Gujarat Bottling Co. Ltd. v. Coca Cola Co.

Coca Cola licensed a Gujarat bottler to make its drinks. The agreement stopped the bottler from dealing in any other brand while the agreement lasted. Pepsi then bought control of the bottler. The Supreme Court held that this clause is not a restraint of trade (a term stopping a person from carrying on a lawful trade) under Section 27 of the Indian Contract Act, and it upheld the interim injunction.

Quick Revision

Read the full judgment: Supreme Court of India (sci.gov.in)

Parties

M/s Gujarat Bottling Co. Ltd. (GBC) — appellant No. 1; a company incorporated under the Companies Act, 1956, with bottling plants at Ahmedabad and Rajkot. It was the defendant bottler in the suit.

Appellants Nos. 2 to 5 — concerns closely associated or affiliated with subsidiaries of Pepsi. They bought the shares of GBC and of respondent No. 7 on 20 January 1995.

The Coca Cola Co. (Coca Cola) — respondent No. 1; an American multi-national soft drink company. It was the plaintiff in the Bombay High Court suit.

Pinakin K. Shah — respondent No. 2; he held, with his family and associates, a large part of the shares in GBC before the transfer.

Ramesh Chauhan and Prakash Chauhan — respondents Nos. 3 and 4; they owned and controlled the Parle group. The Parle group had held the Gold Spot, Thums Up, Limca, Maaza, Rim Zim and Citra trade marks.

Pepsi Foods Limited — respondent No. 5; a subsidiary of Pepsi.

Respondent No. 6 — named in the judgment alongside Pepsi Foods Limited as a Pepsi-side respondent. Its exact role is not stated. Pepsico Inc. (Pepsi) is Coca Cola's trade rival, and its group gained control of GBC.

Ahmedabad Advertising and Marketing Consultants Ltd. — respondent No. 7; it held 21 per cent of GBC's shares.

Procedural History

1. 30 January 1995. Coca Cola filed Suit No. 400 of 1995 in the Bombay High Court. It took out Notice of Motion No. 316 of 1995 for interim relief (Agrawal, J.).
2. 22 February 1995. Dhanuka J., sitting as a single Judge, heard Coca Cola on prayers (a)(i), (a)(ii), (a)(iii) and (a)(viii). He refused prayers (a)(i), (a)(iii) and (a)(viii). He granted an interim injunction stopping GBC from manufacturing, bottling, selling or dealing in beverages of any brand owned by respondents Nos. 5 and 6 or anyone else except Coca Cola (Agrawal, J.).
3. GBC was allowed to pursue its application of 31 January 1995 before the Director (F&VP), Ministry of Food Processing Industries. It was told not to act on any permission without the court's leave (Agrawal, J.).
4. Appeals Nos. 183 and 191 of 1995. GBC and Coca Cola each appealed to the Division Bench of the High Court (Agrawal, J.).
5. By consent of the parties, the Division Bench took up Notice of Motion No. 316 of 1995 and decided it finally (Agrawal, J.).
6. 31 March 1995. The Division Bench made the Notice of Motion absolute on prayers (a)(ii) and (a)(iii), as modified. This is the impugned judgment (Agrawal, J.).
7. Prayer (a)(ii) sought an injunction stopping GBC, directly or through its shareholders, from being concerned with the beverages of any other brand or trade mark of Coca Cola. Prayer (a)(iii), as modified, restrained the share buyers, later transferees and their affiliates from using the Ahmedabad and Rajkot plants for anyone's beverages till 25 January 1996 (Agrawal, J.).
8. Supreme Court. GBC (defendant No. 1) and the four share transferees (defendants Nos. 7 to 10) appealed. Special leave was granted (Agrawal, J.).
9. 4 August 1995. The Supreme Court dismissed the appeals. Agrawal, J. wrote the judgment of the Bench (Agrawal, J.).

