Agreement in restraint of trade means the trade in which one party agrees with the opposite party to restrict their right to perform a job or profession with other persons who are not the trade parties without the explicit authorization of this party. Section 27 of the Indian Contract Act says that agreements that restrict of trade are null and invalid in India. Section 27 says that any contract that debars the other person to exercise their lawful profession, trade, or business of any manner is void. According to Article 301 of the Constitution of India, Freedom of Trade and Commerce is the right of every individual. The Indian Constitution protects the freedom of trade and commerce as a fundamental right. “Every man should be free to develop his abilities and capacities for the benefit of himself and the community.”
Madhub Chunder v. Rajcoomar Doss, 1874 is the first case before the Calcutta High Court in which the extent of the provision had to be determined. In this case, the court said that restraining from exercising a lawful profession, trade, or business does not mean absolute restriction, and the court held the agreement void between the parties. The plaintiff and defendant were rival traders. The defendant consented to give the plaintiff a sum of money to close his business in that area. As a result, the plaintiff did so, but the defendant refused to pay. In its ruling, the court ruled that the agreement was void. The usage of the term “absolutely” in Section 28, which deals with the restraint of legal procedures, was cited by the court as evidence.
Consequently, the court found that because this word is lacking from Section 27, it was intended to restrict a whole restraint and a partial restraint. In general, this interpretation of the section is adopted. “Partial and total trade restraints are no longer distinguished in this section, which eliminates the distinction.”
The House of Lords in England considered the law relating to trade constraint in Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd.
Inventor and gun and ammunition manufacturer sold their goodwill to a buying company that agreed: (1) not to practise the same trade for 25 years; and (2) not to engage in any business competing or liable to compete in any way with the company’s business at that time. Another gun and ammunition maker hired him, and the company could bring in a significant amount of money. The first half of the agreement was legitimate since it was essential to protect the purchaser’s interest, the court found. However, the rest of the covenant, which barred him from competing with the corporation in any business that the company might pursue, was unreasonable and null and void.
However, the Indian judicial system is limited to determining whether or not the action restrained falls under Section 27’s ambit. For example, the high court in Kutch declared unenforceable, under Section 27,65, an agreement that granted a priest exclusive rights to perform religious services in a village, even though it is doubtful that the words “profession, trade, or business” used in the section were intended to cover religious services.
STATUTORY EXCEPTIONS TO AGREEMENT IN RESTRAINT OF TRADE
- Sale of Goodwill – In the case of Cruttwell v Lye, 1810, Lord Eldon said that the goodwill is sold to the other party is nothing more than the possibility that the old customer will return to the same old place. In Ann Trego v George Stratford Hunt, 1869, Lord Macnaghten said that it is the full benefit of the status of association of the company. These opinions were also followed in the case of Parasullah Mullik v Chandra Kanta Das, 1917 by the Calcutta High Court. The main purpose is to uphold the interest of the buyer who has purchased the goodwill. It is hard to think that the vendor might open a shop to attract all the customers near the place. Therefore, it is vital to have some restrictions on the sellers. The limit of these restraints needs to be specified in the agreement between the parties.
- Partnership Act– According to the case of Firm Daulat Ram v Firm Dharm Chand, 1934, Section 11 of the Partnership Act says that there should be a restriction on the freedom of partners for carrying out business other than their own company during their jobs in a company.
Based on Section 36 and 54 of the Partnership Act, the period of the restriction of the local limits should be specified in the agreements and based on Krisnarao v Shankar,1954, these restrictions must be reasonable.
JUDICIAL INTERPRETATIONS TO AGREEMENT IN RESTRAINT OF TRADE
- Trade Combinations – In the case of Kores Mfg Co. Limited v. Kolok Mfg Co Ltd, 1959, the agreement was held void, which prohibited the employment by any company of an individual who has done the work for them based on that the employee may have got the secret knowledge of the company.
- Exclusive Dealing Agreements – If the manufacturer or producer wants to promote his goods employing a specific distributor, the latter will not deal with any other manufacturer’s products. In Shaikh Kalu v Ram Saran Bhagat, 1909, the court held the agreement void based on Section 27 of the Indian Contract Act.
- Restraints Upon Employment – Since the employee is provided with an “objective comprehension” of trade secrets and customer names, service agreements frequently include harmful restrictions restricting the employee from working in a different part of the contract time. This agreement may or may not be accepted by the judicial courts. In Niranjan Shankar Golikari v. Century Spinning & Manufacturing Company Limited, 1967, the court held the agreement to restrain validly. In this case, the defendant was hired for five years based on the deal that he will not work in a different place even if he leaves before five years. It said that Section 27 of the Indian Contract Act is not violated when a provision from an agreement restricts the employee from working in any other place for the duration of time for which the agreement was made.
Suraj Agarwal (Student, Bennett University, Greater Noida)
Aradhya Kumari (Student, NMIMS, Navi Mumbai)