CS (OS) No. 519/2004 Page 1 of 23 .* HIGH COURT OF DELHI : NEW DELHI + FAO (OS) No. 27/2005, FAO (OS) No. 28/2005, FAO (OS) No. 29/2005, FAO (OS) No. 31/2005, and FAO (OS) No.44/2005 in CS (OS) No. 519/2004 Reserved on: 9th February, 2009 % Decided on: 18th September, 2009 FAO (OS) No.27/2005 & CM No.1533/2005 Drager Medical India P. Ltd. ...Appellant Through : Mr. Rajiv Nayar, Sr. Adv. with Mr. Manoj Kumar, Mr. Sushant Kumar, Mr. Shekhar, Mr. Tarun Arora & Mr. Sushil, Advs. Versus Usha Drager P. Ltd. & Ors. ....Respondents Through : Mr. Arvind K. Nigam, Sr. Adv. with Mr. Navin Chawla, Adv. and Mr. Sandeep Mittal, Advs. AND FAO (OS) No.28/05 & CM Nos.1535/05, 3078/05 & 16231-32/05 Dragerwerk AG & Ors. .…Appellants Through : Mr. Rajiv Nayar, Sr. Adv. with Mr. Manoj Kumar, Mr. Sushant Kumar, Mr. Shekhar, Mr. Tarun Arora and Mr. Sushil Advs. Versus Usha Drager Pvt. Ltd. & Anr. ....Respondents Through : Mr. Arvind K. Nigam, Sr. Adv. with Mr. Navin Chawla and Mr. Sandeep Mittal, Advs. AND FAO (OS) No.29/2005 & CM No.1540/2005 H.L. Medical Systems P. Ltd. ......Appellant Through : Mr. Rajiv Nayar, Sr. Adv. with Mr. Manoj Kumar, Mr. Sushant Kumar, Mr. Shekhar, Mr. Tarun Arora and Mr. Sushil, Advs. Versus Usha Drager P. Ltd. & Anr. ....Respondents Through : Mr. Arvind K. Nigam, Sr. Adv. with Mr. Navin Chawla and Mr. Sandeep Mittal, Advs. AND CS (OS) No. 519/2004 Page 2 of 23 FAO (OS) No.31/2005 & CM Nos.1565/05 & 3077/2005 Drager Medical AG & Co. KGaA ......Appellant Through : Mr. Rajiv Nayar, Sr. Adv. with Mr. Manoj Kumar, Mr. Sushant Kumar, Mr. Shekhar, Mr. Tarun Arora and Mr. Sushil, Advs. Versus Usha Drager P. Ltd. & Anr. ....Respondents Through : Mr. Arvind K. Nigam, Sr. Adv. with Mr. Navin Chawla and Mr. Sandeep Mittal, Advs. AND FAO (OS) No.44/2005 & CM Nos.2343/05, 17467/05, 5478/07, 12802/07 & 15546/08 Usha Drager Pvt. Ltd. & Anr. ....Appellants Through : Mr. A.S. Chandhiok, Sr. Adv. with Mr. Navin Chawla and Mr. Sandeep Mittal, Advs. Versus Dragerwerk AG .…Appellants Through : Mr. Rajiv Nayar, Sr. Adv. with Mr. Manoj Kumar, Mr. Sushant Kumar, Mr. Shekhar, Mr. Tarun Arora and Mr. Sushil Advs. Coram: HON’BLE MR. JUSTICE A.K. SIKRI HON'BLE MR. JUSTICE MANMOHAN SINGH 1. Whether the Reporters of local papers may be allowed to see the judgment? No 2. To be referred to Reporter or not? No 3. Whether the judgment should be reported No in the Digest? MANMOHAN SINGH, J. 1. By this common order we shall dispose of five appeals filed by the parties against the impugned order dated 20th January, 2005 passed in I.A. Nos. 3171, 4241 and 4906 of 2004 in CS (OS) No.519/2004. The details of the parties who have filed the appeals are already mentioned. CS (OS) No. 519/2004 Page 3 of 23 2. The brief facts are that Usha Drager Pvt. Ltd., Plaintiff No.1 and M/s. R.K.K.R Infotech Pvt. Ltd., Plaintiff No.2 filed a suit against M/s. Draegerwerk AG, the defendant, praying for permanent injunction restraining it and its group affiliates, shareholders, agents, etc from carrying on competing business with plaintiffs in India, including selling medical appliances through anyone except plaintiff No.1 and for rendition of accounts of all sales by the defendant and its group affiliates in India in addition to a payment of 20% commission on all sales from the date of filing of the present suit with 13% interest per annum. 3. Along with the suit the plaintiffs filed an application for interim injunction being I.A. No.3171/2004 for permanent injunction and rendition of accounts, based upon Clause 6 of the Joint Venture Agreement dated 9th May, 1987, the said clause being in the nature of a non compete clause between the parties. The prayer in the application for injunction reads as follows:- “Pass an order of temporary injunction in favour of the plaintiffs and against the defendants and its group companies or subsidiary companies or any company in which the defendants or its shareholders hold any share from carrying out any business in India in competition with plaintiff No.1 including selling their medical appliances / equipment / apparatus in India except to or through plaintiff No.1.” 4. As per the plaint, a distribution agreement was signed between defendant no. 1 and Usha Services and Consultants (P) Ltd. (hereinafter referred to as UCPL) on 21st March, 1986 for distribution of Drager products in India. On 9th May, 1987 a Joint Venture Agreement was signed between the above-mentioned parties for the sale, development and manufacture of Drager products in India. As a result of CS (OS) No. 519/2004 Page 4 of 23 this, on 5th October, 1988, a JV by the name of Usha Drager (P) Ltd. (hereinafter referred to as UDPL) was incorporated. In 1990, a fresh distribution agreement between defendant no. 1 and UDPL was signed resulting in the mutual termination of the previous distribution agreement dated 21st March, 1986. 