TaxTMI 
TaxTMI 
1995 (8) TMI 232
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....onal 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 drinks market and 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 the 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 manufacturers 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 un....
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....wn 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 the 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 covenant 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 dur....
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....n the said, agreement, it is provided that both the parties shall make application to the Registrar of Trade Marks under the Trade and 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 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 sections 48 and 49 of the Act to r....
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....0, 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.), 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)( ii) 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....
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....rade marks/trade names during the subsistence 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 ....
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....conditions of restrictions to which the registration of the trade mark is subject". In sub-section (1) 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 used by the proprietor thereof and shall be deemed not to be 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 registered user and one of the requirements is that the said application shall be accompanied by the agreement in writing or a duly au....
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....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 registered proprietor of a trade mark to permit a person to use his registered trade mark. Such licensing of trade marks 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 the proprietor of the mark from those connected with others ; and (iii) a connection in the course of trade consistent with the definition of trade mark continues to exist between the goods and the proprietor of the mark, [see P. Narayanan-Law of Trade Marks and Pass-ing-Off, fourth edition, para 20.16 at page 335]. It would thus appear that use of a registered trade mark can be permitted to a registered user in accordance with the 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 t....
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....h 6, GBC undertakes to buy only from Coca Cola or a manufacturer approved by Coca Cola essences and beverage bases (ingredients for making the said beverages). Under clause (b) of paragraph 6, GBC undertakes to buy bottles, crowns, labels 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 items 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, labels 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 paragraph 7, GBC has agreed to vigorously and diligently promote and solicit the sale of the said beverages and assure full and complete distribution of the said be....
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....urious or imitation beverages being filled in the bottles registered under Coca Cola's trade name or trade marks. In paragraph 11 GBC has recognised Coca Cola's ownership of the trade marks and has agreed 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 any 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, copyrights, 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 Coc....
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....ior written consent. Under paragraph, 19 Coca Cola has the 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 of 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. Paragra....
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....ons 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 virtue 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 preparation, 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 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 nonexclusive licence by the licensor to the licensee to use the said trade marks in relation to goods prepared by or for the licensee from concentrates and/or sy....
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....ir 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 virtue 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 covenants that upon any amendments 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 pa....
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....e Division Bench of the High Court have rightly rejected the contention urged on behalf of GBC that the 1993 agreement was superseded by the 1994 agreement. Shri Shanti Bhushan, learned senior counsel appearing 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 paragraph 21 of the 1993 agreement enables the termination period to be reduced by mutual consent in writing between Coca Cola and GBC. There is, however, no such agreement which expressly reduces the said termination period under paragraph ,21 of the 1993 agreement. What is suggested is that paragraph 7 of thel994 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., the 1993 agreement and the 1994 agreement, are not the same and that while the 1993 agreement is an agreemen....
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....rmination 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 the period of one year from the date of the said notice has not been examined by the High Court. We do not propose 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 paragraph 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 the common law in England. Under the common law in En....
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....on of the interest 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 show that the restraint goes no further than is reasonably necessary to protect the interest of the covenantee and if this onus is discharged the onus of showing that the restraint is nevertheless injurious 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 trade, 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, fourth edition, volume 47, paragraphs 9 to 26 ; Niranjan Shankar Golihari v. Century Spinning and Manufacturing Co. Ltd. [1967] 2 SCR 378, at pages 384-85]. In....
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.... pages 1291, 1296-98, per A.P. Sen J.] We do not propose to go into the question whether reasonableness of restraint 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 the 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. Adelaide Steamship Co. Ltd. [1913] AC 781, Lord Parker has said (at page 794) : "Monopolies and contracts in restraint of trade have this in common, that they both, if enforced, 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 int....
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....parties to the contract in such manner as he chooses." In the same case, Lord Denning M.R. has said (at page 169): "Every member of the community is entitled to carry on any trade or business he 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 of trade. 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.'s case [1968] AC 269, 307 (HL) has said : "These are helpful expositions provided they are used rationally 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 indeed if it were sought to describe the contract as being in restraint of trade. In fact such a contract would very likely be for the advancement ....
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....ty of justification under a public policy 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." There is a growing trend to regulate distribution of goods and services through franchise agreements providing for grant of franchise by the franchiser on certain terms and conditions to the franchisee. Such agreements often incorporate a condition that the franchisee 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.'s case [1968] AC 269 (HL), 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 agreeme....
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....es to an end." 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 underlying principle governing contracts 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 Co. Ltd.'s case [1968] AC 269, 328 (HL) : "When 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 restraint of trade within the meaning of the doctrine and no question of reasonableness arises. If, however, the contract ties....
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....nnot be confined to the sub-paragraph immediately preceding the words "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-paragraphs of paragraph 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 diligently to promote 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 otherwise 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 1993 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 agreemen....
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.... 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 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 of 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 given the right to discontinue the supply of essences/syrups and/or other materials to GBC. This clause governs the relationship between Coca Cola and GBC inter se and it cannot be construed as placing a restraint on the right of the shareholders to transfer their shares. V.B. Rangaraj's case [1992] 73 Comp Cas 201 (SC) on which reliance has been placed by Shri Shanti Bhushan has, therefore, no application. Shri Shanti Bhushan has next urged that in the facts and circumstances of the case the High Court was not justified, in law, ....
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....of section 41, where a contract comprises an affirmative agreement to do a certain act, coupled with a negative agreement, express or implied, not to do a certain act, the circumstance that the court is unable to compel specific performance of the affirmative agreement shall not preclude it from granting an injunction to perform the negative agreement. This is subject to the proviso that the plaintiff has not failed to perform the contract so far as it is binding on him. The court is, however, not bound to grant an injunction in every case and an injunction to enforce a negative covenant would be refused if it would indirectly compel the employee either to idleness or to serve the employer, [see Ehrman v. Bartholomew [1898] 1 Ch 671, Niranjan Shankar Golikari's case [1967] 2 SCR 378, 389]. The grant of an interlocutory injunction during the pendency of legal proceedings is a matter requiring the exercise of discretion of 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 plaintiff would suffer an irrepa....
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....s 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 Shri Nariman and Shri Andhyarujina. Having regard to the negative covenant contained in paragraph 14 of the 1993 agreement which is subsisting, Coca Cola has made out a prima facie case for grant of an injunction. As regards the other two requirements for grant of interlocutory injunction, viz., balance of convenience and irreparable injury, we find that as a result of the transfer of shares of GBC and respondent No. 7 in favour of appellants Nos. 2 to 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.....
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.... is difficult to appreciate how Pepsi can ask Coca Cola to part with its 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 the effective control of Pepsi. Pepsi took a deliberate decision to take over GBC 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. It must suffer the consequences of the failure of the effort and it cannot assail the interim injunction 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 GBC had approached the High Court for the injunction order, granted earlier, to be vacated. Under Order 39 of the Code of Civil Procedure, the jurisdiction of the court to interfere with an order of interlocutory or temporary injunction is purely equitable and, therefore, the court,....