Facts

1. The judgment opens by saying that corporations now fight economic wars. This case is a legal battle between two American multi-national corporations that dominate the soft drink market: Coca Cola on one side and Pepsico Inc. (Pepsi), with its subsidiaries, on the other. There is a long history of trade rivalry between them (Agrawal, J.).
2. Coca Cola operated in India until 1977. A change in Government policy then forced it to close its Indian operations (Agrawal, J.).
3. Domestic makers filled the gap. The Parle group, owned by Mr Ramesh Chauhan and Mr Prakash Chauhan (respondents Nos. 3 and 4), took a large market share. Its marks were Gold Spot, Thums Up, Limca, Maaza, Rim Zim and Citra, and it sold Bisleri club soda (Agrawal, J.).
4. Parle had arrangements with bottlers across the country. The bottlers made drinks from essence or syrup supplied by Parle and sold them under Parle's trade marks (Agrawal, J.).
5. Pepsi started operations in India in the late 1980s. Coca Cola followed (Agrawal, J.).
6. 12 November 1993. Under a Deed of Assignment, the Parle group assigned the trade marks Gold Spot, Thums Up, Limca, Maaza, Rim Zim and Citra to Coca Cola (Agrawal, J.).
7. 6 January 1994. Coca Cola applied to the Registrar of Trade Marks to be recorded as the subsequent proprietor of those marks (Agrawal, J.).
8. GBC is a company under the Companies Act, 1956. Respondent No. 7 held 21 per cent of its shares. The other 79 per cent were held by Mr Pinakin K. Shah (respondent No. 2), his family and associates, and respondents Nos. 3 and 4, with their families and associates. The split was 78 to 22 per cent. The shares of respondent No. 7 were held in the same ratio (Agrawal, J.).
9. GBC has bottling plants at Ahmedabad and Rajkot in Gujarat. It had an arrangement with respondents Nos. 3 and 4. That arrangement licensed it to make, bottle, sell and distribute drinks under the Parle marks (Agrawal, J.).
10. 20 September 1993: the 1993 Agreement. Coca Cola expected the Parle assignment. It therefore made an agreement with GBC to bottle, sell and distribute drinks under Gold Spot, Thums Up, Limca, Maaza and Rim Zim. Citra was left out because a passing off (selling goods so as to pass them off as another's) suit against the Parle entity was pending in the Delhi High Court (Agrawal, J.).
11. The 1993 Agreement was to take effect when Coca Cola told GBC in writing that all the marks had been assigned to it. It was to run till 17 November 1998 unless ended earlier (Agrawal, J.).
12. Under clauses 4(a), 6, 18, 19, 20 and 23, Coca Cola could end the agreement without notice. Clause 21 let either side end it on one year's written notice. The notice period could be shortened by mutual written consent (Agrawal, J.).
13. Clause 14 holds the negative covenant. GBC agreed not to manufacture, bottle, sell, deal or otherwise be concerned with the beverages of any other brand or trade mark during the agreement. This included the one year of notice under clause 21 (Agrawal, J.).
14. Under clause 19, Coca Cola could stop supplying essence and syrup on certain events. Clause (b) covered any transfer of GBC's stock or shares that gave an effective transfer of control without Coca Cola's prior written consent (Agrawal, J.).
15. The 1993 Agreement came into force on 12 November 1993, when the marks were assigned to Coca Cola. Two such agreements were signed, one for Ahmedabad and one for Rajkot (Agrawal, J.).
16. By letters of 20 September 1993, Coca Cola also made four separate agreements. Two allowed GBC to use Citra and two allowed it to use Bisleri club soda, for Ahmedabad and Rajkot. Each ran for two years, could be renewed by consent and could be ended on three months' notice (Agrawal, J.).
17. 30 April 1994: the 1994 Agreement. Coca Cola gave GBC a non-exclusive licence to use the scheduled marks, including Gold Spot, Limca, Thums Up, Maaza and Citra. The goods had to be made from Coca Cola's concentrate or syrup and to its standards (Agrawal, J.).
18. Both parties were to apply to the Registrar of Trade Marks under the Trade & Merchandise Marks Act, 1958 to register GBC as a registered user (a person registered to use another's trade mark). The agreement had no fixed term. Either side could end it on 90 days' notice or by consent. For a breach, the other side could end it on 30 days' notice (Agrawal, J.).
19. 12 July 1994. Coca Cola applied under Sections 48 and 49 of the Act to register the 1994 Agreement as a Registered User Agreement (Agrawal, J.).
20. GBC upgraded its Ahmedabad and Rajkot plants. Near completion, Coca Cola advised that GBC must invest more in marketing, crates, equipment and trucks (Agrawal, J.).
21. GBC was reluctant to invest more. Respondent No. 2 asked Coca Cola to agree in advance to the transfer of his interest in GBC. Coca Cola declined to agree without knowing the buyer. It said the transfer could be allowed if GBC did not lose control or management to an outsider (Agrawal, J.).
22. 20 January 1995. The shares held by respondent No. 2, respondents Nos. 3 and 4 and their families and associates, in GBC and respondent No. 7, passed to appellants Nos. 2 to 5. These are concerns closely connected with Pepsi's subsidiaries, respondent No. 6 and Pepsi Foods Limited, respondent No. 5. Pepsi thereby gained control of GBC (Agrawal, J.).
23. 25 January 1995. GBC gave Coca Cola notice under clause 7 of the 1994 Agreement ending that agreement. Without prejudice to its contentions, it asked that the letter also be treated as notice under clause 21 of the 1993 Agreement. The contentions were that the 1994 Agreement replaced the 1993 one, or that the termination period was in any event cut to 90 days (Agrawal, J.).
24. The same day GBC told Coca Cola that appellants Nos. 2 to 5 had acquired about 70.6 per cent of its paid-up equity capital (Agrawal, J.).
25. 31 January 1995. GBC wrote to the Director (F&VP), Ministry of Food Processing Industries, Government of India. It sought approval of crown cap designs for drinks whose marks Pepsi holds (Agrawal, J.).

Issues Raised

1. Was the 1993 Agreement superseded by the 1994 Agreement, so that it no longer subsisted?
2. Was the one-year notice period in clause 21 of the 1993 Agreement reduced to 90 days by clause 7 of the 1994 Agreement? Did the 1993 Agreement therefore end on the notice of 25 January 1995?
3. Is the negative stipulation in clause 14 of the 1993 Agreement void under Section 27 of the Indian Contract Act, 1872, as a restraint of trade?
4. Is that stipulation limited to the sub-paragraph just before the words As such, so that it can be used only if GBC fails to maintain continued supply?
5. Is clause (b) of clause 19 void, so that Coca Cola cannot stop supplying essence and syrup?
6. Was the High Court right to grant an interim injunction enforcing clause 14? Does the balance of convenience, or the loss to workers and the closure of the plants, justify setting it aside?
7. Is the injunction too wide because it also binds the share transferees and their affiliates?

Arguments Contended

For the appellants (GBC and the share transferees), argued by Shri Shanti Bhushan:

• The 1993 Agreement no longer operates. It was superseded by the 1994 Agreement, and the 1994 Agreement was ended by the notice of 25 January 1995.
• In the alternative, clause 7 of the 1994 Agreement reduced the notice period in clause 21 of the 1993 Agreement to 90 days. The 1993 Agreement therefore ended 90 days after the notice.
• The negative covenant in clause 14 is a restraint of trade. It is void under Section 27 of the Indian Contract Act, 1872.
• Even if valid, the covenant is tied to the preceding part of clause 14, which speaks of maintaining supply. He relied on the words As such. It can be used only if GBC cannot maintain continued supply. That has not happened, because Coca Cola itself refused to supply essence and syrup.
• Clause (b) of clause 19 is void. Transfer of shares of a company under the Companies Act is governed by Section 82 of that Act. He relied on V.B. Rangaraj v. V.B. Gopalakrishnan, 1992 (1) SCC 160. If clause (b) is void, Coca Cola cannot use the end of clause 19 to stop the supply.
• The High Court should not have enforced clause 14 by interim injunction. The plants at Ahmedabad and Rajkot would stand idle. Many workers would lose their jobs. GBC would face heavy liabilities and closure, an irreparable loss.
• Coca Cola would suffer no loss, because it had already arranged supply through other licensees in neighbouring areas. He relied on Lalbhai Dalpatbhai & Co. v. Chittaranjan Chandulal Pandya, AIR 1966 Guj. 189, Modern Food Industries India Ltd. v. M/s Shri Krishna Bottlers (P) Ltd., AIR 1984 Delhi 119, and American Cyanamid Co. v. Ethicon Ltd., 1975 AC 396.
• Coca Cola can be paid damages if it wins. GBC's loss would be incalculable.
• The injunction is worded very widely. It also binds the share buyers, later transferees, and their servants, agents, nominees, employees, subsidiaries, controlled companies and affiliates.

