TMI Blog2006 (3) TMI 776X X X X Extracts X X X X X X X X Extracts X X X X ..... b) of the permission agreement entered into between the appellant - Percept D. Markr (India) Pvt. Ltd. and the respondent No. 1 - Zaheer Khan is void under Section 27 of the Indian Contract Act, 1872 has been in restraint of trade. It was submitted by learned senior counsel for the appellant - Mr. Ashok H. Desai that the provision such as the right of first refusal is merely regulatory and not in restraint of trade. FACTS: 3. The appellant is a company incorporated under the Companies Act, 1956 and carries on business, inter alia, of event management, model and celebrity endorsement and management, charity events/social marketing, all entertainment related activities, sports management and marketing, internet marketing, broadband publicity and radio marketing. Respondent No. 1 - Zaheer Khan is an Indian citizen and a cricketer of international repute. He had entered into an agreement with the appellant. Respondent No. 2 is a company incorporated under the Companies Act, 1956. The appellant entered into the said agreement with respondent No. 1 on 01.11.2000 for a period of 3 years commencing on 30.10.2000 and expiring on 29.10.2003. By a letter of intent dated 29.07.2003 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that if the terms offered by the third party materially changed in favour of such third party after the same had been offered by respondent No. 1 to the appellant, respondent No. 1 would be required to re-offer the revised terms of the third party offer. The appellant, by its letter dated 27.10.2003, reiterated the same terms. On 29.10.2003, the agreement expired by efflux of time. The appellant, by its letter dated 10.11.2003 reiterated what was stated by it in its earlier letters with regard to the rights of the appellant and obligations of respondent No. 1 in case respondent No. 1 was desirous of appointing any other person as his agent for rendering services similar to the services rendered by the appellant under the said agreement. 4. Respondent No. 1, by his letter dated 18.11.2003, alleged that he had no obligation under the said agreement after 29.10.2003, save and except honouring the subsisting agreement entered into by respondent No. 1 with third parties as specified in his letter dated 10.09.2003 and the agreement entered into with Adidas Limited which was negotiated prior to the expiry of the said agreement. In the said letter for the first time, after the said a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks from 19.12.2003; and (iii) to place on record the account/s of four weeks under such contracts in a sealed cover. 7. Aggrieved by the above order, two special leave petitions were filed by the appellant in this Court. This Court stayed the impugned order until further orders. On 27.08.2004, leave was granted. We heard Mr. Ashok H. Desai, learned senior counsel, appearing for the appellant and Mr. Chanderuday Singh, learned senior counsel, appearing for respondent No. 1 and Mr. K.N. Bhat, learned senior counsel, appearing for respondent No. 2. 8. Mr. Ashok H. Desai, learned senior counsel, appearing for the appellant submitted that the High Court has failed to appreciate the true legal meaning and effect of Section 27 of the Indian Contract Act, 1872. He submitted that an agreement of 'first option' or the 'right of first refusal' of the kind contained in the Promotion Agreement dated 01.11.2000 entered between the appellant and respondent No. 1 can never be said to be an agreement in restraint of trade. Explaining further, he said that the contract of 'first refusal' on the ground of option in favour of the appellant is not an independent agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of the agreement which are as follows:- Under the Agreement, the appellant was appointed as the sole and exclusive agent to manage and market the affairs of respondent. In consideration for this appointment, respondent No.1 was guaranteed a minimum amount of ₹ 55 lakhs per year. In reality, he was able to obtain ₹ 1 crore per year. Such a celebrity contract involves considerable risk to the agent (in this case, the appellant) who has to guarantee a large amount and to invest considerable amounts of money at a substantial risk in creating and promoting a particular person as a brand. The reciprocal promise obtained from the opposite party (in this case, respondent No. 1) is in the form of a right of first refusal. The Agreement provided for an initial term of three years (from 30.10.2000 to 29.10.2003) and extension thereof for such further period as may be mutually agreed. The extension was contemplated, inter alia, pursuant to the terms of Clause 31 of the Agreement pursuant to which Respondent No. 1 was to negotiate on an exclusive basis with the appellant for a prescribed period. Thereafter, Clause 31(b) contained a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Division Bench found Clause 31(b) to be void under Section 27 of the Indian Contract Act, 1872. Mr. Desai then argued the scope and effect of Section 27 of the Indian Contract Act, 1872. According to him, Section 27 deals with restraint of trade and not with promotion or regulation of trade. The language of the section makes this abundantly clear and the development of the case law in India also supports this. In support of this contention, he relied on V.N. Deshpande v. Arvind Mills AIR1946Bom423. In the said case, the High Court of Bombay was considering a clause relating to confidentiality of information and stated as follows:- Clause 9 of the agreement prevents the appellant from divulging any secret information of the nature mentioned in that clause after the termination of his service. As pointed out in (1916) 1 AC 688 the defendant is not prevented from acquiring knowledge which makes him a better employee for the public for future employment. It only prevents him from divulging information which he has received as respondents' employee to another party. It is, therefore, clear that the clause as worded is proper and an injunction granted in terms thereof is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e passed: such an area has long been and still is that of contracts between employer and employee as regards the period after the employment has ceased. Negatively, and it is this that concerns us here, there will be types of contract as to which the law should be prepared to say with some confidence that they do not enter into the field of restraint of trade at all. How, then, can such contracts be defined or at least identified? No exhaustive test can be stated - probably no precise, non-exhaustive test. The development of the law does seem to show, however, that judges have been able to dispense from the necessity 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. 