Arbitration Petition (Lodging) No.146 of 2012

13th February, 2012

Petitioner Counsel: Ms. DEEPA AHUJA with Ms. KOKILA KALRA
Respondent Counsel: Ms.RAJANI IYER, Mr. MIHIR MODY, M/s. K.ASHAR & CO.

JUDGMENT

JUDGMENT :- By consent, the matter was adjourned twice for settlement, but as failed, heard finally.

2. The Petitioner is a franchisee and the Respondent is a franchisor. As there exists an arbitration clause in the franchisee agreement dated 8 October, 2010 and as there arose dispute, the Petitioner has invoked Section 9 of the Arbitration and Conciliation Act, 1996 (for short, the Arbitration Act).

3. The arbitration clause is as under :

"24 GOVERNING LAW, JURISDICTION AND DISPUTE RESOLUTION :

24.1. This Agreement shall be governed by the laws of the Republic of India. The parties hereby irrevocably submit to the exclusive jurisdiction of the Courts of Mumbai to try all matters arising out of or relating to this Agreement including enforcement of any arbitration award.

24.2. If any dispute or claim arises between the Parties hereto at any time in connection with the validity, interpretation, implementation or alleged material breach of any provision of this Agreement, the Parties hereto shall endeavour to settle such dispute amicably. The attempt to bring about an amicable settlement is considered to have failed as soon as one of the Parties hereto, after reasonable attempts which attempt shall continue for not less than 30 (thirty) days, gives 15 (fifteen) days written notice thereof to the other Party in writing.

24.3. In case of such failure the dispute shall be referred to a sole arbitrator who shall be appointed by the Parties within 15 (fifteen) days from the receipt of the written notice by the other Party.

24.4. In the case of disagreement as to the appointment of the sole arbitrator, the dispute or the claim shall be referred to 3 (three) arbitrators, of which the Franchisor shall appoint 1 (one) arbitrator, the Franchisee and the Promoters shall jointly appoint the 2nd (second) arbitrator, respectively, within fifteen (15) days of the failure to settle the dispute amicably. The 3rd (third) arbitrator shall be appointed by the 2 (two) appointed arbitrators within 15 (fifteen) days from the appointment of both the arbitrators;

24.5. Notwithstanding anything contained herein, this Clause shall not be construed to limit the Fanchisor from bringing any action in any; court of competent jurisdiction for injunctive or other provisional relief as the Franchisor may deem to be necessary or appropriate, or to enjoin or restrain the Franchisee and/or the Promoters from otherwise causing immediate and irreparable harm to the Franchisor.

24.6. The arbitration proceedings shall be conducted in accordance with the Arbitration and Conciliation Act, 1996. The venue for the arbitration proceedings shall be at Mumbai, India and the language of arbitration shall be English. The arbitrator(s) award shall be substantiated in writing."

4. The prayers of the Petitioner is as under :

"A. That, pending the initiation of the arbitration proceedings this Hon'ble Court be pleased to temporarily restrain and grant interim injunction against the Respondent from setting-up and launching any other Lakme Salon/s and to forthwith cease to operate any other existing Lakme Salon set-up by the Respondent within the three years from the date of the agreement dated 8th October 2010 operated by the Petitioner in Gurgaon City Municipal limits as well as in East Patel Nagar area in New Delhi;

B. Ad-interim relief in terms of prayer clause A above may kindly be granted."

5. The purpose and object of Franchisee Agreement is well known in the commercial world. The basic concept as noted & quoted is as under :

"Franchising is a system for the selective distribution of goods and/or service under a brand name through outlets owned by independent businessmen called franchisees. Although the franchisor supplies the franchisee with knowhow and brand identification on a continuing basis, the franchisee enjoys the right to profit and runs the risk of loss. The franchisor controls the distribution of his goods and/or services through a contract which regulates the activities of franchisee, in order to achieve standardization. In simplest terms, franchising involves two levels of business people; the franchisor, who has developed the system and lends its name or trademark to it, and the franchisee, who buys the right to operate the business under the franchisor's name or trademark."

6. Therefore, by keeping above concept in mind and before considering the rival contentions of the parties, it is essential to read and understand the whole franchising agreement and not isolated clauses or provisions.

7. The basic clauses which both the parties have referred and relied are as under:

2.2. "Effective Date" means the date of opening of each individual Franchisee salon under this Agreement more specifically set out in the 'Commencement Letter' issued to Franchisee in the manner set out in Schedule[.] hereto; 5 Salons within 2 years remaining 2 salons in the 3rd year from the start of the agreement;

2.3. "Exclusive Area" means an area of radius [0.75 Kms/perimeter [1.5 kms] extending around each individual salon opened under this Agreement provided that the area falls within the Territory.

2.13. "Right of First Refusal Area" means an area of radius (0.75 kms) perimeter (1.5 kms) extending around each individual salon opened under this Agreement provided that the area falls within the Territory.

