M/S Gujarat Bottling Co.Ltd. & Ors. v. The Coca Cola Co. & Ors.
1995 SCC (5) 545
(Restraint of Trade, Substitution, Assignment)
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 (Para 14) 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 (Para 19). 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 Para 14 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.
- Whether 1994 agreement substituted 1993 agreement?
- Whether Para 14 of 1993 agreement was in restraint of trade u/s 27 of Indian Contrcat Act (ICA), hence void?
Since 1993 agreement was grant of license to GBC under common law and 1994 agreement is executed under the requirements of statute for the purpose of registration of GBC as user under the relevant act, hence, the nature and scope of two agreements was considerably different; such that 1994 agreement could not be considered as substituting 1993 agreement. Mutuality as under S.62 required for substitution of agreement requires both consensus ad idem between the parties and an intention to substitute the original agreement. No such intention of the parties to substitute 1993 agreement could be construed from 1994 agreement.
In UK: While contracts in restraint of trade whether general or partial, are prima facie void. But, if such a restraint is held to be reasonable in regard to public policy and in consideration of interests of both the parties, then such a restraint, whether general or partial, is subsisting.
In India: “A contract in restraint of trade is one by which a party restricts his future liberty to carry on his trade, business or profession in such manner and with such person as he chooses” (Superintendence Company of India v. Krishan) unless such a restriction is in furtherance or promotion of trade in which he is presently voluntary engaged (GBC v. Coca Cola).
Under S.27 of ICA, no distinction, whatsoever, exists between the contracts whether in partial or in general restraint of trade; such that every such agreement is void. Further, no test of reasonableness in such a restraint, as applied in UK, is applicable according to literal interpretation of S.27 in Indian context, such that notwithstanding whether a restraint of trade is reasonable/conscionable or not, it is nevertheless void according to S.27 (Upheld: Zaheer)
When the contract is in promotion, furtherance or facilitating of trade, then it cannot be said to be in restraint of trade. Secondly, except in cases where the contract is wholly one sided and unconscionable, normally when the restriction is subsisting only during the period of the contract and not thereafter, such restriction isn’t held to be in restraint of trade. However, while construing a covenant in light of S.27, balance of rights of both the parties needs to be taken into consideration. “A negative covenant, if subsisting during the existence of contract, must not be greater than necessary to protect the interest of employer, nor unduly harsh and oppressive to the employee” (Superintendence Company of India v. Krishan) But, a post-contractual restriction of trade imposed upon the party, whether partial or complete, is to be held as violative of S.27 (Zaheer & Krishan)
Restrictions imposed on employees must be carefully scrutinized for there is inequality of bargaining power between the parties in employment contracts; with employees being presented with standardized forms of contract either to accept or reject (both cases). However, the general rules as to restraint of trade are applicable in case of all contracts (GBC).
1993 agreement was commercial agreement where under both parties undertook obligations to ‘wholeheartedly’ promote the sale and production of Coca Cola goods for their mutual benefit, such that the restriction not to deal with the competing goods was for facilitating the distribution of goods of franchiser (Coke) and was not in anyway restraint of trade.
Further, since the negative covenant is applied only during the period of sustenance of 1993 contract and not thereafter, hence it not being ‘unduly harsh or unconscionable’ cannot be held to be in restraint of trade.
Author: Vishrut Kansal (National University of Juridical Sciences, Kolkata)