For the respondent (Coca Cola), argued by Shri T.R. Andhyarujina and Shri Nariman:

• The part of clause 14 beginning As such is independent of the sub-paragraph before it. It must be read with all the earlier sub-paragraphs of clause 14. Shri Andhyarujina made this point.
• Pepsi took a calculated commercial risk in taking over GBC. It knew the effect of the negative covenant in the 1993 Agreement.
• If GBC is not stopped from making and selling Pepsi products for the stipulated year, a rival that has captured GBC would destroy the goodwill and market share of Coca Cola's own products. Damages would not be adequate for that irreparable injury.
• GBC would be protected by the undertaking Coca Cola must give under Rule 148 of the Bombay High Court (Original Side) Rules, 1980.
• GBC itself broke the contract. It cannot ask for the injunction to be vacated, because it brought about the state of things it complains of. Shri Nariman made this point.

Court's Reasoning

The judgment has no numbered paragraphs. Agrawal, J. wrote the judgment for the Bench of two Judges (Agrawal and Ahmad Saghir, JJ.). Steps follow the judgment's order. Each ends with the judge's name.

Agrawal, J. (for the Bench)

1. Noted: The High Court's interim order gave effect to clause 14 of the 1993 Agreement. Its text bound the bottler not to manufacture, bottle, sell, deal or be otherwise concerned with other brands during the agreement. This included the one year of notice under clause 21 (Agrawal, J.).
2. Noted: To judge the attack on the covenant, the Court must first decide whether the 1993 Agreement subsists or was lawfully ended. GBC's case was that the 1994 Agreement superseded it. In the alternative, the 1994 Agreement cut the notice period to 90 days (Agrawal, J.).
3. Noted: Trade mark law in India began with the Trade Marks Act, 1940. Before it, the law was common law, much as in England before the Trade Marks Registration Act, 1875. The 1940 Act, based on the U.K. Act of 1938, was replaced by the 1958 Act (Agrawal, J.).
4. Noted: At common law a right in a trade mark is a form of monopoly. It lets the holder stop others using the mark. To be property, the mark must be distinctive. The right is an adjunct of the goodwill of a business and cannot exist apart from it. General Electric Co. v. General Electric Co. Ltd., 1972 (2) All E R 507, is cited for this (Agrawal, J.).
5. Noted: The 1958 Act codified trade and merchandise marks law. Registration of a mark is not compulsory. Some aspects of unregistered marks are governed by the Act and others by common law. A registered proprietor can sue for infringement whether or not the mark is used (Agrawal, J.).
6. Noted: Sections 48 to 54 let a registered proprietor permit another person to use the mark as a registered user. Section 2(m) defines permitted use for a registered user. It covers goods connected with him in the course of trade, goods for which the mark stays registered and for which he is registered, and use that meets any conditions or restrictions on registration (Agrawal, J.).
7. Noted: Section 48(1) lets someone other than the proprietor be registered as a user for all or some of the goods. The Central Government may make rules that no application is entertained unless the agreement meets conditions that prevent trafficking in marks. Under Section 48(2), permitted use counts as use by the proprietor for Section 46 and other purposes (Agrawal, J.).
8. Noted: Section 49 governs the application to register a user. The written agreement between the proprietor and the proposed user on permitted use must go with it. The proprietor, or an authorised person, must give an affidavit on the matters in Section 49(1)(ii)(a) to (d) (Agrawal, J.).
9. Noted: Under Section 51, a registered user may call on the proprietor to sue for infringement. If the proprietor does not do so within three months, the user may sue in his own name and join the proprietor as a defendant. Section 52 lets the Registrar vary or cancel the registration. Under Section 53, a registered user cannot assign or transmit the right to use the mark (Agrawal, J.).
10. Noted: Chapter V of the Trade and Merchandise Marks Rules, 1959 (Rules 82 to 93) has more rules on registered users. Rule 83 lists what the agreement between proprietor and user must state. This includes the Section 49(1)(ii)(a) to (d) particulars and a means to end the permitted use when the relationship, or the proprietor's control, ceases (Agrawal, J.).
11. Noted: These provisions show that a registered user's use depends on conditions. The two parties must sign an agreement with the prescribed particulars and file it with the application. Registration makes the user's use count as the proprietor's use and lets the user sue in his own name (Agrawal, J.).
12. Noted: A proprietor may also let a person use a registered mark outside the Act, by a licence governed by common law. A licence is allowed only if it meets three conditions (Agrawal, J.):
    • It does not cause confusion or deception among the public.
    • It does not destroy the mark's distinctiveness, so that the mark still distinguishes the goods.
    • A connection in the course of trade continues between the goods and the proprietor of the mark.
    The Court cites P. Narayanan, Law of Trade Marks and Passing-Off, 4th Ed., no. 20.16, p. 335.
13. Noted: A registered mark may thus be used by a registered user under the Act. It may also be used under a common law licence outside the Act (Agrawal, J.).
14. Noted: The Court then read the 1993 Agreement closely. In clause 2 Coca Cola permits GBC to bottle, sell and distribute drinks under the marks in Annexure II. Clause 3 requires manufacture in a plant approved by Coca Cola, to its formula and procedure (Agrawal, J.).
15. Noted: Under clause 4(a), GBC must maintain quality and follow Coca Cola's specifications and ingredients. It must avoid sub-standard drinks. If quality fails or complaints persist, Coca Cola may end the agreement at once. Under clause 4(b), Coca Cola's agents may inspect at any time. GBC must send monthly samples, and Coca Cola alone certifies quality (Agrawal, J.).
16. Noted: Clause 5 requires GBC to keep records of tests, production, sale and distribution and to report monthly. Under clause 6(a) GBC must buy essences and beverage bases only from Coca Cola or an approved maker (Agrawal, J.).
17. Noted: Under clause 6(b) GBC must buy bottles, crowns, labels and other ingredients to Coca Cola's standards. It should prefer approved suppliers. Items from others must be submitted to Coca Cola before use. Under clause 6(c) GBC may use only approved bottles, labels and crowns. A breach of 6(a), (b) or (c) lets Coca Cola end the agreement (Agrawal, J.).
18. Noted: Under clause 7, GBC must promote and solicit sales vigorously and diligently and ensure full distribution to meet demand (Agrawal, J.).
