M J Antony: Reading the fine print

OUT OF COURT

The job of balancing pro- and anti-competitive justifications should not be passed on to the courts.

If the aggressive corporates have their way, the cricketers and the stadiums would be plastered with brand labels and the players would be bound down by self-renewing contracts all their active lives. It is not just the sportspersons who are confronted with such inequitable contracts, but also prized professionals, actors and marketing agents. Negative contracts, which restrict a party from signing an agreement with a commercial rival is a controversial field and despite the call of the Supreme Court and the thirteenth Law Commission report, the relevant Section 27 of the Contract Act has not been amended.

The issue came into the limelight recently when another cricketer was caught in litigation up to the Supreme Court (Percept Talent Management Ltd vs Yuvraj Singh). The first one was Zaheer Khan and the company was the same. It claimed 'the right of first refusal' before the player could sign a contract with another such firm. The right of first refusal is said to be common these days in commercial agreements dealing with assets, employment, joint ventures, share transfers, entertainment and other contractual relationships.

In a typical contract signed by Yuvraj, he agreed "not to accept any offer for his endorsement, promotion, advertising or other affiliation with regard to any goods or services" from a new party unless he discloses the new terms to the right holder and the latter is allowed to match the offer of the new party. This is referred to as a negative covenant, and a matter of debate among jurists. After the Zaheer Khan case, the company had slightly changed the terms of the contract to avoid the mischief pointed out by the Supreme Court. However, the court found that the improvement has not substantially changed the application of the law and held that the term could not be enforced.

Some 12 years ago, the Supreme Court dealt with another negative contract in the case of Gujarat Bottling Co vs Coca Cola. The agreement barred the agency from manufacturing, bottling, selling or dealing in products of any other company (Pepsi) during the subsistence of the contract. The bottler argued that the terms of the contract amounted to restraint on trade and were, therefore, void. But the Supreme Court rejected this contention. It said that normally the doctrine of restraint on trade would not be attracted in cases where the restriction is to operate during the contract period, unless the agreement is one-sided, unconscionable, excessively harsh or unreasonable.

According to Section 27 of the Contract Act, "every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void." The court can decide whether a negative stipulation is reasonable. This section has acquired importance these days because of the rise in franchise agreements, among other factors. The Supreme Court noted in the Coca Cola case that Section 27 was lifted from a draft code for New York which was based on an ancient English doctrine on restraint on trade. Even England has vastly relaxed the rule. The Law Commission had recommended that certain reasonable restraint on trade in the interest of the parties and the public should be allowed. However, our lawmakers have not found time to take a second look at the provision in the light of the recommendations made three decades back.

In the Zaheer Khan case decided two years ago, the Supreme Court interpreted the provision to lay down certain principles thus: a restrictive covenant extending beyond the term of the contract is void and not enforceable. The doctrine of restraint of trade does not apply during the continuance of the contract and it applies only when the contract comes to an end. This doctrine is not confined only to the contracts of employment but also applicable to all other contracts.

There is also a constitutional dimension to the problem. During the hearing of the Yuvraj case, the judges pointed out that such negative contracts might infringe the fundamental right to freedom of profession or occupation enshrined in Article 19 (1)(g) of the Constitution. A lawyer, for instance, cannot insist that his client should not go to another.

These are problems which cry for the attention of Parliament in these days of commercialisation of every aspect of our lives, and globalisation. The job of balancing pro- and anti-competitive justifications should not be regularly passed on to the courts. International legal developments should be taken into consideration and the law should be updated to suit the need of the times. Otherwise, the long and winding road through arbitration, single judge and division bench of the high courts and then the Supreme Court would tire all parties involved and create mutual suspicion in all prominent fields of commercial life.