A contract which is intended for advancement of trade shall not be regarded as being in restraint of trade: Bombay High Court
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. This remarkable judgment was passed by the Bombay High Court in the matter of ARNAV ENTERPRISES V IOSIS SPA &amp; WELLNESS PRIVATE LIMITED [ARB.A.NO.7255 OF 2020 IN ARBITRATION PETITION (L) NO.426 OF 2020] by Honourable Justice V.G.Bisht and Justice R.D.Dhanuka. This appeal was filed under section 37 of the Arbitration and Conciliation Act, 1996 where the appellant has impugned the orders dated 30th July 2020 and 26th October 2020 by which ad interim measure was granted in favor of the respondent under section 9 of the Arbitration Act. The relevant facts of the case in brief are, a 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 in December 2018 and subsequently, various correspondences were exchanged between the parties through emails. A Letter of Intent was issued on 5th March 2019 and the Franchise Agreement was executed on 31st March 2019. The appellant later issued a termination notice on 21st June 2020 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. The appellants contended before the HC that a negative covenant is contrary to section 27 of the Contract Act being a contract in restraint of trade whereas the respondents argued that the appellant had continued to use sensitive and confidential information/documents even after termination of the agreement thus ad-interim reliefs were correctly granted by adverting to the negative covenant which is recorded in clause (16) of the Franchise Agreement. 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 and acknowledged that as per the Letter of Intent the appellant was restricted to use the same or similar names upon the termination of the agreement and stated that, “A contract which is intended for the advancement of trade shall not be regarded as being in restraint of trade. The brand name “OASIS” has a 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.”
 on 20 04 2021 on 23 04 Priya Soparkar1aral 7255 20 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION ABRITRATION APPEALNO.7255 OF 2020INABRITRATION PETITIONNO.426 OF 2020WITHINTERIM APPLICATIONNO. 7271 OF 2020ANDINTERIM APPLICATIONNO. 7268 OF 2020INABRITRATION APPEALNO.7255 OF 2020INABRITRATION PETITIONNO.426 OF 2020 Arnav Enterprises ... Appellant ApplicantVs.IOSIS Spa & Wellness Private Limited... Respondent Mr.Vikrant Shetty alongwith Ms.Sakina Electricwala i by M s TaurusLegal Advocates for the Appellant Applicant.Ms.Fatima Barodawalla alongwith Mr.Uttam S. Rane Mr.Laxman Bhinda Mr.Vikram Ahirwar Advocates for the Respondent. CORAM : R.D.DHANUKA & V.G.BISHT JJ. RESERVED ON : APRIL 07 2021. PRONOUNCED ON: APRIL 20 2021.Judgement the appellant(original respondent) has impugned the order dated 30th July 2020 and26th October 2020 passed by the learned Single Judge thereby granting ad interim measures in favour of the respondent undersection 9 of the Arbitration Act. Some of the relevant facts for the purpose on 20 04 2021 on 23 04 Priya Soparkar2aral 7255 20of deciding this appeal are as under.2.It was the case of the respondent that the respondent is engaged inthe business of running wellness centers under the brandname andtrademark of “IOSIS”. The Founder and Managing Director of therespondent has specialized in cosmetology and wellness from LondonBeauty Schoolbeauty and cosmetology at Christine Valmyetc.The respondent has knowledge of running beauty salon slimming skincarecenters and spas in India.3.It was the case of the respondent that the appellant approached therespondent for franchise of the respondent in the month of December 2018.Various correspondences were exchanged between the parties through e mails. The respondent issued a Letter of Intent on 5th March 2019 in favourof the appellant for setting up and operating the franchise center. It is thecase of the respondent that on 31st March 2019 the Franchise Agreementcame to be executed between the parties. The appellant however committeddefault of the said Franchise Agreement. The appellant however through itsadvocate issued a termination notice on 21st June 2020 terminating thebusiness of the franchise center. The appellant however continued to operatethe center and utilized the brandname trademarks of the respondentcontrary to clauseof the Franchise Agreement. on 20 04 2021 on 23 04 Priya Soparkar3aral 7255 204.The respondent wrote a letter dated 28th June 2020 denying theallegations made by the appellant in the letter dated 21st June 2020 andcalled upon the appellant to adhere to clauseof the said FranchiseAgreement. The appellant denied the contents of the said letter dated 28thJune 2020 vide a letter dated 2nd July 2020. The respondent filed petitionunder section 9 of the Arbitration Act on 14th July 2020 and prayed for ad interim reliefs. The said petition was resisted by the appellant. Theappellant raised a preliminary objection with respect to the maintainabilityof the said petition filed by the respondent under section 9 before this Court.In the said affidavit in reply the appellant relied on the Letter of Intentdated 31st March 2019 and alleged that the said Franchise Agreement wasnever signed and executed by and between the parties.5.The matter appeared before the learned Single Judge on variousdates. On 20th July 2020 the appellant through its counsel made a statementthat pursuant