UnitedWorld School of Law

Project On:-

Law of Contract

Topic:- LEGAL CONTOURS OF RESTRAIN OF TRADE AGREEMENTS

Submitted to:- Submitted by:-

Mr.Tanmay Agrawal Abhishek Saad

Professor Roll no :- 35

Unitedworld School of Law Sec:- B

Professors Sign:-…………………..

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 CERTIFICATE OF DECLARATION

I hereby declare that the project work entitled “LEGAL CONTOURS OF RESTRAIN OF
TRADE AGREEMENTS ” submitted to United world school of law, Gandhinagar, is record of
an original work done by us under the able guidance of Professor Tanmay Agrawal, Faculty
Member, United world school of law, Gandhinagar.

Name:- Abhishek Saad

Roll no:- 35

Section:-B

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 ACKNOWLEDGEMENTS

We would like to express our special thanks of gratitude to our teacher Professor
Tanmay Agrawal sir who gave us the golden opportunity to do this wonderful project on
the topic of “LEGAL CONTOURS OF RESTRAIN OF TRADE
AGREEMENTS ”, which also helped us in doing a lot of Research and we came to
know about so many new things we am really thankful to them.

Secondly we would also like to thank our parents, friends and seniors who helped us a
lot and have given us valuable suggestion pertaining to the topic and in completing this
project within the limited time frame.

Name:- Abhishek Saad

Roll no:- 35

Section:-B

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 INDEX

Contents
Significance of the topic:-.............................................................................................................5
Aim and Objective of study...........................................................................................................5
Literature Review:-........................................................................................................................5
Reasearch Question:-.......................................................................................................................6
Introduction......................................................................................................................................6
Restrain of Trade Agreement...........................................................................................................7
Void Agreements:-...........................................................................................................................9
Importance of Section 27 of Indian Contract Act..........................................................................11
Conclusion.....................................................................................................................................13
Bibliography: -...............................................................................................................................13

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 Significance of the topic:-

Specifically Contracts which restrain trade generally and restrain employees in any manner
have always been a subject matter of debate and, consequently, have come under immense
scrutiny by the judiciary. In recent times, there have been interesting developments on this
issue. Naina Krishna Murthy discusses the issues of restraint in employment contracts and
suggests that the need of the hour is to find equilibrium between the two apparently
divergent rights of the employer and the employee.

Aim and Objective of study

The main objective of study of this subject is to understand the concept of Indian Law which
prohibits the agreement to restrain trades and to find out that is fundamental right of trade is
rightly exercise or not as it has been given to the citizen.

Literature Review:-

Bare Act:-

Indian Contract Act, 1872

Specific Relief Act, 1877

Books:-

Indian Contract Act by Dr.R.K.Bangia,

Contract and Specific Relief by Avtar Singh

MULLA Indian Contract Act by Sir Dinshaw Fardunji Mulla.

Case Laws:-

Madhub Chander v Raj Coomar (1874) 14 Beng LR 76.

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Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co.1894 AC 535.

Esso Petroleum Co Ltd v Harper Garage (Stourport) Ltd 1968 AC 269.

Pothi Ram v Islam Fatima AIR 1915 AII 94(2).

McEllistrim v Ballymacelligott Coop Agricultural & Diary Society 1919 AC 1548(HL).

Charlesworth v MacDonald ILR (1898) 23 BOM 103.

Reasearch Question:-

 What do you mean by Restrain of trade agreement?

 What do you mean by void agreement?
 What is necessity of Section 27 of Indian Contract Act 1872?
 What are the exceptions of the section 27 of Indian Contract Act 1872?

Introduction

Just in view of the undue impact of one gathering over the other party are viewed as void
contracts under Section 27 of the Indian Contract Act. To expand, Section 27 of the Indian
Contract Act The idea of agreements which are in restriction of exchange for the most part and
which exist expresses that "each understanding by which anybody is limited from practicing a
legal calling, exchange or business of any sort, is to that degree void." Legal contract between a
buyer and a seller of a business, or between an employer and employee, that prevents the seller
or employee from engaging in a similar business within a specified geographical area and within
a specified period. It intends to protect trade secrets or proprietary information but is enforceable
only if it is reasonable with reference to the party against whom it is made, and is not contrary to
the public policy.

