Hiroo Khushalani & Anr. vs Baker Hughes Ltd., Uk & Anr. on 28 July, 2000

Delhi High Court
Hiroo Khushalani & Anr. vs Baker Hughes Ltd., Uk & Anr. on 28 July, 2000
Equivalent citations: 2000 (3) ARBLR 177 Delhi
Author: D Gupta
Bench: D Gupta, S Agarwal


ORDER

Devinder Gupta, J.

1. This appeal is directed against the order dated 24th July, 1998 passed by learned single Judge of this Court, granting interim mandatory injunction in favour of respondents (plaintiffs), directing the second appellant (defendant No. 2), to stop using the word ‘Baker’ in its corporate name and to approach the Registrar of Companies, for deletion of the word ‘Baker’ from its corporate name, within two months.

2. Facts in brief are: that the respondents (hereinafter, the plaintiffs), filed a suit seeking decree for permanent injunction and damages against the appellants (hereinafter, the defendants), alleging therein that the first plaintiff, M/s. Baker Hughes Limited (formerly-M/s. Baker International Limited, U.K), was a subsidiary of the second plaintiff-M/s. Baker Hughes Incorporated, USA; the plaintiffs and their subsidiary companies have been doing business and using the trade name ‘Baker’. They enjoyed reputation for possessing technology and producing oil field quality equipments all over the world including India; that the trade mark/name ‘Baker’ was invaluable property for the Baker group of companies; that in 1984, the first defendant (sole proprietor of M/s. Miraksha Associates), got in touch with the first plaintiff and they agreed to a business arrangement between them. On 6th April, 1984, the first defendant informed them that Ministry of Industry, Government of India, granted the Letter of Intent for establishment of a new industrial undertaking at Gurgaon, Haryana and Letter of Approval containing conditions on which such foreign collaboration (for short letter of approval) would be permitted. This letter of approval was partially modified/amended on 4th February, 1986 and the name of the foreign collaborator was firstly changed from Baker line USA to Baker Oil Tools, UK Limited and on 17th March, 1986 this was changed to Baker International Limited, UK (the former name of first plaintiff); on 21st December, 1984 the first defendant entered into a promotion agreement (hereinafter, referred to as impugned agreement) with the first plaintiff; inter alia agreeing that a new company under the name of M/s. Baker Oil Tools (I) Pvt. Limited (second defendant) be incorporated and got registered in India under the Companies Act, 1956, this agreement also provided for their respective shares and responsibilities in the company. Clause 8.3 of the agreement provided that in the event of the equity share holding of the Baker Oil falling less than 40% the company shall not be entitled to retain the word ‘Baker’ as part of this corporate name. Clause 12 of this agreement required that its contents would be incorporated as a part of the articles of association of the second defendant. After the company was incorporated the said Letter of Intent and the Letter of Approval of foreign collaboration were got transferred from the name of the first defendant to the name of the second defendant. On 25th July, 1986 Reserve Bank of India also granted permission to the second defendant to issue shares to the first plaintiff equivalent to its 40% of the paid up capital. It was further averred that on 3rd December, 1993 in the general body meeting of the company, plaintiffs attempted to get clause 8.3 of the impugned agreement, which provided that in case the equity share holding of the first plaintiff in the second defendant was reduced to less than 40% then it would stop using the name Baker in its corporate name, included in the articles of association of the second defendant but they did not succeed. Thereafter on 15.2.95 plaintiffs sold their shares to M/s. Whitehorse, Hongkong and thus their shareholding in the company stood reduced to less than 40%. The first plaintiff through Baker Oil Tools Asia Pacific, a subsidiary company of the second plaintiff served a notice calling upon the second defendant to drop the word ‘Baker’ from its corporate name, as per the terms of clause 8.3 of impugned agreement. It was also pleaded that the first defendant had earlier acknowledged on several occasions that clause 8.3 of the impugned agreement was inadvertently left out from the articles of association of the second defendant but the omission did not alter the obligations of the parties and failure to comply with the request amounted to a breach of impugned agreement.

