original Agreements and the Addendum in question preclude the Respondent No.1/ Defendant No.6 from contending that damages is an adequate remedy and shows that Respondent No.1/ Defendant No.6 is party in breach whose actions have caused losses to the Appellant/ Plaintiff. Since in the present case, the Appellant/ Plaintiff in its plaint avers that viewers in Delhi have been specifically targeted and there has been an alleged injurious effect of the same, this Court is of the view that Appellant/ Plaintiff's suit cannot be dismissed at this stage on ground of lack of territorial jurisdiction. It is open to the Respondent No.1/ Defendant No.6 to raise this defence at the trial stage. As it is the Respondent No.1/Defendant No. 6's case that fraud vitiates and invalidates the entire Original Agreement and the Addendum including the arbitration clause therein, the matter cannot be referred to arbitration - as the learned Single Judge in the impugned order has not dealt with the objection, this Court is of the view that it would not be fair and proper to dismiss the present appeal on the said ground. This Court is of the prima facie view that the agreement between the parties is not a contract between a 'Goliath & David' or an employee-employer or a manager-sportsperson contract. Rather they are commercial contracts entered into between parties with equal bargaining power and for mutual commercial benefit. Accordingly, the agreements between the parties are neither 'excessively one sided' nor they impose a 'bondage' on Respondent No.1/ Defendant No.6. Hence, the Respondent No.1/ Defendant No.6 cannot be permitted to renege his promises under the garb of a restriction allegedly violative of any law. The Amendment Act, 2018 has taken away the discretion of the Courts in granting specific performance. Altering the nature of specific relief from an exceptional rule to a general rule has been done to ensure contractual enforcement and to increase adherence to the sanctity of contracts - In any event, Courts are not precluded from granting an injunction to perform a negative covenant and the same is in no manner controlled/ affected by Section 14 of the Act, 1963. Appeal disposed off. 1. ISSUES PRESENTED AND CONSIDERED 1) Whether the agreements were 'determinable' so as to bar enforcement of the obligations sought, and whether earlier reasoning that commercial contracts are terminable by reasonable notice (even without an express clause) applied. 2) Whether Section 14 of the Specific Relief Act, 1963 barred interim injunctive relief on the ground that the arrangement was a contract of personal service, or whether the Court could enforce only a negative covenant under Section 42. 3) Whether Section 27 of the Contract Act, 1872 invalidated the restraint relied upon, particularly where enforcement was sought during the contractual term despite a unilateral termination claim. 4) Whether damages were an adequate remedy so as to justify refusal of injunction. 5) Whether the suit could be rejected at the interim stage for lack of territorial jurisdiction on the pleaded facts of online viewing/download within the forum. 6) Whether, given the pleaded defence that the agreements (including the arbitration clause) were vitiated by fraud, the dispute could be referred to arbitration. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Determinability of the agreements and effect of the 2018 shift towards stronger contractual enforcement Legal framework: The Court examined 'determinable' contracts within the meaning of Section 14(d) of the Specific Relief Act, 1963, and the effect of the Specific Relief (Amendment) Act, 2018 on contractual enforcement. Interpretation and reasoning: The Court held that the legislative shift under the 2018 amendment makes specific performance a general rule rather than an exception, thereby weakening approaches that treated damages as the default remedy and presumed easy terminability of commercial arrangements. The Court found the agreements not determinable because they contained a negative covenant and expressly denied the artist a right to terminate for the contractual term. Conclusions: The agreements were held not determinable. The Court further held that earlier Delhi decisions suggesting a presumption of terminability of commercial transactions by reasonable notice (and treating damages as generally adequate) are no longer good law to that extent, in view of the 2018 amendment's emphasis on enforcing contracts. Issue 2: Applicability of Section 14 (personal service) versus enforcement of a negative covenant under Section 42 Legal framework: The Court distinguished Section 14 and Section 41(e) (bar on injunction where the underlying contract is not specifically enforceable) from Section 42 (injunction to perform a negative agreement notwithstanding Section 41(e)), subject to the proviso that the plaintiff has not failed to perform what is binding on it. Interpretation and reasoning: The Court held the claim was not for compelling affirmative performance (e.g., creating/delivering songs), but for enforcing a negative covenant (the restriction on monetizing with third parties except in the limited