India: Negative Covenant In A Trade Mark Assignment Prevails Even Upon Termination Of Joint Venture

Last Updated: 15 November 2012
Article by Kamakhya Srivastava

The Indian Contract Act, 1872 (the Act), provides a framework of rules and regulations governing the formation and performance of a contract in India. It deals with the legality of non-compete covenants and stipulates that an agreement, which restrains anyone from carrying on a lawful profession, trade or business, is void to that extent.

Agreement in restraint of trade is defined as the one in which a party agrees with any other party to restrict his liberty in the present or the future to carry on a specified trade or profession with other persons not parties to the contract without the express permission of the latter party in such a manner as he chooses. Negative covenants operative during the period of contract when the licensee is bound to serve the licensor exclusively are not regarded as restraint of trade and do not fall under Section 27 of the Act.

Section 27 of the Act implies that to be valid an agreement in restraint of trade must be reasonable as between the parties and consistent with the interest of the public. What is declared to be void by virtue of section 27 is any Agreement to restrain any person from exercising his right to carry on a profession or trade or business and any restraint thereupon by an Agreement would be void.

Whether the invocation of Section 42 of the Specific Relief Act, 1963 to enforce the negative covenant contained in the Deed of Assignment, was contrary to the provisions of Section 27 of the Indian Contract Act, 1872 and was, therefore, void?

This question forms, inter alia, the crux of the decision by the Apex Court in Suresh Dhanuka vs. Sunita Mohapatra (Civil Appeal nos. 10434-10435 of 2011; Supreme Court of India). It was held that the provisions of section 27 of the Act would not be attracted to the facts in the present case, as the injunction sought for by the Appellant was not to restrain the Respondent from carrying on trade or business, but from using the Trade Mark, which was the subject matter of dispute.

Respondents (Sunita Mohapatra), a manufacturer of herbal products entered into an Agreement with the Appellant (Suresh Dhanuka) resulting in the formation of a Joint Venture Company under the name and style of "Abhilasha". The said Agreement was initially for a period of 5 years from 1st April 1999, and, thereafter, extended till 31st March 2009. A Deed of Assignment was executed by the Respondent in favour of the Appellant on 1st October 2000, assigning 50% of the right, title and interest in the Trademark "Naturoma Herbal" registered in the name of the Respondent, with proportional goodwill of the business concerned in the goods in respect of which the Mark is permanently used, inter alia on the following terms and conditions namely:

a. All goods manufactured by the Respondent under the said Trade Mark would be marketed solely by the Appellant;

b. On the termination of the Joint Venture, neither the assignor nor the assignee would be entitled to use or register the Mark in its own name or jointly with some other party;

c. The existing goodwill and further goodwill would vest in the owner and the assignee.

An application was also filed with the Trade Mark authorities for bringing on record the name of the Appellant as the Joint Proprietor of the Trade Mark and objections field thereto were jointly resisted by the Appellant and the Respondent, accepting the fact that the Appellant was the owner of 50% of the Trade Mark and all the rights, title and interest accrued therefrom. However, in 2006, when it came to light that the Appellant had floated a company by the name of "Naturoma Herbals (P) Ltd." and has also applied for registration of the Trade Mark in the name of that company, the Respondent filed a suit on 21st August 2007 under sections 134 and 135 of the Trade Marks Act 1999 in which an ex-parte interim order was passed restraining the Appellant and the Company from selling, distributing, manufacturing and marketing any of the products in the name of "Naturoma" or "Naturoma Herbal".

Thereafter, the Respondent cancelled the Joint Venture Agreement dated 1st April 1999 and also revoked the Deed of Assignment. Immediately thereafter the Appellant filed an application under section 9 of the Arbitration and Conciliation Act 1996 and obtained an ex-parte order restraining the Respondent from selling her products by herself or by any other person save and except through the Appellant. Against this the Respondent preferred an appeal before the Orissa High Court, which the Court allowed.

In the special leave to appeal at Supreme Court directed against the judgment and order passed by Orissa High Court, the Appellant submitted that it was not within the powers of the Respondent to terminate the Deed of Assignment, even if the joint venture for marketing of the goods manufactured by the Respondent under the name of "Abhilasha" was discontinued. He reiterated that all goods manufactured by the Respondent under the trademark "Naturoma Herbal" would have to be marketed solely by the Appellant and on termination of the joint venture, neither the assignor nor the assignee would be entitled to use or register the mark on its own name or jointly with some other party. The Appellant contended that the said condition amounted to a negative covenant, which could be enforced under Section 42 of the Specific Relief Act, 1963.

On this question of grant of injunction to implement a negative covenant, as envisaged aforementioned, the Respondent urged that the covenant contained in the Deed of Assignment, which had not been acted upon, was contrary to the provisions of section 27 of the Indian Contract Act, and was, therefore void. The short reply of the Appellant was that in the instant case there was no violation of section 27 of the Indian Contract Act as the injunction sought for was not on trade or business but in respect of the use of the Trade Mark.

The Apex Court opined that the conditions in the Deed of Assignment clearly stipulate that all the goods manufactured by the Respondent under the Trade Mark "Naturoma Herbal" would be marketed solely by the Appellant. It was also submitted that the said Trade Mark would be used only in relation to goods connected in the course of trade with both the parties. One of the other conditions of the Deed of Assignment was that both the parties would be entitled to assign their respective shares in the Trade Mark subject to prior written consent of the other party, which presupposes that the parties were the absolute owners of their respective shares in the Trade Mark and even on termination of the joint venture, as has been done in the instant case, neither of the parties would be entitled to use or register the Mark in their own names or jointly with some other party.

Therefore even upon termination of the joint venture under the Agreement between the parties, neither the Appellant nor the Respondent would be entitled to use or register the Mark in their own names or jointly with some other party.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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