# PERCEPT D'MARK (INDIA) PVT. LTD v. ZAHEER KHAN

- **Citation:** [2006] 3 S.C.R. 146
- **Court:** Supreme Court of India
- **Decided:** 2006-03-22
- **Case number:** Civil Appeal Nos. 5573-5574 of 2004
- **Bench:** H.K. Sema, Dr. Ar. Lakshmanan
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/percept-d-mark-india-pvt-ltd-v-zaheer-khan-21205
- **Pages:** 29

## Headnote

Specific Relief Act, 1963-Sections 14(l)(a), (b} and (d}-Contract,
1872--Section 27-Promotion agreement for member of Indian Cricket team
C appointing sole and exclusive agent for marketing and generally managing
his diverse media affairs-Agreement having fued term with a clause that
after its expiry if he desired to appoint any other person as hi.f agent for
rendering similar services, he was required to give the agent option to match
offer of other party, and only if the agent refused it, appoint the other partyAfter expiry of the term, cricketer entering into agreement with another person---
D Single judge of High Court granting ad-interim injunction restraining the
cricketer from acting upon agreement with the other party without first
performing his obligation under the clause of first agreement-Division Bench
allowing the appeal-Correctness of-Held: Contract between the cricketer
and the agent was for services which were of personal, confidential and
E fiduciary in nature and its specific performance was barred by Section 14( l}(a),
(b) and (d) of Act of 1953-Grant of interim injunction by Single Judge of
High Court was wrong as it not only compelled such specific performance, but
also granted entire relief before conclusion of trial-Enforcement of negative
covenant of clause in first agreement beyond its term against contract entered
into subsequently was restriction on cricketer's freedom to enter into fiduciary
F relationships of his choice; it compelled him to enter into afresh contract with
the agent after fully performing his pervious contract, and was a restraint of
trade which was void under Section 27 of Act of 1872--Section 9 of Arbitration
and Conciliation Act, 1996.
Contract, 1872-Section 27-Jnterpretation of-Neither test of
G reasonableness nor principle of restraint of trade being partial is app/icab/eAgreement has to fall within express exception engrafted in it to be declared
void
Appellant company, carrying on business, inter alia, of celebrity
H
146
PERCEPT D'MARK (INDIA) PVT.LTD. 1'.ZAHEER KHAN
147
endorsement and management, entered into promotion agreement with A
respondent no. I, who was then a member of Indian Cricket team. Under
the agreement, appellant was to act as the sole and exclusive agent to
market and generally manage diverse media affairs, endorsements etc. of
latter. The term of the agreement was for a period of three years
commencing from October 30, 2000 and ending on October, 29, 2003
unless extended by mutual consent of both the parties. As per clause 31 B
(b) of the agreement, if respondent no. I, after expiry of term of the
agreement was desirous of appointing any other person as his agent for
rendering services similar to those rendered by appellant, he was required
to offer appellant the right to match the third party offer, and only in the
event of appellant opting not to exercise its right to accept it, appoint the C
third party. The appellant on 1.12.2003 became aware that respondent no.
I had entered into an agreement with respondent no. 2 for services similar
to those rendered by them and filed an Arbitration Petition in the High
Court under Section 9 of the Arbitration and Conciliation Act, 1996. They
prayed inter alia, for an interim order that pending the commencement
and duration of arbitration proceeding, respondent no. I be restrained by D
injunction from entering into or continue to act upon agreement with third
party without first performing his obligation under Clause 31 (b) of the
agreement. Single judge of High Court granted the ad-interim reliefs as
prayed for. However, Division Bench of High Court held that Clause 31(b)
of the agreement was in restraint of trade and void under Section 27 of E
Contract Act. It allowed the appeals, dismissed the arbitration petition and
passed orders for further proceedings in the case. Henre the present
appeals.
Appellant contended that (i) Clause 31(b) of the agreement giving
them right of refusal was reasonable, in furtherance

## Text

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A
B
PERCEPT D'MARK (INDIA) PVT. LTD.
v.
