Delhi High Court
Ozone Spa Pvt Ltd vs Jyotsna Sanjay Aggarwal & Anr. on 8 January, 2021
Author: Rajiv Shakdher
Bench: Rajiv Shakdher
$~J-1
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Judgement reserved on 20.11.2020
Judgement pronounced on 08.01.2021
I.A. No. 5541/2020
+ in
CS(COMM) 198/2020
OZONE SPA PVT. LTD. .....Plaintiff
Through : Mr. Tanmay Mehta with Mr. Rajesh
Mahindru, Advs.
versus
JYOTSNA SANJAY AGGARWAL & ANR. .....Defendants
Through : Mr. Manish Sharma, Adv. for D-1.
CORAM:
HON'BLE MR. JUSTICE RAJIV SHAKDHER
RAJIV SHAKDHER, J.
I.A. No. 5541/2020
1. This is an application preferred under Order XIIIA Rule 2 and 6 read with Section 151 of the Code of Civil Procedure, 1908 [hereafter referred to as the "CPC"].
2. The application has been preferred by the plaintiff i.e. Ozone Spa Pvt. Ltd. (hereafter referred to as "Ozone"). Via this application Ozone seeks a summary judgement and decree for recovery of Rs. 97, 43,250/- along with pendent-lite and future interest at the rate of 12% per annum against defendant no. 1. In the alternative, Ozone seeks a direction for the deposit Signature Not Verified Digitally Signed I.A. No. 5541/2020 in CS (COMM) 198/2020 Page 1 of 23 By:VIPIN KUMAR RAI Signing Date:11.01.2021 10:07:14 of the "suit amount" or a security or bank guarantee equivalent to the said sum.
3. Shorn of verbiage, the facts obtaining in the matter, those which are necessary for adjudication of the instant application are set forth hereafter:
4. Ozone, which is in the business of creating, marketing, selling facilities concerning fitness club, beauty and hair care salon and spa in India entered into a franchise agreement on 09.06.2016 [hereafter referred to as "FA"] with defendant no. 1. The FA detailed out the terms and conditions on which franchise was given to defendant no. 1 to run a salon. The upshot of the FA was that defendant no. 1 could use the plaintiff's trademark "OZONE" for its business and to run the same from the "franchise territory"
based on the stipulated "systems" and "standards" subject to payment of franchise fee/royalty. The franchise territory as per schedule "C" to the FA was to be located at M-7, Greater Kailash, New Delhi. Evidently with mutual consent the "franchise territory" was shifted to M-41, M-Block, Greater Kailash, Part-II, New Delhi. The said premises are owned by defendant no.2 and were taken on lease by defendant no. 1 to run its franchise business.
5. The FA had a fixed tenure period of 10 (ten) years which was to expire on 08.06.2026 with an option for renewal as per clause 4 of the FA. 5.1 The initial and continuing obligations which were undertaken by the franchisor i.e. Ozone are outlined in clause 6 of the FA. Likewise, obligations undertaken by defendant no.1 are set forth in clause 8 of the FA. 5.2 The provision for franchise fee/royalty and collection-sharing as well as payment arrangements are provided in Clause 9 read with Schedule D of the FA.
Signature Not Verified Digitally Signed I.A. No. 5541/2020 in CS (COMM) 198/2020 Page 2 of 23 By:VIPIN KUMAR RAI Signing Date:11.01.2021 10:07:145.3 Likewise, the provision for termination of the FA is provided in Clause 18.
5.4 Pertinently, Schedule D detailed out the provisions for payment of franchise fee/royalty. As per clause (i) of Schedule D, defendant no.1 was required to pay on or before the execution of the FA a non-refundable lump- sum franchise fee of Rs.12,00,000/- inclusive of service tax and all applicable taxes.
6. Besides these, defendant no.1, in terms of clause (ii) Schedule D, was required to pay a franchise fee/royalty of Rs.75,000/- per month plus service tax and all other applicable taxes in the first year with the caveat that franchise fee/royalty was not to be paid for the initial 3 (three) months. However, after the first year from the date of execution of the FA, defendant no. 1 was required to pay a royalty fee of Rs.1,00,000/- plus service tax and all other future taxes as may be applicable.
6.1 The royalty fee was to be deposited in the bank account of Ozone by the 7th day of the following month. For this purpose, defendant no.1, was required to give an ECS mandate to its bank in the relevant format. It would be germane to note that no such format was placed on record along with the copy of the FA.
6.2 Going further, it was also provided that if the franchise fee/royalty was not credited into Ozone's account by the designated date, defendant no.1 was liable to pay interest/penalty at the rate of Rs.10,000/- per month for the "period of delay or part thereof".