circumstance specified). Therefore, the bar in Section 14 relating to personal qualifications/personal service did not control the Court's power to restrain breach of a negative covenant under Section 42. The Court identified the Single Judge's foundational error as treating the case as one of specific performance rather than negative-covenant enforcement. Conclusions: Section 14 was held inapplicable because only a negative covenant was being enforced; injunction to enforce the negative covenant was held legally permissible under Section 42, without indirectly compelling personal service. Issue 3: Section 27 (restraint of trade) and whether it bars enforcement during the contractual term after unilateral termination Legal framework: The Court examined Section 27 of the Contract Act in the context of restraints operating during the contract term versus post-contract period, and its interplay with Section 42 of the Specific Relief Act. Interpretation and reasoning: The Court held Section 27 applies to restrictions in the post-contract period-i.e., after expiry of the promised term-rather than the period after a unilateral premature termination by one party. It reasoned that treating unilateral termination as ending enforceability of negative covenants would render Section 42 nugatory. The Court also held that reliance on a precedent concerning enforcement beyond the expiry of the contract term was misplaced because that situation involved an attempted restraint after the contract had ended by efflux of time. Conclusions: The Court held the restraint sought to be enforced during the subsisting contractual term (till 30 September 2025) was not barred by Section 27, and that the Single Judge erred in refusing enforcement merely because the artist asserted termination. Issue 4: Adequacy of damages as an alternative remedy Legal framework: The Court assessed whether damages were an adequate remedy in the context of monetization/revenue from songs under the contractual arrangement, including the terms addressing injunctive relief. Interpretation and reasoning: The Court held it was difficult, if not impossible, to ascertain revenue from songs because performance varies unpredictably across platforms and over time, making damages not readily quantifiable. It rejected reliance on a liquidated damages clause because it applied only to termination by the producer, not termination by the artist; and the addendum did not provide predetermined damages. The Court also treated the addendum's clause acknowledging that damages may not be adequate and permitting injunction/specific enforcement as supporting the conclusion that damages were not an adequate substitute. Conclusions: Damages were held not an adequate remedy, supporting grant of injunctive relief to protect the contractual/copyright-related interests during the term. Issue 5: Territorial jurisdiction at the interim stage for online infringement/viewing within the forum Legal framework: The Court applied principles for internet-based jurisdiction as discussed in its own jurisprudence, focusing on pleaded targeting and injurious effect within the forum. Interpretation and reasoning: The Court relied on the plaint averments that the allegedly infringing content could be viewed in the forum and had been downloaded by consumers there, asserting targeted viewing and injurious impact. On that basis, it held the suit could not be dismissed at the present stage for want of territorial jurisdiction, leaving the issue open for trial. Conclusions: The suit was held not liable to dismissal at this stage on territorial jurisdiction; the defence could be raised at trial. Issue 6: Reference to arbitration in light of the pleaded fraud challenge to the agreements and arbitration clause Legal framework: The Court considered the consequence of a defence that fraud vitiates the agreement including the arbitration clause, treating such challenge as affecting arbitrability when it attacks the validity of the arbitration agreement itself. Interpretation and reasoning: Since the defence asserted that fraud vitiated and invalidated the entire agreement and addendum (which contained the arbitration clause), the Court held the matter could not be referred to arbitration on that basis. Additionally, it noted the Single Judge had not addressed the arbitration objection, and it would not be fair to dispose of the appeal on that ground. Conclusions: The dispute was held not referable to arbitration on the pleaded footing that fraud vitiated the agreements including the arbitration clause. Final operative determination (relief granted) The Court set aside the order vacating the interim protection and injuncted the artist from engaging any third person (including specified respondents and competitors) for monetization of any new song until 30 September 2025, except where the producer refuses to accept delivery of the song, subject to the producer depositing the specified balance fee with the Court Registry; the artist was clarified to remain free to pursue other artistic work but not to sell new songs to third-party distributors/music entities during the period unless refusal conditions are met.