Gujarat Bottling Co Ltd v Coca Cola Co

Facts

Coca-Cola acquired the Parle group beverage trade marks (Thums Up, Limca, Gold Spot, Maaza, etc.) and entered a 1993 bottling agreement with Gujarat Bottling Co. (GBC) containing a negative covenant (para 14) barring GBC from dealing in competing brands during the agreement's subsistence. On 20 January 1995 GBC's shareholders transferred about 70.6% of its equity to Pepsi-controlled entities, and GBC then issued a termination notice on 25 January 1995. Coca-Cola sued and obtained an interim injunction restraining GBC from manufacturing competing beverages. GBC appealed the grant of the interim injunction.

Issues

• Whether the negative covenant in paragraph 14 of the 1993 Agreement amounted to an unenforceable restraint of trade under Section 27 of the Indian Contract Act, 1872
• Whether an interim injunction enforcing that negative covenant could properly be granted under Order 39 Rules 1-2 CPC
• Whether the 1993 Agreement was superseded by the 1994 Agreement and whether the one-year termination notice period had been reduced to 90 days by mutual consent

Arguments

GBC argued that the negative covenant violated Section 27 as an unreasonable restraint of trade, that the 1993 Agreement had been superseded and the notice period reduced, and that the injunction caused irreparable harm through plant closure and unemployment. Coca-Cola argued that the covenant operated only during the subsistence of the agreement and was therefore reasonable and enforceable, that the two agreements coexisted, and that the injunction was needed to prevent transfer of its goodwill and market position to a competitor (Pepsi) that had deliberately acquired GBC.

Held

The Supreme Court dismissed the appeals and upheld the interim injunction. It held that a negative covenant restricting a party only during the subsistence of the contract is generally not regarded as being in restraint of trade and does not offend Section 27, since it promotes rather than sterilises trade. Applying the settled triple test for interlocutory injunctions, the Court found Coca-Cola had a prima facie case on the valid covenant, that the balance of convenience favoured it because loss of goodwill and market share could not be adequately compensated in damages, while GBC's losses (idle plant, unemployment) were compensable in money. The Court also held that GBC's inequitable conduct — the unauthorised transfer of control in breach of paragraph 19(b) — disentitled it to discretionary relief, and that the obligation to grant interim relief must be exercised on settled principles, including requiring the plaintiff's undertaking as to damages.

Ratio decidendi

A negative covenant operating only during the subsistence of a contract is not a restraint of trade hit by Section 27 of the Contract Act and may be enforced by interim injunction. Grant of an interlocutory injunction under Order 39 Rules 1-2 CPC turns on prima facie case, balance of convenience and irreparable injury, and is a discretionary equitable remedy that may be refused to a party guilty of inequitable conduct.

Significance

A leading authority on interim injunctions under Order 39 CPC and on the restraint-of-trade doctrine, frequently followed for its restatement of the prima facie case / balance of convenience / irreparable injury test, its insistence that injunction is a discretionary equitable relief subject to clean-hands considerations, and the during-subsistence versus post-termination distinction for negative covenants.

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