Case: Hi Point Services Private Limited Vs. Chloro Controls (India) Private Limited &amp; Others

2. The facts giving rise to the present appeals, briefly stated are asNo.24 of 2005 is preferred by Severn Trent Water Purification Inc, Defendant No.1. Respondent No.1 is the plaintiff and Respondent Nos.2 to 11 are the Defendant Nos.2 to 11. Appeal No.528 of 2005 is preferred by Hi Point Services Pvt.Ltd., Defendant No.4, wherein the Respondent No.1 is the plaintiff and Respondent No.2 to 11 are the Defendant Nos.1 to 3 and 5 to 11 respectively. The parties shall hereinafter be referred as per their status in the suit.3. Plaintiff is a private limited company incorporated under the Indian Companies Act, 1956 and is a holding company incorporated to hold 50% share holdings in the Capital Controls India Private Limited (Defendant No.5), which is the Joint Venture Company. The plaintiff is registered and beneficial holder of 375000 equity shares (being 50% of the equity share capital) of and in the 5th Defendant Company. Defendant No.1 is a Corporation organised and existing under the laws of the State of Pennsylvania, Unites States of America (for short U.S.A.). Defendant No.2, Capital Controls (Delaware) Company Inc is the Corporation organised and existing under the laws of the state of Delaware, U.S.A. Defendant Nos.12 carry on business of manufacture, supply, sale and distribution of Chlorination equipments including gas and electro chlorination equipments. Defendant Nos.12 are group companies and were earlier part of Capital Controls group not being Defendant No.5 herein.4. Defendant No.3 is the company incorporated under the Indian Companies Act, 1956 and carries on business of manufacture and marketing of electro Chlorination equipments. In or about in the yearDefendant No.3 was floated as Joint Venture in technical and financial collaboration with De Nora group of Italy who hold 51% of equity share capital of the Defendant No.3. Hi Point Services Pvt.Ltd., Defendant No.4 is a private limited company incorporated under the Indian Companies Act, 1956 and interalia carries on business in electro chlorination equipments. Defendant No.4 had a tie up with American Company called Exceltec Inc who were engaged in the business of electrolytic disinfection equipment.5. Defendant No.5 viz.Capital Controls India Pvt.Ltd., is a private limited company incorporated under the Indian Companies Act, 1956 in implementation of the Joint Venture Agreement dated 16.11.1995 executed between the plaintiff and Madhusudan B.Kocha (Defendant No.9) on one hand and Defendant Nos.12 on the other. 50% share capital of Defendant No.5 is held by the plaintiff and the balance 50% share capital is held in the name of Defendant No.2. Plaintiff and Defendant No.2 are the Joint Venture partners constituting Defendant No.5. Defendant No.6 (W.A.Stimeling), Defendant No.7 (Marwan Nesicolasi) and Defendant No.8 (R.Fernandez) are the directors of Defendant No. 5 Company appointed by Defendant No.2 Company for and on behalf of Defendant No.1 Company. Defendant Nos.6 to 8 are Directors/officers of various Severn Trent group companies. Defendant No.6 is also the director of Defendant No.1.6. Defendant No.9 is the Managing Director of Defendant No.5 and Defendant Nos.10 (Milin M.Kocha)11 (Nilesh M.Kocha) are whole time directors of Defendant No.5. The entire share holding of the plaintiff is held by Defendant Nos.9 to 11, who shall hereinafter be referred as the Kocha family.7. Plaintiff instituted Suit No.233 of 2004 on 19.01.2004 interalia praying for (a) a declaration that the Joint Venture Agreements dated 16.11.1995 at Exhibitand Supplemental Collaboration Agreement at Exhibitare valid, subsisting and binding and that the scope of business of Defendant No.5 includes manufacture, sale, distribution and services of the entire range of chlorination equipments, including electro chlorination equipments of the Defendant Nos.12, their parents, associates and affiliated companies as well as of the Kocha family/ Chloro Controls Equipment Company; (aa) a declaration that the notice dated 23.01.2004 (Exhibitis illegal, invalid, malafide and of no effect whatsoever; (aaa) a declaration that the notice dated 21.07.2004 (Exhibitis wrongful, illegal, invalid, malafide in breach of the joint venture agreement and of no effect whatsoever; (b) an order and permanent injunction restraining the Defendant Nos.12, their parents, associates and affiliated companies from committing breach of their obligations under the joint venture agreements read with the supplementary collaboration agreement (Exhibits BM) and/or from committing breach of their obligations as partners in Defendant No.5; (c) an order and permanent injunction restraining the Defendant Nos.12, their parents, associates and affiliated companies from directly or indirectly selling, distributing, manufacturing, dealing in or being financially interested in chlorination equipments, parts, accessories and related equipments, including electro chlorination equipments in India and the designated territory, save and except through Defendant No.5 or from