Introduction
The freedom to practice any profession, or to carry on any trade or business, is a constitutional right under Article 19(1)(g) of the Indian Constitution. In line with this, Section 27 of the Indian Contract Act, 1872 declares that agreements in restraint of trade are void. However, there are certain exceptions where such restraints are considered valid.
Main Body
Section 27 of the Indian Contract Act
Section 27 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 means that any contract that prevents someone from starting or continuing a trade or profession is void, irrespective of reasonableness or mutual consent.
Rationale Behind the Rule
- Protects individual liberty and economic freedom
- Promotes competition and innovation
- Discourages monopolies and restrictive practices
Exceptions to the Rule
Although the rule is strict, courts and statutes have recognized several exceptions where partial restraint is permissible:
1. Sale of Goodwill
Section 27 allows a person selling goodwill to agree not to carry on a similar business within specified local limits, provided the restriction is reasonable.
Example: If A sells his bakery to B, A can agree not to start another bakery within 5 km for the next 2 years.
2. Partnership Agreements
- Partners may agree not to carry on similar business during the partnership (Section 11 of the Partnership Act)
- Upon retirement, a partner may agree to certain restrictions (Section 36)
- On dissolution, partners can agree to restrict trade (Section 54)
3. Trade Combinations
Agreements among businesses for standardization, regulation of prices, or quality control, not aimed at eliminating competition, are generally allowed.
4. Employment Contracts
- During Employment: An employee may be restricted from working for competitors
- Post-Employment: Restraints are generally invalid unless protecting trade secrets or confidential data
5. Legal Exceptions
Certain professional or licensing agreements may require restrictions for quality or brand protection, which are allowed if reasonable and lawful.
Judicial Precedents
- Niranjan Shankar Golikari v. Century Spinning: Reasonable restrictions during employment were upheld.
- Madhub Chander v. Rajcoomar: A clause restraining a person from carrying out trade was held void.
Global Comparison
In English law, reasonable restraints are valid. Indian law is stricter, generally disallowing all restraints except specific exceptions.
Conclusion
Agreements restraining trade are void under Indian law, upholding the principle of economic liberty. However, the law also recognizes certain practical situations where limited restrictions are valid and enforceable. These exceptions are necessary for commercial fairness and protection of legitimate business interests.