This article has been written by Maria Sharwari from Surendranath Law College

Table of Contents

Introduction

Gujarat Bottling Co ltd v Coca-Cola Co is a well-known and extensively quoted franchise agreement case. J. S.C. Agarwal and J.S. Saghir Ahmed made up the divisional bench, with the latter’s stance agreeing with the former. The matter was first heard in the Bombay High Court, where Dhanuka J. granted temporary injunctions against Gujarat Bottling Co.’s (hereafter referred to as GBC) trade. Dissatisfied with the learned bench’s decision, GBC appealed to the Supreme Court.

It is a 33 pages long judgement and is further critiqued with regard to the niche it carved for a vivid judicial interpretation of Section 27 of the Indian Contract Act, which deals with agreements in restraint of trade and the plight which fell on the workmen of GBC after the interim injunction was issued.

Facts of the Case

GBC entered into an agreement in 1993 with Coke for grant of franchisee to prepare, bottle, sell brands of latter, but not to be concerned with the beverages of any other brand during the subsistence of the agreement and of 1 year period notice for its termination under the agreement, GBC also had right to discontinue supplying syrup on effective transfer of control of GBC by transfer of shares or any other indicia without the prior express consent of Coke. In all, 1993 agreement was for grant of license to GBC under common law by Coke.

GBC, however entered into another agreement with Coke in 1994 where under it was required to make an application to register the agreement under the statute as Registered User Agreement. Though the period of termination notice was reduced to 90 days but no similar provision as that of 1993 agreement was stipulated and neither was 1993 agreement expressly substituted.

The shareholding of GBC was transferred subsequently to Pepsi and it served Coke with a notice of 90 days to terminate 1994 agreement, and as a matter of abundant precaution, as 1 year notice terminating 1993 agreement, notwithstanding the contention that 1993 stands replaced by 1994 agreement. Coke sought GBC to be refrained from dealing with the beverages of Pepsi for the period of 1 yr. of termination notice.

Relevant Laws

The laws relied upon in adjudicating the case are the Trade Marks Act, 1999 and the Trade and Merchandise Marks Act, 1958.
Section 27, 41 and 82 of the Indian Contract Act, 1872 is also invoked.

Issues of the Case

Following are the issues of the given case:

Whether the 1994 agreement superseded the existing 1993 agreement.
Whether the 1993 agreement was in restraint of trade under section 27 of the Indian Contract Act, 1872.

Judgment

The Supreme Court referred to multiple observations and stated that agreements such as franchise agreements often incorporate a condition that the franchisee shall not deal with competing goods. Such a condition restricting the right of a franchisee is for facilitating the distribution of goods of the franchiser and cannot be regarded as a restraint of trade.

The purpose of the restrictive covenant in the 1993 Agreement can be construed as a means to further trade, which would be done through GBC promoting the sale of Coke’s products.

The Supreme Court further stated that the negative stipulation in paragraph 14 is operative only during the period of agreement is in operation because of the express use of the words “during the subsistence of this agreement including the period of one year as contemplated under paragraph 21”.

Except in cases where the contract is wholly one sided and when the restriction operates during the term of the contract, the doctrine of restraint of trade is not attracted. It will apply when the restriction operates after the termination of the contract.
In this case, the Supreme Court also referred to Niranjan Shankar Golikari v. Century Spinning and Manufacturing Company Limited where it held that: “… considerations against restrictive covenants are different in cases where the restriction is to apply during the period after the termination of the contract than those in cases where it is to operate during the period of the contract.”

The counsel for GBC contended that the above observation should be confined only to employment contracts, not to other contracts. The Supreme Court disagreed and found no rational basis to confine this principle to employment contracts only. It stated that the underlying principle governing contracts in restraint of trade is the same.

Finally, the Supreme Court held that the negative stipulation contained in paragraph 14 of the 1993 Agreement is valid, and it does not constitute restraint of trade under section 27 of the Act.
It was also contended that the interim injunction granted to the appellants was in consonance with the terms of the negative covenant of 1993 contract and restricted GBC and numerous others parties involved in the due manufacture and dealings of coca cola products to carry on any such contract with any other company or trademark, for a period of one year from the date of termination notice, that is 25th January 1996.

When addressing injunction, the court used the Specific Relief Act. Section 42 of the Act provides mechanism to grant injunction to perform negative agreement. Applying this provision, the court found no issue with the interim order of the High Court.

The court is of the view that granting interim injunction is at the discretion of the court. The court applies several tests before granting the injunction. The aim of giving such relief is to “to mitigate the risk of injustice to the plaintiff during the period before that uncertainty could be resolved”.

Reasoning of the Judges

Hon’ble Justice SC Agarwal has investigated the special nature of both the 1993 and 1994accords in paragraphs 14, 15, 16, 17 of the judgment. The 1993 deal was for the transfer of a license to GBC for the use of trademarks that Coca-Cola had purchased. The agreement spells out the terms and conditions that govern the production, quality, and distribution of GBC-prepared beverages.