6.3 Furthermore, it was also provided that interest/penalty, at the rate of Rs.10,000/- per month, for the delayed payment, was required to be paid by Signature Not Verified Digitally Signed I.A. No. 5541/2020 in CS (COMM) 198/2020 Page 3 of 23 By:VIPIN KUMAR RAI Signing Date:11.01.2021 10:07:14 defendant no.1 even if defendant no.1 made in the payment in the "mid of the month".
6.4 Importantly, this very clause, i.e. clause (iii) of Schedule D stated in no uncertain terms that payment of royalty fees was the essence of the agreement and that failure to remit three consecutive royalty fee payments would be construed as a breach of the agreement, triggering Ozone's right to implement the non-compete clause and other clauses of the FA.
7. At this stage, it is important to note that Clause (v) of Schedule D made provision for collection-sharing royalty which was to be paid by defendant no.1 to Ozone latest by the 5th day of the following month in which the number of members as per slab mentioned in the agreement was achieved. The collection-sharing royalty was, broadly, based on gross sales as defined in Clause (iv) of Schedule D.
8. Clause (iv) of Schedule D, while defining gross sales adverted to indices which formed part of gross sales and those which were required to be excluded. Though there is a reference to a slab based on which collection-sharing royalty was required to be calculated and remitted by defendant no.1 to Ozone, the slab, somehow was not incorporated in the FA giving the impression that it is inchoate and, perhaps, a format agreement which Ozone has entered into with other franchises.
9. The admitted position is that if the provisions of the FA had to apply after the expiry of the initial period of three months, defendant no.1 had to pay a fixed franchise fee/royalty of Rs.75,000/- per month for the first year which stood enhanced to Rs.1,00,000/- per month for the remaining tenure of the FA which was to expire on 08.06.2026.
Signature Not Verified Digitally Signed I.A. No. 5541/2020 in CS (COMM) 198/2020 Page 4 of 23 By:VIPIN KUMAR RAI Signing Date:11.01.2021 10:07:1410. Ozone, both in the plaint and the captioned application, has stated that no claim is made by it concerning franchise fee/royalty that may have accrued up until March 2017.
11. The claim for royalty fee which is pegged at Rs. 41,23,250/- (Rs.35,00,000/- plus GST) concerns the period April 2017 to May 2020.
12. Furthermore, for the same period, Ozone has claimed interest/penalty at the rate of Rs.10,000/- per month which has been quantified at Rs.56,20,000/-.
12.1 Ozone has provided no details as to how it has arrived at the figure of Rs.56,20,000/-. Simple elementary math would show that even if the claim for interest/penalty is sustained, of which I have grave doubts, at least at this stage, the per year liability would be Rs.1,20,000/- and for three years or so, defendant no. 1's liability would be in the range of Rs.3,60,000/- to Rs. 3,70,000/-.
Submissions of Counsels: -
13. Given the aforesaid background, Mr. Tanmaya Mehta, who appeared on behalf of Ozone, argued that this was an open and shut case where defendant no.1 had no real prospect of successfully defending its claim and therefore, there was no compelling reason as to why its claim ought not to be disposed of before recording of oral evidence.
14. According to Mr. Mehta, Clause 9 read with Schedule D of the FA provided that the over a period 10 (ten) years defendant no.1 was required to pay a fixed franchise fee/royalty at the rate of Rs.75,000/- per month in the first year and thereafter at the rate of Rs.1,00,000/-per month. Mr. Mehta said that failure to pay franchise fee/royalty entailed an obligation on the Signature Not Verified Digitally Signed I.A. No. 5541/2020 in CS (COMM) 198/2020 Page 5 of 23 By:VIPIN KUMAR RAI Signing Date:11.01.2021 10:07:14 part of defendant no.1 to pay interest/penalty at the rate of Rs.10,000/- per month.
15. The FA being a written agreement, all that the court was required to see was whether the aforementioned franchise fee/royalty payment clauses were sustainable and apply the same qua the claim set up by Ozone since neither the factum of execution nor the contents of the same were disputed by defendant no.1. In other words, Mr. Mehta contends that the liability to pay franchise fee/royalty is absolute.
16. Mr. Mehta, however, did concede that no claim for payment of franchise fee/royalty between September 2016 to March 2017 is made by Ozone.
17. Mr. Mehta, though, went on to state that thereafter invoices were served regularly for payment of franchise fee/royalty followed by communications via letters/email as regards non-payment of franchise fee/royalty by defendant no.1.
18. In this behalf, Mr. Mehta relied upon the copies of the following invoices and communications:
(i) Invoices dated: "18.04.2017, 02.05.2017, 01.06.2017, 01.09.2017, 01.10.2017, 01.11.2017, 01.12.2017, 02.01.2018, 01.02.2018, 01.03.2018, 31.03.2018, 01.05.2018, 02.06.2018, 02.07.2018, 02.08.2018, 01.09.2018, 01.10.2018, 01.11.2018, 01.12.2018, 01.01.2019, 31.03.2020, 08.06.2020".
