A franchisee opened a competing salon and argued it fell outside the franchise agreement. The Delhi High Court read the agreement as a whole — recitals, schedules and exhibits included — held “salon services” were covered, and enforced the negative covenant. A lesson in how drafting decides the fight.
The dispute
Ozone Fitness sued its franchisee Pure Fitness for breach of a franchise agreement covering confidential information, trade secrets, get-up, layout and trade dress of its fitness centres and spas, and sought an interim injunction.
The agreements and the trigger
- Nov 2012 — Franchise Agreement (policies, training, store-layout design standards).
- Apr 2013 — Management Agreement building on it.
- Mar 2014 — Supplementary Agreement modifying financial terms.
In March 2015, Ozone learned the franchisee was running a “Hair Masters Salon” in violation of the agreement, and sued.
The arguments
Ozone alleged breach of contract, misuse of confidential information, and infringement of its trademark and trade dress, amounting to brand dilution and unfair competition — showing the franchisee had set up a competing salon in the same locality, advertised and distributed pamphlets, and poached trained staff.
Pure Fitness countered that Ozone came with unclean hands; that the agreements, read together, limited the franchise to “fitness centres and spas,” not salons; that Court Commissioners found only fitness/spa use on the premises; that it had invested heavily in the salon as a separate income source; and that treating “salon services” as covered would create a negative covenant against it.
Ozone’s reply: the April 2013 Management Agreement’s Annexure A added “salon services,” backed by a franchise-fee invoice for salon services and evidence of running that business from Nov 2013 to Mar 2015.
The court’s analysis
- Read the agreement as a whole. Using the definition clauses (“agreement,” “franchise business”) and the recitals, the Court held the business did cover salon services — because the defined “agreement” includes recitals, schedules and exhibits.
- No severance. Since salon services were added via the Management Agreement, “Schedule A has an inextricable nexus with… the agreement” — parts of an agreement cannot be severed to defeat its other clauses.
- Practical reality. “Salon activity is not such which is treated totally outside or alien to… fitness and spa” — the defendant’s own hoardings showed an intent to run fitness, salon and spa together.
- Negative covenant valid. Such a clause serves the contractual relationship and is not restraint of trade — so it can be enforced.
The relief — balanced
The Court granted an interim injunction, but balanced both sides: it barred the franchisee from the competing business within the designated territory or within 4 km of it, and from giving promotional material to Ozone’s customers or suggesting any affiliation with Ozone.
The takeaways
- Drafting decides franchise disputes. Definitions, recitals and schedules were read together to fix the scope of the franchise.
- You can’t cherry-pick clauses — courts won’t sever parts of an agreement to escape a covenant.
- Reasonable negative covenants are enforceable in a franchise context — they serve the relationship, not restraint of trade.
- Keep the paper trail — the annexure, invoice and operating history clinched Ozone’s case.
Frequently asked questions
Can a franchisor stop a franchisee running a competing business? Yes, where the franchise agreement — read as a whole — covers that business and contains a valid negative covenant, as in Ozone v. Pure Fitness.
Are negative covenants in franchise agreements enforceable in India? Reasonable ones that serve the contractual relationship are enforceable and not treated as restraint of trade.
How do courts interpret a franchise agreement’s scope? As a whole — using definitions, recitals, schedules and exhibits — rather than reading isolated clauses in isolation.
What made the difference in this case? An annexure adding “salon services,” a franchise-fee invoice, and the operating history — a strong paper trail — plus the court’s refusal to sever clauses.
Legislation referred to
- The Trade Marks Act, 1999
- The Indian Contract Act, 1872