15. In the context of the franchise agreements before this Court in Gujarat Bottling, this Court concluded: 30. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the restraint is not envisaged by Section 27. 19. That in the facts and circumstances, Mr. Desai submitted that Clause 31(b) is reasonable as it is on the basis of the right of first refusal clause that the appellant can take the risk on a relatively less well-known player and compensate him so well. While in determining reasonableness, Courts take a stricter view of employer-employee relationship, but this, according to him, is admittedly not that. According to him, this is an agency and as argued, it is not clear which side has the stronger bargaining power. 20. Learned counsel for respondent No. 2 submitted that no relief can be claimed against it in application under Section 9 of the Arbitration and Conciliation Act, 1996. Such a submission, according to Mr. Desai, fails to appreciate the prayer made by the appellant in Section 9 application wherein relief was claimed only against respondent No. 1 as could be seen from the prayers in Section 9 application. In fact, at the time the Section 9 was applied, the appellant had only reason to believe but could definitively assert that respondent No. 1 had entered into a contract with respondent No. 2. 21. According to Mr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommence arbitral proceedings since the date of the impugned order was fatal to its Section 9 application. According to Mr. Desai, the appellant in fact, in this case, has acted with utmost expedition. The appellant upon becoming aware of the fact that respondent No. 1 had acted in breach of its obligation under the Promotion Agreement filed Section 9 application on 04.12.2003 and the Single Judge granted interim relief on 10.12.2003 which decision was reversed by the Division Bench on 19.12.2003 and the appellants promptly approached this Court. 23. The fact that the appellants have not yet commenced arbitral proceedings is solely on account of the fact that the Division Bench, in the impugned order, has held Clause 31(b) to be void under Section 27 of the Contract Act. Since the claim of the appellant is based on only Clause 31(b), it would be a futile exercise for the appellant to commence arbitration. Learned senior counsel for respondent No. 1 submitted that the impugned judgment of the Division Bench that Clause 31(b) is void under the Indian Contract Act is only a prima facie finding at an interim stage. Such a submission, according to Mr. Desai, is only to be stated to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unless extended by mutual agreement and all obligations and services under the contract were to be performed during the term. It was further submitted that assuming without admitting that the negative covenant in Clause 31(b) is not void and is enforceable, it was nevertheless inappropriate, if not impermissible, for the Single Judge to grant an injunction to enforce it at the interim stage, for the following reasons:- (i) Firstly, grant of this injunction resulted in compelling specific performance of a contract of personal, confidential and fiduciary service, which is barred by Clauses (b) and (d) of Section 14(1) of the Specific Relief Act, 1963; (ii) Secondly, it is not only barred by Clause (a) of Section 14(1) of the Specific Relief Act, but this Court has consistently held that there shall be no specific performance of contracts for personal services; (iii) Thirdly, this amounted to granting the whole or entire relief which may be claimed at the conclusion of trial, which is impermissible; (iv) Fourthly, the Single Judge's order completely overlooked the principles of balance of convenience and irreparable injury. Whereas Percept could be fully compens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ench was clearly right in allowing the respondents appeal. By petition No. 514/2003, the appellant sought an interim order restraining the first respondent from entering into an agreement/arrangement or acting upon or continuing to act upon any agreement/contract with the second respondent or any third party without first performing and complying with the first respondent's obligation under and in terms of Clause 31(b) of the contract. In the correspondence addressed by the appellant, in particular, the letters dated 15.09.2003, 06.10.2003, 27.10.2003 and 10.11.2003 were annexed as Exhibits respectively to the petition. The appellant repeatedly contended that the first respondent was bound at any time during or after the term of the said contract to provide the appellant, in writing, of the terms and conditions of any third party offer so that the appellant would have the right to match the third party offer received by the first respondent prior to the first respondent accepting any such offer. The appellant's interpretation/understanding of Clause 31(b) of the contract that the negative covenant contained in Clause 31(b) will operate after the expiry of the contract is fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is soon to be completed. The appellant is now seeking a mandatory interim order 2= years down the line, praying in effect that this Court should set the clock back and grant an interim injunction which was rejected by the High Court on 19.12.2003 and which was declined at the stage of granting leave to appeal by this Court. 