(ii) Letters dated: "14.11.2017, 18.01.2018, 22.03.2018, 28.06.2018, 28.02.2019 and 26.02.2020" and
(iii) E-mail dated: "26.02.2020, 02.03.2020, 10.05.2020".
19. Mr. Mehta also submitted that the trigger for the institution of the suit Signature Not Verified Digitally Signed I.A. No. 5541/2020 in CS (COMM) 198/2020 Page 6 of 23 By:VIPIN KUMAR RAI Signing Date:11.01.2021 10:07:14 was the alleged attempt by defendant no.1 to hand over the premises to defendant no. 2 contrary to the terms of the FA.
20. On the other hand, Mr. Manish Sharma who appeared on behalf of defendant no.1, submitted that the captioned application seeking the relief of passing a summary judgement against defendant no.1 was not sustainable for the following reasons:
21. There was, in effect, an oral agreement waiver borne out from the conduct of the parties to the effect that no franchise fee/royalty was payable or was required to demanded by Ozone. In support of this plea, Mr. Sharma emphasized the purported largesse of Ozone in giving up its claim for franchise fee/royalty up until March 2017 as also the fact that despite Ozone having allegedly served invoices and communication on defendant no. 1 over 3 (three) years, it did not take recourse to the next logical act which was to terminate the FA.
22. Although, defendant no. 1 paid the non-refundable "but adjustable security deposit of Rs.12,00,000/-" and invested nearly Rs.1.75 Crores in the design and development of the salon, Ozone failed to fulfil its obligations under Clause 6 and 7 of the FA.
23. Amongst other obligations, Ozone was required: to give initial training to the employees and personnel of defendant no. 1 in the standards, procedure, techniques and methods to be applied as per the operating manual; to supply or to recommend suppliers, as the case may be, of, equipment/consumable other materials required to be set up in the business; to advise on marketing and advertising activities before the commencement of business; to provide standard forms of contracts, soft/hard copies for use by defendant no.1 in the dealing with its customers; to assist defendant no.1 Signature Not Verified Digitally Signed I.A. No. 5541/2020 in CS (COMM) 198/2020 Page 7 of 23 By:VIPIN KUMAR RAI Signing Date:11.01.2021 10:07:14 in the selection of trained and qualified staff; to provide details of products, services and equipment described in the operating manual as specified therein and to organise and convene annual conference and meetings to bring about improvements in the system and to bring to fore Ozone's proposals for promotional activities and general operations of the system.
24. Notwithstanding the failure on the part of Ozone to fulfil its obligations under clause 6 and 7 of the FA, defendant no. 1 has incurred fixed and recurring costs concerning lease rent amounting to Rs.7 lacs per month plus GST (amounting to Rs.1,25,000/-). Besides this, defendant no. 1 has had to make payments towards the maintenance of the building, usage of the generator (for backup power) and lift to the tune of Rs.75,000/- per month.
25. This apart, defendant no.1 had to fork out amounts towards the salary of staff and payment of other variable expenses.
26. Because there were huge losses, the business had to be shut down over several days in the 3 years qua which claim has been made by Ozone. In this behalf, reliance was placed on paragraph 19 of the reply filed by defendant no.1.
27. Because defendant no.1 was incurring business losses, which were known to Ozone, a suggestion was made that its business could be taken over by one Mr. Nikhil Gupta who is another franchisee of Ozone and is running other Ozone salons in Greater Kailash, Part 1 and Model Town in North Delhi.
28. To demonstrate that there was an element of truth in the stand taken by defendant no. 1 qua such an arrangement between her and the managing director of Ozone, Mr. Naveen Kandhari, my attention was drawn to the Signature Not Verified Digitally Signed I.A. No. 5541/2020 in CS (COMM) 198/2020 Page 8 of 23 By:VIPIN KUMAR RAI Signing Date:11.01.2021 10:07:14 details of the meetings held between her husband and Mr. Naveen Kandhari outlined in paragraph 21 of the written statement and reply. It appears that three meetings were held on 28.01.2020 and 22.02.2020 and 26.02.2020 at Leela Palace, Chanakyapuri, New Delhi. In between a meeting was also held on 24.02.2020 albeit at the residence of Mr. Kandhari located in Sunder Nagar, New Delhi. In the same paragraph of the written statement and reply, there is also a reference to yet another meeting held on 09.03.2020 at Leela Palace, Chanakyapuri, New Delhi which was attended by not only the husband of defendant no. 1 and Mr. Kandhari but also by Mr. V.K. Pahwa, the director of Ozone, Mr. Manikant Aggarwal/defendant no. 2, Mr. Divya Aggarwal, son of Mr. Manikant Aggarwal, Mr. Ronnie Bhasin, President of Greater Kailash-II market association, Mr. Jitender Agnihotri, employee/accountant of Ozone, Mr. Nikhil Gupta, another franchisee of Ozone and another person, namely, Mr. Ranjit Bhasin. Besides this, defendant no. 1 has also referred to a meeting held two or three days before the 09.03.2020 meeting which was attended by Mr. Kandhari, Mr. Manikant Aggarwal, Mr. Divya Aggarwal, Mr. Ronnie Bhasin , Mr. Ranjit Bhasin and Mr. Nikhil Gupta. This meeting according to defendant no. 1, was held at The Oberoi Hotel in New Delhi.