conducting any competing business in India or the designated territory; (d) an order and permanent injunction restraining Defendant Nos.12, their parents, associates and affiliated companies from in any manner interfering with and/or preventing Defendant No.5 from conducting its business of chlorination equipments, including electro chlorination equipments, of the Kocha family/Chloro Controls Equipment Company, Proprietary concern of Defendant No.9, among other prayers. The plaintiff as beneficial and registered owners of 3,75,000 equity shares of the 5th Defendant has instituted this suit, a derivative action to correct and remedy the illegality and wrong done to the 5th Defendant and its share holders by Severn Trent through Defendant Nos.1, 2 and 6 to 8.8. It is the case of the plaintiff that Defendant No.5 was incorporated on 14.11.1995 and the main object mentioned in the Memorandum of Association of Defendant No.5 is to the followingTHE MAIN OBJECT OF THE COMPANY TO BE PURSUED BY THE COMPANY ON ITS INCORPORATION:1. To design, manufacture, import, export, act as agent, deal in assembling, testing, erecting, servicing and marketing of gas and electro chlorination equipments....Before formation of 5th Defendant company the Kocha family carried on business of manufacture and sale of gas chlorination equipments. On and from 1980 the Kocha family developed and commenced manufacturing of electro chlorination equipments. The business of Kocha family was done in the name of Chloro Controls Equipments Company which is the sole proprietory concern of Defendant No.9. Prior to formation of Defendant No. 5, the Chloro Controls Equipment Company was the distributor in India for the products of Capital Controls for more than a decade. The joint venture agreements between Defendant Nos.12 and the plaintiff/ Defendant No.9 were executed on 16.11.1995. The financial and technical know how licence agreement was entered into between Defendant No.1Defendant No.5, under which Defendant Nos.12 (Capital Controls) agreed to furnish technical know how relating to the manufacture, quality control, installation, testing and servicing of its products existing on the date of the agreement. The International Distributor Agreement (being Appendix II to the Share Holders Agreement) was entered into between Defendant No.1 and Defendant No.5 whereunder Defendant No.1 appointed Defendant No.5 as its exclusive distributor for the products manufactured and marketed by Defendant No.1 viz.chlorination and water disinfection equipments, machineries, parts, accessories and related equipments and services in the territory of India, Afganisthan, Nepal and Bhutan. The list of products offered for distribution at attachmentto the said agreement, included Hypogen Equipment Series 3300 which is electro chlorination equipment and which was the only brand of electro chlorination equipment of Capital Controls (Defendant Nos.12). However the plaintiff has specifically asserted in Paragraph 20 of the plaint that the Defendant No.5 did not deal with Hypogen brand in view of its exorbitant pricing.9. It is the case of the plaintiff that it was also the intention of the parties that the business of Defendant No.5 would include the entire range of chlorination business of Chloro Controls Equipments Company (Proprietary concern of Defendant No.9) including its range of electro chlorination equipments. It was also intended that the entire range of chlorination equipment of Severn Trent which was initially divided between the Technical Know How Agreement and Distributors Agreement, was ultimately to be manufactured by Defendant No.5 indigenously. The purpose of formation of Defendant No.5 was to fuse and pull together the resources and technology and business in the range of chlorination equipments including electro chlorination equipment of Severn Trent (which at that time was conducted through Defendant Nos.12 only) with that of Kocha family/ Chloro Controls Equipment Company (Proprietary concern of Defendant No.9). Plaintiff has set out various circumstances in the plaint to contend that these circumstances establish that to the knowledge and with the acquiescence of Defendant Nos.12, Defendant No.5 was in fact carrying on business of manufacture, sale and distribution of electro chlorination equipments.10. It is the case of the plaintiff that some of the actions of Severn Trent (including Defendant Nos.12) on and from December 1998 onwards were in breach of joint venture agreement, the negative covenants contained therein and to the detriment of Defendant No.5. Some of those acts were clear systematic scheme and design to thwart, scuttle and throttle the business of Defendant No.5 and to illegally conduct the competing business through their group, affiliated and associated companies, as Severn Trent (including Defendant Nos.12) envisaged Defendant No.5 becoming a serious competitor on the termination of joint venture agreements and the Severn Trent did not have the majority /controlling interest in Defendant No.5.11. In or about December, 1998, Severn Trent acquired Exceltec Inc and thereafter Defendant No.1 issued