19. Noted: Under clause 8(a), GBC must not deal in any product under a get-up or container used by Coca Cola, or one likely to be confused with it or passed off. Under clause 8(b) it must not use any trade mark that imitates or infringes Coca Cola's marks or causes passing off. Under clause 8(c), during the agreement, it must not deal in drinks under the same or deceptively similar marks, or any imitation or substitute of the essence, syrup or beverages (Agrawal, J.).
20. Noted: Clause 9 makes Coca Cola's decision on all matters about the marks final. Coca Cola defends the marks at its own cost, and GBC must cooperate. Clause 10 requires GBC to prevent spurious drinks in registered bottles. Clause 11 requires GBC to recognise Coca Cola's ownership of the marks and use them only as lawfully permitted (Agrawal, J.).
21. Noted: Clause 12 says the agreement gives GBC no right, title or interest in the marks, designs, copyrights, patents, trade names, signs or slogans. Clause 13 requires GBC to sell the drinks on their own merits, make only authorised representations, and avoid names or designs similar to Coca Cola's (Agrawal, J.).
22. Noted: In clause 14, GBC accepts that Coca Cola gave it the territory on the assurance that it would work vigorously and diligently. GBC accepts that Coca Cola has spent heavily on advertising and staff training and on protecting its goodwill. It also accepts that it must keep supply continuous to protect consumers and goodwill. The negative stipulation comes at the end of clause 14 (Agrawal, J.).
23. Noted: Clause 15 bars sales to retailers above the price Coca Cola agrees or recommends. Clause 16 lets Coca Cola grant more licences near GBC's plant if it thinks fit. Clause 17 says there is no agency, partnership or joint venture. GBC bears all liability for its own acts (Agrawal, J.).
24. Noted: Clause 18 bars GBC from selling, assigning, transferring, pledging, mortgaging, leasing or licensing the agreement or any interest in it without Coca Cola's written consent. Clause 19 lets Coca Cola end the agreement at once on any event in clauses (a) to (e). Coca Cola may also stop the supply of essence, syrup and materials for as long as it thinks necessary, without losing its right to terminate (Agrawal, J.).
25. Noted: Clause 20 says the agreement expires without notice on 17 November 1998 unless ended earlier. Clause 21 lets either side end it on one year's written notice, which can be shortened by mutual written consent. Clause 23 deals with partial invalidity. Clause 25 supersedes all earlier contracts and commitments, written or oral (Agrawal, J.).
26. Noted: Clause 29 makes the agreement effective when Coca Cola says in writing that the marks were assigned to it. If no such notice comes by the first anniversary, the agreement is void ab initio (void from the start). In clause 30 GBC accepts that the marks will be Coca Cola's property from the effective date. GBC has no right in them except under the licence, and no claim against Parle (Exports) Limited or its affiliates that would affect Coca Cola (Agrawal, J.).
27. Held: The 1993 Agreement was an agreement to grant a licence under common law for GBC's use of the marks that Coca Cola was about to acquire. Its terms ensure GBC's use follows the common law rules on use of marks. It also governs the preparation, bottling and sale of the drinks. In that sense it is an agreement to grant a franchise (a licence to make and sell another's branded goods on set terms) (Agrawal, J.).
28. Noted: The Court then read the 1994 Agreement. It calls Coca Cola the Licensor and GBC the Licensee. The preamble records the assignment of the marks on 12 November 1993, refers to the 1993 Agreement and says the Licensor holds no equity in the Licensee. It adds that the parties wish to deal on a purely contractual basis for the use of the marks (Agrawal, J.).
29. Noted: Clause 1 grants a non-exclusive licence for goods made from the Licensor's concentrate or syrup, to its standards and in approved containers. Clause 2 provides for joint application to register GBC as a registered user. Clause 3 requires GBC to follow specifications, allow inspection and send samples. Clause 4 says GBC is not the sole licensee (Agrawal, J.).
30. Noted: Clause 5 requires the marks to be described as used by permitted use only. Clause 6 requires GBC to accept Coca Cola's title and claim no adverse right. Clause 7 says the agreement runs without limit of time and can be ended by either side on 90 days' notice or by consent. A party in breach can be ended on 30 days' notice. Clause 8 deals with variation or cancellation of the registered user entry. After cancellation GBC cannot use the marks (Agrawal, J.).
31. Held: The 1994 Agreement was made to meet the Act and the Rules for registering GBC as a registered user. Clauses 2 and 8 show this. Clauses 1, 3, 4, 5 and 6 carry the particulars in Section 49(1)(ii)(a), (b) and (c). Clause 7 carries the particular in sub-clause (d). It is a statutory agreement under Section 49 read with Rule 83 (Agrawal, J.).
32. Held: The 1993 Agreement has similar terms because a common law licence can be given only on limits like those for a registered user. But it is wider. It regulates the franchise, covering manufacture, bottling and sale. The 1994 Agreement does not wipe out those terms (Agrawal, J.).
33. Why: Clause 25 of the 1993 Agreement expressly supersedes earlier agreements. The 1994 Agreement has no similar clause superseding the 1993 Agreement (Agrawal, J.).
34. Held: The 1994 Agreement does not supersede the 1993 Agreement. The single Judge and the Division Bench rightly rejected GBC's contention (Agrawal, J.).
35. Noted: Shri Shanti Bhushan then stressed his alternative point. Clause 21 of the 1993 Agreement allows the notice period to be cut by mutual written consent. He argued that clause 7 of the 1994 Agreement did this by implication (Agrawal, J.).
36. Held: The Court could not accept this. No agreement expressly reduces the period. The two agreements differ in nature and scope. Clause 7 of the 1994 Agreement is confined to that agreement and does not change clause 21 of the 1993 Agreement (Agrawal, J.).
37. Why: Clause 21 needs reduction by mutual consent of both parties. "Mutual consent postulates consensus ad idem between the parties." The Court also found no material showing such a consensus ad idem (agreement on the same thing in the same sense) (Agrawal, J.).
38. Why: GBC's notice of 25 January 1995 did not claim any mutual agreement. It only stated GBC's contentions that the 1993 Agreement was replaced and that the period was in any event 90 days. Had there been a mutual understanding, GBC would have mentioned it. The Court said this absence negatives the appellants' case (Agrawal, J.).