5. UCPL ceased to be a shareholder of UDPL in 1992. The distribution agreement of 1990 was transferred by defendant no. 1 to Dragerwork Medizintechnik GmBH in 1997 and in 1999 a distribution agreement took place between the latter and UDPL for the sale of its exclusive as well as non-exclusive products in India. Dragerwerk Medizintechnik GmBH is now Dragerwerk Medical AG & Co. KGaA. In 2001, plaintiff no. 2 (RKKR Infotech (P) Ltd.) purchased shares of UDPL from Usha India Ltd. 6. Dragerwerk Medical AG & Co. KGaA terminated the distribution agreement of 1999 with effect from 31st December, 2003. Defendant no. 1 then proposed setting up another company for distribution of its goods in India and sought the permission of the FIPB on 27th January, 2004 for acquiring 100% shareholding of said company, pursuant to which the plaintiffs filed the present suit. 7. After filing the suit the plaintiffs filed an application being I.A. No.4241/04 seeking the impleadment of M/s. Drager Medical AG & Co. KGaA, M/s. Drager Medical India Pvt. Ltd. and M/s. H.L.Medical Systems Pvt. Ltd. as defendants 2,3 and 4 respectively. Another application being I.A. No.4906/04 was also filed by M/s. Drager CS (OS) No. 519/2004 Page 5 of 23 Medical AG & Co. KGaA, seeking its deletion from the array of parties on the plea that proposed defendant No.2 is not carrying on its business activities in India directly or indirectly. After considering the submissions of the parties in I.A. No.4241/04 the learned Single Judge as per merit has recorded the reasons in allowing the application in Para 7 of the impugned order which reads as under:- “7. The plaintiff's case is thus – (a) Primarily founded on the plea that the phrase "another company of the Draeger group" contained in clause 6 of the agreement covers the three proposed defendants mentioned in is 4241 of 2004. Since the said proposed defendants derived their existence through the Draeger group and clause 6 covers such entities they are not only required to be joined as parties but are required to be injuncted from violating clause 6. (b) That the joint venture is the ultimate victim of the acts of the defendants and the proposed defendants. (c) That it is the defendant who is blackmailing the plaintiff as is evident from the e mail of Mr. Alain Rastouil dated 14th June 2002 wherein it was stated that unless plaintiff No. 1 is converted into a subsidiary of the Draeger Group with 51 per cent of its shares to be with defendant No. 1, no new business plans would be presented or considered by defendant No. 1. (d) That the original share holders are M/s Usha Services - 20 shares, RKKR - 20 shares, Anil Rai & Co. - 20 shares and Mr. Anil Rai - 40 shares. M/s Usha Services ceased to be a share holder on 23.10.1992 and the present share holders are RKKR, Mr. Anil Rai, Mrs. Malvika Rai and Mr. Anand Rai and since shares were transferred in duly convened Board Meeting attended by Draeger nominees who had consented thereto, the joint venture does not cease and the assignment of the shares objected to by the defendants thus has been approved by virtue of the Board meeting attended to by the Draeger nominees.......” 8. On 20th January, 2005 a Single bench of this Court passed an order in three applications being I.A. No. 3171/2004 filed by the plaintiffs as regards Clause 6 of the Joint Venture Agreement, I.A. No. 4241/2004 filed by the plaintiffs for impleadment of Drager Medical AG & Co. KGaA, Drager Medical India (P) Ltd. and H. L Medical Systems CS (OS) No. 519/2004 Page 6 of 23 (P) Ltd, and I.A. No. 4906/2004 by defendant no. 2 (of the amended memo of parties) for its deletion from the arrayed parties. The relief granted as per impugned order can be summarized as follows: (I) I.A. No. 4241/2004 was allowed. Proposed defendant no. 2 & 3 (Drager Medical AG & Co. KGaA and Drager Medical India (P) Ltd.) were found to be part of the same Drager Group. That they were not party to the JVA was held immaterial. Proposed defendant no. 4 (H.L Medical Systems (P) Ltd.) was also impleaded as it was appointed the exclusive distributor in violation of Clause 6 of the JVA. (II) I.A. No. 4906/2004 filed by the proposed defendant no.2 was rejected. (III) As regards I.A. No. 3171/2004, though balance of convenience was even, prima facie case was found to be in favour of the plaintiffs. 