29. In support of defendant no.1's plea that Ozone was a franchisor who had a poor track record concerning business relations with other franchisees in the city, my attention was drawn to paragraph 5 of the reply wherein reference was made to five (5) franchises qua which Ozone was in litigation which led to the termination of the agreements executed with them. These franchise-outlets according to defendant no. 1 were set up in Kailash Colony, Green Park, Rajouri Garden, Punjabi Bagh and Sohna Road.
Signature Not Verified Digitally Signed I.A. No. 5541/2020 in CS (COMM) 198/2020 Page 9 of 23 By:VIPIN KUMAR RAI Signing Date:11.01.2021 10:07:1430. In sum, it was contended that the FA was onerous and one-sided and that it was to the knowledge of Ozone that defendant no. 1 was suffering business losses and therefore it had an understanding/oral agreement with defendant no.1 that no coercive measures would be taken to claim the franchise fee/royalty and that Ozone was interested in taking over directly or indirectly the premises from where defendant no.1 was operating its business.
Analysis and Reasons: -
31. Having perused the record and heard learned counsels for the parties what is required to be ascertained at this stage is whether or not defendant no.1 has any real prospect of succeeding in defending the claim made by Ozone. In other words, as to whether or not defendant no. 1 has raised a plausible defence and triable issues.
32. Rule 6 (1) of Order XIIIA of the CPC sets out various options that the court has while disposing of such an application which includes vesting of power in the court to pass a conditional order in consonance with provisions of Rule 7 (1).
33. Rule 7 (1) of Order XIIIA provides that where it appears to the court that it is possible that a defence may succeed but it is improbable that it should do so, the court can: make a conditional order which includes a direction to deposit money in court; direction to the defendant to take specified steps in his/her defence; direction to furnish security or to provide surety for restitution of cost as deemed fit and proper, or even impose such other condition including providing security for restitution of losses that any party is likely to suffer during the pendency of the suit as may be deemed fit in the discretion of the court.
Signature Not Verified Digitally Signed I.A. No. 5541/2020 in CS (COMM) 198/2020 Page 10 of 23 By:VIPIN KUMAR RAI Signing Date:11.01.2021 10:07:1434. Therefore, the court can inter alia either pass a judgement and decree in terms of the claim(s) made in the application or dismiss the application or issue a conditional order of the kind provided in Rule 7(2) of Order XIIIA.
35. In other words, if the reply raises triable issues then the court would be empowered to dismiss the application for summary judgment. Where, however, the court concludes that a claim or defence may succeed but it is improbable, the court is empowered to pass a conditional order. [See Rule 7(1) and Rule 6(1)(b) Order XIIIA of CPC.] The kind of conditional order that the court can pass is outlined in Rule 7(2)(a)(i) to (iv) of Order XIIIA of the CPC. Under Rule 7(2)(b) of Order XIIIA, the court can also specify consequences of the failure to comply with the conditional order including passing a judgment against the party that fails to comply with it.
36. The perusal of the pleadings and material on record in the instant case would show that the following aspects have emerged quite clearly. 36.1 Ozone entered into an FA with the view of granting a franchise to defendant no. 1 which entailed that defendant no. 1 could use the trademark and brand name qua which it claimed ownership provided the franchise business was operated as per systems and standards adverted to in the said agreement. Clauses to this effect were incorporated in the FA to protect the reputation and goodwill of Ozone. The intent concerning the aforesaid is evident upon a plain reading of clauses 1.7, 1.9, 1.14, 1.16 and 2.1. For the sake of convenience, the relevant clauses are extracted hereafter:
1.7 "FRANCHISED BUSINESS" means the franchised business of Salon and Spa as per Annexure "A", to be run and operated by the Franchisee in accordance with the System and Standards under the Proprietary Marks of the Franchisor, and including the stock, sale, delivery or Signature Not Verified Digitally Signed I.A. No. 5541/2020 in CS (COMM) 198/2020 Page 11 of 23 By:VIPIN KUMAR RAI Signing Date:11.01.2021 10:07:14 use of the Products if any, supplied in relation thereto by the Franchisor, as more particularly described in the Operating Manual.
1.9 'OPERATING MANUAL' or "SOP" means the written specification of the methods, process, techniques, systems and schemes devised and complied and copyrighted by the Franchisor to be observed and implemented by the Franchisee in operating the Franchised Business and any amendment or variation thereof at any time hereafter notified-in writing by the Franchisor to the Franchisee.
