Percept D’Markr Pvt Ltd v Zaheer Khan & Anr Appeal (Civil) 5573-5574 of 2004
Facts
Defendant has entered into a contract with the complainant company for the management of its public relations on the grounds that the complainant would have the right of first resort’ in respect of any bid obtained by the defendant for media affairs management services before and after the end of the first negotiating period; so that the defendant does not consider any offer from third parties to be witty. However, following the termination of that contract, the defendant entered into an arrangement with a third party and the plaintiff demanded a permanent injunction.
Issue
Whether the right of first refusal (ROFR) under clause 31(b) of the permission agreement entered into between the appellant, Percept D. Markr (India) Pvt. Ltd., and respondent No.1, Zaheer Khan is void under Section 27 of the Indian Contract Act, 1872 has been in restraint of trade.
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Rule
- Section 9 Arbitration and Conciliation Act, 1996
- Section 27 Contract Act
- Clause 31(b) of The agreement between parties
- Section 42 Specific Relief Act, 1963
- Section 27 Indian Contract Act.
- Clause 27,28,29 of The agreement between parties
Judgement
The agency contract is of a personal nature, as one entered into here between the parties, such that imposing the negative covenant would imply forcing the defendant to deal with the claimant company’s affairs even after the initial agreement has not been broken and has been legally terminated; this will restrict his right to trade with any entity in any way he wishes. S.27 will be violative and therefore void and unenforceable as long as it is sought to enforce the agreement while it is valid for the subsistence of the agreement, but when it is sought to be enforced after the agreement has been terminated.
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Reasoning
The primary takeaway from the case was that after its termination, any trade restraint agreement could be deemed void. Once the contract is terminated by either natural or legal termination, a restrictive agreement that openly limits the right to trade cannot be enforced and the party seeking its enforcement is not entitled to injunctive relief.
Contract law developments must be considered and, if such restrictive clauses become boiler-plate provisions accepted by the industry, the total invalidity of such restrictive clauses may not always be consistent with industry standards and the principles of natural justice. Unless a restrictive clause in a contract serves a protection purpose other than to unfairly harm an aggrieved party, the balance of convenience between its procompetitive justifications and anti-competitive effects within the context of a particular industry must be taken into account in order to determine whether a contractual clause constitutes a restriction of trade.
Current Day Significance
The rationale held in this instance was replicated in another landmark case of Percept Talent Management Pvt. Ltd. v. Yuvraj Singh & Globosport India in which the validity of the infamous ROFR provision was to be investigated by the Bombay High Court. The agreement between Yuvraj and Percept included a ROFR clause in which Yuvraj was prohibited from entering into an agreement with a third party upon termination of the agreement before the opportunity to match the offer was given to Percept. The Bombay High Court noted that such an arrangement occurs on the basis of the foundations of confidence, trust, and fundamental principles underlying a fiduciary relationship. If faith and trust do not exist between the partners, such a partnership will not survive. The law was held not to enforce and compel the parties to observe a relationship where the fundamental basis of it has disappeared.
The Delhi High Court adopted a similar position in the case of Infinity Optimal Solutions Pvt. v Vijender Singh. It was held that either party, irrespective of whether or not there was a termination clause in the contract, could terminate a contract between the parties. In a contract alone, the right of termination may not be limited to one party.
- Percept Talent Management Pvt. Ltd. v. Yuvraj Singh & Globosport India 2008 (2) BomCR 654
- Infinity Optimal Solutions Pvt. v Vijender Singh CS(OS) 1807/2009
