This case summary is written by Devleena Prasad, a first-year law student at Symbiosis Law School, Noida.

Introduction

The present case, Gujarat Bottling Co ltd v Coca Cola Co[1], is a landmark judgement of franchise agreement and is widely cited. The divisional bench comprised of J. S.C. Agarwal and J.S. Saghir Ahmed, wherein latter’s stance was in concurrence with the former. The case first appeared in the Bombay High Court[2] before Dhanuka J. who issued interim injunctions against the trade of Gujarat Bottling Co. (further referred as GBC) dissatisfied with the judgement of the learned bench, GBC forwarded its appeal 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[3], which deals with agreements in restraint of trade and the plight which fell on the workmen of GBC after the interim injunction was issued.

Background:  

The Plaintiff: The Gujarat Bottling Company (further referred as GBC) had two stakeholders, namely Ahmedabad Advertising and Marketing Consultants Ltd. and Mr Pinakin K. Shah, the latter occupies 79% of total shares which is distributed among two other family members and the former is the recipient of the remaining 21% shares. As the name suggests, the company is Gujarat based and has its plants spread across Ahmedabad and Rajkot. The company had an ongoing contract with Coca Cola Co. which was agreed upon in 1993 and another in 1994. In the year 1995, the company was to undergo certain upgradation with respect to its plants located in Ahmedabad and Rajkot. Owing to the disinterest of the main stakeholder, the shares of the company were transferred to two representatives of PepsiCo who now claimed ownership rights as they were the recipient of 79% of company’s share, the present plaintiff.

The Defendant: Coca Cola was actively operating in India till 1977. However, due to the change in the economic policies introduced by the government the trade setup was hampered. Numerous domestic companies emerged, one such was Parle, with its products like Limca and Maaza. On the revival of Coca Cola Co in 1980, Parle advanced the trademarks of a few its products to Coca Cola. Thereafter, Coca Cola contracted with GBC for the manufacture of bottles and packaging.

Facts of the Case

On September 20th, 1993, Gujarat Bottling Company entered into an agreement with Coca Cola Co to bottle and distribute “Thumbs Up”, “Maaza”, “Limca”, “Rim Zim” and “Gold Spot”, whose trademarks were acquired by Coca Cola from Parle. Paragraph 14 of the above contract posed a negative covenant on GBC wherein they were forbidden from bottling, distributing or simply dealing with any other company or trademarks during the subsistence of the contract. It was to remain in effect till 1998 and could be terminated at the option of either party by sending a 1-year prior notice or by mutual consent. The above contract also bound GBC from the supply of syrup in case of subsequent transfer of control without the consent of Coca Cola.

This contract was followed by another contract in 1994 for the purpose of registration under registered user agreement. The contract dealt with the specifications and standards of the product and their due registration and formulation under the Trademarks Act. A term of the contract reduced the duration of prior notice from 1-year to 90 days. In 1995, due to internal issues pertaining to the expansion of GBC, majority shares were transferred to the representatives of PepsiCo, thereby transferring the ownership rights. The new owners contended that the 1994 agreement had superseded the existing 1993 agreement. They therefore served a 90-day prior notice to Coca Cola for the termination of 1994 agreement. They also forwarded designs for Pepsi product acting beyond the scope of the terms of the 1993 agreement.

Relevant Laws and Issue

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. Following are the issues of the given case:

1) Whether the 1994 agreement superseded the existing 1993 agreement

2) Whether the 1993 agreement was in restraint of trade under section 27 of the Indian Contract Act, 1872.

Judgment

It was held that the 1994 and 1993 agreements were distinctive in nature. The 1993 agreement served the purpose of granting license to Gujarat Bottling Company for dealing with Coca Cola products and the 1994 agreement dealt with the registration of user agreement. Both the agreements served different purpose and varied in the scope of its application. Furthermore, under section 62 of the Indian Contract Act, no agreement can supersede a pre existing agreement without the consent of the contracting parties or without the intention of substitution which was lacking in the case. It was therefore concluded that GBC failed to act in terms of the contract binding both the parties and was held responsible for the violation.

It was also held that paragraph 14 of 1993 agreement was not in restraint of trade as its application is confined to the subsistence of the agreement and not thereafter. It was also mutually entered into by the parties for the promotion of coca cola products for their mutual benefit and therefore doesn’t fall under the ambit of restraining trade.

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.

On the above grounds the plea of the appellants was dismissed. 

Judges’ Reasoning

In paragraphs 14, 15, 16, 17 of the judgement, Hon’ble Justice SC Agarwal has scrutinized the distinctive nature of both the agreements viz 1993 agreement and 1994 agreement. The 1993 agreement was furnished for the transfer of license to GBC for the use of trademarks acquired by Coca Cola. The agreement establishes terms and provisions governing the preparation, quality and distribution of beverage which were to be prepared by GBC. Therefore, this agreement fell under the purview of franchise agreement, wherein Coca Cola acted as the franchiser and GBC acted as the franchisee. The purpose behind introducing the 1994 agreement was the registration of user agreements and it cannot be construed as a replacement for the 1993 agreement.