Ozone Spa Pvt. Ltd. confidential operating manuals, as amended from time to time in the Franchisor's sole discretion, which contain the instructions, requirements, Standards, specifications, methods and procedures for the operation of the premises including (i) those relating to the selection, purchase, training of instructors and the services being provided in the premises; (ii) those relating to the maintenance and repair of the premises, buildings, grounds, equipment, signs, interior and exterior decor items, fixtures and furnishings; and (iii) those relating to employee apparel and dress, accounting, bookkeeping, record retention and other business systems, procedures and operations.
1.14 'SYSTEM' means the proprietary software system/distinctive Franchised Business format and method developed and implemented by the Franchisor in connection with the operation of the Franchised Business. A unique, proprietary system developed and owned by the Franchisor (which may be modified or further developed from time to time, in Franchisor's sole discretion) for the establishment and operation of full-service premises under the Proprietary Marks, which includes, without limitation, a distinctive image consisting of exterior and interior design, decor, color scheme and furnishings; special recipes, menu items; uniform standards, products, services and specifications; procedures with respect to Signature Not Verified Digitally Signed I.A. No. 5541/2020 in CS (COMM) 198/2020 Page 12 of 23 By:VIPIN KUMAR RAI Signing Date:11.01.2021 10:07:14 operations, inventory and management control (including accounting procedures and policies); training and assistance; and advertising and promotional programs.
1.16 "STANDARDS" means Franchisor's set of mandatory and recommended operating procedures, standard, specifications, policies, requirements and controls (including without limitation, those which maybe set forth in the Operating Manual or SOP of the Franchisor, for the operation of the Franchised Business, as maybe unilaterally modified by the Franchisor from time to time. The standards and specifications, as amended from time to time by the Franchisor, in its sole discretion, contained in and being a part of, the Confidential Information pursuant to which Franchisee shall develop and operate the premises at the Site.
2 GRANT OF FRANCHISE 2.1 Upon the representations of the Franchisee that it has the requisite experience, knowledge, qualification, skill and financial capability to carry out its obligations under this Agreement including payment of royalty fee, the Franchisor hereby grants to the Franchisee and the Franchisee hereby accepts the non-exclusive, non- transferable, non-assignable franchise to establish, run and operate the Franchised Business in the Territory i.e. located at M-7, Greater Kailash -II, New Delhi as per the Systems and Standards and under the Intellectual Property of the Franchisor, during the term of this Agreement. Franchisee's rights under the Agreement are limited as provided under the Agreement. And the Franchisee does not have the right to sub-franchise or sub-license the rights granted under this Agreement to any third person.
(emphasis is mine) 36.2 Furthermore, towards this end the FA also provided for initial Signature Not Verified Digitally Signed I.A. No. 5541/2020 in CS (COMM) 198/2020 Page 13 of 23 By:VIPIN KUMAR RAI Signing Date:11.01.2021 10:07:14 obligations that Ozone had to fulfil. These obligations are contained in Clause 6 of the FA. A perusal of the sub-clauses of clause 6 would show that while some are in the nature of advice and guidelines, the others have a mandatory flavour. The mandatory flavour of such sub-clauses was perhaps necessary from the point of view of the parties so that not only was the reputation and goodwill of the Ozone brand protected but also that defendant no. 1 was put in a position that she would be able to earn enough revenue to pay the franchise fee/royalty as provided for in the FA. In this behalf, it would be useful to advert to clauses 6.4, 6.5 and 6.7 of the FA.
6. INITIAL OBLIGATIONS OF FRANCHISOR 6.4 To provide to all employees and personnel of the Franchisee initial training in the Standards, procedures, techniques and methods as per the Operating Manual at such times and at such place as shall be specified by the Franchisor from time to time or upon request as and when made by the Franchisee, the cost of the travel and subsistence in connection therewith being borne by the Franchisee.
6.5 To deliver to the Franchisee at the commencement of the initial training period one copy of the Operating Manual and any other training materials deemed appropriate by the Franchisor.
6.7 To supply or to recommend suppliers of, as the case maybe, the equipment/consumables and other materials required to be procured to set up and run the Business, to the Franchisee at the cost of the Franchisee in due time for the commencement of the Franchised Business. The equipment and consumables should be as per the specification and standards approved by the Franchisor.