4. TERRITORY

4.1. Under this Agreement, the Franchisor grants to the Franchisee, a limited, non-transferable Franchise for not more than (7) (Seven salons) (or such other number as may be mutually agreed in writing) Lakme Salon (Salon format) within the geographical limits of the municipal area of the town known by the name of (Gurgaon and East Patel Nagar in Delhi) which includes the catchment areas of the town, as set out in the MDP or such other areas as mutually agreed in writing between the Franchisor and the Franchisee (hereinafter referred to as the "Territory"). Provided that, nothing contained herein shall give or shall be deemed to give any right or license to the Franchisee to operate the Business outside the geographical limits of the Territory, save except with the prior written approval of the Franchisor and the Franchisee undertakes and warrants that the Licensed Rights granted to the Franchisee shall extend only to the Premises wherein the Lakme Salon operates within the Territory. Further, the Franchisee irrevocably undertakes and warrants that it shall not, directly or indirectly make any use of the Licensed Rights outside the Lakme Salon Premises in the Territory. The Franchisee hereby further agrees and undertakes that it shall not sub-franchise the Franchise granted to it under this Agreement without the prior written consent of the Franchisor.

4.2. Notwithstanding anything contained in Clause 4.1 above, in the event the Franchisee opens all Lakme Salons (salon format) in the Territory as mentioned in the MDP or anytime after the expiry of (.) (.) years from the Effective Date, whichever is earlier,

4.2) 1 the Franchisee shall enjoy Territorial exclusivity for the period of (3) years from the Effective Date in the Exclusive Area and the Right of First Refusal Area and the Franchisor shall not have the right to plan any Lakme Salon (salon and Studio format only) during this period in the Territory.

4.2) 2 the Franchisee shall enjoy the right of first refusal to set up any proposed Lakme Salon (Salon format only) in the Right of First Refusal Area for the period of (7) years from the Effective Date in the Territory Lakme Salon Lakme SalonLakme SalonLakme Salon.

6.1. The Franchisee shall prepare and submit a market development plan ("MD") for the Territory for the Initial MDP Term (as defined herein below) within 30 (thirty) days of execution of this Agreement. Schedule 6.1.1

6.2. The MDP shall clearly and concisely set out the business plan of the Franchisee and identify the key trade areas within the Territory in which it will operate the Business.

8. Considering the above clauses together, it is clear that Franchisor permitted the Petitioner/franchisee to open "Lakme Salon" within the geographical limit of municipal area naming "Gurgaon and East Patel Nagar in Delhi" which includes the catchment area of the town as per the MDP (Master Development Plan) and/or such other area as mutually agreed. The next relevant factor is an exclusive area as defined, means an area of radius is 0.75 kms and perimeter (1.5 kms) extending around each individual salon opened under this agreement. Therefore, in my view, this agreement provides that within the territory area as defined, the Petitioner is entitled to open beauty salons 7 in numbers, keeping an area of radius of 0.75 kms/perimeter 1.5 kms. It means no other salon should be opened within this area. It is also agreed, in view of clause 2.13, that the Petitioner has a "right of first refusal" if someone else or other than the Petitioner, wants to open the salon within the defined area.

9. It is relevant to note that Schedule 6.1.1 deals with the "Master Development Plan" (MDP) for the area. It provides city, location and time line so that the Petitioner can establish/open the salon in the city at the proposed location, within the agreed period of three years, from the Effective Date i.e 8.10.2010 to 8.10.2013.

10. Admittedly, the Petitioner has established three salons. Other proposed four salons are not yet opened, as reflected in the letter dated 02.08.2011. The occasion for this letter was as the Petitioner could not give, within 30 days, the location as required under the agreement, therefore a communication was forwarded by the Respondent to the Petitioner for the same. The Petitioner accordingly provided the basic details of the proposed respective locations.

11. The Petitioner has filed the present Petition on 28.01.2012 in view of the dispute settlement clause as this Court at Mumbai has jurisdiction. There is no issue about the court's jurisdiction.

12. The basic averments are as under :

"8 It is further stated that the Respondent has committed breach of the aforesaid Agreement and in particular breached the right of the Petitioner to enjoy territorial exclusivity by setting up another Lakme Salon in Section 56, SCO 61, 1st floor, Huda Market, Gurgaon which is due to be launched by the end of January, 2012 or early February, 2012. It is further stated that the Respondent is fully aware that the Petitioner has set-up its aforesaid Salons as per the milestones set in the MDP and the right of territorial exclusivity is operating in favour of the Petitioner as per the franchisee agreement dated 8th October, 2010.

