Agreement in restraint of trade is void”. Discuss.

Question: “Agreement in restraint of trade is void”. Discuss. [JJS 2001]

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Answer

Section 27 of The Indian Contract Act, 1872 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. The freedom of trade and commerce is a fundamental right given by the constitution under Art 19(1) [g].

So just like legislature can’t take away any individual’s right to undertake any profession similarly no individual can take the right through the medium of any agreement. The basic principle of law is that every person shall have the freedom to work for his self-fulfilment and no contract shall deprive him of his right & liberty to work for himself.

In the case of Madhub Chander v. Raj Commar [(1874) 14 Beng LR 76], the plaintiff and the defendant were the rival business. The defendant wanted to reduce the competition offered a certain amount of money to the plaintiff so that he would close the business in that locality. So the plaintiff agreed to do so and once he has closed his shop that the defendant declined to pay any sort of money.

So plaintiff has filed suit against the defendant for the recovery of the amount stating this case won’t come under Section 27 of the Act as the restraint was only partial as he was asked to stop business in one locality only where else the Act talks about complete restraint.

The aforesaid was the first case in which the scope of the section came up for consideration. The court observed that the words “restrained from exercising a lawful profession, trade or business”, do not mean an absolute restriction, and are intended to apply to a partial restriction, a restriction limited to someplace. The court held that the agreement was void and said that the restraint as stated in the section doesn’t always mean absolute restraint but also implies partial restriction a restriction limited to a place.

The learned judge drew support from the use of the word “absolutely” in Section 28, which deals with the restraint of legal proceedings. As this word is absent from Section 27, therefore, he concluded, that it was intended to prevent not merely a total restraint but also a partial restraint. This interpretation of the section has been generally accepted. “The section has abolished the distinction between partial and total restraints of trade. Whether the restraint is general or partial, unqualified or qualified, if the agreement is in the nature of a restraint of trade, it is void.”

There are 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 3 provisions in the partnership Act which allows for the agreement which restrains the trade. Section 11 of the partnership Act, states that none of the partners shall carry on any business until the continuity of the partnership.

Section 36 of The Partnership Act allows the remaining partners to restrict the outgoing partner from opening business of similar nature within a specified locality provided that the restrictions are reasonable.

Similarly, 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.

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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