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Case Number

OMP. No. 61/2000

Attorney(S)

Mr. Rajiv Nayar, Sr. Adv. with Ms. Pallavi S. Shroff & Mr. A.K Roy, Advocates for the Respondent.
Mr. Rajeeve Mehra, Mr. Mriganga Dutta & Mr. D.N Ray. Advocates for Petitioner.

Judges

Mukul Mudgal, J.

Acts

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Smart Summary

Judgment Summary — Mukul Mudgal, J.

Factual and Procedural Background

This petition under Section 9 of the Arbitration & Conciliation Act, 1996 read with Order XXXIX Rules 1 and 2 CPC was filed by a franchisee of M/s Domino's Pizza India Ltd. (respondent), the master franchisee of Domino's Pizza International Inc. The parties entered into a Franchise Agreement dated 12.6.1998. The petitioner opened the store on 13.9.1998. The franchise term was ten years with a possible renewal for a further ten years; the petitioner paid upfront franchise fee and agreed to pay monthly percentage fees and to bear the salaries of managers provided by the respondent.

About a year after the agreement, the respondent purported to terminate the agreement by notice dated 1.3.2000. The petitioner alleges that site visits conducted on 18.1.2000, 18.2.2000 and 29.2.2000 were cosmetic and a prelude to an arbitrary termination, and contends that the respondent opened or prepared another outlet in Gurgaon about the same time. The petitioner invoked arbitration on 21.3.2000 and filed the present Section 9 petition seeking interim directions including resumption of supplies, restoration of status quo ante under the Agreement, cancellation of the termination notice dated 1.3.2000 and restraint on the respondent's competing store (relying on Clause 4.2, a negative covenant).

The respondent countered that it had repeatedly communicated deficiencies in the petitioner's operations since July 1999 (including various store visit reports and minutes), that the petitioner did not remedy those deficiencies and that some prayers had become infructuous because another outlet was already functioning. The respondent also argued that an injunction would require continuous court supervision and that Section 14 of the Specific Relief Act would bar such relief. The parties agreed on the appointment of Hon'ble Justice D.P. Wadhwa (retired) as arbitrator; the court appointed him and disposed of the petition.

Legal Issues Presented

Whether the termination notice dated 1.3.2000 is illegal and void ab initio, so that the Franchise Agreement continues to subsist.
Whether, if the Agreement is treated as subsisting, the petitioner is entitled to enforce the negative covenant (Clause 4.2) restraining the respondent from operating or granting a sub-franchise in an overlapping area.
Whether the respondent complied with Clause 17 (particularly Clauses 17.2(i) and 17.2(o)) which requires written notices affording 7 or 30 days for rectification before termination.
Whether interim relief in the form of an injunction or status quo ante should be granted, having regard to the respondent's contention that such relief would require continuous court supervision and may be barred by Section 14 of the Specific Relief Act.

Arguments of the Parties

Petitioner's Arguments

The termination notice of 1.3.2000 is void ab initio because the Agreement required specific notices under Clauses 17.2(i) & 17.2(o) (7 or 30 days for rectification) which were not given.
Site visits conducted on 18.1.2000, 18.2.2000 and 29.2.2000 were cosmetic/pretextual and intended to justify an arbitrary termination; the respondent was targeting the petitioner and had prepared another outlet in Gurgaon.
Any minor infractions were attributable to managers appointed by the respondent (whose salaries were borne by the petitioner), and therefore the petitioner should not be held responsible for those infractions.
The petitioner sought interim relief including resumption of supplies, status quo ante and restraint on the competing outlet under Clause 4.2 (negative covenant), and relied on the Supreme Court judgment in Gujarat Bottling Co. Ltd. v. Coca Cola Co. (1995) 5 SCC 545 for the proposition that an illegally terminated agreement may be treated as subsisting and a negative covenant enforced even if specific performance of affirmative obligations cannot be compelled.