to the letter of termination the appellant has completelyceased use of the respondent’s franchise brandname tradename trademarks printed material brouchers equipments technology and was not referringany of the clients of the respondent to itself. The learned Single Judgerecorded the said statement as an undertaking to this Court. On 30th July 2020 the appellant through its counsel also contended before the learnedSingle Judge that the appellant was not agreeable to acknowledge theFranchise Agreement between the parties and what has been relied upon on 20 04 2021 on 23 04 Priya Soparkar4aral 7255 20by the respondent herein was a bogus document not signed by theappellant.6.This court prima facie held that the appellant has disowned anycontractual relationship on the ground of Letter of Intent or any FranchiseAgreement and not entitled to have any benefits under Letter of Intent orunder Franchise Agreement in respect of facilities brands trademark whichthe respondent would otherwise provide. The appellant made a statementbefore the learned Single Judge that they are in no manner using thetrademark brandnames or any of the facilities of the respondent. This Courtaccepted the said statement.7.It was the case of the respondent that inspite of said statement madeby the appellant the appellant continued to use the brandname andadvertisement materials of the respondent. This court recorded the statementmade by the respondent and directed the appellant not to use any of thebrandname or advertisement material of the respondent or any facilities ofthe respondent in respect of any of its outlet as also on the website orelsewhere. The appellant was directed to take immediate steps to removeany of the brandnames advertisement material belonging to respondent ifthe same was still being used by the appellant.8.By an order dated 30th July 2020 the learned Single Judge granted on 20 04 2021 on 23 04 Priya Soparkar5aral 7255 20ad inerim relief in terms of prayer clausesandthereby restrainingthe appellant from operating that center in the name of “IOSIS” or anyother name for a period of two years from 21st June 2020 and also fromusing the brandname of the petitioner i.e. IOSIS Spa and Wellness PrivateLimited or any other name resembling IOSIS Spa and Wellness PrivateLimited.9.The learned Single Judge passed an order on 26th October 2020 inthe Interim ApplicationNo.5055 of 2020 filed by the appellant formodification of the said order on the ground that the said ad interim order interms of prayer clausesandwas causing prejudice to the appellantas it restrains the appellant from carrying on its business in any othername for a period of two years from 21st June 2020. In paragraph No.4 ofthe said order the learned Single Judge referred to clauseof theFranchise Agreement which provides for the “effect of termination” stronglyrelied upon by the respondent before the learned Single Judge. The learnedSingle Judge observed that there was nothing on record on the date of thesaid order dated 30th July 2020 to discard the Franchise Agreement or toshow that the respondent herein was prohibited from referring to thatagreement. The learned Single Judge clarified in the impugned order thatthe said order dated 30th July 2020 was an ad interim order. Theobservations made in the said order the order dated 30th July 2020 andorder dated 26th October 2020 were prima facie keeping all contentions of on 20 04 2021 on 23 04 Priya Soparkar6aral 7255 20the parties of principal proceedings expressly open. The learned SingleJudge observed that prima facie it is difficult to believe the statement ofthe appellant that the said Franchise Agreement was fabricated or a bogusdocument.10.Being aggrieved by the said two orders the appellant preferred thisappeal. The Division Bench of this Court passed an order on 3rd December 2020 on mentioning the matter by the appellant thereby staying theimpugned order to the extent of restraining the appellant from carrying outspa business for two years from 21st June 2020 to 20th June 2022. TheDivision Bench clarified that the appellant shall not carry out the spabusiness in the name of “IOSIS”.11.Mr.Vikrant D.Shetty learned counsel for the appellant invited ourattention to some of the documents annexed to the appeal paperbook andwould submit that there was no Franchise Agreement signed between theparties. Whatever steps were taken by the parties were taken under the saidLetter of Intent which also came to be terminated by his client. He submitsthat clauseof the Franchise Agreement which prohibits the appellantfrom operating or doing business under any name or in any manner wasnot 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. Suchnegative covenant could not have been enforced against the appellant. The on 20 04 2021 on 23 04 Priya Soparkar7aral 7255 20appellant cannot be restrained from carrying on his own business beingcarried by not using the trademark or material of the respondent.12.In support of this submission learned counsel placed reliance onjudgments in cases of Gujarat Bottling Company Limited and others Vs.Coca Cola Company and others SCC Online Bom 345 Precept D’mark(India) Limited Vs. Zaheer Khan and others Private Limited Vs. Aditya Birla Nuvo Limited6SCC 792. It is submitted that the Hon’ble Supreme Court and this court in those judgments have categorically held that a negative covenant iscontrary to section 27 of the Contract Act being a contract in