3. It was alleged that the second defendant was selling the goods in India and other countries under the name ‘Baker’ by misleading customers regarding their relationship; the defendants’ equipment does not meet the quality standard of the plaintiffs thus their reputation was being damaged; the defendants were guilty of ‘passing of’ their business and goods as those of the plaintiffs’ by using of ‘Baker’ as a part of their corporate name; that in the absence of a technical or financial collaboration between the plaintiffs and the defendants the use of the trade mark and trade name ‘Baker’ by the defendants was causing confusion in the mind of the members of the public and thus the defendants were acting with dishonest and malafide intentions by using plaintiffs’ trade name, mark and goodwill. Plaintiffs also moved an application seeking interim injunction against the second defendant from using the name/mark ‘Baker’ till the disposal of the suit (IA No. 3824/95).

4. The defendants filed separate written statements taking similar defenses, inter alia pleading that through letter dated 6th April, 1984 Secretariat for Industrial Approvals, Ministry of Industry informed the first defendant that it was prepared to approve the terms of collaboration with M/s. Bakerline, USA subject to the conditions contained in the letter and the annexure attached thereto. By another letter of even date the said department also informed the first defendant about the Government’s willingness to grant industrial licence for establishment of an industrial unit, subject to the conditions mentioned therein. It was pleaded that as per the conditions contained in the said two letters it was mandatory to get the terms and conditions of the “foreign collaboration” (both technical and financial) approved and settled by Government of India; It is further pleaded that the impugned agreement dated 21st December, 1984 which is the basis of the suit was neither placed before the Government of India, nor was it ever approved by the Government therefore, the same was inoperative and void; that such approval was necessary as per clause 16 of the approval letter dated 6th April, 1984; in this letter of approval Government had abundantly made clear that approval was subject to compliance with the conditions: (a) proposed transfer of technology would be permanent, (b) name/mark used by the company would not be a foreign brand, (c) Indian company shall be free to manufacture the product even after the expiry of the agreement, (d) any terms of foreign collaboration, financial and/or technical between the parties should be in terms of and in accordance with the conditions stipulated in the Letter of Intent and letter approving the proposed collaboration and should be submitted to the Ministry of Industry, Government of India, for its approval and settlement to its satisfaction. It was also pleaded that the clause 8.3 of the disputed agreement was illegal and contrary, not only to the terms of Letter of Intent and Letter of approval but also to the Foreign Exchange Regulation Act, 1973. Section 41(e) of the Specific Relief Act, 1963, prohibits the issuance of an injunction to prevent the breach of contract which cannot be specifitradename/mark
enforced; clause 8.3 of the impugned agreement was contrary to and forbidden by law thus is not enforceable; the suit was barred by Limitation Act; the second defendant was neither a party to the impugned agreement, nor the same was approved by it, nor this agreement was ever incorporated in its Article of Association; a formation contract or the shareholders agreement cannot govern the company, once the company is formed and the article of association are framed.

5. It was also pleaded that plaintiffs have not approached the court with clean hands and have concealed material facts including the Technical Knowhow Agreement dated 21.12.1984; that the plaintiffs have concealed that as a result of the subsequent discussions and the advise the impugned agreement dated 21st December, 1984 was never given effect to, never placed before the Government of India, never placed before the company, never adopted by it and never inserted in the Article of Association of the second defendant (company); that the technology transfer agreement between the parties was and is still valid and subsisting and the second defendant is within its rights to continue and manufacture the said products; that second defendant has been using the tradename/trademark ‘Baker’ in its own right and not as a licencee of the plaintiffs; that the defendant company has been manufacturing the said products for almost ten years and that the plaintiffs were no longer manufacturing these products and had been in fact purchasing/importing these products from the defendant company.

It was further pleaded that a special resolution of the company with 75% of its members voting in favour would be necessary before the change in name of the company can be effected; the first defendant only holds 10.71% of the shares and, therefore, passing of the resolution for change of the name of the company would not be possible. The right of Mr. Samir Oberoi, (authorised signatory) to sign, verify, file or institute the suit was also challenged. The plaintiffs filed replication to the written statements of the defendants.

6. Learned single Judge vide order dated 24th July, 1998, granted interim mandatory injunction in favour of the plaintiffs restraining the second defendant from using the word ‘Baker’ in its corporate name and directing them to approach the Registrar of Companies within two months for deletion of the word ‘Baker’ from its corporate name as aforesaid.

7. Dr. L.M. Singhvi, learned senior counsel for the appellant argued that the mandatory injunction can only be granted to preserve and restore the status quo of the last uncontested status until the final hearing. On facts the plaintiff should have strong case for trial and the case should be of higher standard than a mere primafacie case which is normally required for the prohibitory injunction. It was argued that the findings recorded by the learned single Judge are against the pleadings and the other materials on record and the basic ingredients of law are not fulfillled. Reliance was placed on the decision of Supreme Court in Dorab Cawasji Warden Vs. Coomi Sorab Warden and Others, .

