Agreement in Restraint of Trade

Introduction: 

An agreement that restricts someone from doing a lawful trade or business either wholly or partly is void as it takes away one’s right to trade. The agreement that restraints doing trade in a particular area or for a period of time is also void. Although, there are some exceptions, where one can be restrained from a trade or business.

Void agreements:

According to section 27 of the Indian Contract Act, 1872 an agreement that restraint a lawful trade, business or profession is void. When the agreement restraint from doing a trade in a specific place or locality, or for a certain period of time is void too.

In Madhub Chander v. Rajcoomar Dass, both parties of the contract run businesses in the same locality. The defendant made a contract with the plaintiff that if he closed his business from here he will pay the former a sum of amount. The plaintiff did so but the defendant did not pay him the amount. The plaintiff filed a suit against him. The court held that the contract is a void one hence the plaintiff is not liable to recover any money.

In Nur Ali Dubash v. Abdul Ali, the court concluded that the agreement which restrain partially from doing a trade is void.

If in an agreement only one part of it imposes restraint, only the part to the extent of restraint is void.

In Har Bilas v. Mahadeo Prasad, it was recognized that the part of the contract that restrained the defendant from selling his surplus silica sand is the only void part contract, the whole of the contract is not void.

Exceptions:

Only certain exceptions are recognized by some statute or precedent, apart from any agreement which restrains from doing a trade or business is void.

  • When a person sold the goodwill of the business, he may be restrained by the buyer to carry on the business.

In Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co.it was recognized by the court that the condition which restricts the defendant from carrying on business is valid. However, the condition to forbid engaging in competition is void.

  • An agreement between the employer and employee, where the employee will serve the employer only for a certain period of time, is a valid contract.

In the case of Charlesworth v. Mac Donald, the plaintiff agreed to practice under a physician and not to practice anywhere else for this period. He left the job under the defendant and started his own practice. It was considered that the plaintiff should be restrained from practicing anywhere during the period of the agreement.

  • If the buyer is agreeing to buy the total quantity, he can restrain the seller to sell the product to any other party. This type of agreement is known as an exclusive dealing agreement.

The same was held in the case of Har Bilas v. Mahadeo Prasad.

  • When the trader or manufacturer made a contract to share their profit to reduce the competition, the agreement is valid.

Fraser & Co. v. The Bombay Ice Manufacturing Co. made a contract to share their profit, which they by selling the ice. In this, it is concluded that the agreement to share profit is valid.

Conclusion:

The agreement that restraint someone from doing a trade or business is void. But in an agreement where a party sold the goodwill of their business, he may be restricted by the buyer of goodwill. A restriction may be imposed by a service provider on the employee or a party who is buying the whole of the products from a manufacturer. An agreement that bound the parties to share the profit between the parties of the contract is not void.

Reference:

Books:

Indian Contract Act, 1872

Law of Contract Part I by R.K.Bangia; Edition 2006

Cases:

Madhub Chander v. Rajcoomar Dass, 1874 14 BLR 76

Nur Ali Dubash v. Abdul Ali, 1892 19 Cal. 765

Har Bilas v. Mahadeo Prasad, AIR 1931 All 539

In Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co., 1894 AC 181

Charlesworth v. Mac Donald, ILR 23 Bom. 103

Fraser & Co. v. The Bombay Ice Manufacturing Co., ILR 1904 29 Bom. 107

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