Vipin Sanghi, J.@mdashBy this order, I propose to dispose of the application filed by the plaintiff under Order 39 Rule 1 & 2 of the CPC and IA No. 5687/2007 and 5689/2007, the applications under Order 39 Rule 4 CPC filed by defendant Nos. 1 and 10 to 12 respectively. Defendant Nos. 2 to 9 have also adopted the aforesaid applications under Order 39 Rule 4 filed by defendant no. 1 and prayed for the vacation of the ex-parte ad interim order of injunction passed by this Court on 4th April, 2007. The plaintiff has filed the present suit seeking the relief of permanent injunction and damages. The claim of the plaintiff is that it entered into a distribution agreement with defendant No. 1, Gyrus Group PLC on 27th September, 2004, whereunder the plaintiff was granted the exclusive distributorship in respect of various products of the defendant company over the defined territory i.e. India, Nepal and Bangladesh.
2. The term of the agreement was for two years, and the plaintiff states that the agreement was automatically renewable and that the same stood renewed for a period of one year upto 26.9.2007, after the initial term of two years, which expired on 26th September, 2006. Plaintiff submits that despite exclusive distributorship granted to the plaintiff, the defendant was preparing to breach the exclusive rights of the plaintiff by entering into other agreements with defendant Nos. 10 to 12 in contravention of the said distribution agreement.
3. When the suit came up before the Court at the ex-parte stage, after hearing counsel for the plaintiff and on the basis of the record and the averments made in the plaint in the application, this Court passed the following order:--
I.A. 4072/07
Issue notice to the defendant, returnable on 22-8-2007.
The plaintiff has filed the present suit against the defendants, inter alia seeking relief of permanent injunction. The plaintiff had entered into an agreement with defendant no. 1 referred to as Gyrus on 22.9.2004 whereunder the plaintiff was appointed as the exclusive distributor of Gyrus with the right to import, promote and sell the products of Gyrus in the agreed territory i.e. India, Nepal and Bangalore. Clause 2 of the Distribution Agreement reads as follows:--
2. Grant of Distributorship
Gyrus hereby grants Distributor the right to import, promote and sell its products in the Territory and Distributor hereby accepts such appointment. If the Exclusivity in Paragraph 1 above is described as Exclusive, then Gyrus hereby grants Distributor the exclusive right to import, promote and sell its products in the Territory. This means that Gyrus shall not sell the products directly in the Territory, or appoint further distributors for such products in the Territory.
The plaintiff states that since the execution of the said agreement over the last about 2-1/2 years, the plaintiff has expended huge amount of money in trying to develop the market for the products of Gyrus within the territory. The plaintiff has filed list of various potential clients all over the country and it is explained that 1,127 potential clients have been talked to by the plaintiff. The plaintiff has also filed the list of various customers with whom agreements are likely to be finalised for supply of medical equipment of Gyrus. This list contains 122 prospective buyers of the said equipment. The plaintiff has filed on record large number of documents to show the hard work done by its employees to develop the market by contacting the prospective clients. It is also claimed that in respect of about 76 prospective clients, live demonstrations have been made on laptop computers etc. to large number of prospective clients.
The plaintiff has also given live demonstration to a large number of prospective customers over this period of the products of Gyrus.
The plaintiff has filed E-mail communications exchanged between defendants nos. 8 and 11 from which it appears that defendant no. 8 who represents defendant no. 1 is planning to terminate the distributorship agreement of the plaintiff with a view to appoint defendant no. 10 (of whose defendant nos. 11 and 12 are the Directors) as its new distributor. It is argued that such a move would cause immense prejudice to the plaintiffs who have invested huge amounts of time and effort, apart from money in developing the market of the machines of Gyrus. Counsel for the plaintiff submits that the agreement in question is in fact governed by the laws of England. It is argued that in view of the exclusivity granted under clause 2 of the agreement, under the Indian Law, the plaintiff is entitled to enforce the negative covenant and thereby seek an injunction to restrain Gyrus from appointing any other distributor or dealing with any other entity in respect of the products within the territory reserved for the plaintiff. It is further submitted that by placing reliance on
It is further argued that in the Indian law, the plaintiff would be entitled to seek a restraint against the defendant from terminating the distributorship agreement. It is however pointed out that in the present case till date, the distributorship agreement between the plaintiff and defendant no. 1 has not been terminated.
