A recent order by the Delhi High Court reiterates the importance of a carefully thought out and drafted agreements. This particular matter was one concerning breach of a franchise agreement which entailed confidential information, trade secrets, get-up, layout, arrangement, trade-dress of the Plaintiff’s fitness centres and spas. The Plaintiff (Ozone Fitness) filed a suit against Pure Fitness and others and sought an interim injunction. This case is definitely one of its kind given the nature of the suit, the reasoning of the Court and the restriction on the interim injunction granted in favour of the Plaintiff.

Brief facts of the case

The Defendant entered into a Franchise Agreement with the Plaintiff in November 2012. The Agreement lists down various policies and procedures to be followed by the franchisee, details of training programs for employees, design standards for layout of the store. In April 2013 the parties entered into a Management Agreement in furtherance to the existing agreement and in March 2014, there was a Supplementary Agreement which modified the financial terms between the parties.

In March 2015, the Plaintiff became aware of the fact that the Defendant was promoting a salon under the name of the Hair Masters Salon, which was in violation of the terms of the agreement and decided to take legal action against the Defendant.

Arguments of the Plaintiff

The Plaintiff’s arguments are based on breach of contract, confidential information and infringement of trademark and trade dress of the store. The Plaintiff has argued that the acts of the Defendant have resulted in dilution of their brand and makes out a case of unfair competition in addition to the breach of contract and infringement. The Plaintiff has been able to provide evidence to show that the Defendants have,

  • Set-up a similar store for salon services in the same locality where the Defendant offers salon services, as per the agreement
  • Promoted their salon through advertisements and have also distributed pamphlets in their franchise
  • Poached well trained staff of the Plaintiff

Arguments of the Defendant

Firstly, the Defendant argued that the Plaintiff has come to the Court with unclean hands and that the agreements read together, will indicate that the Defendant had not opted for “salon services” and the agreement is limited to “fitness centres and spas”. That accordingly, there is no breach of contract. Further, that the Court Commissioners who came to inspect the premises also found that the three floors of the premises were being used only for the fitness centre and spa and there was no salon service provided by the Defendant and the contention that the basement was used as the salon was false.

They also argued that they have opened the salon services with a lot of investment and that it is the source of income for the Defendant apart from the Ozone Fitness Club. Further, that since the Defendant has made prior commitments to clients, an interim injunction would cause irreparable loss and injury to them.

Lastly, the counsel for the Defendant also stated that if the Court were to find that “salon services” was a part of the agreement, then it would be a negative covenant which would also be against the Defendant.

Response of the Plaintiff

The Plaintiff confirmed that they had not concealed any material facts and that the Management Agreement dated April 2013 included Annexure A which added “salon services” to the agreement. The Plaintiff also provided an invoice for Franchise Fee paid in respect of salon services and evidence to show that they were running that business from November 2013 to March 2015.

Analysis of the Court

The highlights of what the Court’s analysis is as follows:

  • The Court discussed various parts of the agreement and took into consideration the definition clauses for the words “agreement” and “franchise business” and the recitals while interpreting the agreement. The Court also stated that though the relevant places use “fitness centre and spa”, the business also covers salon services per the recitals since the definition of agreement includes recitals, schedules and exhibits.
  • Since “salon services” were added to the Management Agreement, Schedule A has an inextricable nexus with that of the clauses contained in the agreement and reiterated the well-established principle of law that parts of an agreement cannot be severed in order to give full effect to all the clauses in the agreement.
  • The Court also gave this a practical outlook and stated that in practice and implementation the Salon activity is not such which is treated totally outside or alien to the activity of fitness and spa. Further, that since the pictures of the hoardings/ premises produced by the Defendant goes to show that intention is to treat the business fitness, salon and spa together.
  • With regard to the negative covenant, the Court stated that it was not a restraint of trade since such clauses in a contract is to serve the contractual relationship and can therefore be validly enforced.

The Court granted interim injunction in this matter, however, in a view to balance the interests of both the parties, prohibited the Defendant from carrying on such competing business within the designated territory or within the range of 4 kilometres of the designated territory. The Court also prohibited them from providing any promotional material to the customers of Ozone and also causing any connection and affiliation to the Plaintiff.

Such analysis and enforcement of contracts by Courts highlights the importance of agreements and more so, the importance of having well-drafted agreements in place. With specific reference to franchise agreements, this case has a lot to offer in terms of what needs to go into it. For all those including me who were surprised when the European Court allowed Apple’s flagship store to be registered as a trademark, this case definitely is a ray of hope for those looking to enforce such clauses of a franchise agreements which would be treated as confidential information!

This article has been authored by Nikita, an IP Law practitioner.