An agreement for partnership containing a clause that a partner shall not carry on any business other than that of the firm while he is a partner is void in view of section 27 of the Indian Contract Act, 1872.

Question: An agreement for partnership containing a clause that a partner shall not carry on any business other than that of the firm while he is a partner is void in view of section 27 of the Indian Contract Act, 1872. [Gujarat JS 2020]

Find the answer to the mains question only on Legal Bites. [An agreement for partnership containing a clause that a partner shall not carry on any business other than that of the firm while he is a partner is void in view of section 27 of the Indian Contract Act, 1872.]

Answer

Section 27 of the Indian Contract Act,1872 lays down the provision on Agreement in restraint of trade, void. It states, “Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void”.

“This section states that any agreement which obstructs any person from exercising his right to undertake any profession or trade, then that agreement shall be considered as a void agreement”.

There were two exceptions to this rule: –

Sale of goodwill

This principle states that the person when one person sells goodwill of his business to another person, then that person can impose certain restrictions to the seller like restricting him from carrying business of similar nature in the same locality.

The only caveat regarding this is that the agreement should be reasonable according to the nature of the business. The whole point of making this exception is to protect the interest of a purchaser of goodwill. If this provision is not provided then it might happen that the seller after selling his goodwill pens to another shop and that will in effect attract all the customers from the buyer of the goodwill.

Partnership Act

There are three provisions in the Partnership Act that validate agreements in restraint of trade.

Section 11 enables partners during the continuance of the firm to restrict their mutual liberty by agreeing that none of them shall carry on any business other than that of the firm.

Section 36 enables them to restrain an outgoing partner from carrying on a similar business within a specified period or within specified local limits. Such agreement shall be valid if the restrictions imposed are reasonable. A similar agreement may be made by partners upon or in anticipation of dissolution by which they may restrain each other from carrying on a business similar to that of the firm.

Section 54 of the Partnership Act states that in the event of the dissolution of the partnership, a similar agreement may be entered into by all the partners by which they may restrict themselves from opening business of a similar nature to that of the dissolved partnership firm.

It is necessary for the validity of a restraint under Section 36 or 54 that—

1. 1. The agreement should specify the local limits or the period of restraint, and
   2. The restriction imposed must be reasonable.

In the case of Hukmi Chand v. Jaipur Ice and Oil Mills, [AIR 1980 Raj 155], the court held that an agreement by a retiring partner not to carry on similar business on the land belonging to him and adjoining the factory of the firm has been held to be reasonable and binding on the persons buying the land from him.

Thus, applying the above provisions of the Partnership Act to the present case at hand, where an agreement for partnership containing a clause that a partner shall not carry on any business other than that of the firm while he is a partner, the restraint imposed on the trade comes under the second exception to Section 27 of The Indian Contract Act,1872 and hence is not void in view of Section 27 of the Indian Contract Act, 1872.

---

Law of Contract Mains Questions Series: Important Questions for Judiciary, APO & University Exams

1. Law of Contract Mains Questions Series Part-I
2. Law of Contract Mains Questions Series Part-II
3. Law of Contract Mains Questions Series Part-III
4. Law of Contract Mains Questions Series Part-IV
5. Law of Contract Mains Questions Series Part-V
6. Law of Contract Mains Questions Series Part-VI
7. Law of Contract Mains Questions Series Part-VII
8. Law of Contract Mains Questions Series Part-VIII
9. Law of Contract Mains Questions Series Part-IX
10. Law of Contract Mains Questions Series Part-X