In my view, in the light of the aforesaid submissions, the pleadings contained in the plaint and the documents filed on record, the plaintiff has made out a prima facie case for grant of ex parte order of injunction. I accordingly restrain the defendants in terms of clause (a) to (c) of the application till the next date of hearing. Compliance of order 39 Rule 1 and C.P.C. be made within a week.
Copy of the order be given dasti under the signature of the Court Master.
4. The defendants were served the injunction order and, as aforesaid, have preferred the applications under Order 39 Rule 4 CPC. I have heard the arguments of the parties in these applications and that is how, I am now proceeding to dispose of these applications.
5. The case of the plaintiff is founded upon Clauses 2 & 6 of the Distribution Agreement dated 27th September, 2004 and therefore. I reproduce these Clauses hereunder:
2. GRANT OF DISTRIBUTORSHIP
Gyrus hereby grants Distributor the right to impart, promote and sell its Products in the Territory, and Distributor hereby accepts such appointment. If the Exclusivity in Paragraph 1 above is described as Exclusive, then Gyrus hereby grants Distributor the exclusive right to import, promote and sell its Products in the Territory. This means that Gyrus shall not sell the Products directly in the Territory, or appoint further distributors for such Products in the Territory.
6. TERM AND RENEWAL
The initial term of this Agreement shall commence as of the effective date as set out above and shall continue, subject to the termination rights stated herein, for a period of two (2) years from such date. At the end of such initial term, the Agreement would automatically be renewed for successive terms of one (1) year. However, either party may decide not to renew this Agreement beyond the initial or any renewal term. Further, that for any successive term the parties shall agree upon a new annual Purchase Target for the next year of the Agreement no later than three (3) months prior to the expiration of the contract term then in progress. Notwithstanding the foregoing, this Agreement may be terminated for cause at any time in accordance with the provisions of Paragraph 12 hereof.
6. The submission of the plaintiff is that as per Clause 15(d), the agreement is governed by the laws of England and Wales and under the English Law, a negative covenant would normally be enforced by a Court. As recorded in the ex-parte order, counsel for the plaintiff placed reliance on Supreme Court decision in
7. The contention of the plaintiffs is that the agreement stood renewed automatically, since there was no expression of intention by either party, not to renew the same. Counsel for the plaintiff referred to Clause 12 of the agreement, which contains the rights of the parties to terminate the agreement, by contending that there had been no notice of termination issued by the defendant, prior to the automatic renewal of the agreement on 27th September, 2006. Clause 13 sets out the procedure for termination, and it is argued that the said procedure has also not been resorted to by any of the parties to the agreement.
8. On the issue of interpretation of Clause 6 of the agreement, counsel for the plaintiff placed reliance on the correspondence exchanged with the defendant on 21st April, 2004 i.e. before the execution of the Distribution Agreement. It is stated that in the draft Distribution Agreement, the term for renewal had been worded in a fashion that it would terminate automatically at the end of its term, unless renewed three months in advance. By this e-mail communication, the plaintiff had stated that normally, the renewal should be automatic, unless recalled or terminated by either party, by giving three months'' notice. It is submitted that in view of the aforesaid negotiation undertaken by the plaintiff, Clause 6 of the Distribution Agreement was modified to incorporate the view of the plaintiff which now provides for automatic renewal.
9. Counsel for the plaintiff drew my attention to the averments made in the plaint, coupled with the documents filed as Annexure R, which contains the list of 1127 prospective clients tapped by the plaintiff all over India for selling the products in question. He also referred to Annexure S, which enlists 122 prospective clients in respect of whom the contracts for supply of the products in question are likely to be finalized in due course. The plaintiff also drew my attention to Annexure T, which enlists 76 prospective clients, to whom laptop presentations have been given in respect of products of the defendants. The plaintiff has also filed a large number of documents such as bills, vouchers, correspondence exchanged with prospective clients to show the efforts and expenditure expended for the purpose of developing the market for the defendants'' products in India. The plaintiff states that after having availed of the services of the plaintiff in the initial stage, when great deal of effort is required to develop the market, the defendants are now acting malafide by proceeding to breach the agreement, whereunder the plaintiff enjoys the exclusive right to distribute the products in question within the earmarked territory.
10. The plaintiff also placed reliance upon an email communication received from the defendants on 3rd January 2007, to say that far from having the termination of the Distribution Agreement on its mind, the defendants were desirous of expanding their business association with the plaintiff by consolidating all the businesses pertaining to the fields of ENT, Urology, Gynecology and General Surgery. It is argued that had the agreement not been renewed automatically beyond 26th September, 2006, there is no question of the defendants communicating with the plaintiff in the manner they did on 3rd January, 2007.