39. Held: The 1993 Agreement can be ended only by one year's notice under clause 21 (Agrawal, J.).
40. Noted: The High Court did not examine whether the notice of 25 January 1995 ends the 1993 Agreement after one year. The Supreme Court did not go into it and left it to the High Court if raised. It proceeded on the basis that the 1993 Agreement subsists and did not end after 90 days (Agrawal, J.).
41. Noted: The Court then took up the Section 27 argument. It said it had to consider whether, and how far, Indian law differs from English common law (Agrawal, J.).
42. Noted: In English common law, a man may exercise any lawful trade or calling as he wills. The law watches any interference with trade, since public policy opposes restraints on liberty of action that harm the State. A person can still be restrained by his own agreement. Then the freedom of trade is balanced with the public policy of utmost freedom of contract for adults (Agrawal, J.).
43. Noted: The doctrine traditionally applied to two kinds of covenant: an employee's promise not to compete after leaving, and a seller's promise not to compete with the buyer of his business. It is not confined to those two. Their covenants are always tested for reasonableness (Agrawal, J.).
44. Noted: Because the doctrine rests on public policy, it changes with changing views of the public interest, trade, communications and economic thought. In earliest times all restraints, general or partial, were void. Later a partial restraint could be good if reasonable. The distinction between general and partial restraint was then dropped (Agrawal, J.).
45. Noted: The English rule now is that any restraint, general or partial, may be good if reasonable. It must be reasonable for public policy and reasonably necessary to protect the covenantee. The covenantor's interests also count (Agrawal, J.).
46. Noted: Contracts in restraint of trade are prima facie (on first view) void. The party relying on the contract must show the restraint goes no further than reasonably necessary to protect the covenantee. If so, the party attacking it must show it harms the public. The court decides as a matter of law whether the contract is in restraint of trade and, if it is, whether it is reasonable (Agrawal, J.).
47. Noted: Courts take a stricter view of employer and employee covenants than of vendor and purchaser covenants or partnership agreements. A restraint may be unreasonable between employer and employee yet reasonable between a seller and buyer of a business. The Court cites Halsbury's Laws of England, 4th Edn., Vol. 47, nos. 9 to 26, and N.S. Golikari v. Century Spinning Co., 1967 (2) SCR 378, at pp. 384-85 (Agrawal, J.).
48. Noted: English courts often merge the two questions, asking whether the contract is in undue restraint of trade. Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd., 1968 AC 269 at p. 331 (Lord Wilberforce), is cited for this (Agrawal, J.).
49. Noted: In India, Section 27 governs. It makes void to that extent every agreement restraining anyone from a lawful profession, trade or business. Exception 1 lets a seller of goodwill agree not to carry on a similar business within specified local limits. The limits must appear reasonable to the court, with regard to the nature of the business (Agrawal, J.).
50. Noted: The section was taken from David D. Field's Draft Code for New York, which was based on the old English doctrine. It was never applied in New York. Sir Frederick Pollock criticised it. He said Indian law is tied to a hard rule with limited exceptions, a principle now exploded in England, in his words (Agrawal, J.).
51. Noted: Indian High Courts have held that neither the reasonableness test nor the partial restraint rule applies to a case under Section 27, unless it falls within the exception. The Law Commission's Thirteenth Report recommended amending the section to allow reasonable restraints. Parliament has taken no action. The Court cites Superintendence Company of India (P) Ltd. v. Krishan Murgai, 1980 (3) SCR 1278, at pp. 1291, 1296-98, per A.P. Sen J. (Agrawal, J.).
52. Held: The Court did not decide whether reasonableness lies outside Section 27. It proceeded on the basis that Section 27 does not call for an enquiry into reasonableness. Indian courts therefore have one question: is the contract in restraint of trade or not? (Agrawal, J.).
53. Noted: The Court then asked what a contract in restraint of trade means. In Attorney-General of the Commonwealth of Australia v. Adelaide Steamship Co. Ltd., 1913 AC 781, p. 794, Lord Parker said monopolies and restraint contracts both derogate from the common law right to trade as one pleases (Agrawal, J.).
54. Noted: Lord Reid in Esso Petroleum, p. 294, said this was not a definition. All restraint contracts derogate from that right, but not all contracts that derogate from it are in restraint of trade. A man who agrees to give exclusive service for a period cannot engage in other business then. No one has suggested such contracts are in restraint of trade except in very unusual circumstances (Agrawal, J.).
55. Noted: In McEllistrim v. Ballymacelligott Co-operative Agricultural and Dairy Society Ltd., 1919 AC 548, Lord Finlay applied to the right to sell goods the principle of Herbert Morris Ltd. v. Saxelby, 1916 (1) AC 688. Lord Reid doubted this in Esso Petroleum, p. 296. On that view every long-term agreement to sell one's whole output would be a restraint, yet no one has suggested that of ordinary commercial contracts (Agrawal, J.).
56. Noted: In Petrofina (Great Britain) Ltd. v. Martin, 1966 Ch. 146, Diplock L.J. (p. 180) defined it. The covenantor agrees with the covenantee to restrict his liberty to trade in the future with other persons as he chooses. Lord Denning M.R. said any contract interfering with the free exercise of trade, by restricting work for others, is a restraint and invalid unless reasonable between the parties and not injurious to the public (Agrawal, J.).
57. Noted: Lord Morris in Esso Petroleum (p. 307) said these expositions help if used rationally and not too literally. A contract to serve B on reasonable terms for a few years, giving B one's whole working time, would hardly be called a restraint of trade. Such a contract would likely advance trade (Agrawal, J.).
58. Noted: The Court drew the principle that a stipulation meant to advance trade is not a restraint of trade. Lord Pearce in Esso Petroleum (pp. 327-328) said the doctrine does not apply to ordinary commercial contracts that regulate and promote trade during the contract. This holds where any bar on outside work is aimed at absorbing the parties' services, not sterilising them. Sole agencies are a normal incident of commerce (Agrawal, J.).