(emphasis is mine) Signature Not Verified Digitally Signed I.A. No. 5541/2020 in CS (COMM) 198/2020 Page 14 of 23 By:VIPIN KUMAR RAI Signing Date:11.01.2021 10:07:14 36.3 Likewise, The FA also provided for continuing obligations that Ozone was required to fulfil once the franchised business had commenced so that the systems and standards were maintained and/or improved. Provisions qua these aspects are found incorporated in Clauses 7.2, 7.3, 7.4, 7.5, 7.6, 7.8 and 7.9. The said clauses are extracted hereafter:
7 CONTINUING OBLIGATIONS OF FRANCHISOR 7.2 To provide the Franchisee with advice, knowledge and guidance relating to the management, finance, advertisements, promotion and methods of operation to be employed in connection with the System and to provide reasonable facilities for consultation with the Franchisee in connection with any problems relating to the System from time to time arising with a view of assisting and enabling the Franchisee to operate and maintain the System.
7.3 To provide the Franchisee with standard forms of contracts, soft/hard copies for use by the Franchisee in dealings with its customers.
7.4 To assist the Franchisee in the selection of trained and qualified staff for engagement in the Franchised Business.
7.5 To improve and develop the System and to make available to the Franchisee and its employees, such further training as may from time to time appear necessary in the light of such improvements or developments, subject to the Franchisee bearing the cost of any travel and subsistence involved in such further training and the salaries of its employees during the course of training or upon request as and when made by the Franchisee for further training to his staff. Further the Franchisor should be duly informed about the same.Signature Not Verified Digitally Signed I.A. No. 5541/2020 in CS (COMM) 198/2020 Page 15 of 23 By:VIPIN KUMAR RAI Signing Date:11.01.2021 10:07:14
7.6 To provide to the Franchisee the details of the Products, Services and equipment described in the Operating Manual on the terms from time to time herein specified and to assist the Franchisee in procuring such additional supplies of Products, Services and equipment as may be required by the Franchisee to commence and operate the Franchised Business and to use reasonable endeavours to negotiate and obtain from such suppliers favourable discount rates for furnishing such supplies to the Franchisee at the cost of the Franchisee.
7.8 In addition to the initial training pursuant to clause 6.4 above, to provide at the Franchisee's cost, such additional training in accordance with the Training Schedule to be decided from time to time by the Franchisor, to the staff employed by the Franchisee. The Franchisee shall bear the cost of any travel and subsistence involved in connection with such training.
Franchisor reserves the right to require as a condition of providing training, that Franchisee's employees execute confidentiality agreements in form and substance satisfactory to Franchisor.
7.9 To organize and convene by written notice to each of the Franchisees an annual conference and meetings, the agenda for which shall include discussion of any improvements to the Systems and the Franchisor's proposals for promotional activities and the general operation of the System, the Franchisee bearing the cost of any travel and subsistence expenses incurred in attending such conference or meetings.
(emphasis is mine) 36.4 How the FA was structured gives the impression that what was fundamental to the business was that the systems and standards, which were to be put in place by Ozone, were adhered to and therefore defendant no. 1 Signature Not Verified Digitally Signed I.A. No. 5541/2020 in CS (COMM) 198/2020 Page 16 of 23 By:VIPIN KUMAR RAI Signing Date:11.01.2021 10:07:14 was inter alia mulcted with obligations, the failure to discharge the same would furnish a ground for terminating the FA. A perusal of clauses 8.8, 8.9, 8.10, 8.11, 8.12 and 8.20 would demonstrate that the franchise business could only be run by defendant no. 1 as per the system and standards put in place by Ozone. For the sake of convenience, the said clauses are extracted hereafter:
8.8 To operate the Franchised Business strictly in accordance with the provisions of this Agreement and the Operating Manual and to conform in all respects and at all times with the System and Standards as may be modified from time to time and not at any time to use any additional trade name or symbol, not do or permit to be done anything which is additional to or not in accordance with the System and Standards without the prior consent in writing of the Franchisor. In the event of default or non compliance, the Franchisee must rectify the defects within one week failing which the Franchisee will be liable to pay penalty of Rs. 50,000/- per month till such defects/non compliance continue.
8.9 To ensure that the Franchised Business conforms to the Standards and System· with respect of quality, service and cleanliness, the Franchisee acknowledging that such conformity is of utmost importance to the successful operation of the Franchised Business and the protection of the goodwill attaching to the Proprietary Marks.
8.10 To comply with all advice and instructions given by the Franchisor with regard to the operation of the System.
8.11 Forthwith on commencement of the Franchised Business to engage all staff and other persons required for the successful operation of the Franchised Business with the prior written approval of the Franchisor and to ensure that all such staff who are required under the terms of Signature Not Verified Digitally Signed I.A. No. 5541/2020 in CS (COMM) 198/2020 Page 17 of 23 By:VIPIN KUMAR RAI Signing Date:11.01.2021 10:07:14 this Agreement to undergo training in the System, are trained in the System at such time and place as may be specified by the Franchisor for such purpose. The Franchisee shall bear the cost of any travel and subsistence incurred in connection therewith and the salaries of such persons. During the course of such training the Franchisor reserves the right to reject solely at its own discretion any such staff found unfit for the purpose of providing Services.