11. The plaintiff argued that, apparently, on account of an oversight, the defendants forwarded their inter-se email communication to the plaintiff from which the plaintiffs learnt that the defendants were planning to terminate the Distribution Agreement.
12. It appears that on 11th September, 2006 at 9.06 PM, a communication was sent from Mr. Ram Narain, Defendant No. 11 to Mr. Mark Lawrence, Defendant No. 8. In this communication, Mr. Mark Lawrence in response to the query by Mr. Ram Narain: whether the defendant company has a distributor and whether their contract is still valid, stated, that the agreement is overdue and will be terminated with notice. It appears Mr. Ram Narain was apprehensive of stepping into a situation of confrontation, and stated that he would not like to promote a product and have legal issues on his hands subsequently. The plaintiff also finds mention in the said communication.
13. Mr. Mark Lawrence also stated that they (referring to the plaintiff) would have some stock which the company of Mr. Ram Narain may buy in return for customer lists. Mr. Mark Lawrence also offered to broker this deal for Mr. Ram Narain.
14. On the same day, there is a subsequent email communication from Mr. Ram Narain at 10.50 PM wherein he writes to Mr. Mark Lawrence that it is important that he wrote him (which refers to the plaintiff) about the ''change'' of distributor and also of the ''discontinuation'' of the Distribution Agreement.
15. He further states that "this is a small market, I know him well and I would like to avoid any unpleasantness. Once this is done, then talk to him about his stock ML". It appears that Mr. Mark Lawrence responded to this by stating that it would be done.
16. The plaintiff also relied upon an email communication dated 26th March, 2007 from the defendants, to state that by this communication, the defendants in fact disclosed the breach of the exclusivity clause contained in the Distribution Agreement when they admitted that they had reached an agreement with Healthcare Pty Ltd. establishing them as the exclusive distributor in India, for the full Gyrus ACMI product range. It is argued that this product range would obviously include the products in respect of which the distribution agreement was entered into with the plaintiff.
17. Counsel for the plaintiff submitted that even under the Indian Law as contained u/s 42 of the Specific Relief Act, (notwithstanding Section 41(e) - which states that an injunction cannot be granted to prevent the breach of a contract, the performance of which can not be specifically enforced), where a contract comprises an affirmative agreement to do a certain act, and a negative covenant, not to do certain act, even though the Court may not be able to compel specific performance of the affirmative agreement, that would not preclude the Court from granting an injunction to restrain the breach of the negative covenant. It is argued that the negative covenant contained in the Distribution Agreement against the defendant is that they would not deal with any other person in relation to the products in question, and within the territory in question, during the subsistence of the Distribution Agreement.
18. Plaintiffs argued that the defendants made evident their malafides by seeking to terminate the distribution agreement on 9.5.2007, that is after the filing of the present suit and the service of the ex parte ad interim order of injunction. It is argued that the termination notice is an after-thought and has been issued with a view to defeat the claim of the plaintiff as well as the ex parte ad interim order passed by this Court. It is also argued that the ground taken by the defendants for termination of the agreement--that the plaintiff had not met the target for the year September, 2005 to September, 2006- stood waived upon the automatic renewal of the Distribution Agreement and also in view of the subsequent conduct of the defendant in offering an even wider range of products to the plaintiff for being covered by the Distribution Agreement. It is argued that the stand taken by the defendant, that the agreement was not automatically renewed upon the expiry of the initial period of two years, on the ground that no annual purchase target for the year 2006-2007 had been agreed to, was also an after-thought. The automatic renewal was not dependent on the fixation of a fresh annual purchase target, and if a fresh annual purchase target was not specifically agreed to, the implication was that the target fixed in the previous year would continue to remain valid for the renewed one year period.
19. On the other hand, counsel for the defendants, at the outset, points out that the plaintiff has not even impleaded the contracting party, namely, Gyrus International Limited, United Kingdom who had executed the distribution agreement with the plaintiff. No doubt Gyrus Group PLC is the umbrella company and the contracting party Gyrus International Limited is a part of the same Group. However, the plaintiff ought to have impleaded the contracting party.