ZAHEER KHAN
MARCH 22, 2006
[H.K. SEMA AND DR. AR. LAKSHMANAN, JJ.}
Specific Relief Act, 1963-Sections 14(l)(a), (b} and (d}-Contract,
1872--Section 27-Promotion agreement for member of Indian Cricket team
C appointing sole and exclusive agent for marketing and generally managing
his diverse media affairs-Agreement having fued term with a clause that
after its expiry if he desired to appoint any other person as hi.f agent for
rendering similar services, he was required to give the agent option to match
offer of other party, and only if the agent refused it, appoint the other partyAfter expiry of the term, cricketer entering into agreement with another person---
D Single judge of High Court granting ad-interim injunction restraining the
cricketer from acting upon agreement with the other party without first
performing his obligation under the clause of first agreement-Division Bench
allowing the appeal-Correctness of-Held: Contract between the cricketer
and the agent was for services which were of personal, confidential and
E fiduciary in nature and its specific performance was barred by Section 14( l}(a),
(b) and (d) of Act of 1953-Grant of interim injunction by Single Judge of
High Court was wrong as it not only compelled such specific performance, but
also granted entire relief before conclusion of trial-Enforcement of negative
covenant of clause in first agreement beyond its term against contract entered
into subsequently was restriction on cricketer's freedom to enter into fiduciary
F relationships of his choice; it compelled him to enter into afresh contract with
the agent after fully performing his pervious contract, and was a restraint of
trade which was void under Section 27 of Act of 1872--Section 9 of Arbitration
and Conciliation Act, 1996.
Contract, 1872-Section 27-Jnterpretation of-Neither test of
G reasonableness nor principle of restraint of trade being partial is app/icab/eAgreement has to fall within express exception engrafted in it to be declared
void
Appellant company, carrying on business, inter alia, of celebrity
H
146
PERCEPT D'MARK (INDIA) PVT.LTD. 1'.ZAHEER KHAN
147
endorsement and management, entered into promotion agreement with A
respondent no. I, who was then a member of Indian Cricket team. Under
the agreement, appellant was to act as the sole and exclusive agent to
market and generally manage diverse media affairs, endorsements etc. of
latter. The term of the agreement was for a period of three years
commencing from October 30, 2000 and ending on October, 29, 2003
unless extended by mutual consent of both the parties. As per clause 31 B
(b) of the agreement, if respondent no. I, after expiry of term of the
agreement was desirous of appointing any other person as his agent for
rendering services similar to those rendered by appellant, he was required
to offer appellant the right to match the third party offer, and only in the
event of appellant opting not to exercise its right to accept it, appoint the C
third party. The appellant on 1.12.2003 became aware that respondent no.
I had entered into an agreement with respondent no. 2 for services similar
to those rendered by them and filed an Arbitration Petition in the High
Court under Section 9 of the Arbitration and Conciliation Act, 1996. They
prayed inter alia, for an interim order that pending the commencement
and duration of arbitration proceeding, respondent no. I be restrained by D
injunction from entering into or continue to act upon agreement with third
party without first performing his obligation under Clause 31 (b) of the
agreement. Single judge of High Court granted the ad-interim reliefs as
prayed for. However, Division Bench of High Court held that Clause 31(b)
of the agreement was in restraint of trade and void under Section 27 of E
Contract Act. It allowed the appeals, dismissed the arbitration petition and
passed orders for further proceedings in the case. Henre the present
appeals.
Appellant contended that (i) Clause 31(b) of the agreement giving
them right of refusal was reasonable, in furtherance of trade and hence F
not void under Section 27 of Contract Act (ii) Under Section 42 of Specific
Relief Act, 1963 Court can grant injunction to perform negative covenant
even where specific performance of affirmative covenant may not enforced.
Respondent contended that the agree!Dent cannot be specifically
enforced under Section 14 of the Specific Relief Act, 1963, and accordingly, G
F
under Section 4l(e) no injunction could be granted as prayed by appellant.
Dismissing the appeals, the Court
HELD: 1.1. In view of the personal nature of the service and
relationship between the contracting parties, a contract of agency such as H
148
SUPREME COURT REPORTS
[2006] 3 S.C.R.
