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The Gujarat High Court (“GHC”) has in its judgment dated June 10, 2022 (“Judgment”), in the matter of Kanhai Foods Limited v. A and HP Bakes [R/First Appeal No. 2638 of 2021], held that issues involving enforcement of the conditions of a contract cannot be the subject matter of an application for interim measures under Section 9 of the Arbitration and Conciliation Act, 1996 (“Act”).

Facts

Kanhai Foods Limited (“Appellant”), a registered company, was engaged in the business of production, marketing and selling of bakery products under its brand ‘KABHI B’ (“Appellant’s Brand”). The Appellant had started selling its bakery products in the year 2007 and started granting franchises to other persons in the State of Gujarat as its business started expanding. Amongst the 50 franchises granted by the Appellant, A and HP Bakes (“Respondent”) was granted franchisee for the Appellant’s Brand in the year 2015 at Pij Road, Nadiad (“Franchised Premises”). Consequently, a franchise agreement was entered into between the Appellant and the Respondent on November 1, 2017, which, inter alia, provided for an initial term of three years.

Subsequently, the franchise agreement was renewed and a fresh Franchise Agreement (“Franchise Agreement”) was entered into between the parties on November 1, 2020. As per the terms of the Franchise Agreement, the Respondent was obliged to sell only the bakery products of the Appellant’s Brand. Further, the Respondent was restrained from, directly or indirectly, conducting similar business during the term of the Franchise Agreement.

Following the execution of the Franchisee Agreement on November 1, 2020, it came to the knowledge of the Appellant that the Respondent had started selling other bakery products, particularly bakery products of the brand ‘G5’, in which partners of the Respondent were connected. Despite receiving a warning from the Appellant, the Respondent continued to store and sell the products of other bakery brands with a trade mark similar to that of the Appellant’s Brand so as to pass them off as the products of the Appellant’s Brand.

Thereafter, in the month of July 2021, the Respondent issued a notice to the Appellant seeking to terminate the Franchise Agreement. The Appellant not only rejected such termination by the Respondent but also stated that the Respondent had breached the terms of the Franchise Agreement by attempting to pass off its products as those of the Appellant.

In view of the above, the Appellant filed an application under Section 9 (Interim Measures, etc. by Court) of the Act (“Application”) before the Commercial Court, City Civil Court, Ahmedabad (“Commercial Court”) seeking interim measures, including a direction to the Respondent to handover the Franchised Premises to the Appellant and a direction restraining the Respondent from carrying out any activity at the Franchised Premises for a specified period as per the terms of the Franchise Agreement. The Appellant also sought a direction to restraint the Respondent from conducting a business similar to that envisaged in the Franchise Agreement.

The Respondent challenged the said Application by filing a reply contending that the termination of the Franchise Agreement by the Respondent was legal. The Respondent further contended that it could not be restrained from conducting its business as the same is violative of the provisions set out in Section 27 of the Indian Contract Act, 1872.

The Commercial Court by its order dated August 31, 2021 (“Impugned Order”) rejected the Application filed by the Appellant on the ground that the relief which was prayed for by the Appellant were of the nature in respect of which the Appellant could be compensated in terms of money.

Hence, the Appellant approached the GHC for setting aside the Impugned Order passed by the Commercial Court.

Issue

Whether issues involving enforcement of the conditions of a contract can be the subject matter of an application for interim measures under Section 9 of the Act.

Arguments

Contentions raised by the Appellant:

The Appellant submitted that the Franchise Agreement was for a fixed term of three (3) years and could not be prematurely terminated by either of the parties except in accordance with the terms stipulated in the Franchise Agreement. Further, the franchisor, that is, the Appellant had the sole right to terminate the Franchise Agreement provided that the five requisite conditions mentioned thereunder were satisfied.

Highlighting the provisions of Clause 5(22) of the Franchise Agreement, the Appellant submitted that it was the duty of the franchisee, that is, the Respondent to handover the Franchised Premises to the Appellant for a minimum period of three months in the event a dispute arose between the parties to the Franchise Agreement.

The Appellant referred to Section 14 (Contracts not specifically enforceable) of the Specific Relief Act, 1963, and submitted that in view of the nature of conditions incorporated in the Franchise Agreement, the contract between the parties was not determinable in nature and that only the Appellant could terminate the Franchise Agreement.

