Image source: https://blog.ipleaders.in/powers-and-functions-of-the-supreme-court/

This article has been written by Samidha Hegde pursuing an Introductory Course to Legal Writing from LawSikho.

Introduction

Hon’ble Judges/Coram:

Jayant Nath, J.

Counsels:

For Appellant/Petitioner/Plaintiff: Kailash Vasdev, Sr. Adv., Priyadarshi Manish and Anjali J. Manish, Advs.

For Respondents/Defendant: Sumeet Verma, Vijay Kumar Wadhwa, and Maninder Pratap Singh, Advocates

The suit is one pertaining to an arbitration matter, a question involving Section 8 of the Arbitration and Conciliation Act, 1996 (Act), heard in the High Court of Delhi. 

The Plaintiff contended that the agreement between the Plaintiff and Defendant was terminated arbitrarily after having made significant investments into the business which disabled the Plaintiff from manufacturing and selling exclusive brands of Defendant in the market. While the defendants referenced the agreement and said the termination was well within the provisions of the agreement and cited the arbitration clause and sought reference of dispute to sole arbitrator.

The question was, whether the suit could be referred to arbitration in view of the existing agreement?

The bench was presided by Jayant Nath, J and the court held that the dispute in question was one related to the interpretation of the terms of the agreement and legality of its cancellation and therefore the right of the Plaintiff arose out of the contract and not from the statutory act and thus parties were referred to arbitration.

Facts

  • Initially, the Plaintiff entered into a Master Long Term Supply Agreement on 16/8/2019 by which the Defendant supplied exclusive brands of the Defendant to the Plaintiff “Golden’s Gold Flake, Golden Classic, Taj Chhap, Panama and Chancellor”. They exclusively sold, distributed, and supplied these brands in both domestic and international markets.
  • Later, on 12/02/2020 the Plaintiff entered into a trademark license agreement with Defendant. By this agreement, the Plaintiff was given exclusive non-assignable, non-transferable license to manufacture Defendant’s products at Plaintiff’s factory in Noida and to market and distribute it accordingly.
  • Plaintiff presented that, despite huge capital and operational expenditure including that for advertising and promotional schemes by Plaintiff to increase the availability of the Defendant’s products, Defendant on 14/8/2020, ignoring the prevailing pandemic, arbitrarily chose to terminate the license agreement.
  • Plaintiff further stated that the termination communication was withdrawn and a subsequent amendment agreement was entered into between the parties on 29/8/2020.
  • Thereafter, on 13/02/2021 the Defendant served another termination notice to Plaintiff for not having made timely payments as per the agreement. Defendant terminated the agreement dated 12.02.2020 and the amendment agreement dated 29.08.2020 with immediate effect and the Plaintiff was not allowed to manufacture and sell the exclusive brands of Defendant in the market from that point onwards. Hence the present suit was filed.

Issue

Whether the assignment of Trademark in the present case is arbitrable or not?

Arguments by the parties-

Plaintiff

  • Plaintiff contended that, as per terms of the agreement dated 12/02/2020, Defendant has assigned the trademarks in question in perpetuity to Plaintiff and the agreement cannot be terminated merely because there is a default in payment of royalty.
  • It is further pointed out by Plaintiff that pursuant to the agreement, the information was sent to SEBI and Trademark Registry. It is also claimed that based on the Agreement the Plaintiff has set up a factory in question and that the agreement cannot, therefore, be terminated. Furthermore, the transfer of trademark is in perpetuity and the dispute is a dispute in rem and cannot be referred to arbitration.
  • Plaintiff relied on the fourfold test laid down in the Vidya Drolia and Ors. vs. Durga Trading Corporation case, claimed that issue of patents and registration of trademarks are actions in rem and exclusively fall under government and sovereign functions and therefore have erga omnes effect. Such grants confer monopolistic rights, and they are non-arbitrable.
  • Further, Plaintiff claimed that the termination of assignment by Defendant touches upon the issue of registration of trademarks which is a sovereign function, and pleaded that the application by Defendant to refer the matter to arbitration under Section 8 of the Arbitration and Conciliation Act, 1996, be dismissed.

Defendant

  • The case of the defendants is that the trademark license agreement dated 12/02/2020 and amendment agreement dated 29/08/2020 that Plaintiff is seeking to enforce is determinable and could be terminated legally as per clause 8 of the agreement dated 12/02/2020 and clause 5 of the amended agreement dated 29/08/2020, and therefore the termination of the agreement via notice dated 13/02/2021 was valid.
  • Further, Defendant pointed out that clause 12 of the agreement dated 12/02/2020 provides for arbitration, hence the dispute between Plaintiff and Defendant be referred to a sole arbitrator as per the terms of the agreement of 12/02/2020 and amended agreement of 29/02/2020.
  • Defendant also relied on the judgment of a co-ordinate bench in Hero Electric Vehicles Pvt. Ltd. & Anr. vs. Lectro E-Mobility Pvt. Ltd. & Anrto point out that a co-ordinate Bench had rejected a similar plea with similar facts and circumstances as are presented by senior counsel for Plaintiff in the present suit.
  • Further relying on the judgment of the Supreme Court in the case of Vidya Drolia and Ors. vs. Durga Trading Corporation,  asserted that the present suit was arbitrable and liable to be referred to arbitration as per the arbitration agreement between the parties.

