Proceedings Under Section 9 Of A&C Act Cannot Be Used For Enforcement Of The Conditions Of A Contract: Gujarat High Court

The Gujarat High Court has ruled that issues involving enforcement of the conditions of a Franchise Agreement cannot be the subject matter of an application for interim measures under Section 9 of the Arbitration and Conciliation Act, 1996 (A&C Act). The Bench, consisting of Justices N.V. Anjaria and Samir J. Dave, held that conditions of a contract can be enforced only when the rights of the parties are finally adjudged and crystallised by the Arbitrator. The Court ruled that proceedings under Section 9 of the A&C Act are only for interim measures and that they cannot be converted into proceedings where a party can indirectly seek the final relief. The appellant Kanhai Foods Ltd. is a company engaged in production and selling of bakery products under its own brand. The respondent A and HP Bakes was granted a franchisee by the appellant. A Franchise Agreement was entered into between the parties, under which the respondent was required to sell only the bakery products of the appellant. The respondent allegedly started selling bakery products of other 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, the respondent issued a notice to the appellant seeking to terminate the Franchise Agreement. The appellant averred that the respondent had committed a breach of the Franchise Agreement and that the termination of the Franchise Agreement was invalid. The appellant filed an application before the Commercial Court under Section 9 of the A&C Act seeking interim measures, including a direction to the respondent to not carry out any activity at the franchised premises for a specified period and to handover the franchised premises to the appellant. The appellant also sought a direction to restraint the respondent from conducting a business similar to that envisaged in the Franchise Agreement. The Commercial Court rejected the application of the appellant under Section 9 of the A&C Act for interim measures. Against this, the appellant filed an appeal before the Gujarat High Court. The appellant Kanhai Foods Ltd. submitted before the Gujarat High Court that the contract between the parties was for a fixed term of three years and that it could not be terminated by either of the parties except in accordance with the terms of the Franchise Agreement. The appellant averred that only the franchisor, i.e., the appellant, had the right to terminate the Franchise Agreement provided the requisite conditions mentioned therein were satisfied. The appellant contended that the respondent could not have prematurely terminated the Agreement. Thus, the appellant/franchisor 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 franchisor could terminate the contract. The respondent/ franchisee A and HP Bakes averred that the contract between the parties was determinable, and thus the respondent had terminated the Franchise Agreement. The Court observed that as per the law laid down by the Supreme Court in the case of Arvind Constructions Co. (P) Limited versus Kalinga Mining Corporation (2007), power under Section 9 of the A&C Act is to be exercised in accordance with the principles that are applicable when power under Order 39 of the Code of Civil Procedure, 1908 is exercised by the Court to grant interim injunction. Thus, the Court held that establishment of a prima facie case, balance of convenience and irreparable injury are all relevant considerations while passing orders granting interim measures under Section 9 of the A&C Act. The Court ruled that it is a trite principle that interim injunction cannot be granted in a case where it would amount to granting of a principal relief. The Court added that the reliefs granted by the Court under Section 9 of the A&C Act are interim in nature. The Court held that such interim measures 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 Court observed that the appellant in its application under Section 9 of the A&C Act for interim measures had sought a direction to restrain the respondent from carrying out any activity at the franchised premises and to hand over the franchised premises to the appellant. The Court noted that the appellant had also sought to restrain the respondent from conducting a business similar to the business mentioned in the Franchise Agreement. The Court ruled that the Commercial Court had rightly rejected the application for interim measures. The Court observed that the Commercial Court had ruled that no irreparable loss would arise to the appellant if it finally succeeded in the arbitral proceedings and that the appellant could be...

Proceedings Under Section 9 Of A&C Act Cannot Be Used For Enforcement Of The Conditions Of A Contract: Gujarat High Court

Parina Katyal

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