10% commission of sales were directed to be secured by the Registrar of this court since the date of filing of the suit, as regards the products in Appendix 1 of the JVA as well as future sales covered by Clause 6 of the JVA as per the quarterly statement of accounts. 9. Firstly, we shall deal with the three appeals being FAO (OS) Nos. 27/2005, 29/2005, 31/2005 filed against the impugned order by which I.A.No. 4241/2004 was allowed and defendant nos. 2 to 4 were impleaded. In FAO (OS) No. 27/2005, defendant no. 3 (appellant herein i.e. Drager Medical India Pvt. Ltd.) has prayed that the impugned order dated January 20, 2005 passed in I.A No. 4241/2004 be quashed/set aside/modified and that it be deleted from the array of parties. Defendant no. 3 has submitted that the relevant portion of the impugned order sought to be set aside is as follows: “…the defendant has already set up a company by the name of Drager Medical India Pvt. Limited., proposed Defendant no. 3, which was actually to be the changed name of plaintiff no. 1 company as per the Board meeting dated 15th February, 2002, hence the proposed defendant no. 3 is also required to be joined as CS (OS) No. 519/2004 Page 7 of 23 a party. Furthermore, it is also a Drager Group Co. covered under Clause 6 of the Agreement. Accordingly, it would be appropriate and indeed in the interest of justice that since both the proposed defendants 2 and 3 are group companies of Drager Group and would thus fall within the scope and ambit of Clause 6 of the agreement, they are required to be impleaded as defendants 2 and 3. Whether or not the proposed defendants 2 and 3 are necessary parties, they certainly are proper parties.” 10. As grounds for supporting its contention, defendant no. 3 has submitted the following : a) The learned single judge has passed the impugned order without allowing defendant no. 3 to present its arguments in violation of the natural principles of justice. b) There exists no contract of any nature between defendant no. 3 and the plaintiffs and no allegation has been made against the former by the latter, thus resulting in an absolute lack of any cause of action against defendant no. 3. Further, the plaintiffs‟ agreements with the other defendants in the suit do not impact the rights of defendant no. 3 in any way. c) The present suit has been filed for specific performance of Clause 6 of the JVA to which neither the plaintiffs nor defendant no. 3 are party and that in a suit for specific performance of an agreement relief cannot be granted against a stranger to the contract. d) Defendant no. 3 is not a necessary party to the present suit as the plaintiffs have no right or claim for any relief against it and also because its absence would not render it impossible for the court to decide the disputes involved. e) The finding that defendant no. 3 and defendant no. 2 are part of the „Drager Group‟ is based on the website of defendant no. 1 company. f) The impleadment of defendant no. 4 has been allowed by the impugned order despite the absence of any allegations in the plaint as to the same and contrary to the settled law that where a defendant is added, unless the court directs otherwise, the plaint shall be amended in such a manner as may be necessary and the amended copies of the summons shall be served upon the new defendant. g) No opportunity has been granted to defendant no. 1 to state that it has not been carrying on any business other than through CS (OS) No. 519/2004 Page 8 of 23 plaintiff no. 1 and therefore no cause of action lies against the former. Further, it has been wrongly held that defendant no. 3 is distributing medical equipment of defendant no. 1 as there exists no privity of contract between the two. 11. FAO (OS) 29/2005 has been filed by defendant no. 4 i.e. H.L. Medical Systems (P) Ltd. praying that the following portion of the impugned order be set aside/quashed : “14. In so far as the proposed defendant no. 4 is concerned, after the hearing on 17.05.2004 in the present suit, when the defendant appeared through its counsel, the said Drager Medical AG & Co. KGaA caused a public notice to be published in the Economic Times announcing that M/s. H.L Medical Systems (P) Ltd. would be the exclusive distributor for their products for the territory of India. This act of the defendants, shows beyond doubt that the defendant is distributing through its exclusive distributor HL Medical Systems (P) Ltd. (proposed defendant no. 4) the products of the defendant as is evident from the public notice published in the Economic Times and the violation of Clause 6 has been averred to be achieved through the distribution of the products through defendant no. 4. This defendant is also required to be impleaded as defendant no. 4 as the violation of Clause 6 is being sought to be achieved through the medium of defendant no. 4.” 