59. Noted: Lord Wilberforce in Esso Petroleum (p. 332) said a bare allegation that a contract limits a trader's freedom does not put the burden of justification on the party suing. Some sensitive areas, such as employer and employee after employment ends, always need the reasonableness test. Other types of contract do not enter the field at all (Agrawal, J.).
60. Noted: Lord Wilberforce also said no exhaustive test can be stated. Judges have excused from the reasonableness test contracts, or terms, that have passed into the accepted and normal currency of commercial, contractual or conveyancing relations (pp. 332-33) (Agrawal, J.).
61. Held: There is a growing trend to distribute goods and services through franchise agreements. These often require that the franchisee not deal in competing goods. A condition that restricts dealing in competing goods "cannot be regarded as in restraint of trade", because it facilitates distribution of the franchiser's goods (Agrawal, J.).
62. Held: The 1993 Agreement is an agreement to grant a franchise. It is a commercial agreement in which both sides take on duties to promote trade in beverages for mutual benefit. The aim of clause 14 is to promote that trade. The covenant does so by requiring GBC to apply itself wholeheartedly to selling Coca Cola's products (Agrawal, J.).
63. Held: The covenant operates only while the agreement is in force. Clause 14 says so in its words about the subsistence of the agreement and the one year of notice (Agrawal, J.).
64. Noted: Normally the restraint of trade doctrine is not attracted where the restriction operates only while the contract subsists, unless the contract is wholly one-sided. It applies to restrictions that operate after the contract ends. The Court quotes N.S. Golikari (p. 389). That passage says negative covenants during the contract of employment, when the employee serves the employer exclusively, are generally not a restraint of trade and fall outside Section 27. It adds an exception where the contract is unconscionable, excessively harsh, unreasonable or one-sided, as in W.H. Milsted and Son Ltd. (Agrawal, J.).
65. Noted: A.P. Sen J., concurring in Superintendence Company, said the doctrine never applied during a contract of employment and applies only when the contract ends (p. 1289) (Agrawal, J.).
66. Held: Shri Shanti Bhushan argued these remarks are limited to employment contracts. The Court disagreed: "We find no rational basis for confining this principle to a contract for employment and excluding its application to other contracts." The same principle governs all restraint contracts. Courts are stricter with employer and employee covenants than with vendor and purchaser or partnership covenants (Agrawal, J.).
67. Noted: The Court cites Lord Pearce in Esso Petroleum (p. 328). Where a contract binds the parties only while it lasts, and the negative ties are only those incidental and normal to the positive commercial arrangement, there is no restraint. This holds even if the ties exclude all dealings with others. If the contract ties trading activities after its end, the question of reasonableness arises (Agrawal, J.).
68. Held: Clause 14 applies only while the 1993 Agreement subsists. It "cannot be held to be in restraint of trade so as to attract the bar of section 27 of the Contract Act". The Court rejected the contention that it is void under Section 27 (Agrawal, J.).
69. Noted: Shri Shanti Bhushan next argued that the negative stipulation is tied to the sub-paragraph just before it. He relied on the words As such. On his reading, it could be invoked only if GBC fails to keep up supply. That had not happened because Coca Cola refused to supply essence and syrup (Agrawal, J.).
70. Noted: Shri Andhyarujina replied that the part from As such is independent. It must be read with all the earlier sub-paragraphs of clause 14 (Agrawal, J.).
71. Held: The Court agreed with Shri Andhyarujina. The stipulation applies to all the sub-paragraphs of clause 14 before it. Read so, its purpose is that GBC will work vigorously and diligently to promote the sale of drinks under Coca Cola's marks. GBC could not do that if it also made, bottled, sold or dealt in other brands (Agrawal, J.).
72. Held: The negative stipulation is not confined to the sub-paragraph immediately before it (Agrawal, J.).
73. Noted: Shri Shanti Bhushan next argued that clause (b) of clause 19 is void. He said transfer of shares of a company under the Companies Act is governed by Section 82 of that Act, which gives a right to transfer shares. He relied on V.B. Rangaraj v. V.B. Gopalakrishnan, 1992 (1) SCC 160. If clause (b) is void, Coca Cola cannot use the end of clause 19 to stop supply while the 1993 Agreement subsists (Agrawal, J.).
74. Noted: The Court quotes clause 19. Clause (b) says that a bottler that is not a natural person must make no change in structure and no transfer of stock or ownership resulting in effective transfer of control without Coca Cola's prior written consent. Coca Cola may end the agreement at will if it is not told. On any of the events, Coca Cola may also stop supplying essence, syrup and materials for as long as it thinks necessary (Agrawal, J.).
75. Held: Clause (b) is not happily worded. The parties to the agreement were Coca Cola and GBC only. The shareholders were not parties, so the clause cannot bind them. It cannot be read as restraining the shareholders' right to transfer shares (Agrawal, J.).
76. Held: The clause means only this. If shareholders transfer shares and control effectively passes, Coca Cola may end the agreement. It may also, without ending it, stop supply for as long as it thinks necessary. The clause governs the relationship between Coca Cola and GBC between themselves. V.B. Rangaraj therefore has no application (Agrawal, J.).
77. Noted: Shri Shanti Bhushan next argued that the High Court should not have enforced clause 14 by interim injunction. The injunction and Coca Cola's stopping of supply would leave the plants idle. Workers would lose their jobs. GBC would incur heavy liabilities, face closure and suffer irreparable loss. He added that Coca Cola would lose nothing, as it had arranged supply from other licensees nearby (Agrawal, J.).
78. Noted: He relied on Lalbhai Dalpatbhai & Co. v. Chittaranjan Chandulal Pandya, AIR 1966 Guj. 189, Modern Food Industries India Ltd. v. M/s Shri Krishna Bottlers (P) Ltd., AIR 1984 Delhi 119, and the remarks of Lord Diplock in American Cyanamid Co. v. Ethicon Ltd., 1975 AC 396 (Agrawal, J.).
79. Noted: In England, where a contract is negative or has an express negative stipulation, a breach may be restrained by injunction. It is normally granted as a matter of course even though the remedy is discretionary. A defendant cannot resist it only because the contract is burdensome to him. A breach of an express negative stipulation can be restrained even if the plaintiff shows no loss. The Court cites Chitty on Contracts, 27th Edn., Vol. 1, no. 27-040, p. 1310, and Halsbury's Laws of England, 4th Edn., Vol. 24, no. 992 (Agrawal, J.).