circular which was received by Defendant No.5 on 01.02.1999 stating that Defendant Nos.12s Hypogen brand of electro chlorination equipment was to be completely replaced by Exceltecs Omnipure and Sanilec. Upon such replacement of Hypogen, Defendant No.5 was exclusively entitled to conduct business of Omnipure and Sanilec in India. As noted earlier, the plaintiff has asserted that Defendant No.5 did not deal with Hypogen brand in view of its exorbitant pricing.12. Prior to acquisition of Exceltec by Severn Trent, Exceltec had existing tie up and arrangement with Defendant No.4 in India. Upon such acquisition of Exceltec by Severn Trent and replacement of Hypogen by Exceltec brand of Omnipure and Sanilec, the said brands of electro Chlorination equipments could only be dealt with in India through Defendant No.5. However, upon such acquisition, Exceltec was none the less supplying its products through both Defendant No.4 and Defendant No.5. Plaintiff through Defendant No.9 repeatedly protested against this conduct at the Board meeting of Defendant No.5 of 26.09.2001.13. While discussion with Exceltec were still pending, in or about September 2001, Severn Trent Services Inc and one Gruppo De Nora purported to merge their sea water and marine disinfection business into a single joint venture under the name of Severn Trent De Nora LLC to market and service the products manufactured by Exceltec and De Nora. As electro chlorination equipment (Omnipure, Sanilec and Seaclor) fell within the range of Severn Trents range of electro chlorination equipment, the same could not be dealt with in India except through Defendant No.5.14. It is the case of the plaintiff that several discussions were held and it was pointed out that the failure to honour the joint venture agreement and lack of support of Severn Trent was leading to Defendant No.5s market share in electro chlorination equipment, being captured by competitor. In order to salvage the situation, the Defendant No.9 at the Board meeting of 10.12.2001 and in email dated 12.01.2002 wrongly contended that the plaintiff be permitted to conduct the business of electro chlorination equipment of the Kocha family outside the scope of the joint venture by interpreting the joint venture agreements to be in respect of gas chlorination equipment only and keeping Defendant No.5 away from electro chlorination business. Defendant No.1 through their Advocates letter dated 06.09.2002 addressed to Defendant No.5, for the first time, alleged as an afterthought, that the scope of the joint venture agreement was restricted to marketing and sale of gas chlorination equipment only, with the exception of right to distribute the Hypogen Equipment Series 3300 product line and that any venture by Defendant No.5 into electro chlorination business was in violation of the joint venture agreement. Plaintiff has referred to the correspondence ensued between the parties. In substance, the case of the plaintiff is that having regard to the main object for which Defendant No.5 was incorporated, as also by virtue of agreement entered into between the parties, electro chlorination business of both Severn Trent as well as Kocha family.15. Chloro Controls Equipments Company (Proprietary concern of Defendant No.9) clearly fell within the scope of business of Defendant No.5. Defendant No.2 being the joint venture partner cannot carry on competing business in gas or electro chlorination equipments in India and cannot divert such business of Defendant No.5 to other concerns either through device of acquisitions and mergers or in any other manner whatsoever. Plaintiff relied upon clause 4.5 of the Share Holders Agreement and contended that in view thereof, the plaintiff is entitled to specific enforcement of the said negative covenant.16. During the pendency of the suit, Defendant Nos.12 issued notice dated 23.01.2004 to be a notice to settle the dispute in terms of clauses 22.2 (i) and 21.2.(iv) of the Share Holders Agreement dated 16.11.1995, as also Defendant No.1 terminated the joint venture agreements contained in (i) Shareholders Agreement, (ii) International Distributors Agreement, (iii) Financial and Technical Know How Agreement, (iv) Export Sales Agreement, (v) Trademark Registered User Agreement, by a fax dated 21.07.2004. Plaintiff suitably amended the plaint and has challenged the notice dated 23.01.2004 and the fax dated 21.07.2004. Plaintiff took out Notice of Motion No.553 of 2004 claiming interim reliefs during the pendency of the suit substantially in terms of prayer clauses (c), (d), (e)(k) of the Plaint.17. Affidavit in reply was filed by Mr.K.V.Ramesh on behalf of Defendant No.1 on 27.04.2004. In substance, it was contended that the Memorandum and Articles of Defendant No.5 cannot be interpreted to expand the scope of activities as the object clause of the Memorandum of Association is in general and broad based terms and includes objects which the company may undertake in future. The actual scope of activities of Defendant No.5 as well as terms, rights and obligations of the parties are set out in the Joint Venture Agreement alone. The Joint