31. Most importantly, the appellants are seeking at the interlocutory stage to question the interpretation of restraint of trade during the post-contractual period, which interpretation has been uniform, consistent and unchanged for the past several years since the judgment of Sir RichardCouch, C.J. in Madhup Chunder v. Rajcoomar Doss (1874) 14 Beng. L.R. 76. The interpretation of Section 27 of the Contract Act which found prima facie favour with the Division Bench is one which has been uniformly and consistently followed from 1874 till 2006 by all High Courts in India, and which has expressly been approved by this Court in Niranjan Shankar Golikari (supra), Superintendence Company of India (supra) and Gujarat Bottling (supra ). Even if there were a case for reconsideration of this 132-year old interpretation, though none is made out by the appellant, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cause of action for filing the petition was the concluded agreement between respondent Nos. 1 and 2. An injunction was sought seeking to restrain respondent No. 1 from entering into any agreement/arrangement or acting upon or continuing to act upon any agreement/contract with respondent No. 2 or any third party without first performing and complying with Clause 31(b) of the said agreement. PLEADINGS IN THE ARBITRATION PETITION 35. The express case pleaded in the petition under Section 9 was that (i) the agreement was for a term of 3 years from October 30, 2000 till October 29, 2003; (ii) the agreement came to an end by efflux of time on October 29, 2003; (iii) the petitioner (appellant herein) had learnt and confirmed that respondent No. 1 and respondent No. 2 had entered into an agreement ; Clause 31 of the agreement survives the expiry of the agreement; the agreement contained a negative covenant which was valid and binding after its expiry; and the subsequent agreement entered into between respondent No. 1 and respondent No. 2 was null and void. 36. According to the respondent, there is no pleading whatsoever to support the argument that respondent No. 1 was a fle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extension of the term; and (iv) the full term contemplated was beyond the initial term of 3 years. 38. The legal position with regard to post-contractual covenants or restrictions has been consistent, unchanging and completely settled in our country. The legal position clearly crystallised in our country is that while construing the provisions of Section 27 of the Contract Act, neither the test of reasonableness nor the principle of restraint being partial is applicable, unless it falls within express exception engrafted in Section 27. Section 27 of the Indian Contract Act, 1872 provides as follows:- 27. Agreement in restraint of trade, void. Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind is to that extent void. Exception 1.- Saving of agreement is not to carry on business of which goodwill is sold.- One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein, provided that such limits appear to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement, it becomes prima facie void, as rightly held by the Division Bench. 41. If the negative covenant or obligation under Clause 31(b) is sought to be enforced beyond the term, i.e. if it is enforced as against a contract entered into on 20.11.2003 which came into effect on 1.12.2003, then it constitutes an unlawful restriction on respondent No. 1's freedom to enter into fiduciary relationships with persons of his choice, and a compulsion on him to forcibly enter into a fresh contract with the appellant even though he has fully performed the previous contract, and is, therefore, a restraint of trade which is void under Section 27 of the Indian Contract Act. Under Section 27 of the Contract Act (a) a restrictive covenant extending beyond the term of the contract is void and not enforceable. (b) The doctrine of restraint of trade does not apply during the continuance of the contract for employment and it applied only when the contract comes to an end. (c) As held by this Court in Gujarat Bottling v. Coca Cola (supra), this doctrine is not confined only to contracts of employment, but is also applicable to all other contracts. 42. Assuming without admitting that the negat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e wrong to put pressure on the defendants to continue to employ in the fiduciary capacity of a manager and agent someone in whom he had lost confidence. Clause 31 (a) and (b) is reproduced below:- 31. NEGOTIATION AND RIGHTS OF FIRST REFUSAL: (a) NEGOTIATION: During the third contract year, and in any event not later than August 1st, 2003 the Parties shall meet to commence discussions with a view to the extension of their relationship beyond the Term. For sixty (60) days thereafter, Zaheer Khan, agrees to negotiate in good faith only with Percept, and not with any third party, concerning the right after the Term to the use of his endorsement or for the arrangement contemplated by this Agreement in association with any goods or services. Only after such one hundred and eighty (180) day period from the date of the last assignment, Zaheer Khan shall have the right to negotiate with other persons, subject however to Sub-clause (b). (b) FIRST REFUSAL: During the Term of the Agreement, prior to completion of the first negotiation period provided for in Sub-clause (a) above, Zaheer Khan agrees not to accept any offer for his endorsement, promotion, adverti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any dispute between the parties regarding the enforceability of the said clause would come under the provision of Clause 32(g) of the agreement which provides for resolution of any claim or controversy pertaining to the agreement through the process of arbitration. Clause 32(g) of is reproduced below: G) ARBITRATION : Any claims or controversies relating to this Agreement shall be resolved by arbitration held under the auspices and rules of the Indian Arbitration and Conciliation Act, 1996 by one arbitrator appointed in accordance with the arbitration rules. The place of arbitration shall be Mumbai. Any award of such arbitration shall be final, conclusive and legally binding, without any right of appeal and may be entered into judgment in any court of competent jurisdiction. This Agreement and all matters related hereto shall be governed by the laws of India. 44. In our view, no case is made out by the appellant for compelling respondent No. 1 to appoint the appellant as his agent in perpetuity when the first respondent has no faith or trust in the appellant. The grant of injunction restraining respondent No. 1 from acting upon the agreement entered into with t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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