8. Mr. Arun Jaitley, learned senior counsel for the respondents while supporting the impugned order, argued that the findings recorded by the learned single Judge are neither arbitrary nor perverse and that this court would not alter the findings even if the view taken by the single Judge was one of the possible views. Reliance was placed on the Supreme Court decisions in Wander Ltd. and Anr. Vs. Antox India P. Limited, 1990 (Suppl.) SCC, 727 and in N.R. Dongre and Others Vs. Whirlpool Corporation & Anr ,

9. There can be no dispute about the principles of law, dealing with powers of the court for grant of mandatory injunction and powers of the appellate court hearing an appeal against an order of exercise of discretion. In the light of the principles laid down in the said authoritative pronouncements of the Apex Court we proceed to examine the respective contentions on merits.

10. Learned counsel for the appellant argued that clause 8.3 of the impugned agreement dated 21.12.1984, on which the entire suit is based, cannot be invoked since the impugned agreement was neither valid nor binding as it was never placed before the Government for approval. The Letter of Approval of the foreign collaboration and the Letter of Intent specifically mentioned that all agreements in connection with the foreign collaboration were subject to the acceptance and approval of the Government. In reply it was argued that the impugned agreement was not required to be approved by the Government since it was merely a shareholders agreement, having no foreign exchange implication. The shareholding of the plaintiffs in the Indian company were duly approved by the Reserve Bank of India and the impugned agreement dealt with only the mechanics of operation of the Indian company and regulations interse the shareholders. Alternatively, it was argued that the novation agreement dated 18.11.1985 referred not only to the Technical Knowhow Agreement but also specifically referred to the impugned agreement, which was admittedly transmitted to the Government by the letter dated 25.11.1985. The Government in its letter dated 7.2.1986 acknowledged the receipt of the novation agreement, which shows that the Government was not only aware of the Technical Knowhow Agreement but was also aware of the impugned agreement. The Government having not raised any objection to the effect that the impugned agreement was not approved, it was not open for the defendants to urge that the agreement was illegal or not binding between the parties.

11. In order to determine whether the impugned agreement is legal and binding between the parties firstly it would be necessary to find out whether the terms of the impugned agreement dated 21.12.1984 were required to be settled and approved by the Government of India, as per the conditions mentioned in the Letter of Approval and the Letter of Intent dated 6.4.1984? If it be so, was the impugned agreement produced before the Government for approval? If not, its effect. Before considering the rival contentions and to find out answers to the issues involved, it would be appropriate to examine the relevant clauses/terms of Letter of Approval and Letter of Intent, and the impugned agreement.

12. Government of India/Ministry of Industry, Department of Industrial Development, Secretariat for Industrial Approvals (special cases section) vide Letter of Approval dated 6.4.1984, addressed to the company of the first defendant informed him that the Government was prepared to approve the terms of collaboration with M/s. Bakerline USA (hereinafter, foreign collaborator, former name of the plaintiffs), subject to the conditions mentioned in the letter and the annexure attached thereto, which inter alia provided for equity participation of foreign collaboration upto 40% amounting to Rs. 40 lacs in the paid up capital of Rs. one crore of the Indian company; lumpsum payment of US $ 2,50,000, in three equal instalments to the foreign collaborator for providing technical know how on permanent basis and royalty payable at the rate of 5% on internal sales and at the rate of the 8% on the exports, for five years during the period of agreement which was fixed as ten years subject to the payment of taxes. Other relevant conditions mentioned in the Annexure attached to this Letter of Approval read as follows:-

Clause 1 to 11 : xxxxx

Clause 12: Foreign brand names will not ordinarily be allowed for use on the products for internal sales although there is no objection to their use on products to be exported.

Clause 13: In case the item of manufacture is one which patented in India, the payment of royalty/lump sum payment made by the Indian Company to the Foreign Collaborator during the period of the agreement shall also constitute full compensation for use of the patent rights till the expiry of the life of the patent and the Indian Company shall be free to manufacture that item even after the expiry of the collaboration agreement without making any additional payments. A specific provision in this regard must be incorporated in the collaboration agreement to be entered into between the two parties.