Respondent's Arguments

The respondent produced multiple communications and store visit reports dating from July 1999 onward (including minutes of meetings and store visit reports on specified dates) pointing out repeated deficiencies in operations and hygiene that were not remedied.
The respondent relied on a notice dated 12.10.1999 regarding outstanding dues (alleged Rs. 10 lakhs) and asserted delay/default in payment by the petitioner.
The respondent argued that some of the petitioner's prayed-for reliefs (prayers c & d) had become infructuous because another outlet had already opened before the court considered interim relief.
The respondent contended that granting the injunction sought would require continuous supervision by the court, and that Section 14 of the Specific Relief Act would bar such a prayer; the respondent also argued that even if termination were found invalid the petitioner’s remedy might be limited to damages rather than injunctive relief.
The respondent stated it would not, in any event, enforce Clause 18.2 (a post-termination non-compete clause) against the petitioner.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Gujarat Bottling Co. Ltd. & Ors. v. Coca Cola Co. & Ors., (1995) 5 SCC 545	Principle that an illegally terminated agreement may be treated as subsisting and that a court may grant an injunction to enforce a negative covenant even if it cannot compel specific performance of affirmative obligations.	The petitioner relied on this authority to argue that the negative covenant (Clause 4.2) should be enforced because the termination was void. The court observed that Gujarat Bottling proceeded on the basis that the agreement held the field as it was not terminated, but found that, on the material before it at the interim stage, it could not prima facie conclude that the termination was void ab initio; the question was left for the Arbitrator to determine.

Court's Reasoning and Analysis

The court undertook an interim, prima facie examination of the material lodged by the parties to decide whether the petitioner had established that the termination notice dated 1.3.2000 was void ab initio and whether the Agreement therefore subsisted so as to permit enforcement of Clause 4.2 (the negative covenant).

The petitioner’s core contention was that Clause 17 — specifically Clauses 17.2(i) and 17.2(o) — prescribed the exclusive mode of termination by requiring written notice affording seven or thirty calendar days respectively to cure material breaches, and that no such notice was given in the present case. The petitioner relied on this omission to argue illegality of termination.

The respondent countered by producing communications and store-visit reports commencing in July 1999 (including minutes and specific store-visit reports dated in June, July, October and November 1999) which, it was submitted, put the petitioner on notice of operational and hygiene deficiencies that were not remedied. The respondent also relied on a notice dated 12.10.1999 relating to outstanding dues.

After reviewing the material on record, the court stated that it was not satisfied prima facie that the petitioner had established that the termination was void ab initio. Although Clause 17 prescribes a mode of termination, the court observed that non-mention of Clause 17 in the communications produced did not, on the interim material, permit the court to hold that Clause 17's requirements were not satisfied. The court emphasized that this was a prima facie view and that the learned Arbitrator is free to come to his own conclusions, uninfluenced by these interim observations.

The court further noted that the question of enforcement of the negative covenant and other contractual provisions could only arise after a determination on the validity of the termination. The court also recorded the respondent’s concession that it would not enforce Clause 18.2 (the post-termination two-year non-compete clause) against the petitioner and clarified that this concession would not preclude any relief the Arbitrator might grant, including possible resumption of the franchise.

Holding and Implications

Holding: The court held that, on the material before it at the interim stage, the petitioner had not prima facie established that the termination notice dated 1.3.2000 was void ab initio. The petition under Section 9 was disposed of after the court appointed Hon'ble Mr. Justice D.P. Wadhwa (retired) as the Arbitrator to decide the disputes between the parties.

The court made the following specific orders and consequential directions:

Hon'ble Justice D.P. Wadhwa was appointed as Arbitrator; he will fix his own fees as agreed by the parties.
The parties were directed to approach the appointed Arbitrator within three weeks and to request an expedition of the arbitral proceedings, preferably aiming for disposal within four months from the date of the order.
The court recorded the respondent's statement that it would not enforce Clause 18.2 (the post-termination non-compete) against the petitioner; the court clarified that even if the petitioner benefits from non-enforcement of Clause 18.2, that concession would not prevent the Arbitrator from granting any relief, including resumption of the franchise, if appropriate.
The petition was disposed of by the court (i.e., no interim injunction or status quo order was granted by the court at that stage).

Implications: The immediate effect is that the dispute is to be resolved by arbitration before the appointed arbitrator. The court did not reach a final conclusion on the validity of the termination nor order enforcement of the negative covenant; those questions remain for the Arbitrator. No new legal precedent was established by this interim order — the court confined itself to prima facie observations and directed the parties to arbitration.

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Sumer Arora v. Domino'S Pizza India Ltd.