80. Noted: In India, Section 42 of the Specific Relief Act, 1963 deals with negative agreements. It applies despite Section 41(e). Where a contract has an affirmative agreement not to do an act, the court may still grant an injunction (an order to do or not do an act) to perform the negative agreement. This holds even if the court cannot compel specific performance (a court order to carry out the contract) of the affirmative agreement. The plaintiff must not have failed to perform the contract so far as it binds him (Agrawal, J.).
81. Noted: The court need not grant an injunction in every case. It would refuse an injunction to enforce a negative covenant if it would indirectly compel the employee to be idle or to serve the employer. The Court cites Ehrman v. Bartholomew, (1927) W.N. 233, and N.S. Golikari at p. 389 (Agrawal, J.).
82. Noted: An interlocutory injunction (a temporary order during the suit) is a matter of discretion. The court asks three questions: (i) is there a prima facie case, (ii) does the balance of convenience (weighing the harm each side may suffer) favour the plaintiff, and (iii) would the plaintiff suffer irreparable injury if relief is refused? (Agrawal, J.).
83. Noted: The decision is taken while the right and its violation are both contested and uncertain until trial. The relief reduces the risk of injustice to the plaintiff in the meantime. It protects the plaintiff against injury that damages at trial could not adequately make good. This need is weighed against the defendant's need to be protected against injury from being kept from exercising his own rights. The Court cites Wander Ltd. v. Antox India P. Ltd., 1990 (Supp) SCC 727, at pp. 731-32 (Agrawal, J.).
84. Noted: To protect the defendant, the court can require the plaintiff to give an undertaking (a promise to pay the defendant's loss if the plaintiff loses at trial), so the defendant can be compensated if he wins (Agrawal, J.).
85. Noted: The parties' positions on harm were opposed. Shri Shanti Bhushan said Coca Cola could be paid damages while GBC's loss would be irreparable. Shri Nariman and Shri Andhyarujina said Pepsi took a calculated commercial risk with full knowledge of the covenant. They said that without the restraint, Coca Cola's goodwill and market share would be destroyed. They added that GBC would be protected by Coca Cola's undertaking under Rule 148 of the Bombay High Court (Original Side) Rules, 1980 (Agrawal, J.).
86. Held: The Court agreed with Shri Nariman and Shri Andhyarujina. With the covenant in clause 14 subsisting, Coca Cola has made out a prima facie case for an injunction (Agrawal, J.).
87. Why: The Court gave these reasons on balance of convenience and irreparable injury (Agrawal, J.):
    • After the share transfer, the Ahmedabad and Rajkot plants are under Pepsi's control.
    • Coca Cola made the 1993 Agreements so that those plants would be available for its drinks. The negative stipulation was meant to stop the plants making other makers' products.
    • By taking control of GBC, Pepsi sought a dual purpose. It would cut production of drinks under Coca Cola's marks and add production capacity for Pepsi products.
    • The interim injunction stops the plants making Pepsi products till 25 January 1996. It thus frustrates, to some extent, Pepsi's effort to gain an advantage over Coca Cola.
    • Without the injunction Pepsi could use the plants. Coca Cola's share would fall, and the loss of goodwill and profits could not be made good by damages.
88. Held: The loss GBC may suffer can be assessed and paid by damages from Coca Cola, because of the undertaking under Rule 148. It was not suggested that Coca Cola cannot pay (Agrawal, J.).
89. Noted: The appellants argued that, with the supply stopped, the plants would stand idle and many workers would lose their jobs. The Court said the complaint is made by Pepsi through the appellants. It is hard to see how Pepsi can ask Coca Cola to give its trade secrets to a business rival. Coca Cola would do so by supplying essence and syrup to GBC, which is under Pepsi's effective control (Agrawal, J.).
90. Held: Pepsi took over GBC deliberately and with full knowledge of the 1993 Agreement. It meant to paralyse Coca Cola's operations in the region and promote its own products. Pepsi cannot attack the interim injunction by pointing to the workers' plight (Agrawal, J.).
91. Noted: GBC had also asked the High Court to vacate the earlier injunction. Under Order 39 of the Code of Civil Procedure, the power to interfere with an interlocutory injunction is purely equitable. The court looks at the conduct of the party approaching it, and may refuse to interfere unless his conduct is free from blame. He must show that he was not at fault, did not bring about the state of things complained of, and was not unfair or inequitable. His conduct should be fair and honest. These considerations apply to a party who seeks an injunction under Order 39 Rule 1 or 2 and to one who seeks to vacate an ad-interim or temporary injunction (Agrawal, J.).
92. Held: On its conduct, GBC did not act in line with the 1993 Agreement. It was itself, prima facie, responsible for the breach. Coca Cola's consent was not obtained for the share transfer, and Coca Cola was not told who the buyers were. Coca Cola had the right to end the agreement but did not. GBC itself gave notice ending the agreements, by giving three months notice (Agrawal, J.).
93. Held: A party that has itself broken the contract cannot ask for the injunction to be vacated. GBC is primarily responsible for the state of things it complains of. It acted unfairly and inequitably. There was hardly any occasion to vacate the order. It cannot be interfered with even on the ground of closure of the factory, because the party prima facie responsible for the breach cannot raise that grievance (Agrawal, J.).
94. Noted: Shri Shanti Bhushan lastly argued that the injunction is very wide. It covers GBC, the share buyers, later transferees, and their servants, agents, nominees, employees, subsidiaries, controlled companies, affiliates and associates, or anyone acting for them (Agrawal, J.).
95. Held: The injunction is widely worded. In operation it only stops those persons using the Ahmedabad and Rajkot plants to manufacture, bottle, sell or deal in beverages of any person till 25 January 1996. That date is one year from the notice of 25 January 1995. It is confined to the use of the plants and is in line with the negative stipulation in clause 14 (Agrawal, J.).
96. Held: The Court found no infirmity in the High Court's order of 31 March 1995 granting the interim injunction on prayers (a)(ii) and (a)(iii) of the Notice of Motion as amended. The appeals fail and are dismissed. No costs (Agrawal, J.).