Clause 15: The agreement shall be subject to Indian Laws.

Clause 16: The Indian company should confirm to the Administrative Ministry/Department referred to in the letter and also to the Foreign Collaboration II Section, Secretariat for Industrial Approvals, Udyog Bhavan, New Delhi 110011 that the terms of the collaboration stipulated in the letter and in the Annexure are acceptable to them.

13. Government of India vide letter dated 6.4.1984, had also informed the first defendant that it was prepared to consider the request for issuance of an Industrial Licence under the Industries (Development & Regulation) Act, 1951 for establishment of a new undertaking at Gurgaon (Haryana), for manufacture of oil filed equipments, subject to the conditions stipulated in the letter of intent and its annexure. Relevant standard conditions mentioned in the Annexure attached to this Letter of Intent, read as follows:-

(1) xxxxx
(2) xxxxx

(3) The need for and the terms of foreign collaboration (financial and/or technical) will be settled to the satisfaction of the Government.

(4) In considering Foreign Collaboration approvals the following guidelines interalia will be taken into account.

(a) to (e) xxxxxxx.

(f) the use of foreign brand names will not be permitted for the purposes of internal sales;

14. The entire suit of plaintiffs is based upon clauses 4.2, 8.3 and 12 of the impugned agreement dated 21.12.1984, which read:-

Clause 4.2 : (1) HK shall be responsible for carrying out the following obligations, namely:-

(a) (i) making applications to various government authorities in India (I) for obtaining their approvals to the Technical know how Agreement referred to hereafter and this Agreement and for registration of the same with such authorities, and (II) for obtaining all statutory approvals and consents required for or in connection with any matter pertaining to the said Project; (ii) to (iv) xxx (b) xxx (c) xxx

Clause 8.3 : In the event of Baker holding less than 40% of the paid up equity capital of the said company, if the word “Baker” is part of the name of the said company, the said company shall not be entitled to retain the said word as part of its name; the intention being that the said word shall be used as part of the name of the said company by virtue of the permission of Baker and that the company shall have no property interest in the said word; and if Baker so requires the said company shall change its name to a name not including the word Baker or any similar word. If Baker so desires, the parties shall ensure that Baker and the said company shall enter into an agreement in a form and substance satisfactory to Baker so as to ensure observance and implementation of this condition by the said company”.

Clause 12 : Text of this agreement to be incorporated in the articles of association: The text of this Agreement shall be incorporated as part of the Articles of Association of the said company and any amendment to the Articles of Association affecting the rights of the parties under these presents, shall be deemed to be an amendment to the Articles of Association of the said company. The said company shall, soon after its incorporation adopt this Agreement so as to confirm that it will be bound by the provisions herein contained.

15. Learned counsel for the appellants, as noticed above, relying upon the conditions contained in the Letter of Approval and Letter of Intent, argued that the impugned agreement, including clause 8.3 was required to be submitted to and approved by the Government. Learned counsel for the respondent relying upon the findings of the learned single Judge contended that there was no such requirement.

16. Perusal of the conditions in the Letter of Approval shows that it fixed the percentage of foreign equity participation (at 40%); fixed the percentage of royalty payable on the internal sales and exports for a period of 5 years during period of agreement at 5% or 8%; fixed lumpsum payment of US $ 2,50,000 for technical know how in three equal instalments on permanent basis subject to the payment of taxes; fixed duration of the agreement ten years. The Annexure contained details, making it clear that the royalty would be payable at the market exchange rate prevalent at the time of remittance and would be calculated on the net exfactory sale price and also indicated procedure for calculating the same. It correlated that the lumpsum payment for the Technical knowhow to the different stages of the setting up of the unit. The period of the agreement was to start from the date the collaboration agreement was taken on record. It envisaged that the Indian company should develop, set up their own design and research facilities so that continued dependence on the foreign collaboration was not necessary. It required that under the collaboration agreement the export should be permitted in all countries. It is clarified that the import of capital equipment and raw material would be allowed as per import policy prevailing in India, from time to time. It required that the Indian company should be free to sublicence the Technical Knowhow to another Indian company should it become necessary, subject to the approval of the Government. Even the deputation for training of the technicians was required to be with prior approval of the Government.