20. It is next contended that the prayers made by the plaintiff in the suit and in the interim application under Order 39 Rule 1 & 2 CPC are separate and distinct. In the suit the plaintiff has sought the reliefs of injunction;
(i) to restrain termination of the Distribution Agreement dated 27.9.2004;
(ii) to restrain the stopping of the supply of machines as and when ordered by the plaintiff, or the stopping of supplies of consumables or parts of the machines already supplied;
(iii) to restrain the defendants 1 to 9 from dealing with any entity other than the plaintiff.
21. However, in the interim application, the relief sought by the plaintiff and granted by the Court is to:
(i) restrain the defendants from dealing with the clients mentioned in the list annexed as Annexures R, S & T to the plaint to the exclusivity of the plaintiff with regard to the products which are subject matter of the Distribution Agreement dated 27.9.04;
(ii) direct the defendants 1 to 9 to supply to the plaintiff information with regard to any dealing and/or meeting and/or any transaction which may take place between clients mentioned in Annexures R, S & T; and defendants 1 to 9 with regard to the products being subject matter of the Distribution Agreement dated 27.9.2004, and;
(iii) injunct and restrain the defendants 10 to 12 against their dealing with entities mentioned in Annexures R, S & T and for further restraining them from inducing the breach of the Distribution Agreement dated 27.9.2004 which the plaintiffs have with defendants 1 to 9.
22. The plaintiff could not seek a larger relief by way of an interim application than what is not even prayed for in the suit. Counsel for the defendants relied on Section 14, 41 & 42 of the Specific Relief Act (The Act).
23. Section 14 of the Act in so far as it is relevant reads as follows:--
14. (1) - The following contracts cannot be specifically enforced namely;--
(a) a contract for the non-performance of which compensation in money is an adequate relief;
(b)..............
(c) a contract which is in its nature determinable.
24. Defendants rely on clause 12(iv) of the distribution agreement which states that "either party shall have the right to terminate this agreement upon writing notice on the occurrence of any of the following events:
(i)..............
(ii)............
(iii)............
(iv) The failure by the distributor to achieve the annual purchase target for the preceding year.
25. It is further argued that the Distribution Agreement is in its nature determinable and the same is evident from the fact that it is within the powers of the parties to terminate the agreement in accordance with Clause 12 thereof.
26. The defendants contended that they were entitled to, and they have terminated the distribution agreement vide notice dated 9th May 2007. The relevant extract of the notice of termination of the distribution agreement sent by Gyrus International Ltd., reads as follows:
As you are aware, the initial term of the agreement was for a period of two (2) years which expired on 26th September 2006. Whilst the agreement had a renewal clause, it also provided either party an option not to renew the agreement.
You are aware that IPL had been unable to meet its annual purchase target of Pounds 150,000.00 for the year 2006 and that there was a shortfall of more than pounds 100,000.00 on the part of IPL in achieving the aforesaid target. For this reason, amongst others, Gyrus on the expiry of the initial term of the agreement on 26th September 2006, had exercised its option not to renew the agreement with IPL and the agreement is no longer subsisting between parties.
The expiry of the agreement is evidenced, amongst other factors, by the fact that admittedly no annual purchase target for the year 2007 was determined by parties as required in the event of renewal of the agreement.
Despite being aware of the fact that the agreement is no longer in existence, IPL has mala fide approached the Hon''ble High Court of Delhi by way of a civil suit, bearing no. CS(OS) No. 650 of 2007, seeking injunctive relief and damages against Gyrus by falsely alleging that the Agreement stands renewed and there is a valid and subsisting agreement between parties. We are taking steps to place the correct facts before the Hon''ble High Court.
Without prejudice to the above, by way of abundant caution, assuming without admitting, that the Agreement subsists, we hereby exercise our right under Clause 12A(iv) of the Agreement to terminate the same.
IPL having failed to achieve the Annual Purchase Target of $150,000.00 for the year 2006, the Agreement, if any, hereby stands terminated forthwith.
27. Defendants submit that even if it was assumed that the Distribution Agreement stood automatically renewed after the termination, the agreement could not be reinstated through the instrumentality of the Court. It is argued that u/s 41 of the Act, an injunction cannot be granted to prevent the breach of a contract, the performance of which would not be specifically enforced. Since the Distribution Agreement cannot be specifically enforced, no injunction could be granted to prevent its breach and the only remedy available to the plaintiff is in damages which have already been claimed in the present suit. The Defendants also agreed to render accounts of any sales undertaken by them after the 27th September 2006 in the event of it being finally held that the distribution agreement stood automatically renewed for the period of one year. The defendants contend that there is no equity in favour of the Plaintiff who has itself admittedly and miserably failed to meet the targets for the first two years.