Mukul Mudgal, J.— This is a petition under section 9 of the arbitration & conciliation act, 1996 read with order xxxix rules 1 and 2 cpc, filed by a Franchisee of the respondent-M/s Domino's Pizza India Ltd., who are the Master Franchisee of the parent company, Domino's Pizza International Incorporate Ltd. based at USA. The petitioner has contended that the Franchisee Agreement required from him considerable financial input of about Rs. 70 lacs apart from the valuable site and the superstructure that the petitioner already owned, in order to set up the Domino's franchise at Gurgaon.

The petitioner submits that the store was opened on 13.9.98 The principal terms of the agreement between the petitioner and the respondent in so far as they are relevant are that the franchise was for a period of ten years, renewable for a further period of 10 years on terms agreeable mutually. Upfront franchise fee of Rs. 5 lacs was to be paid by the petitioner besides the payment of 6 per cent of monthly sale of the store as franchisee fee and 4 per cent of the monthly sales were to be given to the respondent for advertisement and promotion of authorised products of the respondent. The respondent was also to provide two (and in fact did provide four) managers who were totally in charge of the functions and operations of the franchise store run by the petitioner.

The salaries of such managers was to be borne by the petitioner though they were in fact managers chosen and appointed by the respondent to run and supervise the petitioner's outlet.

The principal grievance of the petitioner is that sometime after a year had passed after the Franchise Agreement dated 12.6.1998 was entered into and acted Upon between the parties, it was sought to be terminated by the respondents on 1.3.2000 It is stated that the Agreement between the parties stipulated regular site visits by the respondent. Such site visits were however carried on 18.1.2000, 18.2.2000 and 29.2.2000 which were according to the petitioner cosmetic in nature and pre-planned and a prelude to the arbitrary unlawful and planned termination of the Agreement dated 12.6.1998 on 1.3.2000 The petitioner has also submitted that the petitioner had preplanned the termination of the franchise of the petitioner as is evident from the fact that in Gurgaon itself, around the same time, another outlet for its products was almost ready for operation. It is submitted that the petitioner was being singled out as a target by finding minor and insignificant faults with its functioning. It is also submitted that assuming without admitting there were some minor infractions, the responsibility for the same could be laid only at the door of the managers in charge of the store who were selected and appointed by the respondents and the petitioner could not be blamed for it. Accordingly in this petition under Section 9 of the Arbitration Act seeking interim directions, the petitioner while seeking resumption of the supplies to it by the respondent has sought a status quo ante in terms of the Agreement dated 12.6.1998 and has also sought the cancellation of the termination Notice dated 1.3.2000 and has prayed for restraining the respondents from bringing into operation its stores at SCF-94, Sector-14, Gurgaon, Haryana which falls within the ambit of the prohibition contained in Clause 4 relating to the exclusive operation in the locality.

The petitioner's plea is that the Agreement's termination being void ab initio, the agreement still holds the field and the petitioner is entitled to invocation of negative covenant No. 4.2 which operates during the subsistence of the agreement. The petitioner has stated that the respondent had unlawfully taken the possession of all the stores upon termination of the said Agreement and despatched letters to various customers of the petitioner intimating them that the store was closing down. The letter further stated that the another store was very soon being started in Gurgaon. The petitioner has also sought arbitration on 21.3.2000 in accordance with the arbitration clause which stipulated that the Arbitration would be in Delhi.

The petitioner's main plea is that the petitioner should be permitted to invoke Clause 4.2 which reads as follows:

“Provided you are in compliance with the terms of this Agreement, we will not operate or grant a Sub-franchise for the operation of a DOMINO'S PIZZA Store during the term of this Agreement whose area of Primary responsibility significantly overlaps your Area of primary Responsibility as determined by us.”

Thus it is prayed that the operation of the other outlet of the respondent in Gurgaon which opened subsequent to the purported termination of the agreement on 1.3.2000 is clearly hit by Clause 4.2 and should not be permitted to continue its operations.

The petitioner has sought to rely upon the judgment of the Hon'ble Supreme Court in Gujarat Bottling Co. Ltd. & Ors. v. Coca Cola Co. & Ors. (1995) 5 SCC 545 to contend that an illegally terminated agreement is liable to be treated as subsisting and the negative covenant in any case is required to be enforced. Reliance has been placed upon the finding in the aforesaid judgment that even if the Court is unable to compel the specific performance of the affirmative agreement yet it is not precluded from issuing an injunction to perform the negative agreement.

