The Bombay High Court recently comprising of a bench of Justices V.G.Bisht and R.D.Dhanuka observed that a negative covenant is enforceable in law and is not contrary to section 27 of the Contract Act, in view of the nature of confidential information and documents furnished to the appellant with permission to use such sensitive and confidential information of the documents during the existence of the Franchise Agreement and not after the termination of the said agreement. (Arnav Enterprises V Iosis Spa & Wellness Private Limited)
Facts of the case
The respondent is engaged in the business of running wellness centers under the brand name and trademark of “IOSIS”. The appellant approached the respondent for a franchise and subsequently, various correspondences were exchanged between the parties through emails. A Letter of Intent was issued and the Franchise Agreement was executed. The appellant later issued a termination notice, terminating the business of the franchise center yet continued to operate the center and utilized the brand name, trademarks of the respondent contrary to clause (16) of the Franchise Agreement.
Later, the appellant denied any of these allegations due to which respondent filed a petition under section 9 of the Arbitration Act prayed for ad-interim reliefs. However, the appellant raised a preliminary objection with respect to the maintainability of the said petition and alleged that the Franchise Agreement was never signed and executed between the parties and hence was indeed a bogus document. However, the learned single judge granted ad-interim relief to IOSIS since prima facie it was difficult to believe the statement of the appellant that the said Franchise Agreement was fabricated or a bogus document.
This appeal was filed under section 37 of the Arbitration and Conciliation Act, 1996 where the appellant has impugned the orders by which ad interim measure was granted in favor of the respondent under section 9 of the Arbitration Act.
Contention of the Parties
The counsel for the appellant invited the courts attention to some of the documents annexed to the appeal paperbook and submitted that there was no Franchise Agreement signed between the parties. Whatever steps were taken by the parties were taken under the said Letter of Intent which also came to be terminated by his client. He submitted that clause (16) of the Franchise Agreement which prohibits the appellant from operating or doing business under any name or in any manner was not applicable since no such Franchise Agreement was signed by his client. In any event, such clause is contrary to Section 27 of the Contract Act. Such negative covenant could not have been enforced against the appellant. The appellant cannot be restrained from carrying on his own business being carried by not using the trademark or material of the respondent.
The counsel for the respondent on the other hand submitted that not only the Letter of Intent was issued by the respondent but the parties had also executed the Franchise Agreement. Various steps were taken pursuant to those documents by the parties. The appellant had however terminated the said agreement between the parties. Though this Court had granted ad-interim relief, the appellant committed violation of the ad-interim order passed by this court and continued to use the trademark of the respondent. The respondent has already filed a separate contempt proceedings against the appellant.
The learned counsel for respondent submitted that it was a specific case of the respondent in para 10 of the arbitration petition that the respondent had shared with the appellant various information/ documents which were sensitive and confidential including trade secrets and computer database in the form of files programs, knowhow, formulae and the like which had been created by the respondent as also the customer details etc. The appellant had continued to use those sensitive and confidential information/documents even after termination of the agreement entered into between the parties. The learned Single Judge was thus right in granting ad-interim reliefs in terms of prayer clauses (a) and (b) by adverting to negative covenant which is recorded in clause (16) of the Franchise Agreement.
It was submitted that such negative covenant is enforceable in law and is not contrary to section 27 of the Contract Act, in view of the nature of confidential information and documents furnished to the appellant with permission to use such sensitive and confidential information of the documents during the existence of the Franchise Agreement and not after termination of the said agreement.
Courts Observation & Judgment
The Court observed that “On the basis of the material produced by the parties on record it is evident prima facie that the argument of the appellant that the Franchise Agreement was not signed by the appellant and was a bogus document cannot be considered since the appellant had acted upon the said agreement and started the business by using such confidential and sensitive information/documents. Thus, there is no substance in the submissions of the appellant that the said Franchise Agreement was a bogus document.”
The HC also relied on the judgment of Gujrat Bottling Company Limited and others Vs. Coco-Cola Company and others wherein it was held that in a contract which is intended for advancement of trade shall not be regarded as being in restraint of trade. The Court has to decide as a matter of law whether the contract has or not in restraint of trade and whether, if so, it is reasonable.
The bench noted, “In our prima facie view considering the fact that the respondent had the brandname in the name of “OASIS” and has reputation in the market and having furnished various sensitive and confidential documents and information including the list of their customers, such restraint as recorded in clause (16) of the Franchise Agreement, in our prima facie view would not be a restraint of trade under section 27 of the Contract Act. Hon’ble Supreme Court in the said matter had granted injunction against the defendant after considering the provisions of section 27 of the Contract Act and also the principles under order XXXIX and also section 42 of the Specific Relief Act, 1963.”
Thus, the HC disposing of the petition remarked, “Be that as it may, since the impugned observations made by the learned Single Judge are prima facie in nature and since those two orders are ad-interim orders, even otherwise we do not propose to interfere with those two orders even on this ground. It is made clear that the observations made by the learned Single judge as well as the observations made by this Court in this order are prima facie in nature. No case is made out by the appellant for interference with the impugned orders passed by the learned Single Judge. The appeal is devoid of merits and is accordingly dismissed. All pending Interim Applications are also dismissed.”
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