A one entered into between the appellant and respondent No. I is incapable
of specific performance and to enforce the performance thereof would be
inequitable.
1.2. Grant of injunction restraining first respondent would have the
effect of compelling the first respondent to be managed by the appellant,
B in substance and effect a decree of specific performance of an agreement
of fiduciary or personal character or service, which is dependent on mutual
trust, faith and confidence.
1.3. Grant of this injunction resulted in compelling specific
C performance of a contract of personal, confidential and fiduciary service,
which is barred by Clauses (b) and (d) of Section 14 (I) of Specific Relief
Act, 1953.
1.4. 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
D specific performance of contract for personal services.
2.1. 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. I's freedom
E 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 pervious contract, and is therefore,
a restraint of trade which is void under Section 27 of the Indian Contract
Act.
F
Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co.
G
H
Ltd., (1967[ 2 SCR 378 and Gujarat Bottling Co. ltd. v. Coca Cola Co.,
(1995[ 5 sec 545, relied on.
Madhup Chander v. Rajcoomar Doss, (1874) 14 Beng. L.R. 76,
approved.
2.2. The terms of the contract was expressly limited to 3 years from
30-10-2000 to 29-10-2003, unless extended by mutual agreement, and all
obligations and services under the contract were to be performed during
the term.
-
t
PERCEPT D'MARK (IND!A) PVT.LTD. r.ZAHEER KHAN
149
2.3. Clause 31(b) was also to operate only during the term, i.e. from A
the conclusion of the first negotiation period under clause 31(a) on 29-72003 till 29-10-2003. This respondent No. I has scrupulously complied with.
2.4. While construing the provisions of Section 27 of the Contract
Act, neither the test of reasonableness nor the principle of restraint of trade
being partial is applicable, unless it falls within express exception engrafted B
in Section 27.
3.1. Grant of injunction by Single Judge amounted to granting the
whole or entire relief which may be claimed at the conclusion of trial,
which is impermissible.
Bank of Maharashtra v. Race Shipping. (1995) 3 SCC 257, relied on.
3.2. The single Judge's order completefy overlooked the principles
of balance· of convenience and irreparable injury. Whereas appellant could
c
be fully compensated in monetary terms if they finally succeeded at trial, D
respondent No. I could never be compensated for being forced to enter
into a contract with a party he did not desire to deal with, if the trial results
in rejection of Percept's claim.
Hindustan Petroleum v. Sriman Narayan, [2002) 5 SCC 760, relied on.
3.3. The Division Bench was right in coming to the prima facie E
conclusion drawn by it, and in setting aside the Single Judge's order. No
case was made out by the appellant for compelling respondent no. 1 to
appoint the appellant as his agent in perpetuity.
4.1. The present appeal challenges the interlocutory order of the High F
Court in which the Division Bench has itself made it clear that it is
recording only a prima facie finding that Clause 31(b) of the agreement
is void under Section 27 of the I,ndian Contract Act, 1872.
4.2. Ever since the rejection of the said interlocutory application by
the Division Bench there has been no injunction in operat~n and this G
Court while granting leave to appeal also declined to grant any stay of
the Division Bench's order or restoration of the Single Judge's order.
Consequently, during the past 2 112 years, the contract dated 22-11-2003
between respondent No. 1 and respondent No. 2 has been in operation and,
indeed, is soon to be completed. The appellant is now seeking a mandatory H
150
SUPREME COURT REPORTS
(2006] 3 S.C.R.
A interim order 2 1/2 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.
4.3. The appellants are seeking at the interlocutory stage on question
B the interpretation of restraint of trade during the post-contractual period,
which interpretation has been uniform, consistent and unchanged for the
past several years. Even if there were a case for reconsideration of this
132 year old interpretation, though none is made out by the appellant,
such an exercise ought not be undertaken in the present interlocutory
C proceedings.
5. Clause 31(b) of the agreement is an independent clause which
survives the expiry of the agreement and any dispute between the parties
regarding the enforceability of the said clause would come under the
Clause 32(g) of the agreement which provides for resolution of any claim
D or controversy pertaining to the agreement through the process of
arbitration.