Venture Agreement clearly describe and specifically set out the list of products which the Defendant No.5 can manufacture, sell or distribute. Clause 4.5 of the Shareholders Agreement dated 16.11.1995 clearly provides that the plaintiff, Defendant No.9 and Kocha family shall not during the term of agreement, engage directly or indirectly or be financially interested in the manufacture, sale or distribution of chlorination equipments and related products which are similar to those manufactured or sold by Defendant No.5 Joint Venture Company. There is no such provision under the said clause restricting the erstwhile Defendant No.2 now Defendant No.1, and further goes on to say that during the term of this agreement the erstwhile Defendant No.2 now Defendant No.1, its parentsassociates will not directly or indirectly engage and/or be financially interested in the manufacture, sale and distribution in India of the products manufactured or sold by Defendant No.5. Theobligations of the plaintiff and Defendant No.9 on one hand and that of Defendant No.1 on the other, are conspicuously different. It is further contended that the specific products list in the joint venture agreement and in particular International Distributors Agreement (Appendix II to the Shareholders Agreement) only lists the Hypogen Equipment Series 3300 brand line of electro chlorination equipments. At the time of joint venture agreement, erstwhile Defendant No.2 manufactured the Hypogen Equipment Series 3300, the electro chlorination equipment. The erstwhile Defendant No.2 discontinued the manufacture of hypogen product line in U.S.A., and said discontinuation was done before acquisition of Exceltec. Hypogen brand was not superseded by the brands of Exceltec viz. Omnipure and Sanilec. It was further contended that had the parties actually intended in 1995 to include all present and future lines of Defendant No.1s lines of electro chlorination products, they would have (i) made theprovision identical for both parties, (ii) drafted the list of products to include all lines of gas and electro chlorination equipment produced then or to be produced in future. It was reiterated that the scope of joint venture agreement can be clearly ascertained from the bare perusal of these agreements, and by plaintiffs own admission the plaintiff has shown clearly that the scope of joint venture did not extend to electro chlorination business.18. By the impugned order dated 23.12.2004, the learned Single Judge partly allowed the Notice of Motion No.553 of 2004 as mentioned earlier and in view thereof disposed of the Notice of Motion No.2382 of 2004 as it does not survive. It is against this order, Defendant No.1 has preferred Appeal No.24 of 2005 and Defendant No.4 has preferred Appeal No.528 of 2005.

Reasoning:
Perusal of thiswould indicate that it does not include any electro chlorination equipment. Appendix II to this agreement specifically deals with the products and parts not manufactured by Defendant No.Thus Appendix II clearly sets out the list of products and parts not manufactured by the Joint Venture and it further provides all capital control products not listed in Exhibit I. We have already noted that Appendix I to this agreement provides for products manufactured by Defendant No.5 for chlorine service only, and deals only with gas chlorination equipment and does not include any electro chlorinationour opinion, clause 4.5 is in two parts viz. (i) Mr.Kocha, Defendant No.9 (including his wife and sons), Chloro Controls, the Plaintiff shall not, during the term of this agreement, engage, directly or indirectly, or be financially interested in the manufacture, sale or distribution of chlorination equipments and related products which are similar to those manufactured or sold by Defendant No.5 Company. In so far as obligation cast on Defendant No.9 and the plaintiff is that during the term of this agreement, they shall not deal in any manner, in the manufacture, sale or distribution of chlorination equipments and related products which are similar to those manufactured or sold by the Defendant No.5 Company. (ii) During the term of this agreement the Capital Controls (Defendant Nos.12), its parents and associates will not directly or indirectly engage in or be financially interested in the manufacture, sale or distribution in India of the products manufactured or sold by Defendant No.5 Company. Thus, in so far as plaintiff and Defendant No.9 are concerned, the negative covenant is wide enough to include chlorination equipment and the related products which are similar to those manufactured or sold by defendant No.5. Thus , the said negative covenant in so far as plaintiff and Defendant No.9 are concerned, is widely worded, whereas in so far as Defendant Nos.12 are concerned, it only prohibits them from dealing in any manner with the products manufactured or sold by Defendant No.5 Company. In other words, this covenant is not as widely worded as compared with the wordings of negative covenant qua the plaintiff and Defendantotherwise, from the material on record, we do not find that in fact Defendant No.5 was manufacturing or selling electro chlorination equipments. As noted earlier, in the plaint the plaintiff has asserted that Defendant No.5 did not deal with Hypogen brand in view of its exorbitant pricing. That apart, plaintiff has not led any foundation in the plaint for invoking clause 4.5 of the Shareholders Agreement.Perusal of section 27 of the Indian Contract Act, in our opinion, casts onus of proving reasonableness under Exception I on the covenantee. The Plaintiff has notestablished that the agreements entered into between the parties fall in Exception 1 to Section 27 of the Act. The view we are taking is also supported by the decision of the Apex Court in the case of Percept DMarle (India) (P) Ltd.V/s.Zaheer Khan, (2006) 4 SCC 227.   