28. It is submitted that the plaintiffs were well aware that under the law they are not entitled to grant of an order of injunction in a case like present, and that is why the plaintiffs have also made a claim for damages of Rs. 3,42,11,558/-. The interim injunction sought by plaintiffs and granted by this Court is not to enforce the negative covenant. It has the effect of completely paralyzing the business of the defendants. It is also argued that, in fact, the plaintiff is seeking specific performance of the Distribution Agreement and an injunction against its termination, and neither of these reliefs can be granted by the Court in view of the various provisions contained in the Specific Relief Act.
29. While not disputing that Clause 2 of the Distribution Agreement contains a negative covenant against the other contracting party, i.e., Gyrus International Ltd., counsel for the defendants points out that the plaintiff would not be entitled to seek the enforcement of the negative covenant since the plaintiff had itself failed to perform the contract in so far as it is binding upon it.
30. It is submitted that the admitted position is that the plaintiff had failed to meet the annual purchase targets set under the agreement for the first two years. Reference has been made by the defendants to the e-mail communications sent by the plaintiff on 2nd August, 2006 wherein the plaintiff admits the fact that it had failed to meet the annual purchase targets for the first two years which was set at GBP 50,000 and GBP 150,000 respectively. The shortfall in the year 2005, which was the first year under the agreement (from September, 2004 to September, 2005), was to the tune of GBP 34,384.54 and the shortfall in the subsequent year (between September, 2005 to September, 2006) was GBP 112907.30.
31. From the communication dated 2nd August 2006 and 4th January 2007, sent by the plaintiff, by email, (filed by defendant No. 1 along with I.A. No. 5687/2007), it was pointed out that even to the plaintiff it was clear that the distribution agreement was no longer subsisting. The plaintiff by writing this communication was trying to emphasize that the defendant should continue to deal with the plaintiff alone in relation to representation of Gyrus ACMI in India. There would have been no occasion to write this letter, if it was clear to the parties that the plaintiff is, and would continue to act as the sole and exclusive distributor of the defendant Nos. 1 to 9. The plaintiff in this communication inter-alia stated as follows:
If you are even dealing with 2-3 responsible companies and they do not bother you much, you will be able to encash on the strength of each one of them, individually. As far as I can see, it may not be possible to find a single company covering all areas, without actually losing out on a big percentage of business. This is because in this age of super-specialization, only the specialized companies are active nationwide. Then there is a segment of surgical dealers who deal with all products, but then, they are active only region wise.
From your point of view you may feel that the current business does not justify dealing with several companies, but trust me, the market does have a potential to grow big.
I have tried to cover it exhaustive (I hope, it did not exhaust you already) but I wanted you to have a complete picture from your experienced partner in India.
32. In this very communication, the plaintiff had advocated the appointment of Healthcare i.e. Defendant No. 10 to 12 alongwith the plaintiff itself to act on behalf of Gyrus ACMI in India. If the right to exclusivity for distribution was subsisting in favour of the plaintiff in January 2007, it is argued that there was no occasion for the plaintiff to either appeal for its continuation as a distributor of the defendants or to recommend defendant No. 10 to 12 also to the defendants for being appointed as its co-distributor alongwith the plaintiff.
33. It was next argued that the pre-requisite, without the fulfillment of which the distribution agreement could not have been automatically renewed, was not fulfilled in the present case. The renewal clause states "that for any successive term the parties shall agree upon a new annual purchase target for the next year of the agreement not later than three(3) months prior to the expiration of the contract term then in progress." (emphasis supplied) The defendants submit that, admittedly, no annual purchase target has been set at least 3 months prior to the expiration of the contract term on 26th September 2006 for the next year i.e. 2006-2007. The fixation of the target for the renewal period of one year was essential so that the parties could fix their respective responsibilities and obligations. Else the parties would be left without any definite commitment on either side about the respective obligations. It is argued that from the point of view of the defendants, the fixation of the fresh annual purchase target for the renewed year was absolutely essential, lest the sole distributor takes no interest in enhancing the sales of the products in question to their grave detriment. Without establishing an annual purchase target for the renewed year, in the event of there being a breach of the distribution agreement by the plaintiff, there would be no way by which the defendants would measure or quantify the damages suffered by them. There would be absolutely no sanction upon the plaintiff, in case of its failure to fulfill its obligations under the distribution agreement. Such a course is not envisaged under the agreement, since the annual purchase targets have been set in the first two years of the agreement, and in the renewal clause it has been made mandatory for the target to be set for the renewal period of one year, at least 3 months in advance of the expiry of the existing term of the agreement.