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 5573-5574
of 2004.
E
From the Final Judgment and Order dated 19.12.2003 of the Bombay
F
High Court in Appeal Nos. 1109 and 1110 of 2003 in Arbitration Petition
No. 514/2003.
Ashok H. Desai, Ritin Ray, E.C. Agrawala, Mahesh Agarwal and Rishi
Agarwal for the Appellant.
K.N. Bhat, Chanderuday Singh, Prem Prakash, Ashok Mathur, Ms.
Ruby Singh Ahuja and Navin Kumar for the Respondents.
The Judgment of the Court was delivered by
G
DR. AR. LAKSHMANAN, J. The above appeals were filed from the
common final judgment and order dated 19.12.2003 passed in Appeal No.
1109/2003 in Arbitration Petition No. 514/2003 and Appeal No. 1110/2003
in Arbitration Petition No. 514/2003 by the Division Bench of the High
Court of Judicature at Bombay whereby the appeals filed by the appellant
against fhe order of the learned Single Judge were allowed and the arbitration
H petition filed by the appellant herein before the Single Judge was dismissed.
PERCEPT D'MARK (INDIA) PVT.LTD. 1'.ZAHEER KHAN [ LAKSHMANAN, J.]
J 5}
The central issue of importance in this appeal is whether the right of A
first refusal under clause 31 (b) of the permission agreement entered into
between the appellant Percept D. Markr (India) Pvt. Ltd. and the respondent
No.I 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. B
Ashok H. Desai that the provision such as th,e right of first refusal is merely
regulatory and not in restraint of trade.
FACTS:
The appellant is a ~ompany incorporated under the Companies Act, C
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.
,
D
Respondent No. I - 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 con1pany incorporated under the Companies Act, 1956.
'
The appellant entered into the said agreement with respondent No. I on
01.11.2000 for a period of 3 years commencing on 30. 10.2000 and expiring E
on 29.10.2003. By a letter of intent dated 29.07.2003, the appellant forwarded
to respondent No. I the draft terms for extension of the said agreement for a
further period of 5 years. Respondent No. I informed the representative of the
appellant from time to time that he does not intend to appoint any agent for
managing his different media affairs. Respondent No. I informed the appellant
on I 0.09.2003 that he was. not desirous of renewing and/or extending the F
terms of the said agreement and the same would, therefore, terminate as of
20.10.2003. He further stated that the said letter provided for notice of nonrenewal. By the said letter, he informed the appellant of having received the
letter of intent and informed the appellant that he was not desirous of signing
the same. By the said letter, he confirmed that the 3 agreements stated in the G
said letter were subsisting. Respondent No. I was further informed that as per
the terms of the said agreement, prior to the execution of the first negotiation
period provided in Clause 3 l(a), he could not accept any offer for
endorsements, promotions, advertising or other affiliation with regard to any
product or services and that prior to accepting any offer, he was under an
H
152
SUPREME COURT REPORTS
(2006] 3 S.C.R.
A obligation to provide the appellant in writing all the terms and conditions of
such third party and offer the appellant the right to match such third party
offer. Respondent, by his letter dated 23.09.2003, did not deny his
representation to the fact and the effect that he did not intend to appoint any
agent for managing his media affairs, however. clarified that he intended to
perform the subsisting agreement which had been entered into between the
B appellant and him and third parties which would continue beyond the terms
of the said agreement. The appellant. by its letter, clarified its position as
regards its contention in paragraphs 3 and 4 of letter dated 15.09.2003 and
further reiterated that if respondent No. I was at any time during or after the
term of the said agreement desirous of appointing any other person as his
C agent for rendering services similar to the services rendered by the appellants
under the said agreement. respondent No. I was first required to offer the
appellant the right to match the third party offer only in the event the appellant
• does not exercise its right to accept respondent No. I's offer on the same
terms and conditions as the third party offer. It was further stated that if the
terms offered by the third party materially changed in favour of such third
D party after the same had been offered by respondent No. I to the appellant,
respondent No. I 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 oftime. The appellant,
by its letter dated I 0.11.2003 reiterated what was stated by it in its earlier
E letters with regard to the rights of the appellant and obligations of respondent
No. I in case respondent No. I 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.