12. The grounds that have been raised by defendant no. 4 in support of its contentions are identical to the grounds raised by defendant no. 3 in FAO (OS) No. 27/2005. 13. FAO (OS) 31/2005 has been filed by defendant no. 2 i.e. Drager Medical AG & Co. KGaA praying for its deletion from the array of parties, with the following arguments in support of its prayer : (a) The impugned order has directed lifting of the corporate veil and impleadment of defendant no. 2 (appellant herein) in a suit wherein the only defendant previously impleaded was Dragerwerk AG. The corporate veil was lifted on the basis of information contained in the website of Dragerwerk AG. The law with respect to lifting of the corporate veil is elucidated in LIC of India v. Escorts Ltd., AIR1986 SC 1730 and it is defendant no. 2‟s contention that the plaintiffs have failed to CS (OS) No. 519/2004 Page 9 of 23 bring out the existence of any of the instances which permit lifting of the veil. b) Further, with regard to the law on lifting of the corporate veil, the decision in New Horizons Ltd. v. Union of India, 1995 1 SCC 478 states that lifting of the corporate veil occurs when the principle of the corporate personality is too flagrantly opposed to justice or convenience or is against the interest of revenue. The appellant submits that it is by no stretch of imagination a group company of Dragerwerk AG. It is further submitted that it was wrongly assumed that the distributor agreement of 1999 was between plaintiff no. 1 and defendant no. 1. c) Defendant no. 2 is not a necessary party for adjudication of the relevant dispute as it is a complete stranger to the JVA between defendant no. 1 and USCL and as such, there is no cause of action in favour of the plaintiffs and against Defendant no. 2. In a case of specific performance of contract filed by way of suit for injunction, a stranger cannot be impleaded as necessary party. Defendant no. 2 is the outcome of a JVA between Dragerwerk AG and Siemens AG with the management veto rights in the hands of the latter. Since under this JVA goods are supplied by the appellant across the globe, it cannot be restricted by the negative covenant contained in a JVA to which it is not even party. 14. The contention of the respondents herein/plaintiffs in the suit is that the defendant No.1 i.e. Dragerwerk AG is a foreign company without any assets in India and in case the appeals of the appellants/group affiliates of the defendant No.1 are allowed, the respondents/plaintiffs shall be left without any remedy. It is further argued by respondents that the appellants‟ contention that they are not party to the JVA and, therefore, cannot be restricted by clause (6) of the same has no force. It is argued by respondents that Section 43 of the Specific Relief Act, 1963 provides that where a contract comprises an affirmative agreement to do a certain act, coupled with the negative agreement not to do a certain act, the CS (OS) No. 519/2004 Page 10 of 23 circumstances that the court is unable to compel specific performance of the affirmative agreement shall not be precluded from grant of an injunction to perform the negative agreement. This has also been held in Gujarat Bottling Co. Ltd. v. The Coca- Cola Co. & Ors., 1995(5) SCC 545. 15. As per the respondents, the plea of Dragar Medical A.G. and Co. KGaA, defendant no. 2, that it is not a group affiliate of defendant no. 1 is submitted as wrong as 65 % of its shares are held by defendant no. 1 (presently 75 %) and the former is openly advertised as a group company of the latter. The respondents have submitted that it is a fit case for lifting of the corporate veil. In the New horizons case (supra), it was held that the corporate veil could be lifted not only in cases of fraud against the Government but also in commercial matters. The JVA, Foreign Collaboration Agreement, Distribution Agreement and Articles of Association all show relationship between the various defendants on group basis and not on individual basis as contended. The respondents have submitted Clause 17 of the Distribution Agreement to further prove the implicit relationship between Defendant no. 1 and Defendant no. 2. The said clause states in part as follows : “commencing with this agreement all previous distribution agreements between the distributor and Dragerwerk AG, legal predecessor of Drager Medical AG & Co. KGaA, stand null and void.” 16. It is the respondents‟ submission that Defendant no. 2 in its letter dated 19th March, 2004 to the FIPB wrongly stated that it was a CS (OS) No. 519/2004 Page 11 of 23 separate legal entity having no existing/previous venture in the same/allied field as plaintiff no. 1. It is pertinent that the FIPB also initiated an investigation with regard to the purported fraud of the defendants vide C.M. No. 15546/2008. 