17. Clause 12 of the Letter of Approval specifically prohibited the use of foreign brand name on the products for internal sales but said that there is no objection to the use of such name on products to be exported. Clause 13 provided that after expiry of the period of agreement Indian company should be free to manufacture the equipments on the basis of Technical Knowhow received by them without any additional payment. Clause 16 required that the terms of the collaboration agreement should be acceptable to the Government. Similarly, terms of clauses 3 and 4(f) of the Letter of Intent required that foreign collaboration (financial/technical) will have to be settled to the satisfaction of the Government and that use of the foreign brand names will not be permitted for internal sales. On the other hand, clause 8.3 of the impugned agreement provided that the Indian company would not be entitled to use the word ‘Baker’ as a part of its corporate name, if the plaintiffs (foreign collaborators), require, the Indian company would have to change its name and enter into an agreement with the plaintiffs so as to ensure its implementation. Clause 4.2 fixed the responsibility of the first defendant to submit to the Government relevant documents and to get approval, and clause 12 of the impugned agreement required that its terms would be incorporated in the article of association of the Indian company.

18. In view of above, we are of the considered opinion that clause 8.3 of the impugned agreement which envisaged that the Indian company would drop the word ‘Baker’ from its corporate name in the event of shareholdings of the foreign collaborators falling less than 40% did require approval and acceptance from the Government of India, in terms of clause 16 of the Letter of approval read with clause 3 of the Letter of Intent, as per the specific condition contained in clauses 12 and 4(f) of the said letters respectively, prohibiting the use of foreign brand names on internal sales, and permitting the user of the foreign brand names at the discretion of the Government only on exports.

19. We may now proceed to examine the findings of learned trial court in this regard, which read as under :- “it appears to me that the only clause in the basic agreement (impugned agreement) which would attract the provisions of FERA is clause 5.1 as it allowed the first plaintiff to acquire 40% of shareholding of the second defendant and, therefore, except clause 5.1 of the basic agreement. Rest of the clauses did not require approval of the Government of India and, therefore, they would be operative, even without approval of the Government of India. This, however, is not to suggest that the Government of India had disapproved the basic agreement. It is important to note that for the acquisition of the equity by the first plaintiff approval of the Government of India was required for this could involve inflow of foreign exchange. Since the Government of India did approve the equity participation of the Baker Oil Tools (UK Division) to the extent of 40% of the paid up equity capital of the second defendant it was not necessary for the Government of India to accord a formal approval to clause 5.1 of the basic agreement providing for equity participation of Baker International Limited, Baker Oil Tools (UK) Division as it was not contrary to the FERA or the terms of the approval laid down by the Government in its letter of intent and letter of approval of foreign collaboration.”

20. The above reasoning appears to be untenable in law. Impugned agreement cannot be permitted to be read in piecemeal. Even if one clause of the impugned agreement, required approval and acceptance by the Government, it must be held that the entire agreement ought to have been submitted for approval as per the terms and conditions contained in the letter of approval and letter of intent. Even otherwise parties cannot be permitted to say that since the clause requiring approval was allegedly in consonance with the conditions contained in the Letter of Approval, the entire agreement containing such clause should be deemed to have been approved by the Government.

21. Learned single Judge also observed:- “Under section 28(1)(c) of the FERA as it existed at the relevant time the permission of the Reserve Bank of India for the use of foreign trade mark or brand name by a company would be necessary in case any consideration was paid or promised to be paid for it. Where, however, no element of consideration is involved no permission would be required by the user of the foreign trade mark as Section 28(1)(c) of the FERA will not be attracted. Therefore, clause 8.3 of the `Basic Agreement’ allowing the second defendant to use the name Baker as part of its corporate name upto the time the first plaintiff holds 40% of its equity capital and interdicting the use of the name Baker as part of its corporate name in case the shareholding of the first plaintiff drops below 40% is not illegal, unlawful or void. The above view finds support from a decision of this court in Pioneer Hybrid International Inc. USA Vs. Pioneer Seed Company Ltd., AIR 1989 NOC 120 (Delhi).

22. The facts of the Pioneer Hybrid’s case were entirely different. In that case no industry was to be set up and moreover the conditions contained in the letter of approval or letter of intent for grand of licence for setting up the industry were not found to be contrary of the impugned agreement. In the present case, as noticed above, the Government issued the letter to the Indian company permitting foreign collaboration subject to the conditions contained in the letter of approval and the annexure attached. The Government also agreed to grant of Industrial licence for establishing an industry, subject to the conditions contained in the letter of intent. Prima facie, clause 8.3 of the impugned agreement dealing with the use of foreign trade names, is in contravention to the conditions contained in the said two letters with regard to the use of that trade name/trade mark ‘Baker’ on the internal sales or exports. Therefore, in our considered view, the impugned agreement did require submission to the Government for an approval.