Respondent No. I, by his letter dated 18.11.2003, alleged that he had no
F obligation under the said agreement after 29.10.2003, save and except
honouring the subsisting agreement entered into by respondent No. I 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 Jetter for the first time, after the said agreement
G had expired by efflux of time, respondent No. I alleged that the said agreement
was allegedly one-sided and an unfair arrangement. It is pertinent to note that
during the entire period of the said agreement, respondent No. I had not
alleged to the appellant that the terms of the said agreement was either onesided or unfair. The appellant states that the same was clearly an afterthought.
H
PERCEPT D'MARK (INDIA) PVT.LTD. 1•.ZAHEER KHAN [ LAKSHMANAN, J.]
J 53
The appellant, for the first time, became aware on 01.12.2003 from A
some sources and from the website of respondent No.2 that respondent No. I
has entered into an agreement with respondent No.2 for services similar to
the services rendered by the appellant under the said agreement. Respondent
No. I has not denied the fact that he negotiated with third parties, including
respondent No.2 prior to expiry of the agreement with.out discharging his B
obligation to intimate the appellant of such offer.
On 04.12.2003, the appellant filed an Arbitration Petition No. 514/2003
in the High Court under Section 9 of the Arbitration and Conciliation Act,
1996 praying, inter alia, for an interim order that pending the commencement
of and during the arbitration proceedings and the making of the award therein C
and the implementation thereof, respondent No. I be restrained by an interim
order and injunction 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 respondent
No.l's obligations under and in terms of Clause 31 (b) of the agreement.
Learned Single Judge of the High Court granted ad-interim relief in
terms of prayer Clause (a) of the petition. Respondent Nos. I and 2,preferred
separate appeals against the order of the learned Single Judge praying, inter
alia, for a stay therein.
D
The Division Bench allowed the appeals and dismissed the arbitration E
petition filed by the appellant on 19.12.2003. The High Court, by the said
order, directed respondent No.I (i) to place before the High Court in a sealed
cover the copy of the agreement entered into by respondent No. I with
respondent No.2 and/or any other third party immediately and was further
directed to place upto date accounts under the said contract/s (ii) to place F
before the High Court any other contract that he may enter into with any
third party within a period of 4 weeks from 19.12.2003; and (iii) to place on
record the account/s of four weeks under such contracts in a sealed cover.
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 G
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. I and Mr. K.N. Bhat, learned senior counsel, appearing for
respondent No.2.
H
154
SUPREME COURT REPORTS
[2006) 3 S.C.R.
A
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. I can never be said to be an agreement in restraint of
B 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
to promote trade and not an agreement in restraint of trade. He would submit
that the High Court was not justified in rejecting the contention of the appellant
that the obligation of respondent No. I in Clause 31 (b) of the agreement
C survives the term of the said agreement. It was also submitted that the High
Court is not correct and justified in coming to the conclusion that the agreement
is a contract of service. Likewise, the High Court was not justified in coming
to the conclusion that the covenant contained in Clause 3 l{b) of the said
agreement was applicable only during the period of contract and not thereafter.
The High Court was also not justified in rejecting the appellant's contention
D that the derogation contained in Clause 31 (b) of the agreement is not in
restraint of trade but effectively in furtherance of trade and, therefore, not
void under Section 27 of the Contract Act. According to Mr. Desai, the
covenant in Clause 31 (b) of the agreement was an obligation which was to
operate after the close of business hours on 29.10.2003. There is also no
E contention on behalf of respondent No. I that the agreement was
unconscionable or excessively harsh or unreasonable or one sided. It was
submitted that the covenant contained in Clause 3 l(b) did not restrict
respondent No. I from accepting any offer for his endorsements, promotions,
advertisements or other services on his own and thus did not restrict respondent
No.1 's liberty to carry on his affairs in the manner he liked. The finding and
F the conclusion of the High Court that the covenant contained in Clause 3 l(b)
of the agreement curtailed respondent No. I to accept any offer for his
endorsement, promotion etc. by dealing with any person on his own. Under
the covenant contained in Clause 31 (b ), the appellant did not match the third
party offer within ten days of receiving such offer from such third party,
G respondent No. I had the liberty to enter into an agreement with such third
party.
