CRITICAL ANALYSIS OF SECTION 27 OF INDIAN CONTRACT ACT

INTRODUCTION

This blog is about Section 27 of the Indian Contract Act and the relevant case laws also critically analyzing the same by finding its various loopholes and comparison to English Law. The original draft that was ready by the Third Law Commission of British Asian Nation fashioned in 1861 bestowed the Draft Contract Act in 1866. The act was passed in 1872 and is predicated on the lines of English Law. As per Section 2(e)[1] of the Indian Contract Act, 1872, an agreement is outlined as a promise or guarantees created in exchange for a lawful thought and Section 2(g)[2] stipulates that agreement don’t seem to be enforceable by law or that area unit unremarkably called unlawful area unit void. “Every agreement by that a person is restrained from conducting a lawful profession, trade, or business of any kind, is thereto extent void,” says Section 27 of the constant statute.”[3]

“This section is based on the old English idea of trade restraint that prevailed in ancient times, as outlined in Field’s Draft Code for New York (but not enacted). The section was written with the objective to regulate the common law because “modern judgments have authorized contracts in restraint of trade to a worrisome level,” and the makers of that Code drafted it with that goal in mind.”[4] In general, the clause declares all trade restrictions agreements void pro tanto. This can be considered as a violation of our right to trade and business as vested under Article 19 (1) (g). But there also are certain exceptions to it under which we can see that the agreements are valid even under the restraint of trade be it partial or absolute.

ANALYSIS

The first time when the need for interpretation of this section rose was in the case of Madhub Chander v Raj Coomar Doss[5] in which the Judge referred to an English case clearing the distinction between absolute restraint and partial restraint and also added that any case that falls within the ambit of Section 27 will be considered void unless in case of its exceptions (to be discussed further). He further added an important thing in his judgment that led to the enforcement of this doctrine clearing all its ambiguities in India stating that the restraint in carrying out trade or business does not have to be absolute but can be partial also following the facts. Now, there comes another gap which is how can we establish the validity of the restraint. This is assessed in four stages (1) whether the restraint is only in the view to attract the doctrine (2) securing the legitimate interest of the covenantee (3) Reasonability of covenant (4) Reasonability concerning (a) both the parties & (b) interest of the public at large.

EXCEPTIONS

There are two broad categories of exceptions namely (a) Statutory provisions (b) Judicial Interpretations. Under the first category there are two types of exceptions, (i) Goodwill- In this. the buyer of the goodwill of the trade restricts the seller not to engage in the similar trade within certain boundaries in view of the fact that the old customers might still want to buy commodities from the old seller only, so that would be unfair on the side of the buyer of the goodwill. This is for the purpose of protecting the interest of the buyer and not because of the competition perspective, as viewed in the case of Vancouver Malt & Sale Boring Co. vs Vancouver Breweries Ltd[6]. (ii) Partnership- There are four provisions related to restraint of trade in Partnership Act under Section 11(2)[7] according to which partners agree that none of them will conduct any other business than the firm’s, Section 36(2)[8] which restrains the resigning or outgoing partner to trade in specific boundary, for a defined time and not to indulge in the same business, Section 54(3)[9] restrains the partners business rights at the time of the dissolution of the business and Section 55(3)[10] defines the goodwill clause. Example- Firm Daulat Ram v. Firm Dharm Chand[11]. Now, under the second category namely judicial interpretations exceptions, there are three exceptions-

(i) Restraint by constraint of trade- Under this, the agreements of service restrict the employees during their course of employment preventing them to work somewhere else for the tenure of their agreement. This is often considered a negative covenant as in the case of India Charlesworth vs Mac Donald[12].

(ii) Trade Combinations- In this format, traders or manufacturers form groups or unions and regulate the business or market of that commodity according to their terms and for the benefit of the public at large, like if one commodity has excess supply, so the price drops drastically because of its surplus, so in a situation sellers may form a union and ask everyone to stop the supply of the commodity in the market so as to create an artificial shortage in view to hike the price of the commodity not the purpose of hoarding, just to maintain equilibrium. Example- Municipal Committee, Khurai v Firm Kaluram Hiralal[13].

(iii) Solus Agreement – It comes in the frame when the situation arises that the manufacturer or the seller wants a distributor or a retailer who should just buy and deal with the former’s goods exclusively and sells it to the public or traders at large as in the case of Mackenzie v Striramiah, the contract required the company to sell all of its salt for the next five years.[14]

According to the Indian Contract Act, 1872 what we have read so far and analyzed is that all the contracts in restraint of trade whether partial or absolute are considered to be void unless they fall under any of the two broad categories of exceptions as aforementioned namely to be Statutory provisions and Judicial interpretations. In any such case, they can be held valid as per the facts of the case.

COMPARISON WITH ENGLISH LAW

While the English law states that all the contracts in restraint of trade for both absolute and partial are prima facie void. For the restraint to hold validity in the eyes of law there must be “reasonability” is interpreted by the English Law. We can observe this fact in the cases like Nordenfelt vs Maxim Nordenfelt Guns and Ammunition Co Ltd[15] in which the ‘reasonable’ word was defined and in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd[16] the Learned Judge stated that the categories and classifications of the factors that can constitute reasonability should remain dynamic and cannot be restricted to certain particular provisions only. This is a great dissimilarity between both the laws as also mentioned by two of the learned Indian Judges namely Mookerjee and Carnduef JJ in the case of Sk Kalu vs Ram Saran Bhagat[17] in which they said that as observed in the Nordenfelt case “the rule as embodied in S. 27 has a surprising resemblance to the most recent phase of English dominance on the subject.”[18]

CONCLUSION

Lastly, for the application of restraint to be held legitimate in the eyes of law, the onus of proof is on the party supporting the contract or applying the restraint on another person that his interests are reasonable and duly necessary to protect his trade or business and does not affect the public at large. From all the things we can conclude and sum up all as to be the fact that though Section 27 was inspired and taken from English Law only, still it is very much varied and dissimilar in terms of its application. In the present scenario, the scope of it in ICA is very narrow as compared to English Law. In my opinion, there is a certain need to set new precedents and look broadly into different factors that may constitute reasonability in restraint of trade and not restrict ourselves to only the exceptions written in the bare act.

Author(s) Name: Parnika Agarwal (Symbiosis Law School, Noida)

References:

[1] Indian Contract Act § 2 (1872)

[2] Indian Contract Act § 2 (1872)

[3] Indian Contract Act § 27 (1872)

[4] Pollock & Mulla, The Indian Contract and Specific Relief Acts (14th ed. 2012)

[5] Madhub Chander v. RajCoomar Doss [1874] Beng LR 76

[6] Vancouver Malt & Sale Boring Co. v. Vancouver Breweries Ltd, Privy Council [1934].

[7] Indian Partnership Act, § 11 (1932).

[8] Indian Partnership Act, § 36 (1932).

[9] Indian Partnership Act, § 54 (1932).

[10] Indian Partnership Act, § 55 (1932).

[11] Firm Daulat Ram v. Firm Dharm Chand, (1934).

[12] India Charlesworth v. Mac Donald, (ILR 1899).

[13] Municipal Committee, Khurai v. Firm Kaluram Hiralal, (AIR 1944).

[14] Mackenzie v. Striramiah, (ILR 1890).

[15] Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co Ltd, (House of Lords 1894).

[16] Esso Petroleum Co Ltd v. Harper’s Garage (Stourport) Ltd, (1968).

  [17] Sk Kalu v. Ram Saran Bhagat, [1909].

[18] Avtar Singh, Law of Contract and Specific Relief Act (12th ed. 2017).