8.12 To ensure that the Persons responsible for managing the Franchised Business shall attend such further periods of training at Franchisee's cost as may from time to time be required by the Franchisor and to bear any travel and subsistence expenses incurred in connection therewith and the salaries of such Persons.
8.20 To promote and preserve the goodwill and reputation associated with the Proprietary Marks by promptly replacing or refunding the cost of any goods or Services supplied by the Franchisee which do not conform to the high Standards required by the System.
(emphasis is mine) 36.5 The record shows that, although, Ozone has asserted in paragraph 25 and 35 of the plaint that it provided the necessary technical input for setting up the franchise business as also the operation manual, requisite know-how, training to staff as well as details of vendors/suppliers, there is not a shred of evidence on record to back these averments. This becomes important given the complete denial of defendant no. 1 in her written statement concerning Ozone's assertion of having fulfilled its obligations under the FA. 36.6 When examined in the context of the aforesaid discussion, the submission of Mr. Mehta that the FA casts an absolute liability to pay the franchise fee/royalty is belied by the terms contained therein. Prima facie, Signature Not Verified Digitally Signed I.A. No. 5541/2020 in CS (COMM) 198/2020 Page 18 of 23 By:VIPIN KUMAR RAI Signing Date:11.01.2021 10:07:14 the liability of defendant no. 1 to pay fixed franchise fee/royalty was dependent on Ozone fulfilling its initial and continuing obligations as etched in the FA.
36.7 The sense one gets after reading the plaint is that the immediate provocation for Ozone to approach the court was its apprehension that defendant no. 1 was selling or assigning the franchise business to a third- party contrary to the terms of the FA. This aspect also emerges upon a perusal of the e-mail dated 25.06.2020, transmitted by Ozone's advocate, to defendant no. 1. In this e-mail, a grievance was made on behalf of Ozone that defendant no. 1 had decided to handover the premises (from where the franchise business was run) to defendant no. 2 i.e. the lessor, only after she had received an advance copy of the instant suit action on 24.06.2020. This allegation was, however, denied by defendant no. 1's advocate vide a return mail dated 28.06.2020. Via the return mail, it was conveyed on behalf of defendant no. 1 that the discussion concerning the takeover of the franchise business by Ozone was going on for the past 6 months. 36.8 Going further, the documents placed on record by Ozone would show that although photocopies of monthly invoices spanning the period 18.04.2017 up until 01.01.2019 (excluding invoices for July and August 2017) and for March 2020 and June 2020 are on record, most invoices bear no indication that they had been received by defendant no. 1. I must indicate, though, at this juncture, that while defendant no. 1 has in paragraph 9 of the written statement denied the receipt of invoices, in paragraph 18 of the written statement it is averred by her that she is not aware as to the reasons why the alleged "invoices" towards franchise fee/royalty have been issued. Defendant no. 1 in the very same paragraph has gone on to say that Signature Not Verified Digitally Signed I.A. No. 5541/2020 in CS (COMM) 198/2020 Page 19 of 23 By:VIPIN KUMAR RAI Signing Date:11.01.2021 10:07:14 she denies the invoices in their entirety. The denial of the invoices is reiterated by defendant no. 1 via her affidavit of admission and denial of documents dated 14.08.2020. Therefore, this may require a further probe along with further defences set up by defendant no. 1. 36.9 Ozone, on the other hand, has not helped its cause as it has not placed on record invoices for the period spanning between February 2019 and February 2020; besides invoices for April and May 2020.
37. While Ozone has placed on record copies of letters and e-mails that are said to have been served on defendant no.1 concerning payment of outstanding franchise fee/royalty which included past dues as well, there are unexplained periods qua which there are no communications on record. The first communication concerning payment of dues is a letter dated 14.11.2017 which is followed by three letters dated 18.01.2018, 22.03.2018 and 28.06.2018. Thereafter, the next reminder-letter is, purportedly, sent on 28.02.2019 followed by one letter and email dated 26.02.2020 and e-mails dated 02.03.2020 and 10.05.2020.
38. While it is not suggested that reminders ought to have been issued by Ozone every other day - long gap in communication, especially, between June and December 2018 and between February 2019 and February 2020 may require inquiry given the defence set up by defendant no. 1 that Ozone had waived payment of franchise fee/royalty.