The respondent in refuting the allegations canvassed by the petitioner in this petition under Section 9 has sought to establish that persuant to various store visits several communications were sent to the petitioner pointing out the repeated deficiencies in the running of the outlet and non-adherence of the required norms and standards. Store visits were in fact carried out since July 1999. It is also stated that various deficiencies pointed out by the respondents were not remedied by the petitioner. The respondent further submitted that prayer c) & d) of the petition have become infructuous in view of the fact that another outlet of the respondent has already opened in Gurgaon and has been functioning before this case was taken up by this Court for considering the grant of interim relief. It has also been stated that in view of the fact that an injunction granted would require continuous supervision by the Court, Section 14 of the Specific Relief Act would bar the grant of such a prayer. Any status quo ante granted would also require the monitoring of a performance constantly by this Court as the agreement comprises of numerous detailed covenants. The injunction would inter alia require the respondent to continue the supply of ingredients for the preparation of the principal product marketed by the respondent, i.e, Domino's Pizza. It has also been contended that even if the termination is to be held illegal, only a claim for damages and not the relief for injunction could be granted to the petitioner. The reliance on Gujarat Bottling Case (Supra) by the petitioner has been termed as wholly unwarranted and misconceived. However, the respondent has stated that it would not enforce or seek compliance on the part of the petitioner in so far as Clause 18.2 is concerned which put a restraint on the petitioner to carry on a similar business. The said clause 18.2 read as under:—

“ You and your Owners agree that for a period of two(2) year after termination or expiration of this Agreement, or the date on which you cease to operate the Store whichever is later, neither you nor your Owners will, directly for the benefit of you or your or through or on behalf of or in conjunction with any other person, partnership or corporation, own, engage in, be employed by, advise, assist, invest in, franchise, Sub-franchisee make loans to, or have any interest in any pizza business, including but not limited to, sit-down, carry-out or Pizza delivery business located at the premises of the Store or within ten (10) miles of the premises of the Store (except for other DOMINO'S PIZZA Stores operated under sub-franchisee agreements with us or other DOMINO'S PIZZA Stores in which you or your Owners shall have an ownership interest.”

The petitioner's main submissions are that as the termination of the Agreement dated 12.6.1998 is illegal and void ab initio, the petitioner is entitled to enforce the aforesaid negative covenant as the Agreement dated 12.6.1998 still subsists. It is also submitted that the term of the agreement is for a period of 10 years and the termination being invalid, the agreement continues to subsist and its Clauses are invokable. The petitioner has, therefore, laid emphasis on the illegal termination of the agreement and the consequent relief at least of the enforcement of the negative covenant and restraining the respondents from running any franchise in the area covered by the petitioner's outlet. In support of this plea, the petitioner has relied upon the three weekly site visits conducted within two months which were motivated and were conducted on 18.1.2000, 18.2.2000 and 29.2.2000 leading to the purported termination of the Agreement on 1st March, 2000. The petitioner has submitted that the infractions/violations complained of are minor and insignificant in nature and are being used as a ruse to justify the illegal termination. It is also stated that in fact the petitioner has received a certificate from the respondent for achieving the record weekly sales in October-November, 1998 and February-March, 1999. The respondent has, however, stated that the plea of the petitioner that the weekly site visits were only three and were conducted between 18th January, 2000 and 29th February, 2000 is not correct as the deficiency in running of the outlet and the variance in the prescribed standard of hygiene have been communicated by various communications to the petitioner since July, 1999. Reliance is also placed on notice and communications sent to the petitioner or an authorised representative, General Manager, Satya Narain. The respondent has submitted that apart from the delay and default regarding non-payment of their dues, the deficiencies pointed out on behalf of the respondents were completely ignored by the petitioner and not remedied.

It would therefore be necessary to consider whether prima facie the petitioner has been able to establish that the termination Notice dated 1st March, 2000 is illegal and void ab initio and whether the agreement can therefore be said to be subsisting so as to enable the respondents to seek the enforcement of the negative covenant. The submission of the petitioner in this behalf is that the termination notice must be strictly according to the Clauses 17.2(i) & 17.2(0) which mandate the provision of notice seeking remedial rectification within a period of 7 or 30 days and no such notice were given to the petitioner and this is evident from the Notice dated 12th October, 1999, given by the respondent to the petitioner. This notice relates to the outstanding dues of Rs. 10 lacs against the petitioner. The petitioner's plea is that until and unless such a specific notice was given to the petitioner even in respect of deficiencies sought to be relied upon by the respondents, the termination of agreement on 1.3.2000 is illegal and invalid.