As a result, this deal was classified as a franchise agreement, with Coca-Cola acting as the franchisor and GBC acting as the franchisee. The 1994 agreement was created to allow for the registration of user agreements, and it is not intended to be a replacement for the 1993 agreement.

By applying English jurisprudence, the learned bench resolved on the concerns of trade restraint as indicated in paragraph 14 of the 1993 agreement. The evolution of common law concepts dealing with trade barriers is detailed in paragraph 21 of the judgment.

Any trade restrictions are against English public policy, and there are only two exceptions where the reasonableness of a restriction can be questioned: when a former employee of a business tries to compete with the employer after leaving the job, and when the previous owner of a business competes with the new owner to whom the business was sold.
However, as time passed and public policy changed, the foundations for reasonability shifted.

Due to the limited scope of Section 27 of the Indian Contract Act, the judges forgo its interpretation in favor of precedents in determining whether or not paragraph 14 of the 1993agreement imposes any restrictions on GBC’s trade. As a result, the ratio centered on the decisions in the Esso Petroleum Co. case and the Niranjan Shankar Golikari case.

As a result, it was found that because the application of paragraph 14 was limited to the duration of the agreement and not beyond, it could not be read as a restriction on GBC’s commercial activities.

The court did not waive the interim injunction imposed on GBC, which is now owned by PepsiCo. GBC stated that the order would result in the layoff of many of the company’s employees.
The court, on the other hand, disagreed with their demands. Before contracting with Coca-Cola, GBC was aware of all of the terms of the 1993 agreement, and Coca-Cola denied the appellants the syrup due to their violation of those requirements.

GBC clearly acted inequitably in advancing its shares to PepsiCo in order to reveal the secret of Coca-syrup, Cola’s and will thus suffer the consequences of its conscious decision. The injunction applied to everyone who had even a tangential relationship with GBC or the company.

Criticism

Section 27 of the Indian Contract Act, 1872, governs trade restraint. The infamous Niranjan Shankar Golikari case, which took place in 1967, was the first instance of a trade restriction problem. Unlike common law principles and the approach followed in English jurisprudence. the quantity of reasonability is not an issue under the scope of the provision in question. The section’s purpose at the time of its creation was to defend the interests of aspiring merchants.

However, decades later, there has been no significant change in its scope or meaning. The above decision is an excellent illustration of this insufficiency, since the court relied on English jurisprudence standards to assess whether or not the 1993 agreement article was in trade restriction. The section’s scope is limited, leaving no space for ambiguous interpretations. It made me happy that the words constraint and rationality go together.

As a result, reasonableness must be deduced from the context. Ironically, whenever the question of trade constraint is raised, it is always pointed out that India varies from common law in that the reasonableness inquiry is not conducted. Despite this, there are situations like this one where decisions are based on the same common law grounds. Restrictions that are limited to the duration of a contract or a certain region are not specifically stated in section 27, which regulates such restraints.

The preceding decision offered no addition to our understanding of section 27’s consequences. The judges stated in paragraph 24 of the judgement that they did not want to go into the weeds of the section and relied on English decisions to reach a decision.

The plight of all GBC employees was another troubling problem that developed as a result of the judgement. Every single person who was even remotely related to the company’s dealings was served with an interim injunction. The members, including the servants of the transferees to affiliated businesses, are discussed in paragraph 50 of the judgement. This resulted in a one year spell of unemployment for them. Following GCB’s ill-treatment, Coca-Cola took the right decision to pursue contract termination.

The temporary injunction, on the other hand, was broad in reach and applied to a large number of persons. The court’s decision to dismiss all challenges and uphold the Bombay High Court’s judgement proved catastrophic for all employees. The court might have issued an order allowing all of these employees to seek relief from GCB. but no such action was taken.

Conclusion

The case is famous for the rivalry between the two beverage powerhouses. Here, a case has arisen between Coca-Cola and GBC, as Pepsi, gained control of the bottling plant used by Coca-Cola. The High Court granted an injunction preventing GBC from carrying out any contract with Coca-Cola or any such other party, for one year. GBC had argued against the injunction given by the High Court, but the Supreme Court’s analysis shows that despite the negative covenant of the 1993 contract, the Specific Relief Act allowed for an injunction to be granted.

Indian courts have clarified the legal status of post-contractual covenants or restrictions. Unless it comes within the stated exception set out in Section 27, neither the reasonableness test nor the partial constraint are relevant when construing Section 27 of the Act. The Law Commission of India’s 13th report proposed in 1958 that section 27 be adequately revised to allow restrictions, to the extent that they are reasonable, in the interests of both the parties and the public. However, no action has been made in response to this suggestion.

The Law Commission of India’s 13th report proposed in 1958 that section 27 be adequately revised to allow restrictions, to the extent that they are reasonable, in the interests of both the parties and the public. However,
no action has been made in response to this suggestion Indian courts have clarified the legal status of post-contractual covenants or restrictions. Unless it comes within the stated exception set out in Section 27, neither the reasonableness test nor the
partial constraint are relevant when construing Section 27 of the Act.