The Coca-Cola Company entered into an agreement for grant of a franchise to Gujarat Bottling Company to manufacture, bottle, sell and distribute beverages under trademarks… Was the negative stipulation in restraint of trade?

Question: The Coca-Cola Company entered into an agreement for grant of a franchise to Gujarat Bottling Company to manufacture, bottle, sell and distribute beverages under trademarks held by the franchiser.

There was a negative stipulation in the agreement which restrained the franchise not to manufacture, bottle, sell and deal or otherwise be concerned with the products, beverages of any other brand or trademarks/trade names during the subsistence of this agreement including the period of one year’s notice.

The operation of this stipulation was to be confined only during the subsistence of the agreement and not after the term thereof. Was the negative stipulation in restraint of trade? Answer with reference to provisions of Contract Act and case law, if any. [Punjab JS 2000]

Find the answer to the mains question only on Legal Bites. [The Coca-Cola Company entered into an agreement for grant of a franchise to Gujarat Bottling Company to manufacture, bottle, sell and distribute beverages under trademarks… Was the negative stipulation in restraint of trade? Answer with reference to provisions of Contract Act and case law, if any.]

Answer

Section 27 of the Indian Contract Act, 1872 talks about that the agreement in restraint of trade, is void. It states, “Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.

Exception 1: Saving of agreement not to carry on the business of which goodwill is sold- One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein, provided that such limits appear to the Court reasoned, regard being had to the nature of the business.”

The facts of the present proposition are borrowed from the case before the Hon’ble Supreme Court Gujarat Bottling Co Ltd v. Coca Cola Co. [AIR 1995 SC 2372]

An agreement for grant of the franchise by Coca Cola Co to Gujarat Bottling Co to manufacture, bottle, sell and distribute beverages under trademarks held by the franchiser contained the negative stipulation restraining the franchisee to “manufacture, bottle, sell, deal or otherwise be concerned with the products, beverages of any other brands or trademarks/trade names during the subsistence of this agreement including the period of one year’s notice”.

It was held that the negative stipulation was intended to promote the trade. Moreover, the operation of the stipulation was confined only to the subsistence of the agreement and not after termination thereof. Hence stipulation could not be regarded as in restraint of trade.

The court proceeded as follows

“A stipulation in a contract which is intended for the advancement of trade shall not be regarded as being in restraint of trade. Similarly, except in cases where the contract is wholly one-sided, normally the doctrine of restraint of trade is not attracted in cases where the restriction is to operate during the period the contract is subsisting and it applies in respect of a restriction that operates after the termination of the contract.”

There is a growing trend to regulate the distribution of goods and services through franchise agreements providing for the grant of the franchise by the franchiser on certain terms and conditions to the franchisee.

Such agreements often incorporate a condition that the franchisee shall not deal with competing goods. Such a condition restricting the right of the franchisee to deal with competing goods is for facilitating the distribution of the goods of the franchiser and it cannot be regarded as in restraint of trade.

The agreement in question, in this case, was an agreement for a grant of the franchise by Coca-Cola to GBC to manufacture, bottle, sell and distribute the various beverages for which the trademarks were acquired by Coca-Cola. It was thus, a commercial agreement where both the parties have undertaken obligations for promoting the trade in beverages for their mutual benefit.

The purpose of the negative stipulation contained in the agreement was that GBC will work vigorously and diligently to promote and solicit the sale of the products/beverages produced under the trademarks of Coca-Cola. This would not be possible if GBC were to manufacture, bottle, sell, deal, or otherwise be concerned with the products, beverages, or any other brands or trademarks/trade names.

Thus, the purpose of the said agreement is to promote the trade and the negative stipulation seeks to achieve the said purpose by requiring GBC to wholeheartedly apply to promote the sale of the products of Coca-Cola.

Moreover, since the negative stipulation is confined in its application to the period of subsistence of the agreement and the restriction imposed therein is operative only during the period the agreement is subsisting, the said stipulation cannot be held to be in restraint of trade so as to attract the bar of Section 27 of the Contract Act.

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Law of Contract Mains Questions Series: Important Questions for Judiciary, APO & University Exams

1. Law of Contract Mains Questions Series Part-I
2. Law of Contract Mains Questions Series Part-II
3. Law of Contract Mains Questions Series Part-III
4. Law of Contract Mains Questions Series Part-IV
5. Law of Contract Mains Questions Series Part-V
6. Law of Contract Mains Questions Series Part-VI
7. Law of Contract Mains Questions Series Part-VII
8. Law of Contract Mains Questions Series Part-VIII
9. Law of Contract Mains Questions Series Part-IX
10. Law of Contract Mains Questions Series Part-X