Prima facie we are not satisfied on the basis of material on record that the negative covenant contained in clause 4.5 of the Shareholders Agreement can be invoked by the plaintiff. As indicated earlier the plaintiff has notestablished that Defendant No.5 was manufacturing or selling electro chlorination equipments, having regard to various joint venture agreements.Perusal of clause 4.4.5 would indicate that the gas chlorination was covered in the joint venture agreement and electro chlorination was excluded in the joint venture agreement. Perusal of clause 4.4.6 would indicate that it was suggested that it would be prudent for all to keep the joint venture company away from electro chlorination business and continue the electro chlorination business in the company owned by Defendant No.9. This would resolve the most of the problems and no complications would take place at the time of bidding for the tender and no embarrassing situations would arise at any time in future between the companies., at this stage, we are of the opinion that even the plaintiff and Defendant No.9 accepted that the joint venture agreements were only in respect of gas chlorination equipments and did not cover electro chlorination business. Plaintiff strongly relied upon various circumstances which found favour by the learned Single Judge. Mr.Doctor strenuously contended that the Under Secretary to the Government of India, Ministry of Industry, addressed the letter dated 11.10.1996 to Defendant No.5 (Exhibitto the plaint) conveying approval of the Government of India to the proposal for foreign collaboration with Defendant No.2 subject to the terms and conditions set out therein. Defendant No. 5 replied this on 21.12.1996 (Exhibitto the plaint) and in so far as point No.2 of letter dated 11.10.1996 is concerned, approval was requested to be amended so as to include manufacture of gas chlorination and electro chlorination equipments among other products. This was responded by the Under Secretary to the Government of India, Ministry of Industry on 21.04.1997 (Exhibitto the plaint) conveying the approval of the Government of India to the amendment of clauses 2, 3 and 4 of the approval letter dated 11.10.1996. Pursuant to the approval dated 21.04.1997 Supplementary Collaboration Agreement was executed between Defendant No.2 and Defendant No.5 wherein parties confirmed that they shall adhere to the terms and conditions as stipulated by the Government of India vide letter dated 11.10.1996, amended on 21.04.1997. The said Supplementary Collaboration Agreement is at Exhibitto the plaint. Relying upon this correspondence alongwith the other circumstances, Mr.Doctor contended that the object of the Joint Venture Agreement was not only to manufacture gas chlorination equipments, but also to manufacture electro chlorinationregard to clauses 6, 7, 89 of the Shareholders Agreement and having further due regard to the fact that the disputes and differences arose between the plaintiffDefendant No.9 on one hand and Defendant Nos.12 on the other from December, 1998 onwards and the said disputes and differences continued between them even in the year 2001, wouldindicate that Defendant No.5 was not in a position to carry on business. It is in these circumstances, we are of the opinion that the plaintiff has not made out acase for issuance of injunction as prayed for. This is to be appreciated on the backdrop of the fact that in for as Defendant No.4 is concerned, even in the plaint the plaintiff has admitted that prior to acquisition of Exceltec by Severn Trent, the Exceltec had an existing tie up and arrangement with Defendant No.4 in India.36. Even otherwise, there is one more reason for denying any interim relief to the plaintiff and that is the delay in approaching the Court. The Plaintiff has specifically averred in the plaint itself that Defendant Nos.12 started committing breaches since December 1998 and even in the year 2001 they continued to commit breaches. In the meeting of Board of Directors held on 10.12.2001 Defendant No.9 in terms of clauses 4.4.5 and 4.4.6 declared that the joint venture agreements are only in respect of gas chlorination equipments and the electro chlorination was excluded. Despite this position, the plaintiff has instituted a suit as late as on 19.01.2004. This is the additional reason for denying any interim relief to the plaintiff.