“An Agreement in Restraint of Trade is Void” – Examine This Statement with Exceptions
Introduction
The Indian Contract Act, 1872 emphasizes the freedom of trade and profession. To protect this freedom, the Act declares any agreement that restrains a person from carrying on lawful trade or profession as void. This ensures that every individual has the right to use their skills and efforts to earn a livelihood.
This concept is laid out in Section 27 of the Indian Contract Act, 1872.
What is an Agreement in Restraint of Trade?
An agreement in restraint of trade is one where a person agrees not to engage in any kind of business, trade, or profession, either entirely or for a certain period, or in a specific area.
Legal Provision – Section 27
Section 27 of the Indian Contract Act states:
“Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind is to that extent void.”
Reason Behind This Law
- To promote free trade and open competition
- To protect the right of individuals to earn a living
- To prevent monopolies or unfair practices
Examples of Void Agreements
- A agrees not to open a grocery store in any part of India in exchange for ₹1,00,000. This agreement is void.
- B, a tailor, promises not to stitch clothes for 5 years after leaving his current shop. This is a restraint of trade and is void.
Exceptions to the Rule
Although Section 27 says such agreements are void, there are some important exceptions where restraints are allowed.
1. Sale of Goodwill
When a person sells the goodwill of a business, they may agree not to start a similar business within a certain area or time. This condition is valid if it is reasonable.
Example: A sells his bakery to B and agrees not to open another bakery in the same locality for 2 years. This is valid.
2. Partnership Agreements
Under the Indian Partnership Act, 1932, certain agreements among partners involving trade restrictions are valid:
- Partners can agree not to carry on a competing business during the existence of the firm.
- Outgoing partners may agree not to compete with the firm for a reasonable time and area.
3. Employment Contracts
During employment, an employee may agree not to engage in other businesses or with competitors. This restriction is valid as long as employment continues.
However, a clause that restricts a person from working anywhere after leaving a job is not valid in India.
4. Trade Combinations
Agreements that regulate business practices among traders (like fixing prices or quantity) are not void if they promote fair competition and are reasonable.
5. Restraints under Judicial Orders
Sometimes, courts may order a person not to carry on a business (e.g., for violating laws). This is not considered void because it is legal and for public benefit.
Difference from English Law
In England, partial restraints are allowed if they are reasonable. Indian law does not recognize even partial restraint unless it falls under the specific exceptions.
Case Law: Madhub Chander v. Raj Coomar (1874)
In this case, an agreement that one person will not do business in a certain area was declared void, as it restrained trade.
Conclusion
The Indian Contract Act strictly prohibits agreements that restrict trade and business, ensuring every citizen has the freedom to earn and compete fairly. However, the law also recognizes the practical needs of business and allows some reasonable and limited restrictions, especially in cases of goodwill, partnership, or employment. These exceptions balance individual freedom with business interests.