Discuss the law relating to contracts in restraint of trade in India and compare it with the English law on the subject. 'A' firm of lawyers in Delhi when employing a young advocate 'B' asks him to execute an agreement undertaking not to practice as an advocate in Delhi for all his life. Is this agreement binding?

Question: Discuss the law relating to contracts in restraint of trade in India and compare it with the English law on the subject. ‘A’ firm of lawyers in Delhi when employing a young advocate ‘B’ asks him to execute an agreement undertaking not to practice as an advocate in Delhi for all his life. Is this agreement binding? Decide giving reasons and citing decided cases. [RJS 1970]

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Answer

Section 27 of the Indian Contract Act, 1872 clearly states that every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, is to that extent void.

However, restraints during employment are generally allowed as agreements of service often contain negative covenants preventing the employee from working elsewhere during the period covered by the agreement.

“Trade secrets, the names of customers, all such things which in sound philosophical language are denominated as objective knowledge—these may not be given away by a servant; they are his master’s property, and there is no rule of public interest which prevents a transfer of them against the master’s will being restrained.”

A servant may, therefore, be restrained from taking part in any business in direct competition with that of his employer. But an agreement to restrain a servant from competing with his employer after the termination of employment may not be allowed by the courts.

In McEllistrim v. Ballymacelligott Coop Agricultural & Diary Society [1919 AC 548 (HL)] where an agreement contained in the rules of a society by which a former member agreed that for an unlimited time he would sell all the milk he produced to a creamery run by the society was held to be invalid.

The doctrine of restraint of trade has been reconsidered by the House of Lords in Esso Petroleum Co Ltd v. Harper’s Garage (Stourport) Ltd [1968 AC 269] In this case, their Lordships struck down an exclusive dealing agreement because it extended to a period of 21 years, which was unreasonable.

In the present case at hand, where ‘A’ firm of lawyers in Delhi when employing a young advocate ‘B’ asks him to execute an agreement undertaking not to practice as an advocate in Delhi for all his life.

This agreement is not binding on the ‘B’ as far as it restrains his right to practice for all his life even after termination of the employment. Such an agreement is in clear violation of freedom of trade, business, and profession and is against Section 27 of The India Contract Act,1872. The agreement thus, between the parties is void.

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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