34. The defendants further argued that in view of the dismal performance of the plaintiff in the first two years, it was clearly understood by the parties that the distribution agreement was not to be renewed any further, and it is for that reason that fresh annual purchase targets were not set for the third year. The defendants also state in paragraph 12 of their application being I.A. No. 5687/2007, that Gyrus International Ltd., communicated its dissatisfaction with the performance of plaintiff No. 1 time and again and being dissatisfied with the performance of the plaintiff, it had taken the decision not to renew the agreement. Accordingly, no annual purchase target was fixed for the year 2006-07 as required in clause 6 of the distribution agreement and the same was allowed to lapse.
35. The defendants further state that after the expiration of the distribution agreement by efflux of time, the plaintiff has placed only a couple of ad hoc orders for the products in question with the knowledge that the exclusive arrangement under the distribution agreement has lapsed.
36. The defendants also argued that it is absolutely wrong for the plaintiff to claim that the dealings between defendant No. 1 to 9 and 10 to 12 were clandestine or mala fide. From the email communication dated 29th December 2006 sent by the plaintiff to Mr. Mark Lawrence, defendant No. 8, it is clear that, in fact, it was Mr. Ram Narain of defendant No. 10 to 12 who had introduced the said Mr. Mark Lawrence, defendant No. 8, to the plaintiff. Counsel for the defendants relied upon
37. Mr. Parag P. Tripathi, Sr. Advocate, who appeared for Defendant No. 10 to 12, adopted the argument advanced by Mr. Anil Dewan, Sr. Advocate. He further submitted that the agreement in question was determinable and relied upon section 14(i)(c) of the Act. to state that such an agreement cannot be specifically enforced. He also cited various English Authors to submit that the English Law is the same as the Indian Law on the subject. He relied upon the decision in
38. Having considered the rival submissions of the parties, I am of the view that the ex-parte ad interim injunction granted by this court on 4th April, 2007, cannot be sustained and the same deserves to be vacated forthwith.
39. The distribution agreement entered into by the plaintiff with Gyrus International Limited, UK, on the face of it, is a determinable contract. The distribution agreement does not purport to be an agreement which is to operate perpetuity. Even the renewal clause specifically states "however, either party may decide not to renew this agreement beyond the initial or renewal term". The said clause further states "......... this agreement may be terminated for cause at any time course in accordance the provisions of paragraph 12 herefor."
40. Clause 12 of the agreement gives both parties the right to terminate the agreement upon written notice upon the occurrence of the continuances mentioned therein. Clause 13 sets out the procedure for termination of the agreement.
41. That being the position, u/s 14(1)(c) of the Act, the distribution agreement in question cannot be specifically enforced. This means that neither Gyrus International Limited, UK nor defendant nos. 1 to 9 can be compelled by a decree or order of this Court to honour the said agreement. The said defendants cannot be directed to make supplies of the equipments, or consumables, or parts to the plaintiff. The fall out of the fact, that the distribution agreement is determinable and therefore not specifically enforceable, is that an injunction cannot be granted to prevent the breach of the said contract by virtue of Section 41(e) of the Act which states "An injunction cannot be granted to prevent the breach of a contract the performance of which would not be specifically enforced."
42. Consequently, the plaintiff may be entitled only to claim damages for the breach or termination of the distribution agreement, in case it establishes that the said agreement stood renewed after 26th September 2006 and that the termination thereof on 9th May 2007 by Gyrus International Ltd. UK is illegal.
43. The argument of the Plaintiff that the Defendant had waived its right to take action under clause 12(iv) of the distribution agreement upon the automatic renewal of the distribution agreement since no notice had been issued during the currency of the contractual period 2005-06, is fallacious. Since the notice for termination under clause 12(iv), has to relate to the preceding year, such a notice could obviously not have been given during the currency of the year to which it relates, since there would still be time to meet the annual purchase target set for that year. Such notice obviously has to be issued after the close of the year to which it relates. The contention that the termination of the distribution agreement on 9th May, 2007 is malafide is also of no avail. The termination of the agreement, if it is held to be illegal, may give rise to claim for damages, which have been claimed by the plaintiffs in the suit.
