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2003 Supreme(Bom) 1374
IN THE HIGH COURT OF BOMBAY
Karnik D.G., J.
Percept D’Mark (India) Pvt. Ltd. .... Petitioner.
Versus
Zaheer Khan another.... Respondents.
Arbitration Petition No. 514 of 2003, decided on 10-12-2003.
Advocates appeared :
Virag Tulzapurkar with Ms. V.C. Khatri i/b DSk Legal, for petitioner.
I.M. Chagla, Sr.C. with C.U. Singh, Ms. Soma Singh, Hetal Thakore Ms. Jyoti Garg i/b Thakore Jariwala Associates, for respondent No. 1.
Janak Dwarkadas i/b. Atul Damle, for respondent No. 2.
Headnote:Contract Act, 1872 - Section 27 - Negative stipu- lation - Contained in sole selling agency agreement - Validity of - Agreement containing negative covenant that seller or agent shall not sell the competitor s products of similar description - Such negative covenant contained in contract for sale between parties not void. - Whenever a person enters into a contract with another regarding the sale of a product or a thing, he necessarily agrees that the product or that thing which he had agreed to sell, would not be sold by him to another. This is implicit in the agreement inasmuch as once he agrees to sell a thing to A he cannot sell that thing to B . Nobody has ever suggested that the covenant or an implicit covenant contained in the contract for sale between the parties that the seller would not sell the thing which he had agreed to sell to any other persons is void under Section 27. Every other restriction contained in a contract of sale between the parties cannot be said
to be void. Similar is a case of a sole selling agency agreements or franchise agreements. There is a growing tendency among commercial men to enter into sole selling or franchisee agreements. They necessarily contain a negative stipulation that the sole selling agent or franchisee shall not sell the competetor s products of similar description. It is too late in the day to contend that such negative covenant contained in the sole selling agency or franchisee agreement that the seller or agent shall not sell the competetor s products of similar description is vo
2. This is a petition under section 9 of the Arbitration and Conciliation Act, 1996 (for short "the Act"). The facts giving rise to the disputes between the parties are briefly stated below.
3. The petitioner No. 1 is an Advertising Agency and so is the respondent No. 2. The respondent No. 1 is a cricketer who has acquired a celebrity status. On 1st November, 2000, the petitioner and the respondent No. 1 entered into a contract titled as "Promotion Agreement" which was valid initially for a period of three years commencing on 30th October, 2000 and expiring on 29th October, 2003. Under the contract, the respondent No. 1 retained services of the petitioner and appointed him as a sole and exclusive agent to manage market and render various consultancy services and other activities set out in Annexure A to the agreement. Clause No. 31 of the agreement provides for negotiation atleast 60 days prior to the expiry of the terms of the contract for its renewal. In the event the agreement is not renewed, the clause also gives a right to the petitioner of first refusal. Clause No. 32(g) of the agreement provided for resolution of all disputes including all claims and controversies relating to the agreement by arbitration under the Arbitration Act.
4. It appears that as provided under Clause No. 31 of the agreement, negotiations were commenced between the parties regarding renewal of the agreement before 60 days of the expiry of its initial period. In pursuance of the said negotiations, the petitioner wrote a letter to the respondent on 29th July, 2003 offering to renew the contract on the terms and conditions mentioned therein. By a reply dated 10th September, 2003, the respondent No. 1 informed the petitioner of its intention of not renewing and/or extending the initial term of the agreement. Some correspondence ensued between the parties thereafter in which the petitioner referred to Clause No. 31(b) of the 'Promotion Agreement' and reiterated the petitioner's right of first refusal. The petitioner also intimated to the respondent that in the event the respondent No. 1 desired to enter into any transaction covered under the clause, he was under an obligation to notify to the petitioner in writing to the petitioner all the terms and conditions of the third party offer to enable the petitioner to match the said terms of third party offer.
5. It appears that after the expiry of the initial period of the agreement, the respondent No. 1 entered into negotiations for a Promotion Agreement with the respondent No. 2. In paragraph No. 13 of the petition, the petitioner has averred that respondent No. 1 has wrongfully entered into an agreement with respondent No. 2 in breach of Clause No. 31(b) without intimating the terms of the offer made by the respondent No. 2 and without giving an opportunity to the petitioner to match the said terms in pursuance of the right of "first refusal" granted to it.
6. Learned Counsel for the respondents contend that Clause No. 31(b) of the Promotion Agreement dated 1st November, 2000 being in restraint of trade is void under section 27 of the Contract Act. They strongly rely upon the judgment of the Supreme Court in (Niranjan Shankar Golikari v. Century Spinning and Mfg. Co. Ltd.)1, reported in A.I.R. 1967 S.C. 1098 and (Superintendence Co. of Indian Ltd. v. Krishan Murgai)2, reported in A.I.R. 1980 S.C. 171. In both the cases mentioned above, the Apex Court was considering the validity of a negative covenant contained in the contract of employment which prevented the employee from directly or indirectly taking an employment with or be engaged by a third party in a business similar to that of an employer after the termination of the contract of employment with the former employer. The Court drew a distinction between the restraints put on the employee during the period of his contract of employment and the restraints which were sought to be impo
