Examine the validity of the following agreement: A enters into an agreement with B that he will not carry on the business of medicine within his entire area mentioned. Is the agreement enforceable against B?

Question: Examine the validity of the following agreement: A enters into an agreement with B that he will not carry on the business of medicine within his entire area mentioned. Is the agreement enforceable against B? [BJS 2017]

Find the answer to the mains question of the Law of Contract only on Legal Bites. [Examine the validity of the following agreement: A enters into an agreement with B that he will not carry on the business of medicine within his entire area mentioned. Is the agreement enforceable against B?]

Answer

Freedom of trade and commerce is a right protected by the Constitution of India. Just as the Legislature cannot take away individual freedom of trade, so also the individual cannot barter it away by agreement.

“The principle of law is this: Public policy requires that every man shall be at liberty to work for himself, and shall not be at liberty to deprive himself or the State of his labour, skill or talent, by any contract that he enters into.”

“Every man should have unfettered liberty to exercise his powers and capacities for his own and the community’s benefit.”

Section 27 of the Indian Contract Act, therefore, declares in plain terms that: 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 an agreement, which restrains anyone from carrying on a lawful profession, trade or business, is void to that extent with the main reason behind it that agreements of restraint are unfair, injustice as they impose an undue restriction on the personal freedom of a contracting party.

However, as an exception appended to the section, if a party sells his goodwill to another he can agree with the buyer that he will not carry on a similar business within the specified local limits.

Under the provision, all restraints are covered whether partial or general. The first landmark case is Madhub Chander v. Raj Coomar [(1874) 14 Beng LR 76] in which the scope of the section came up for consideration before the Calcutta High Court. The plaintiff and the defendant were rival shopkeepers in a locality in Calcutta. The defendant agreed to pay a sum of money to the plaintiff if he would close his business in that locality.

The plaintiff accordingly did so, but the defendant refused to pay. The plaintiff sued him for the money contending that the restraint in question was only partial as he was restrained from exercising his profession only in one locality and that such restraints had been upheld in English law. Couch J, however, held the agreement to be void and laid down: 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 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.”

The Supreme Court of United States, in the leading decision in Standard Oil Company v. the United States [221 U.S. 1 (1911] that as a ‘rule of reason’ that the term “restraint of trade” means that it meant at common law and in the law of the United States when the Sherman Act was passed and it covered only those acts or contracts or agreements or combinations which prejudice public interest by unduly restricting competition or unduly obstructing the due course of trade or which injuriously restrain trade either because of their inherent nature of effect or because of their evident purpose.

Thus, applying the provision and reason behind the same to the present case at hand, an agreement between A and B that he will not carry on the business of medicine within his entire area mentioned, is void by virtue of section 27 of the Indian Contract Act and the agreement is not enforceable against B.

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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