44. In Indian Oil Corporation Ltd. (supra), the Hon''ble Supreme Court held that the distributorship agreement could not be said to be for an indefinite period where it was revocable in accordance with Clauses 27 and 28 thereof. Section 14(1)(c) was invoked by the Court and the restoration of the distributorship of the Respondent, even on a finding that the breach of the agreement was committed by the appellant corporation, was held to be contrary to the mandate of section 14 (1) of the Specific Relief Act.
45. In Rajasthan Breweries Limited (supra), the Division Bench of this Court held that even in the absence of a specific clause authorizing and enabling either party to terminate the agreement in the event of happening of the events specified therein, from the very nature of the agreement, which is a private commercial transaction, the same could be terminated even without assigning any reason, by serving reasonable notice. At the most, in case ultimately it is found that the termination was bad, illegal or contrary to the terms of the agreement, or the understanding between the parties or for any other reason, the remedy of the aggrieved party would be to seek compensation for wrongful termination, but it could not claim specific performance of the agreement. Such an injunction is statutorily prohibited in view of Section 14(1)(c) read with Section 41 of the Specific Relief Act.
46. The Hon''ble Division Bench cited with approval another decision of this Court in
47. The law in England and Wales, which governs the distribution agreement between the parties also appears to be no different from the Indian Law on the subject. Farnsworth on Contracts, Second Edition, Vol. III at page 165 states:
.......A court will not order a performance that has become impossible, unreasonably burdensome, or unlawful, nor will it issue an order that can be frustrated by the defendant through exercise of a power of termination or otherwise.
48. Chitty on Contracts, Twenty Nineth Edition, Vol. I at page 1543 states:
If a contract is expressed to be revocable by the party against whom an order of specific performance is sought, the order will be refused as the defendant could render it nugatory by exercising his power to terminate.
49. Similarly, Halsbury''s Laws of England, Fourth Edition, Vol. 44(1) in paragraph 818 states:
Specific performance is not decreed if the defendant would be entitled to revoke or dissolve a contract when executed, as in the case of a contract containing an express power of revocation, since it would be idle to do that which might instantly be undone by one of the parties.
50. Therefore, the only issue is whether the plaintiff is entitled, u/s 42 of the Specific Relief Act, to the relief of injunction to perform the negative agreement contained in the distribution agreement, i.e. to preserve the exclusivity of distributorship of the plaintiff under Clause 2 of the distribution agreement.
51. In my view, the plaintiff has not made out a case for grant of an injunction to perform the aforesaid negative agreement, since:
(i) it cannot be said, prima facie, at this stage that the distribution agreement stood automatically renewed for a period of one year on 27th September, 2006 after the expiry of the initial period of two years;
(ii) the said agreement has, in any event, been terminated on the 9th May 2007 and;
(iii) the plaintiff is itself guilty of failure to perform its obligations under the Distribution Agreement.
52. I find force in submission of the defendants that as a pre requisite for the renewal of the distribution agreement, it was imperative that "the parties shall agree upon a new annual purchase target for the next year of the agreement no later than three (3) months prior to the expiration of the contract term then in progress". This stipulation is couched in mandatory terms since the parties have used the word "Shall" which normally connotes that the compliance with the term is mandatory. There is nothing pointed out by the plaintiffs from the terms of the agreement that the parties intended to read "shall" as "may". The defendants are right in contending that without an annual purchase target having been agreed upon for the renewal term, the agreement between the parties for the renewal period would remain ineffective and un-enforceable. The defendant is the manufacturer and supplier of the specialised equipments and products mentioned in the agreement. It is only fair that in return for grant for the exclusive rights to distribute their products in the large territory earmarked under the agreement, there should be a definite commitment to make annual purchase of the specified value by the distributor. By agreeing to appoint an exclusive distributor for the territory, the defendants agreed to give up their right to deal with any other party. It cannot be that the distributor who claims the valuable privilege of exclusivity, would not commit itself to a minimum annual purchase target. The importance of the annual purchase target can also be assessed by the fact that the failure to achieve the same gives the defendants the right to terminate the agreement.
53. The interpretation of the distribution agreement, as put forward by the plaintiff, to my mind, is most unreasonable and would lead to absurd results. I do not agree that even if the parties do not specifically agree to set a fresh annual purchase target for the renewal year, the implication is that they agreed to continue with the target that was set for the previous year. Such an implication is not borne out from the terms of the Distribution Agreement, which requires a fresh annual purchase target to be set by the parties, much in advance of the expiry of the term of the agreement, and also by the fact that even for the first two years, the targets set were different. Any business enterprise cannot be expected to be satisfied with stagnation of its business/turnover and one would normally expect, in keeping with the trend for the first two years, that the fresh annual purchase targets for the later years would be successively higher.