Legal provisions referred to in the case

Section 8 of the Arbitration and Conciliation Act reads as follows:

“8. Power to refer parties to arbitration where there is an arbitration agreement. —

(1) A judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.

(2) The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof.

Provided that where the original arbitration agreement or a certified copy thereof is not available with the party applying for reference to arbitration under sub-section (1), and the said agreement or certified copy is retained by the other party to that agreement, then, the party so applying shall file such application along with a copy of the arbitration agreement and a petition praying the court to call upon the other party to produce the original arbitration agreement or its duly certified copy before that court.”

(3) Notwithstanding that an application has been made under sub-section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made.”

Cases relied on 

In this case, the court dealt with the question of arbitrability of disputes. The court had propounded a fourfold test to determine arbitrability, and laid down the following conditions for a dispute being non-arbitrable:

1) When the cause of action and subject matter of the dispute relates to actions in rem.

2) When the cause of action and subject matter of the dispute affects third-party rights and have erga omnes implication.

3) When the cause of action and subject matter of the dispute relates to inalienable sovereign functions of the state.

4) When the subject matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statutes.

The Supreme Court held in this case also held that registration, issuing, and granting of patents and trademarks are matters which fall under sovereign function and have an erga omnes effect. They grant monopoly rights and hence are non-arbitrable.

In this case, a similar matter was dealt with by the Delhi High Court, one of the parties to dispute objected to the application of arbitrability clause while relying on the Vidya Drolia Judgement.

The court held that in this case, the assignment of the trademark was resulting from the contract between the parties, while the registration of the trademark already stood. Thus the dispute arising was because of violation of contractual terms and not from the violation of the Trademark Act. Hence arbitration was allowed by the court.

These two cases laid down the framework for determining the arbitrability of disputes pertaining to intellectual property matters and clearly defined the ambit of Section 8 of the Arbitration and Conciliation Act.

What did the Court hold?

The court was of the view that while examining the aspect of arbitrability of the dispute in the exercise of its jurisdiction under Section 8 of the Arbitration and Conciliation Act, 1996, the court is exercising the very same jurisdiction that the Arbitral Tribunal is empowered to exercise, and therefore the court must ensure that jurisdiction under Sec 8 and Sec 11 should not be exercised in such a manner that would erode the authority of the Arbitral Tribunal to rule thereon.

The court examined the judgment in the case of Hero Electric Vehicles Pvt. Ltd. & Anr. vs. Lectro E-Mobility Pvt. Ltd. & Anr held that the dispute does not pertain to infringement of trademark by Defendant as a result of using deceptively similar trademark but rather that the right to use the trademark was conferred on the Plaintiff consequent to the agreement between the parties. The infringement as alleged by Plaintiff was not of the Trademark Act but of the provisions of the agreement in question.

The dispute which emanates out of the agreement between the parties was held to be arbitrable. Further, the court clarified that the controversy in the present case was not related to the grant or registration of trademarks as the trademark stood granted and registered. It was also held that the assignment of a trademark is by a contract and is not a statutory fiat. It does not involve any exercise of sovereign functions.

And therefore, the court referred the parties to Arbitration as per the Arbitration agreement.

Conclusion

The present case further reinforced what was established in the case of Hero Electric Vehicles Pvt. Ltd. & Anr. vs. Lectro E-Mobility Pvt. Ltd. & Anr that when a dispute arises as a result of an infraction of the trademark agreement between the parties the same cannot be alleged to be an infringement of the provisions of the Trademark Act and thus the rights arising out of the disputes cannot be claimed to be rights in rem. Registration of trademarks is part of sovereign function but licensing or assigning are done by the instrument of contract and rights and obligations arising from the contract are limited to the parties to the contracts and no rights are created vis-à-vis the whole world.

When an arbitration agreement exists between the parties and the cause of action arises as a result of the infringement of a provision of the contract between the parties and if one of the parties to the dispute wishes to refer the dispute to Arbitral Tribunal then the arbitration agreement cannot be ignored and an opportunity for the same must be provided and the court should not absorb the dispute as that would amount to usurping of the powers of the Arbitral Tribunal.

From this case, more clarity is given on when a dispute becomes non-arbitrable and the scope of what was held in the case of Vidya Drolia and Ors. vs. Durga Trading Corporation is further amplified so that the broad scope of the Vidya Drolia judgment cannot be misconstrued or misinterpreted to bypass the arbitration clause or arbitration agreement to approach the courts.


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