According to Mr. Desai, the facts in this case clearly disclose the nature
of the Promotion Agreement entered into between the parties and the benefit
obtained by respondent No. I as well as the appellant. The Promotion
H Agreement dated 0 I. I 1.2000 is a class of contracts, common in the industry,
PERCEPT D'MARK (INDIA) PVT.LTD. 1>.ZAHEER KHAN [ LAKSHMANAN, J.J
155
that may be termed as 'celebrity contracts'. While arguing the case, Mr. A
'
Desai highlighted certain provisions of the agreement which are as follows:-
J
•
Under the Agreement, the appellant was appointed as the sole
and exclusive agent to manage and market the affairs of
respondent.
1
•
In consideration for this appointment, respondent no. I was B
..__
guaranteed a minimum amount of Rs. 55 lakhs per year. In reality,
he was able to obtain Rs. I 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 c
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. I) 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 D
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. I was to negotiate on an exclusive basis with the appellant
E
for a prescribed period.
*
Thereafter, Clause 31 (b) contained a right of first refusal clause
pursuant to which the appellant was to be given an opportunity
to match any third party offer made to Respondent No. I before
Respondent No. I was permitted to enter into the third party
agreement. If the appellant failed to match the third party offer, F
Respondent· no. I was free to enter into a contract with the third
party. If the appellant matched the offer, Respondent no. I suffered
no detriment. In either case, it cannot be said that Respondent
no. I was restrained in any manner and more importantly, the
right of first refusal clause has no detrimental impact on G
respondent No.I - Zaheer Khan whatsoever. It is submitted that
such right of first refusal provision is customary in agreements
of this nature.
*
The Agreement contains an arbitration clause to refer disputes to
arbitration.
H
156
A
*
B
SUPREME COURT REPORTS
(2006) 3 S.C.R.
It is the undisputed position that both parties performed their
respective obligations under the Agreement and that Respondent
no. I therefore benefited financially for the 3 years that the
Agreement was in force. After gaining such benefit over a three
year period, Respondent No. I now challenges the validity of
clause 31(b) which is an integral part of the bargain and mutual
rights and obligations of the parties to the Promotion Agreement
in the following circumstances.
Mr. Desai also furnished a brief list of dates which, according to him,
will restrict the contract of respondent No. I in attempting not to honour his
C obligation under the agreement to provide the appellant with a right to match
any third party offer.
01.11.2000
Appellant enters into Promotion Agreement with
Respondent no. I. Initial term is to expire on 29.10.2003.
29.07.2003
Appellant's letter to Respondent No. I forwarding the draft
D
terms of an extension of the Promotion Agreement. Only
if accepted, the letter speaks of a condusion of the
negotiations contemplated under clause 31 of the Promotion
Agreement.
E
F
G
H
10.09.2003
15.09.2003
23.09.2003
06.10.2003
Reply of Respondent no. I stating that he was not desirous
of renewing and or extending the term of the Promotion
Agreement. Respondent no. I also informed the appellant
that he did not intend to appoint any agent to manage his
different media affairs, which was misleading.
Appellant's letter referring to discussions with Respondent
no. I wherein Respondent no. I had informed the appellant
that he did not intend to appoint any agent .for managing
his different media affairs. The letter clearly stated the
understanding of the parties that the right of first refusal
did not apply if the appellant himself managed his media
affairs and that otherwise, it applied during and after the
terms of the Agreement.
Reply of the Respondent no. I not contraverting the position
stated in the appellant's letter dated 15.9.2003.
Further letter by appellant during term of Promotion
Agreement.
7
PERCEPT D'MARK (INDIA) PVT.LTD. ,.,zAHEER KHAN [ LAKSHMANAN, J.]
J 57
No re~ly from respondent no. 1 to appellant's letter
A
27.10.2003
dated 6.10.2003.
Further letter by appellant during term of Promotion
Agreement.
