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

Parina Katyal
17 Jun 2022 4:30 AM GMT
Proceedings Under Section 9 Of A&C Act Cannot Be Used For Enforcement Of The Conditions Of A Contract: Gujarat High Court
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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 compensated monetarily for the reliefs sought by it in its application under Section 9.

The Court held that the reliefs sought by the appellant were in the nature of a final relief. The Court added that granting the relief of directing the respondent to hand over 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.

The Court ruled that if the said reliefs were granted by the Court to the appellant, it would bring the business of the respondent to a complete halt. The Court ruled that such a relief cannot be the subject matter of interim measures.

The Court held that issues involving enforcement of the conditions of the Franchise Agreement should be resolved in the arbitral proceedings. The Court held that proceedings under Section 9 of the A&C Act cannot be used for enforcement of the conditions of a contract since the said conditions can be enforced only when the rights of the parties are finally adjudged by the Arbitrator. The Court added that proceedings under Section 9 are only for interim measures and that they cannot be converted into proceedings where a party can indirectly seek the final relief.

"The contentions raised by the appellant with regard to the enforcement of conditions of the franchisee agreement and the applications of the parties arising therefrom, are the issues to be decided and resolved in the arbitration proceedings. These issues are in the nature of arbitrable disputes, to be tried and decided by the Arbitral Tribunal. Proceedings of section 9 are not meant for enforcement of conditions of the contract as it could be done only when the rights of the parties are finally adjudged or crystlised by the Arbitrator. Section 9 proceedings which are for interim measures, cannot be converted into the proceedings where a party may seek indirectly the final relief."

The Court added that whether a contract is determinable in nature or not is also an arbitrable issue. Thus, the Court held that the issue regarding the determinability or non-determinability of the Franchise Agreement should to be decided by the Arbitrator and that the Court cannot delve into the said issue on merits.

"The nature of conditions incorporated in the franchisee agreement, its scope and import in law and its applicability, are all questions to be examined by the arbitrator. The question of determinability or otherwise of the franchisee agreement in respect of which the parties have adverted to the detailed submissions, is also a merit aspect and an arbitrable issue."

The Court thus upheld the order of the Commercial Court and dismissed the appeal.

Case Title: Kanhai Foods Ltd versus A and HP Bakes

Citation: 2022 LiveLaw (Guj) 219

Counsel for the Appellant: Mr. Nandish Chudgar with Ms. Nidhi N Prajapati

Counsel for the Respondents: Mr. Darshan M Varandani and Mr. Jaimin R Dave

Click Here To Read/Download Order

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