17. The appellants‟ contention that the respondents cannot invoke the JVA is wrong as plaintiff no. 1 is a product of the said JVA and is entitled to protection of its interest from its own shareholders. 18. Having gone through the contentions of all the parties involved, we find it necessary to refer to Clause 6 of the JVA of 1987. Clause 6 read as follows : “The shareholders of the joint venture and their directors including their husbands/wives shall not compete in any respect directly or indirectly, neither as share holders nor as Board Members, employees or consultants with the activities of the joint venture or of Drager or of any company of the Drager Group in the field of the products as specified in Appendix 2.” „Drager‟ has been defined in Article 2 of the Articles of Association of plaintiff no. 1 as : “Drager means Draegerwerk Aktiengeselisschaft a Corporation having an office at Moislinger Allee, 53-55, D 24 OO Lubeck, Federal Republic of Germany, its successors, assigns and nominees and their respective parent, subsidiary or associate companies, corporations or bodies corporate and any company, corporation or body corporate in which drager is amalgamated or merged and their respective parent subsidiary or associate companies and bodies corporate including any company or corporation or body corporate into which any such parent, subsidiary or associate companies, corporations or bodies corporate have merged.” 19. The structure of the Drager group, as given on the website of defendant no. 1 on September 4, 2004, is produced hereinbelow: 12. Draeger WERK AG 13. ---------------------------------- 14. | | | CS (OS) No. 519/2004 Page 12 of 23 15. SUBGROUPS SUBSIDIARIES 16. SERVICES 17. | IN GERMANY & 18. --------------- ABROAD ---------------- 19. | | | | 20. Draeger Draeger Draeger OTHER 21. MEDICAL SAFETY AG INTERSERVICES SERVICE 22. AG & Co AG & Co GmbH COMPANIES KGaA 23. 24. 65% 100% 25. 26. SUBSIDIARIES SUBSIDIARIES 27. IN GERMANY IN GERMANY 28. & ABROAD & ABROAD 20. Having stated the essential facts and pertinent clauses, as regards the law on the subject, we are of the view that the principle objective of the rule under Order 1 Rule 10 of the Code of Civil procedure, 1908 is to enable the addition of parties for the sole purpose of completely and effectually adjudicating upon the dispute arising between the original parties in the presence of newly impleaded parties, without which there would necessarily be multiplicity of proceedings. 21. At the stage of hearing of an application under Order 1 Rule 10 of the Code of Civil Procedure, 1908 the court is not required to adjudicate upon the claims of the parties finally. While deciding an application for impleadment, the Court has to record only a prima facie finding as to whether the proposed parties are proper and necessary and not venture into deciding the real controversy between the parties. It cannot finally adjudicate the questions of fact which would be decided later in the main suit itself. 22. It need not be pointed out that while considering an application for impleadment, the merit of the defenses is hardly a relevant consideration as it will be open to the impleaded defendants to CS (OS) No. 519/2004 Page 13 of 23 raise their objection and contentions as regard the lack of their locus standi in their written statement. 23. While deciding the application under Order 1 Rule 10 being I.A. No.4241/04 seeking the impleadment of defendants No.2 to 4, the learned single Judge has given valid reasons stated in Para 7 of the impugned order while exercising his discretion by arriving at the finding that these are proper and necessary parties for the purpose of deciding the real dispute between the parties. The said discretion has been exercised by the learned single Judge after having gone through the pleadings and documents on record. 24. We feel that the Ld. Single Judge has given valid reasons for impleading defendant nos. 2 to 4 and we agree with the same. Therefore, we are not inclined to interfere with the finding of the Ld. Single Judge. In view of the above said facts and circumstances FAO (OS)