28.10.2003
Reply of respondent no.I (one day before expiry of initial
B
term of Promotion Agreement) making out a new case that
clause 31 (b) was void under the Contract Act.
20. J l .2003
Respondent no. I enters into contract with Respondent no-.
2 (Appellant became aware of the contract only during
proceedings before the Division Bench in the Bombay HC).
C
04.12.2003
10.12.2003
Appellant files Arbitration Petition No. 514/2003.
Order of Single Judge granting ad in,terim relief in terms
of appellant's prayer (a)
19.12.2003
Impugned judgment of Bombay High Court holding clause
D
31(b) to be void.
According to Mr. Desai, it is clear from the above details that contrary
to his commitment and without giving the appellant a right of first refusal as
required by Clause 3 l(b), respondent No.I appeared to have entered into an
agreement with respondent No.2 on 20.11.2003 for managing his media affairs. E
In such circumstances, on 01.12.2003, the appellant filed an application under
Section 9 of the Arbitration and Conciliation Act, 1996 praying that respondent
No.I be injuncted from entering into any such agreement or from acting in
furtherance of it. Thus, the relief claimed in Section 9 proceedings was only
against respondent No. I.
The learned Single Judge of the Bombay High Court granted the interim
relief in terms of prayer (a). The appeal filed by the respondent was allowed
and the learned Division Bench found Clause 31 (b) to be void under Section
27 of the Indian Contract Act, 1872.
F
Mr. Desai then argued the scope and effect of Section 27 of the Indian G
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, AIR (1964) Bombay 423. In the said case, the H
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SUPREME COURT REPORTS
[2006] 3 S.C.R.
A High Court of Bombay was considering a clause relating to confidentiality of
infonnation and stated as follows:-
'"Clause 9 of the agreement prevents the appellant from divulging any
secret infonnation of the nature mentioned in that clause after the
tennination of his service. As pointed out in ( 1916) l AC 688 the
B
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 tenns thereof
C
is not unreasonable or wider latitude than justified in law." (emphasis
added)
D
The decision in Deshpande ·s case (supra) was affinned in Niranjan
Shankar Golikari v. Century Spinning and Manufacturing Co. Ltd., [1967] 2
SCR 378.
"29. These observations indicate that a stipulation in a contract which
is intended for advancement of trade shall not be regarded as being
in restraint of trade. In Esso Petroleum Co. Ltd. the question whether
the agreement under consideration was a mere agreement for the
promotion of trade and not an agreement in restraint of it, was
E
answered thus by Lord Pearce : (All ER pp. 726-27)
F
G
"Somewhere there must be a line between those contracts which
are in restraint of trade and whose reasonableness can, therefore,
be considered by the courts, and those contracts which merely
regulate the normal commercial relations between the parties
and are, therefore, free from doctrine.
* * *
In the same case, Lord Wilberforce has observed : tAll ER p. 729)
"It is not to be supposed, or encouraged, that a bare allegation that
a contract limits a trader's freedom of action exposes a party suing
on it to the burden of justification. There will always be certain
general categories of contracts as to which it can be said, with some
degree of certainty, that the 'doctrine' does or does not apply to
them. Positively, there are likely to be certain sensitive areas as to
H
which the law will require in every case the test of reasonableness to
-
t
PERCEPT D'MARK (INDIA) PVT.LTD. 1'.ZAHEER KHAN [ LAKSHMANAN, J.)
J 59
be passed: such an area has long been and still is that of contracts A
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.
B
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 C
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."
In the context of the franchise agreements before this Court in Gujarat
Bottling, this Court concluded:
D
"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 tenns and conditions to the franchisee.
Such agreements of often incorporate a condition that the franchisee
shall not deal with competing goods. Such a condition restricting the E
right of the franchisee to deal with competing goods is/or facilitating
the distribution of the goods of the franchiser and it cannot be regarded
as in restraint of trade. "
"24. We do not propose to go into the question whether reasonableness
of restraint is outside the purview of Section 27 of the Contract Act F
and for the purpose of the present case we will proceed on the basis
that an enquiry into reasonableness of the restraint is not envisaged
by Section 27."