23. Learned single Judge while interpreting clause 12 of the Letter of Approval for foreign collaboration dated 6th April, 1984, held that it does not render clause 8.3 of the impugned agreement a nullity and observed:- “Strictly speaking the above clause deals with the use of foreign trade names on the products and not with the use of foreign trade names as part of the corporate names of the Indian companies. As the clause suggests ordinarily the Government of India will not allow foreign trade names to be used on the products for internal sales. But there is no embargo on the use thereof if the Government of India permits such a user”.

With due respect to learned Single Judge, it is not possible to agree to the interpretation which is not in consonance with the settled principles of law. It is not possible to interpret that if clause 12 of the letter of approval prohibited the use of ‘the foreign brand’ names “on the product for sales in a restricted manner, so as to mean that it did not restrict the use of foreign brand names in the corporate names for an Indian company for internal sales. Clause 12 could not be read in isolation. True meaning and import of this clause becomes clear by reference to clause 4(f) of the letter of intent which states that the use of foreign brand names will not be permitted on internal sales. If clause 12 is given a restricted meaning clause 4(f) Letter of Intent would become redundant, which would be against the settled principles of interpretation. To repeat the upshot of the above discussion is that the impugned agreement containing clause 8.3 did require approval the Government as per the terms contained in clause 16 of the Letter of Approval and clause 3 of the Letter of Intent.

24. Now comes the question whether the agreement was actually submitted or transmitted for approval to the Government? Learned counsel for the appellants while challenging findings of the learned Single Judge as arbitrary and perverse, argued that as per the plaintiff’s own case in the pleadings impugned agreement was not submitted to the Government for approval. It was only the Technical knowhow agreement which was submitted to the Government for approval and the same was taken on record after modifications by way of addendums that the terms of the impugned agreement were never adopted to form part of the articles of association of the Indian company as required by clause 12 of the impugned agreement. From 1986 till 1993 no effort was even made in that direction therefore, the impugned agreement was a dead letter. Learned counsel for the respondents supporting the findings of the learned Single Judge argued that under article 4.2 of the impugned agreement it was the responsibility of the first appellant to place and transmit all the necessary documents for approval to the Government. Having not done so he cannot be permitted to take advantage of his own wrong.

25. We have considered the rival contentions. Admittedly, there is no averment in the plaint that the impugned agreement was ever sent to the Government for approval. The appellants in their written statement pleaded that the impugned agreement was illegal, void and a dead letter as the same was never placed before the Government for approval or acceptance. Respondents in their replication in reply to para 2 and 3 of the preliminary objections in the written statement stated that the “the only agreement that the Government is concerned with and which is required to be filed with it is the Technical Know how Agreement…..”. And again “under the said approval letters in which the technical know how agreement had to be submitted and approved by the Government of India…., it is specifically stated that the promotional agreement dated 21.12.1984 was a private contract between the first plaintiff and the first defendant and was not required to be submitted to the Government for its approval….”. Thus from the pleadings of the parties itself, it is clear that the impugned agreement was not submitted to the Government for approval.

26. Learned single Judge however, while rejecting the contention that the impugned agreement was never sent to the Government for approval held:

(i) “The final determination of the question whether the basic agreement was produced before the Government of India by the first defendant will depend upon the evidence which the parties will lead at trial, “but one thing is clear that the article of Agreement between parties dated 18.11.1985 (Novation Agreement), whereby Baker International Limited, Baker Oil Tools (UK) Division assumed the responsibility for financial equity participation and technology transfer to the second defendant, not only alluded to the factum of the execution of the Technical Know how Agreement but also specifically referred to the execution of the Basic Agreement”.

(ii) It was further held that “none of these letters provide for any consequences, penal or otherwise for not presenting any of the agreements before Government of India for its approval. After the receipt of the novation agreement the knowledge of the Government of India regarding the `Basic Agreement’ is not in doubt. In case the `Basic Agreement’ was compulsorily required to be produced before the Government of India and was not so produced for approval or any of the mandatory condition subject to which the `letter of intent’ and the `letter of approval for foreign collaboration’ were issued were not carried out by the parties, the Government of India would have cancelled the letters or would have taken some punitive action against the parties. This was not done by the Government of India. The `Basic Agreement’ therefore was not unlawful or violative of the provisions of FERA.”