Ahmad Saghir, J.

He sat on the Bench. The reported judgment gives no separate opinion by him. Agrawal, J. wrote the judgment for the Bench.

Authorities

• General Electric Co. v. General Electric Co. Ltd., 1972 (2) All E R 507. Cited for the common law rule that a trade mark right is an adjunct of the goodwill of a business (Agrawal, J.).
• P. Narayanan, Law of Trade Marks and Passing-Off, 4th Ed., no. 20.16, p. 335. Cited for the three conditions of a valid common law trade mark licence (Agrawal, J.).
• Halsbury's Laws of England, 4th Edn., Vol. 47, nos. 9 to 26. Cited for the English law of restraint of trade (Agrawal, J.).
• N.S. Golikari v. Century Spinning Co., 1967 (2) SCR 378, pp. 384-85 and 389. Cited and quoted. It says negative covenants during the contract, for an employee bound to serve exclusively, are generally not a restraint of trade. Also cited on refusing an injunction that would compel idleness (Agrawal, J.).
• Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd., 1968 AC 269, pp. 294, 296, 307, 327-28 and 331-33. Cited and quoted for the test of what a restraint of trade is, and for the view that sole agency ties during a contract are not a restraint (Agrawal, J.).
• Superintendence Company of India (P) Ltd. v. Krishan Murgai, 1980 (3) SCR 1278, pp. 1289, 1291 and 1296-98. Cited for the Indian reading of Section 27 and for Sen J.'s view that the doctrine does not apply during a contract of employment (Agrawal, J.).
• Attorney-General of the Commonwealth of Australia v. Adelaide Steamship Co. Ltd., 1913 AC 781, p. 794. Lord Parker's remarks on monopolies and restraint of trade. Said by Lord Reid not to be a definition (Agrawal, J.).
• McEllistrim v. Ballymacelligott Co-operative Agricultural and Dairy Society Ltd., 1919 AC 548. Lord Finlay's remark on the right to sell goods. Doubted by Lord Reid in Esso Petroleum (Agrawal, J.).
• Herbert Morris Ltd. v. Saxelby, 1916 (1) AC 688. Principle that every man should be free to work for himself, as referred to by Lord Finlay (Agrawal, J.).
• Petrofina (Great Britain) Ltd. v. Martin, 1966 Ch. 146, p. 180. Diplock L.J.'s and Lord Denning M.R.'s statements of what a restraint of trade is (Agrawal, J.).
• W.H. Milsted and Son Ltd. Named inside the Golikari passage as the example of a one-sided contract (Agrawal, J.).
• V.B. Rangaraj v. V.B. Gopalakrishnan, 1992 (1) SCC 160. Relied on by the appellants on share transfers. Held to have no application (Agrawal, J.).
• Lalbhai Dalpatbhai & Co. v. Chittaranjan Chandulal Pandya, AIR 1966 Guj. 189. Cited by the appellants on the interim injunction. The judgment does not discuss it further (Agrawal, J.).
• Modern Food Industries India Ltd. v. M/s Shri Krishna Bottlers (P) Ltd., AIR 1984 Delhi 119. Cited by the appellants on the interim injunction. The judgment does not discuss it further (Agrawal, J.).
• American Cyanamid Co. v. Ethicon Ltd., 1975 AC 396. Cited by the appellants through Lord Diplock's remarks. The judgment does not discuss it further (Agrawal, J.).
• Chitty on Contracts, 27th Edn., Vol. 1, no. 27-040, p. 1310, and Halsbury's Laws of England, 4th Edn., Vol. 24, no. 992. Cited for the English practice on injunctions to restrain breach of negative stipulations (Agrawal, J.).
• Ehrman v. Bartholomew, (1927) W.N. 233. Cited for refusing an injunction that would compel idleness or service (Agrawal, J.).
• Wander Ltd. v. Antox India P. Ltd., 1990 (Supp) SCC 727, pp. 731-32. Cited and quoted for the tests for an interlocutory injunction (Agrawal, J.).

Judgement

1. The appeals are dismissed (Agrawal, J.).
2. The interim injunction granted by the Division Bench of the Bombay High Court on 31 March 1995, on prayers (a)(ii) and (a)(iii) of Notice of Motion No. 316 of 1995 as amended, stands (Agrawal, J.).
3. The injunction stops GBC, the share transferees and their affiliates from using the Ahmedabad and Rajkot plants for beverages of any person till 25 January 1996 (Agrawal, J.).
4. No order as to costs (Agrawal, J.).

Legal Principle / Ratio

A negative covenant that applies only while a franchise agreement lasts, and that promotes the trade, is not a restraint of trade under Section 27. The same holds outside employment contracts. The key holding: the stipulation "cannot be held to be in restraint of trade so as to attract the bar of section 27 of the Contract Act". The Court also treated the three-part test (prima facie case, balance of convenience, irreparable injury) as the guide for interlocutory injunctions, and held that a party who has itself broken the contract cannot ask to vacate the injunction.

Critical Analysis

Analysis based on the judgment text.

• The Court did not decide whether reasonableness is outside Section 27. It said only that it would proceed on that basis.
• The Court said a covenant applying only during the contract is normally outside the doctrine unless the contract is wholly one-sided. It did not state how a court tests whether a franchise contract is one-sided.
• The Court treated the covenant as aiding trade because it requires GBC to apply itself to selling Coca Cola's products.
• The judgment records no ruling on whether the notice of 25 January 1995 ends the 1993 Agreement after one year. It left that to the High Court.
• The refusal to vacate the injunction rests partly on GBC's own conduct. The Court called GBC prima facie responsible for the breach.

Significance

• The case applied the Golikari rule on covenants during a contract to a commercial franchise, not just to employment.
• It set out how the Trade and Merchandise Marks Act, 1958 and common law licences differ in trade mark use.
• It shows how Section 42 of the Specific Relief Act, 1963 allows an injunction on a negative covenant.
• It shows the equitable bar on a party that has itself broken the contract.

Exam-Important Points

• Rule first: a negative covenant operating only during the contract is not a restraint of trade under Section 27. Trap: this is not limited to employment contracts.
• Exception: the covenant may still fail if the contract is unconscionable, excessively harsh, unreasonable or one-sided.
• The Court did not decide whether reasonableness is relevant under Section 27. It assumed it is not.
• The 1993 Agreement was a common law licence and franchise. The 1994 Agreement was a statutory registered user agreement. The 1994 one did not supersede the 1993 one.
• Notice cut by mutual consent needs consensus ad idem. The Court said GBC's notice did not mention any mutual agreement, which weakened its case.
• Clause 19(b) binds only the parties, not the shareholders. It does not restrain share transfers.
• Interim injunction tests: prima facie case, balance of convenience, irreparable injury. The plaintiff's undertaking under Rule 148 protects the defendant.
• A party who broke the contract cannot ask to vacate the injunction, even by pleading closure of the factory.

Prepared from the full text of the judgment. The judgment has no numbered paragraphs, so passages are cited by judge. The official citation (AIR, SCC) is printed in the header of the judgment text.