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 G
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.
H
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SUPREME COURT REPORTS
(2006] 3 S.C.R.
A
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. I as could be seen from the
B 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. I had entered into a contract with respondent No.2.
According to Mr. Desai, a relief can be granted even against a third
party under Section 9 of the Arbitration and Conciliation Act, 1996 which
C provides as follows:-
D
E
F
G
H
"9. Interim measures, etc. by Court.- A party may, before or during
arbitral proceedings or at any time after the making of the arbitral
award but before it is enforced in accordance with Section 36, apply
to a Court-
(i)
for the appointment of a guardian for a minor or a person of
unsound mind for the purposes of arbitral proceedings; or
(ii) for an interim measure of protection in respect of any of the
following matters, namely:-
(a) the preservation, interim custody or sale of any goods which
are the subject-matter of the arbitration agreement;
(b) securing the amount in dispute in the arbitration;
( c) the detention, preservation or inspection of any property or
thing wliich is the subject-matter of the dispute in arbitration,
or as to which any question may arise therein and authorising
for any of the aforesaid purposes any person to enter upon
any land or building in the possession of any party, or
authorising any samples to be taken or any observation to be
made, or experiment to be tried, which may be necessary or
expedient for the purpose of obtaining full information or
evidence;
(d) interim injunction or the appointment of a receiver;
( e) such other interim measure of protection as may appear to
the Court to be just and convenient,
--
PERCEPT D'MARK (INDIA) PVT. L m. 1• ZAHEER KHAN [ LAKSHMANAN, J.]
161
and the Court shall have the same power for making orders as A
it has for the p purpose of, and in relation to, any proceedings
before it."
Explaining further, Mr. Desai, submitted that the language of Section
9 states that the application has to be made by a party to the arbitration
agreement but not that the relief would be confined only against a party. For B
instance, preservation or custody of goods or appointment of a receiver may
involve a third party as well, along with the party to the arbitration agreement.
In the present case, the application is made by a party to the arbitration
agreement against another party to the arbitration agreement, and a third
party may be affected by the application. This is the very principle underlying C
Section 9 otherwise, the purpose and intent of interim relief contemplated
· under Section 9 cannot be frustrated.
Learned counsel for respondent No. I submitted that the failure of the
appellant to commence arbitral proceedings since the date of the impugned
order was fatal to its Section 9 application. According to Mr. Desai, the D
appellant in fact, in this case, has acted with utmost expedition. The appellant
upon becoming aware of the fact that respondent No. I 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 .12.2093 and the
appellants promptly approached this Court.
E
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 F
counsel for respondent No. I 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 rejected. The judgment of the Division
Bench is a determination o~ a point of law and is a final and binding decision, G
even if such determination is in proceedings arising out of Section 9
application.
Learned senior counsel for respondent No. I submitted that the agreement
may not be specifically enforced under Section 14 of the Specific Relief Act,
1963 and accordingly, under Section 41 ( e ), no injunction could be granted as H
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SUPREME COURT REPORTS
[2006] 3 S.C.R.
A prayed for by the appellant. According to Mr. Desai, this submission loses
sight of Section 42 of the Act which provides that a Court may grant an
injunction to perform a negative covenant even where specific performance
of the affirmative covenant ~ay not be enforced. Section 42 provides as
follows:-
B
c
"42. Injunction to perform negative agreement.- Notwithstanding
anything contained in clause (e) of Section 41, where a contract
comprises an affirmative agreement to do a certain act, coupled with
a negative agreement, express or implied, not to do a certain act, the
circumstances that the court is unable to compel specific performance
of the affirmative agreement shall not preclude it from granting an in
junction to perform the negative agreement:
Provided that the plaintiff has not failed to perform the contract so far
as it is binding on him."
Learned senior counsel for respondent No. I, Mr. Chanderuday Singh,
D per contra, submitted that since the present appeal challenges an interim
order, and no interim relief having been granted in favour of the appellant
during the past 2= years, during which the contract between respondent No. I
and respondent No.2 has been in operation and indeed is soon to be completed,
there is no cause for interference at this late stage by this Court.