39. What is also required to be noted is that none of the invoices made any reference to the interest/penalty amount which according to Ozone was payable at the rate of Rs.10,000/- per month. I may also note that while in the email 02.03.2020, towards outstanding franchise fee/royalty a sum of Rs.32,75,000/-(exclusive of GST and Service Tax amounting to Signature Not Verified Digitally Signed I.A. No. 5541/2020 in CS (COMM) 198/2020 Page 20 of 23 By:VIPIN KUMAR RAI Signing Date:11.01.2021 10:07:14 Rs.5,82,750/-) was demanded for the period spanning between April 2017 to February 2020. In the email dated 10.05.2020 the outstanding dues towards franchise fee/royalty for the period April 2017 to May 2020 were quantified at Rs.35,75,000/- (exclusive of GST and Service Tax quantified at Rs.5,82,750/-). In both e-mails, the interest/penalty amount was quantified at Rs.56,20,000/-. The total amount demanded in the email dated 02.03.2020 was Rs.94,77,750/- while the total demand in the email dated 10.05.2020 was Rs.97,77,750/-. What is not clear that even though the franchise fee/royalty increased from Rs.32,75,000/- to Rs.35,75,000/- as the latter also covered the months of March to May 2020, the GST and Service tax amount continues to remain quantified at Rs. 5,82,750/-.
40. If one were to keep in mind the aforesaid aspects which have emerged from the record, it would be evident that defendant no. 1 has raised issues which would require a trial qua the claim set up by Ozone.
41. Apart from anything else, what comes to fore, upon a meaningful and careful reading of the pleadings filed by defendant no. 1 is that, she, in effect, is raising a defence of waiver of franchise fee/royalty or, in the very least, a plea of mitigation. A perusal of the pleadings filed by defendant no. 1 would show that she seeks to assert that Ozone ought to have terminated the agreement if it was not inclined to waive the recovery of franchise fee/royalty to mitigate its losses. These assertions, to my mind, at this juncture, raise not only a possibility of the defence succeeding but also appear to be bona fide and genuine for the reason that Ozone has not been able to explain, at least at this stage, as to why, firstly, it did not press for claiming franchise fee/royalty between September 2016 and March 2017 and secondly, it did not terminate the FA despite failure on the part of Signature Not Verified Digitally Signed I.A. No. 5541/2020 in CS (COMM) 198/2020 Page 21 of 23 By:VIPIN KUMAR RAI Signing Date:11.01.2021 10:07:14 defendant no. 1 to pay franchise fee/royalty for three consecutive months in consonance with clause (iii) of Schedule D read with clause 18 of the FA.
42. All that Ozone did over 3 (three) years was to serve upon defendant no.1 invoices and issues letters/emails demanding payment of franchise fee/royalty (assuming, for the moment that all the invoices and communications were served on defendant no.1) without taking any steps towards cutting its losses.
43. On the other hand, defendant no.1, has asserted that Ozone did not discharge a single obligation as provided in Clause 6 and 7 of the FA.
44. Thus, taking an overall view of the pleadings and material presently placed on record, I am of the view that evidence is required to be placed on record by Ozone to demonstrate, firstly, that it fulfilled its obligations under the FA. Secondly, as to why Ozone did not take steps to mitigate its losses once defendant no. 1 had defaulted in payment of royalty fee for three consecutive months; conduct which seems inexplicable to any reasonable man of commerce. Defendant no. 1, on the other hand, would have to establish a waiver of dues by Ozone.
45. Furthermore, in my opinion, an opportunity needs to be given to parties to demonstrate as to whether or not they have discharged their respective obligations as stipulated in the FA.
46. I may also indicate that prima facie the claim for payment of interest/penalty at the rate of Rs.10,000/- per month at this stage is suspect unless Ozone can demonstrate that it suffered an injury which resulted in damages. The damages, if at all payable, can only be granted to the extent they are reasonable. In the plaint, there are no such assertions made.
47. Furthermore, as noticed hereinabove, the claim for a penal amount of Signature Not Verified Digitally Signed I.A. No. 5541/2020 in CS (COMM) 198/2020 Page 22 of 23 By:VIPIN KUMAR RAI Signing Date:11.01.2021 10:07:14 Rs.56,20,000/- seems to be completely unsustainable at this juncture.
48. In nutshell, in my view, the case needs to proceed to trial as there are aspects which would, perhaps, require oral evidence. In other words, given the gaps in the material, presently, available with the Court, it would not be appropriate to render a summary judgement in favour of Ozone.
49. Therefore, for the foregoing reasons, the application is disposed of with the following directions:
(i) Defendant no. 1 will file an affidavit setting forth therein the details of its unencumbered assets worth Rs. 35,75,000/-.
(ii) In case, defendant no. 1, is desirous of selling or disposing of assets detailed out in her affidavit, prior permission of the Court would be taken.
(iii) The aforementioned affidavit will be filed within three weeks from the date of receipt of the copy of this order.
CS(COMM) 198/2020
50. List before the Joint Registrar (Judicial) on 28.01.2021 for exhibiting the documents.
51. List before the Roster Bench, for framing of issues, on 18.03.2021.
RAJIV SHAKDHER, J JANUARY 08, 2021 Click here to check corrigendum, if any Signature Not Verified Digitally Signed I.A. No. 5541/2020 in CS (COMM) 198/2020 Page 23 of 23 By:VIPIN KUMAR RAI Signing Date:11.01.2021 10:07:14