The respondent has relied upon various documents since July, 1999 which according to him have pointed out the various defects in the operations of the petitioner which have remained unremedied. The respondents have relied upon the following communications of store visit reports and Minutes of the Meeting between the parties to contend that several reminders were sent to the petitioner for improving the working of the outlet. They are inter-alia as follows:

“(a) Minutes of Meeting dated 24.6.99

(b) Minutes of Meeting & Store visits dated 3.7.99

(d) Store Visit dated 29.11.99

In the aforesaid communications various deficiencies in the working including the hygiene deficiencies have been pointed out to the petitioner by the respondents. Therefore, one of the main issues to be determined by the arbitration proceedings is whether the termination of the agreement was invalid or not. At present I am not satisfied that the petitioner has been prima facie able to establish that the determination of the agreement was void ab-initio and of no effect in law. The only plea of the petitioner is that the term of the agreement between the parties required giving of a specific notice as a preclude to the termination of the agreement which in the present case was not done as the clauses 17.2(i) & 17.2(o) require rectification of the defects pointed out within a period of 7 or 30 days. The said Clauses read as follows:—

“17.2(1) You fail to comply with any material provision of this Agreement or any specification, standard or operating procedure or rule prescribed by us which relates to use of any Mark or the quality of pizza or any beverage sold by you or the cleanliness and sanitation of the Store and you do not correct this failure within seven (7) calendar days after written notice is delivered to you;

17.2(o) You or any of your Ownere fail to comply with any other material provisions of this Agreement or any specification, standard or operating procedure, and you fail to correct this failure within thirty (30) calendar days after written notice is delivered to you.”

It is contended that the sole mode of termination and expiration of the agreement is stipulated in Clause 17, and unless the notice specifically stated to be under Clause 17 was given, the respondents were not entitled to terminate the agreement and any such purported termination without following the provisions of Clause 17 would be void ab-initio. Reliance is placed on Clause 17.2(i) which provided rectification of the deficiencies as contemplated by said Clause (i) within seven days. The respondents' plea is that since notice was not specifically given under Clause 17, the termination is void ab initio.

Considering the above communications issued from July, 1999 to the petitioner by the respondents it cannot be said prima facie that provisions of Clause 17 relating to termination were not satisfied in view of the fact that Clause 17 was not specifically mentioned in the communications sent from July, 1999. This is a matter which is require to be considered by the learned Arbitrator and at this stage the Court cannot come to a finding that the termination was void ab initio. Even the judgment of the Hon'ble Supreme Court in Gujarat Bottling case (Supra) in para 19 proceeded on the basis that the agreement containing the negative covenant held the field as it was not terminated. From the material produced before me by the respondent inclusive of communications addressed to the petitioner by the respondent regarding the functioning of the petitioner's outlet, it cannot be held at this stage that the non-mention of Clause 17 or the absence of notice contemplated by the above provision makes the termination of the franchise of the petitioner void ab-initio. It is, however, made clear that these observations are merely primia facie in nature and the learned Arbitrator is free to arrive at his own conclusion regarding the termination of the agreement entirely uninfluenced by any of these observations made at an interim stage in this order. The question of enforcement of the provisions of the agreement, including the negative covenant can only be considered after a finding as to the invalidity of the termination of the agreement is arrived at.

However, it is made clear that in view of the offer made by the respondents, the respondents would not enforce Clause 18.2 of the Agreement which operates post-termination against the petitioner and even if the petitioner takes advantage of the no-operation of the Clause 18.2 that will not come in the way of any relief being granted to the petitioner by the Arbitrator including the resumption of the franchise.

Both the counsel have agreed that Hon'ble Mr. Justice D.P Wadhwa, a retired Judge of the Hon'ble Supreme court be appointed as Arbitrator. Hon'ble Justice D.P Wadhwa is accordingly appointed as the Arbitrator in the present dispute and will fix his own terms regarding fees as agreed by both the parties. The parties to approach the said Arbitrator within three weeks from today and request for an expeditions disposal of the disputes between the parties perferably within four months from today.

The petition is accordingly disposed of.

Sumer Arora v. Domino'S Pizza India Ltd.

Judgment Summary — Mukul Mudgal, J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Petitioner's Arguments

Respondent's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Sumer Arora v. Domino'S Pizza India Ltd.

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