54. Now coming to the facts of this case, admittedly the plaintiff miserably failed to meet their annual purchase targets for the first two years under the distribution agreement. This is evident from the various e-mail communications sent by the plaintiff, relied upon by the defendants. In the background of the dismal performance of the plaintiff in the first two years, and I am not going into the reasons for the same, it appears that the parties realised that the agreement is not working as planned and neither of them appear to have seen any point in even discussing the annual purchase target for the next year beginning 27th September, 2006. From the communication dated 2nd August 2006 it is evident that even before the expiry of the initial term of the distribution agreement on 26th September 2006, the Plaintiff had sensed that the said distribution agreement was not to be renewed by Gyrus International Ltd.
55. In my view, the defendants are right in their submission that the distribution agreement did not stand automatically renewed on 27th September, 2006 since the annual purchase target for the renewal period was not agreed upon between the contracting parties at any point of time before the expiry of the initial distribution agreement.
56. I do not see any force in the arguments of the plaintiffs that from a reading of the e-mail communication dated 3rd January, 2007 of the defendants to the plaintiff, it appears that the defendants did not consider the distribution agreement as having expired on 26th September, 2006. The said communication has to be seen in the light of the fact that another competitor of defendant nos. 1 to 9, namely, ACMI, had emerged with it to offer a wider range products in the region including India. In that context, it appears the defendants sent a communication to the plaintiff on 3rd January, 2007. There is nothing to suggest in that communication of the defendants, that the defendants understood the distribution agreement in question to be subsisting, or that the defendants offered a wider range of products to the plaintiff for distribution under the distribution agreement in question.
57. From the correspondence placed on record, it also appears that there was nothing clandestine about defendant nos. 1 to 9 dealing with defendant nos. 10 to 12. In fact, it was the plaintiff who advocated the cause of defendant nos. 10 to 12 for being appointed as a co-distributor. It also appears that the plaintiff and defendant nos. 10 to 12 were working in tandem and in fact the plaintiff was introduced to defendant no. 8 by defendant nos. 10 to 12, as is evident from the email communication dated 29th December 2006 of the plaintiff.
58. The e-mail communications exchanged between the defendant nos. 1 to 9 on one hand and defendant nos. 10 to 12 on the other hand relied upon by the plaintiff only shows that they apprehended some resistance and legal action from the plaintiff to the formalization of their, inter se, arrangements. Obviously, those apprehensions were well founded since the plaintiff has indeed instituted these proceedings. However, it does not follow from a reading of those communications dated 11th September, 2006 that the defendants were in breach of the distribution agreement then in force. There was nothing wrong in defendant nos. 1 to 9 talking to other potential distributors for their products in India, once they had decided not to renew the distribution agreement with the plaintiff. It is not the plaintiffs case that the defendant nos. 1 to 9 on the one hand and defendant nos. 10 to 12 on the other hand, entered into a distribution agreement before the expiry of the distribution agreement in question on 26th September, 2006.
59. Assuming that the distribution agreement stood automatically renewed as contended by the plaintiff, the plaintiff cannot rely upon Section 42 of the Act also for the reason that admittedly it has failed to perform its obligations under the contract. The plaintiff has failed to meet the annual purchase targets in the first two years of the agreement. Obviously, the plaintiff cannot seek to restrain the defendants, to enforce the negative agreement while at the same time itself failing to perform its own obligations thereunder.
60. Another important aspect to be noticed is that the defendants have admittedly terminated the distribution agreement on 9th May, 2007. That being the position, the distribution agreement certainly cannot be enforced or reinstated through the instrumentality of the Court.
61. In the facts of this case, the ratio of the judgment of the Hon''ble Supreme Court in Gujarat Bottling Company and Ors. (supra) has no application.
62. As recorded hereinabove, the defendants have undertaken to maintain and furnish complete account of the transactions undertaken by them in relation to the products in question, within the territory in question, after 27th September, 2006, in the event of it being held that the distribution agreement stood automatically renewed, and that the termination thereof by the defendants was wrongful. The defendants would be bound by that aforesaid undertaking. For the reasons aforesaid, I dismiss the plaintiff''s application being IA No. 4072/2007 and allow the defendants'' application being IA nos. 5687/2007 and 5689/2007.