restraint oftrade.13.Ms.Fatima Barodawala learned counsel for the respondent on theother hand would submit that not only the Letter of Intent was issued bythe respondent but the parties had also executed the Franchise Agreement.Various steps were taken pursuant to those documents by the parties. Theappellant had however terminated the said agreement between the parties.Though this Court had granted ad interim relief the appellant committedviolation of the ad interim order passed by this court and continued to use thetrademark of the respondent. The respondent has already filed a separatecontempt proceedings against the appellant. on 20 04 2021 on 23 04 Priya Soparkar8aral 7255 20 14.The learned counsel for respondent submits that it was a specific caseof the respondent in para 10 of the arbitration petition that the respondenthad shared with the appellant various information documents which weresensitive and confidential including trade secrets and computer database inthe form of files programs knowhow formulae and the like which had beencreated by the respondent as also the customer details etc. The appellant hadcontinued to use those sensitive and confidential information documentseven after termination of the agreement entered into between the parties.The learned Single Judge was thus right in granting ad interim reliefs interms of prayer clausesandby adverting to negative covenantwhich is recorded in clauseof the Franchise Agreement.15.It is submitted that such negative covenant is enforceable in law andis not contrary to section 27 of the Contract Act in view of the nature ofconfidential information and documents furnished to the appellant withpermission to use such sensitive and confidential information of thedocuments during the existence of the Franchise Agreement and not aftertermination of the said agreement. She distinguished the judgments reliedupon by the learned counsel for the appellant and also sought to relyupon such judgments Niranjan Shankar Golikari Vs. Centrury Spinning andManufacturing 2 SCR 378 V.M.Deshpande Vs. The Arvind MillsCompany Ltd. order dated 10th July 1945 in FA 86 1945 and AnindyaMukherjee Vs. Clean Coats Private Limited order dated 28th October 2020 in on 20 04 2021 on 23 04 Priya Soparkar9aral 7255 20ARBP 947 2009 in support of her submissions. 16.It is not in dispute that in the impugned orders passed by the learnedSingle Judge are ad interim orders. The Arbitration petition filed by therespondent under section 9 of the Arbitration act is still pending.17.The parties have not even appointed any arbitrator. On the basis ofthe material produced by the parties on record the learned Single Judge hasmade prima facie observations that the argument of the appellant that theFranchise Agreement was not signed by the appellant and was a bogusdocument cannot be considered. The appellant had acted upon the saidagreement and started the business by using such confidential andsensitive information documents. In our prima facie view there is thus nosubstance in the submissions of the learned counsel for the appellant that thesaid Franchise Agreement was a bogus document.18.Be that as it may even in the said Letter of Intent at page 101 of theappeal memo it is made clear that upon termination of the agreement thefranchise will not use the name of “IOSIS” or any name resembling thename of “IOSIS”. All branding materials data are to be handled as perrules.19.The Hon’ble Supreme Court in case of Gujrat Bottling Company on 20 04 2021 on 23 04 Priya Soparkar10aral 7255 20Limited and others Vs. Coco Cola Company and others has held thatin a contract which is intended for advancement of trade shall not beregarded as being in restraint of trade. The Court has to decide as a matterof law whether the contract has or not in restraint of trade and whether ifso it is reasonable. In our prima facie view considering the fact that therespondent had the brandname in the name of “OASIS” and has reputation inthe market and having furnished various sensitive and confidentialdocuments and information including the list of their customers suchrestraint as recorded in clauseof the Franchise Agreement in our primafacie view would not be a restraint of trade under section 27 of the ContractAct. Hon’ble Supreme Court in the said matter had granted injunction againstthe defendant after considering the provisions of section 27 of the ContractAct and also the principles under order XXXIX and also section 42 of theSpecific Relief Act 1963.20.Be that as it may since the impugned observations made by thelearned Single Judge are prima facie in nature and since those two orders aread interim orders even otherwise we do not propose to interfere with thosetwo orders even on this ground.21. It is made clear that the observations made by the learned Singlejudge as well as the observations made by this Court in this order are primafacie in nature. No case is made out by the appellant for interference with on 20 04 2021 on 23 04 Priya Soparkar11aral 7255 20the impugned orders passed by the learned Single Judge. The appeal isdevoid of merits and is accordingly dismissed. All pending InterimApplications are also dismissed. 22.Ad interim relief granted by this court on 3rd December 2020 standsvacated. The learned Single Judge is directed to dispose of the saidArbitration Petition No.426 of 2020 expeditiously.23.There shall be no order as to costs. ( V.G.BISHT J. )( R.D.DHANUKA J. )…. 