The Appellant, in order to support its submissions, placed reliance on DLF Homes Developers Limited v. Shipra Real Estate Limited and Others [2021 SCC Online Del 4902], wherein the Delhi High Court analysed the question on determinability of contracts in detail.

Contentions raised by the Respondent:

Placing reliance on ABP Network Private Limited v. Malika Malhotra [O.M.P. (I) (COMM) 292 of 2021], the Respondent debated as to what nature of contract could be said to be determinable in law. The Respondent averred that the Franchise Agreement entered into between the Appellant and the Respondent was determinable in nature and thus could be terminated by the Respondent.

With respect to the contention of the Appellant regarding the Respondent’s duty to handover the Franchised Premises, the Respondent submitted that the handover of the Franchised Premises to the Appellant had become infructuous in view of the passage of time.

Lastly, the Respondent submitted that the prayers made by the Appellant in its Application, did not fall within the purview of Section 9(ii) clauses (a) to (e) (application to Court for an interim measures of protection) of the Act.

Observations of the Gujarat High Court

The GHC observed that as per the law laid down by the Supreme Court in Arvind Constructions Company Private Limited v. Kalinga Mining Corporation [(2007) 6 SCC 798], the powers under Section 9 of the Act are to be exercised in accordance with the recognized principles that are applicable when a court exercises its powers under Order 39 of the Code of Civil Procedure, 1908, to grant interim injunction.

The GHC further observed that the establishment of prima facie case, balance of convenience and irreparable injury are all relevant considerations while passing orders granting interim measures under Section 9 of the Act. Moreover, interim injunction is an equitable remedy and cannot be granted in a case where it would amount to granting a principal relief.

Essentially, the interim reliefs granted by a court under Section 9 of the Act are intended to protect and preserve the subject matter of arbitration as well as balance the equitable rights of the parties, during the pendency of the arbitral proceedings.

The Appellant in its Application had sought a direction to restrain the Respondent from carrying out any activity at the Franchised Premises and to handover the Franchised Premises to the Appellant. The Appellant had also sought to restrain the Respondent from conducting a business similar to the business mentioned in the Franchise Agreement.

The GHC further observed that the Commercial Court had ruled that no irreparable loss would arise to the Appellant and that the Appellant could be compensated monetarily for the reliefs sought by it in its Application, if it finally succeeded in the arbitral proceedings.

Decision of the Gujarat High Court

The GHC ruled that the Commercial Court was justified in observing that the reliefs which were prayed for by the Appellant were of such nature in respect of which the Appellant could be compensated in terms of money.

The GHC held that granting the relief of directing the Respondent to handover the Franchised Premises to the Appellant and to restrain the Respondent from carrying out any activity at the Franchised Premises, were reliefs of a final nature. Moreover, the effect of granting such relief to the Appellant would bring the business of the Respondent to a complete halt.

Further, the issues involving enforcement of conditions of the Franchisee Agreement and the applications of the parties arising therefrom, should be decided and resolved in the arbitration proceedings. As such, the question of determinability of the Franchisee Agreement is also an arbitrable issue that is to be decided by the arbitrator and cannot be weighed for merits by the GHC.

Therefore, there being no grounds to interfere with the Impugned Order passed by the Commercial Court, the GHC dismissed the appeal filed by the Appellant.

VA View:

The GHC in this Judgment has rightly held that proceedings under Section 9 of the Act are not meant for enforcement of the conditions of a contract as the said conditions could be enforced only when the rights of the parties to such contract are finally adjudged or crystalized by the arbitrator. Besides, granting any relief in favour of the Appellant, directing the Respondent to handover the Franchised Premises to the Appellant and restraining the Respondent from carrying out any activity at the Franchised Premises, would tantamount to granting principal relief to the Appellant.

Affirming the Commercial Court’s decision, the GHC reiterated that the proceedings under Section 9 of the Act which are for interim measures, cannot be converted into proceedings where a party may seek the final relief indirectly.

Therefore, through this Judgment the GHC has clarified that the principal relief cannot be granted at the interim stage, and granting interim directions which are indirectly in the nature of final relief is not permissible in law.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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