Agreements in restraint of trade

1) Introduction:

As per section 27 of the Indian Contract Act, 1872, An agreement by which any person is stopped from practice a lawful profession, trade or business then it is void. An agreement which unnecessarily reduce the freedom of a person to trade is against public policy. Stopping a person from carrying on a trade generally aims at avoiding competition and has monopolistic tendency and this is both against an individual’s interest and also the interest of the society and on that ground such restraints are discouraged by law.

This section 27 which declares an agreement in restraint of trade as void does not allow any distinction between a total or partial restraint. Thus, when the agreement imposes a total restraint e.g. it says that C shall not carry on a trade anywhere in the country during his lifetime or it imposes only a partial restraint requiring C not to trade within a certain area or for a certain duration the agreement is not valid.

2) Exceptions for an agreement in restraint of trade:

1. Sale of Goodwill:

When there is sale of business along with its goodwill by a person then the seller of the business can make an agreement with the buyer about not to carry on the business in competition with the buyer. Such an agreement if imposes a reasonable restriction on the seller’s right to carry on the business is valid in India and England.

Exception 1:

Saving of agreement not to carry on business of which goodwill is already sold. One who sells the goodwill of a business may agree with the buyer to abstain from carrying on a similar business within specified local limits so long as the buyer or any other person deriving title to the goodwill from him or her carried on a like business in this provided that such limits appear to the court regard being had to the nature of the trade or business. An agreement by a person who sells the goodwill of his business not to carry on a similar business within specified local limits so long as the buyer carries on a similar business is valid provided that the restrictions are reasonable. When a person purchases the goodwill of the business or trade, he or she pays for the right to carry on a certain type of business or trade in exchange for an express or an implied promise by the seller not to carry on that type of business or trade. It will be opposite to the spirit of the contract of sale of goodwill if the seller of the goodwill who has received money for the same starts the business in competition with the buyer one more time. If the object of the agreement is to protect the right of the buyer of the goodwill the restraint is valid. If the restraint merely aims at avoiding competition the covenant would be invalid.

2. Exception under the Indian Partnership Act:

 As per section 27 of the Indian Contract Act 1872, that an agreement in restraint of trade is in valid, it is an agreement which can be validly made by the partners in four situations mentioned in:

i. section 11 (2) of Indian Partnership Act, which permits the partners of a partnership firm to make a contract which provides that a partner shall not carry on any other business other than that of the firm while he is a partner in a firm. The motive of such an agreement is that the partners will not carry on their own business ignoring the partnership business. Such agreement is valid.

ii. section 36 (2) of Indian Partnership Act, an agreement may be made between the outgoing partner and the remaining partners who continue the business of the firm. An outgoing partner is paid his share of the goodwill of the firm and it is reasonable that he agrees that he will not carry on a business similar to that of the firm. Such an agreement is valid only if the restrictions as relates time for which and the area within which  a similar business is not to be carried on are reasonable.

iii. Section 54 of Indian Partnership Act, which contains partners may in anticipation of the dissolution of the firm make an agreement that some or all of them will not carry on a business similar to that of the firm within a specified period and specified local limitations. If the limitations imposed are reasonable then the agreement is valid.

iv. Section 55(3) of Indian Partnership Act, when on the dissolution of the firm, firm’s goodwill has been sold. Thus, there may be an agreement by any partner who has received consideration on the sale of goodwill of the firm in favour of the buyer of the goodwill that such partner who has received consideration on the sale of goodwill of the firm in favour of the buyer of the goodwill that such partner shall not carry-on similar business for a certain duration of time or within specified local limits such an agreement is valid if the restrictions imposed are reasonable.

3. Restraint by a contract of service:

An agreement of service where an employee agrees that he or she will serve a particular employer for a certain period of time and that he or she will not serve anybody else during that certain period of time is a valid agreement. The employer has an exclusive right to avail the services of his employee during the period of employment and therefore the restraint on the employee to serve somebody else at the same time is reasonable. This agreement is not hit by the doctrine of restraint of trade. Although according to the Specific Relief Act, 1963 a contract to serve a particular person is not capable of being specifically enforced yet the negative deal saying that the employee will not serve anybody else is valid and legally enforceable by law.

4. Trade Combinations:

Sometimes the traders or manufactures combine together to remove competition as between themselves and make agreements by fixing minimum price, resulting the supply of goods and putting profits in a common pool and the dividing the same amongst oneself. Such agreements are not void on the ground of that it is opposed to public policy but also, they are deemed to be in restraint of trade.

5. Solus Agreement:

At times, the seller or the manufacturer of a certain product may agree that he or she will supply the whole of his or her product to a particular single buyer only. Similarly, a buyer may agree that he will purchase all his requirements of certain commodity from a particular seller or manufacturer only. These agreements are called ‘solus agreements.’ In this case one party agrees to deal only with the other party. They are  known to be  ‘exclusive dealing agreement’. So long as the object of the agreement is the beneficial to the parties to the contract rather than monopolising the trade, there is nothing unreasonable in it and the agreement is not considered to be in restraint of business. Thus, if the seller agrees to supply of the goods produced by him to a certain buyer and to nobody else and the buyer also in turn undertakes to accept buyer and to nobody else and the buyer also in turn undertakes to accept the whole of the quantity produced by the seller the agreement is valid as per the law.

  • Exceptions where solus agreements are noy valid:

1. When the buyer does not agree to purchase the whole quantity, he can not restrain the seller from selling his surplus to others.

2. When the object of the agreement is to corner goods or to monopolise trade or the restraint is for an unduly long time.

3) References:

1. https://blog.ipleaders.in/agreements-in-restraint-of-trade-marriage-and-legal-proceedings/

2. https://www.linkedin.com/pulse/agreements-restraint-trade-abhijeet-negi/

3.https://www.toppr.com/guides/business-laws/indian-contract-act-1872-part-ii/expressly-void-agreements/

4. https://en.wikipedia.org/wiki/Restraint_of_trade

5.http://www.legalservicesindia.com/article/1753/Exceptions-of-agreement-in-restraints-of-trade-with-reference-to-Indian-and-English-case-laws.html

Aishwarya Says:

I have always been against Glorifying Over Work and therefore, in the year 2021, I have decided to launch this campaign “Balancing Life”and talk about this wrong practice, that we have been following since last few years. I will be talking to and interviewing around 1 lakh people in the coming 2021 and publish their interview regarding their opinion on glamourising Over Work.

IF YOU ARE INTERESTED IN PARTICIPATING IN THE SAME, DO LET ME KNOW.

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The copyright of this Article belongs exclusively to Ms. Aishwarya Sandeep. Reproduction of the same, without permission will amount to Copyright Infringement. Appropriate Legal Action under the Indian Laws will be taken.

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In the year 2021, we wrote about 1000 Inspirational Women In India, in the year 2022, we would be featuring 5000 Start Up Stories.

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