The learned bench decided upon the issues of restraint of trade as stated under paragraph 14 of 1993 agreement by applying the principles of English jurisprudence. Paragraph 21 of the judgement is a comprehensive account of the evolution of common law principles dealing with trade restraints. Any restraints on trade is opposed to the public policy in England, and there are only two exceptions where the reasonableness of restraint can be challenged, one where the employee of a business tries to compete with the employer after leaving the job and another where the previous owner of the business competes with the new owner to whom the business was sold.

However, with changing times and changing public policies the grounds for reasonability diversified. Due to the constricted scope of section 27 of the Indian Contract Act, the judges forgo its interpretation and rely upon precedents to come to a conclusion and decide whether or not paragraph 14 of 1993 agreement is posing any restriction on the trade of GBC. The ratio therefore pivoted around the decision given in Esso Petroleum Co. case[4] and Niranjan Shankar Golikari case. It was thereby decided that since the application of paragraph 14 was only confined to the subsistence of the agreement and not beyond, it couldn’t be interpreted as a restraint in the trade affairs of GBC.

The interim injunction levied upon GBC which was now occupied by PepsiCo was also not waived by the court. GBC argued that the injunction would cause unemployment of numerous employees working for the organization. However, the court’s contention was opposed to their demands. GBC was aware of all the terms of the 1993 agreement before contracting with Coca Cola and upon disregard of the said terms Coca Cola denied the syrup to the appellants. It was evident that on advancing its shares to PepsiCo, GBC acted in an inequitable manner so as to disclose the secret of Coca Cola’s syrup and shall therefore face the wrath of its conscious decision. The injunction widely covered every person who was even mildly connected to GBC or the plants in Ahmedabad and Rajkot.

Critique

Restraint of trade is governed under Section 27 of the Indian Contract Act, 1872. The first instance of an issue arising out of restraint in trade was recorded in the year 1967 in the infamous Niranjan Shankar Golikari case. Unlike the common law principles and the approach taken in English jurisprudence the quantum of reasonability is out of question under the ambit of the said section. At the time of its inception, the object of the section was to protect the interest of budding traders. However, decades down the line we have witnessed no considerable change in its purview or interpretation. The above judgement stands a perfect example for this inadequacy wherein the judge’s inclined towards English jurisprudence principles to determine whether or not the clause of 1993 agreement was in restraint of trade. The scope of the section is constricted and leaves no room for open ended interpretations. It was contented that the word restraint and reasonableness consort with each other.

So, reasonableness is to be read between the lines. Ironically, whenever the issue is brought up with regard to restraint in trade it is religiously highlighted that India differs from common law as the reasonableness enquiry is excluded. Despite that, we have cases like this where judgements are derived from the very same common law principles. Restraints confining to the subsistencexof a contract or a particular area are not expressly declared in section 27 which governs such restraints. The above judgement made no contribution in enabling us to further understand the implications of section 27. Paragraph 24 of the judgement declares that the judges do not wish to get into the nitty gritty of the section and relied upon English cases to come to a conclusion.

Another concerning issue which arose as a result of the judgement was the plight of all the employees of GBC. The interim injunction was levied upon every single person who was even mildly connected to the dealings of the company. Paragraph 50 of the judgement throws light upon the members, including the servants of the transferees to associate companies. This resulted in their unemployment for a period of one year. Coca Cola made a just move by seeking termination of contract after the ill treatment meted out by GCB. But the interim injunction had an enormous scope which covered numerous people. Court’s decision to dismiss all appeals and abide by the impugned order of Bombay High Court proved to be fatal foe all the employees. The court could have issued an order in favour of all such employees to seek relief from GCB, however no advancement of such fashion was made. 

Conclusion

This case was the portrayal of the deep-seated rivalry in the beverage industry and the extent to which the competition can thrive. We are also introduced to the inadequacy of certain provisions of the Indian Contract Act, which demand thorough amendments and expansion. Agreements in restraint of trade is in a dire need to define and substantiate solid grounds, embarking them as terms. This will enable free trade and remove the animosity of traders and businessmen towards it. The judgement in favour of Coca Cola Co was fair and just, however the wrath of the interim injunction on the employees was unsolicited. The court could have devised a relief seeking mechanism for all such employees. Nevertheless, the judgement sets out as a precedent which has been cited in a number of disputes and expanded the ambit of trade restraints, trademark and interim injunctions.  

References

• https://indiankanoon.org/
• https://www.manupatrafast.com/

[1] M/S Gujarat Bottling CoLtd & Ors v The Coca Cola Co & Ors [1995] SC, 5 (SC)

[2] On 31st March, 1995

[3] Wadhwa AD Mulla, Mulla On the Indian Contract Act (LexisNexis Butterworths Wadhwa 2011)

[4]Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC (AC)

[5]Niranjan Shankar Golikari vs The Century Spinning and Mfg Co [1967] SC, 2 (SC)