(iii) “From this letter it is apparent that the Government of India was apprised not only of the technical know how agreement but was also made aware of the Basic Agreement. It is not the case of the second defendant that the Government of India raised any objection to the effect that the Basic Agreement was not presented before it or the same was not approved by it and, therefore, was illegal and not operative between the parties, being contrary to the provisions of FERA and to the conditions laid down in its letter of 6.4.1984.”

27. Admittedly, Technical Know how Agreement dated 21.12.84 was sent to the Government for approval, Government raised several objections, inter alia also on the dealing with tax liability to the foreign collaborator. The objected clauses had to be amended by the subsequent addendums dated 9.5.85 and 15.5.85 and the same were taken on record. Initially BOT (UK) was to supply the technical know how to the Indian company, subsequently, Baker International Limited Baker Oil Tools (UK) Division assumed the responsibility of financial equity participation and the transfer of technical knowhow to the Indian company. It was in this context that novation agreement came to be executed between the three parties, namely, BOT UK, First Defendant and Baker International Limited and the preamble of this tripartite agreement read as under:-

WHEREAS

(A) On the 21st of December, 1984 KH (Hiroo Khushalani) and BAKER (Baker International Limited, Baker Oil Tools (UK) Division) entered into Articles of Agreement relating to the incorporation in India of a company to be named Baker Oil Tools (India) Private Limited (such Articles of Agreement being hereinafter referred to as “the Articles of Agreement”) and

(B) On the 21st of December, 1984 HK and BOT UK (Baker Oil Tools (UK) Limited entered into Articles of Agreement relating to the transfer of technical know how by BOT UK to the said Baker Oil Tools (India) Private Limited (such Articles of Agreement being hereinafter referred to as “the Technical Know How Agreement”)

28. Perusal of clause A in the preamble of the novation agreement referred to above shows that it referred to articles of agreement relating to incorporation of company named Banker Oil Tools India Private Limited. There is no dispute about the incorporation of the company. The dispute is with regard to the validity of clause 8.3 of agreement, which prohibited the use of word ‘Baker’ in the corporate name of the Indian company in the eventuality of the shareholdings of the foreign collaborator falling less than 40%. By mere reading of clause A, nobody can even imagine about the contents of clause 8.3 of the impugned agreement, therefore, the presumption raised by the learned single Judge that after the receipt of the novation agreement the knowledge of the Government of India regarding impugned agreement is not in doubt is not justifiable in law. Another observation of the learned single Judge that if the Government had any objection with regard to any of the clauses of this agreement, it would have taken some action against the parties is also not sustainable. Thus prima facie we are of the view that the conclusions arrived at that the impugned agreement was not unlawful are without any basis. In any case having held that the final determination of the question that whether the impugned agreement was produced before the Government of India by the first defendant will depend upon evidence which the parties will lead at the trial of the suit, the learned single Judge was not justified in reaching the said conclusion.

29. This leads us to the question as to who was responsible for its nonsubmission and the consequences of the same? Learned counsel for the respondents argued that under clause 4.2 of the impugned agreement it was the responsibility of the appellant/defendant No. 1 to place and transmit the documents for approval to the Government of India, on the other hand appellants argued that under clause 12.3 of the impugned agreement, its terms were to be adopted to form part of the Article of Association of the Indian company (appellant No.2). It was argued that there were two directors of the plaintiffs (foreign collaborator) on the Board of Directors of the Indian company including the Chairman. The terms of the impugned agreement were never adopted and from 1986 to 1993 no effort was made by the plaintiffs to get the same adopted, therefore, the same was a dead letter and that the defendants alone cannot be blamed for the same.

