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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 & 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.

Thus, the HC held that the observations made by the learned Single judge are prima facie in nature and the appeal is devoid of merits and hence was dismissed.

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