9 It is further stated that the Respondent denied the Petitioner's right of first refusal to set up any proposed Salon in the Right of First Refusal Area by setting up another Salon as aforesaid and hence, the Respondent has committed a further breach of the said Agreement. It is stated that this conduct of the Respondent is nothing but an unfair trade practice adopted by the Respondent by taking disadvantage of its dominant position under the said Agreement and upper hand in the industry. It is stated that the Respondent has caused unlawful gain to itself by accepting a huge sum towards non-refundable deposit as well as by accepting licence fees from the competitor franchisee. The Respondent has deliberately caused loss of business development opportunities to the Petitioner by introducing competition amongst its own Salons in the same area as well as deliberately created hurdles for the Petitioner from achieving his milestones under the MDP. It is further stated that in view of the aforesaid conduct of the Respondent, the Respondent has committed a breach of the terms of the said Agreement and a dispute has arisen between the parties. It is further stated that the Petitioner has tried to amicably resolve the dispute with the Respondent by requesting it from refraining to open a competitor Lakme Salon in the area of operation of the Petitioner but to no avail."

13. After going through the documents as a whole and considering the facts and circumstances of the case and also the nature of the business, purpose and object of Franchising Agreement, I am inclined to observe that though "territory" is defined, yet the facets of "exclusive area" and "Right of First refusal area" are relevant for considering the petitioner's case, that even the Respondent, who is the owner of the brand, cannot open such salons within the defined territory of Gurgaon. To say that the owner under no circumstances, because of this agreement, be permitted to open any other salons in this area, is unacceptable. The franchisor is definitely bound by the agreement and also the franchisee, but if agreement itself restrict and define the exclusive area, then in that case, the submission that the franchisor is not permitted to open any other salon in any other area within the territory so defined is incorrect. The franchisor has right to do business, in other unrestricted area. There is no bar created under the agreement.

14. The Franchisor when permits the franchisee to develop his brand and/or product, through such permissible method, both the parties are bound by their boundaries as defined under the agreement. The franchisor is under obligation to see that there should be no other outlet and/or salons within the agreed territory but subject to the agreement. The franchisee is, in my view, is not permitted to raise the objection if the franchisor wants to open or permit someone else to open a new salon as it is not falling within the radius/perimeter. The franchisee has no business to restrain the franchisor from doing and expanding market of it's products in any other area.

15. Admittedly, there is no material placed on record to justify that the new salon which Respondent wants to open falls within the radius 0.75 kms/perimeter of 1.5 km, though it is within the "territory". It is quite away from the Petitioner's present or proposed Salons. There is no force in the contention that it will affect its business and/or future business if the franchisor permitted to open the salon in question. When party intentionally agree for the territory, as well as, exclusive area, the intention is clear that this agreement permit, as well as, restrict both the parties to do business in their respective defined area. Having once agreed for these clauses and terms, to say that the franchisor has breached the present agreement is also unacceptable.

16. It is unfeasible from the commercial point of view that the franchisor by this agreement has restricted themselves not to do business in Gurgaon territory at any point of time and basically for three years as per this agreement. The franchisor being owner of the brand, as well as, product, know how to expand and do business considering the requirement and need of the market specially when the consumer demands service even at the doorsteps. There is no clause pointed out and/or referred other than so reproduced above whereby it is agreed that franchisor shall not open and/or permit any other party to open such salons in Gurgaon area apart from the defined area so far as the Petitioner is concerned. Therefore, I am not inclined to accept the submissions made by the learned counsel for th Petitioner, including the interpretation so made, that the Petitioner is entitled for the injunction as prayed.

17. All ingredients which are necessary for the grant of interim injunction as contemplated under Order 39 of Code of Civil Procedure, and as explained from time to time by the Supreme Court as well as this Court are missing. No case of any interim measures as contemplated under Section 9 of the Arbitration Act is made out.

18. The learned counsel appearing for the Respondent also submitted that there was an advertisement in the area since December 2011 with regard to the opening of new salons by the Respondent. The Petitioner was well aware of the opening of the salons in the area, yet never moved and/or made any representation to the Respondent as contemplated in clause 24 of the agreement, at the earliest point of time. The filing of the present Petition in Mumbai, therefore, in this background and moving for ad-interim relief to halt the inauguration of the salons, is also a facet which goes against the petitioner. The balance of convenience and equity lies in favour of the Respondent/franchisor.

19. The submission that based upon this agreement, the Petitioner has invested about Rs. 3 crores till this date and deposited the substantial money with the Respondent, in my view, also loses its importance once I have noted that the new establishment/salon of the Respondent is not within the area defined and prescribed, and as there is no breach of terms of franchisee agreement. The loss of business or profit even if any from the money point of view that cannot be adjudicated at this stage and basically for the reasoning so given above.

20. It is made clear that these are prima facie observations. All points are kept open to be adjudicated by the Arbitrator. Resultantly, the Petition is dismissed. There shall be no order as to costs.

Petition dismissed.