30. Having considered the rival contentions it appears to us that under the circumstances noticed above the defendants alone could not be blamed for not submitting the impugned agreement to the Government for its acceptance. It is obvious that if clause 8.3 of the impugned agreement was brought to the notice of the Government it being apparently contrary to clause 12 of the Letter of Approval and clause 4(f) of Letter of Intent, the Government would have, in all probability objected to the same. Possibly for this reason it was not brought to the notice of the Government. The plaintiffs did not make any effort to get the terms of clause 8.3 of the impugned agreement incorporated in the Articles of Association of the Indian company as required by clause 12 of the impugned agreement from 1986 till 1993. Admittedly, the memorandum of article of association were drafted in England by the solicitors and bankers of the plaintiffs and even at that stage they did not think it appropriate to include the contents of clause 8.3 of the impugned agreement in the memorandum of articles of the Indian company as the inclusion of the clause would have been in violation of Industrial policy in India, and the terms and conditions of the Letter of Approval and Letter of Intent.

31. It was then argued by the learned counsel for appellants that the memorandum of article of association of a company would override any prior agreement between the promoters of the company. Reliance in this regard was placed on the decision of Supreme Court in V.R. Rangaraj Vs. V.B Gopala krishnan and Ors. 1992 (73) company cases 201. It was submitted that the corporate veil of the company can only be lifted where the company was a party to the fraud or where it had evaded taxes. Without deciding this aspect learned Single Judge observed: “I am primaacie of the opinion that the second defendant had adopted the `Basic Agreement’ and had acted upon it”.

32. In our considered view this prima conclusion also apparently could not be recorded by learned single Judge on the basis of the material on record. Indian company was not a party to the impugned agreement; there is no evidence of its having adopted the same; there is nothing on record to suggest that the impugned agreement was ever placed before any Board meeting before 1993. Therefore, the conclusions arrived at by the learned single Judge that the defendant company had adopted the impugned agreement is not sustainable.

33. In this case admittedly “foreign collaborator” had sold their Technical Know how for manufacturing of the oil field equipments for a valuable consideration of US $ 2,50,000. Indian company was set up, the period of this agreement had its full run; foreign collaborator had received the royalty both on internal sales as well as on external sales, as per the terms contained in the Letter of Approval and the Letter of Intent. After the period of agreement as per the conditions contained in the Letter of Approval Indian company would be free to manufacture the equipment of their own without payment of any additional consideration to Indian collaborator. Under the circumstances, can the foreign collaborator now turn around and stop the Indian company from representing to its prospective buyers that the equipment being manufactured or being offered for sale by them is the product of the Baker technology? Answer is obviously no. Foreign collaboration agreement regarding transfer of Technical Know how carried with it the right to use the goodwill attached to the Baker’s technology. It would be difficult to hold that the transaction did not constitute a transfer of goodwill attached to technology by the foreign collaborator. Merely because the holdings of the foreign collaborator in the Indian company fell below 40% of the paid up equity capital, would not alter the situation, in so far as the goodwill attached to technical know how is concerned. The goodwill attached to the business of the foreign collaborator would be different from the goodwill attached to the technology but there is bound to be some overlapping. Whether the Indian company and the foreign collaborator had been simultaneously operating and competing in the market would require evidence and cannot be decided at this stage.

34. To summarise: prima facie the impugned agreement containing clause 8.3 was required to be submitted for approval to the Government of India as required by clause 16 of the Letter of Approval read with clause 3 of the Letter of Intent; the impugned agreement was not submitted for approval to the Government and that clause 8.3 of the impugned agreement apparently is violative of the clause 12 of the Letter of Approval and clause 4 (f) of the Letter of Intent, which prohibited the use of foreign trademark/name on internal sales and restricted its use on exports. Consequently, the requisite test of a strong case and not a mere prima facie case, required for seeking mandatory injunction is not fulfillled as per the principles laid down in Dorab Cawasji’s case (supra). The plaintiff respondent on the basis of the material placed before the learned single Judge were not entitled to the interim relief prayed for.

35. In view of the above said conclusions we are of the view that it is not necessary for us to deal with the other points urged before us in this appeal. However, before we part we would also like to note the observations of the learned Single Judge:    "In the event of a contrary view the international trade and commerce will receive a set back and will undermine the faith of the trading community in the country where such acts are condoned". 
  

36. We feel that the concept of public policy is not a branch of law. The province of the Judge is to expound the law only. The foreign collaborators cannot be placed at a higher pedestal in law and must know that those who try to by pass law of the land by so called private agreements, should not expect sympathy of the court. 
 

37. For the foregoing reasons, the appeal is allowed. The impugned order of the learned single Judge is set aside. The application of the plaintiff respondent (IA 3824/95) is dismissed. Needless to add that observation made by us in this order would not prejudice the rights of any of the parties during the trial.  

 

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