India has gradually opened up its markets through economic reforms and reduced government
controls on foreign trade and investment, and in line with such economic development, it may be
worthwhile for the legal machinery to adopt an attitude which rings true with the sentiment of a

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free market. Therefore, restraint of trade in the right dosage, although a bitter medicine to
swallow, may be just what the doctor ordered towards mitigating substantial business losses.
This article focuses on the other emerging exception to Section 27, that of an instance where
there is an employer-employee relationship. Interestingly, apparently "intransigent" Indian
Courts have already recognized this exception as far back as in the 1960. After that we see a
number of cases, where the Indian Courts have consistently held that any restriction operating
during the subsistence of a contract of employment does not attract Section 27, unless the
contract appears to be heavily one sided in favour of the employer.

Contrast this with the position in the United States of America and even the United Kingdom
from where we get "inspiration" for most of our laws. We would first like to examine the
principles laid down under English law. It is interesting because although the framework on
restraint of trade under English law began with stringent dictums as under the present Indian
Contract Act, it has gradually evolved to adapt itself to the myriad trends of the modern
economy. Under the laws of the Unites States of America, the ubiquitous concept of "trade
secrets" has become synonymous with restraint on trade within the industry and the judiciary.
Therefore, the Courts in the US may have adopted an extreme measure to implement such
protection based principles like the "Inevitable Disclosure Doctrine" and "Inducement to
Breach".
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 principal 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.” Thus both in England and India the
general principle is the same, namely, that all restrains of trade whether partial or total, are void.
The only difference is that in England a restriction will be valid if it is reasonable.

Also a restriction upon trade mark does not attract Section 27, it being not a restriction upon
carrying on any trade or business.

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 Restrain of Trade Agreement

“And while the law of competition may be sometimes hard for the individual, it is best for the
race, because it ensures the survival of the fittest in every department.”

A non-compete clause or a covenant not to compete is a term used in contracts under which the
employee agrees to not pursue a similar profession, trade or business in competition against the
employer. Apart from the regular employment agreements, such covenants are also at times
included in the agreements relating to sale of goodwill of business or professional practice,
employment exit and other exclusive dealings and service arrangements.

The Indian Contract Act, 1872, which provides a framework of rules and regulations, governing
the formation and performance of a contract in India deals with the legality of such non-compete
covenants. It stipulates that an agreement, which restrains anyone from carrying on a lawful
profession, trade or business, is void to that extent. Under section 27 of the Indian Contract Act,
1872 agreements in restraint of trade are void.

Agreement in restraint of trade is defined as the one in which a party agrees with any other party
to restrict his liberty in the present or the future to carry on a specified trade or profession with
other persons not parties to the contract without the express permission of the latter party in such
a manner as he chooses. Providing for restraint on employment in the employment contracts of
the employees in the form of confidentiality requirement or in the form of restraint on
employment with competitors has become a part of the corporate culture.
Agreement in restraint of trade is void under Section 27 of the Act. That is, any agreement that
debars one person from starting or continuing his trade or profession, in return for some
consideration is void. Therefore, any agreement stopping a person from trading in the manner he
likes or wherever he likes, on an agreement with other party, in which the other party benefits
from him stopping his trade or profession, will be called an agreement in restraint of trade. Apart
from two exceptions, which we will discuss below, all agreements in restraint of trade are void.
The two exceptions lie in Sale of Goodwill and Partnership Act.

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In the case of Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd1, Thorsten
Nordenfelt was a manufacturer of guns in Sweden and England. Thorsten sold his business to a
company, which then transferred the business to Maxim Nordenfelt. At this time, Thorsten
entered into an agreement with Maxim that he would not engage in the manufacture of guns for
25 years, other than what he manufactures on behalf of the company. Later, Thorsten broke his
vow claiming that the agreement was not enforceable as it was in restraint of trade. The decision
of the court was in Thorsten’s favour.
In the case of Madhub Chunder v. Rajcoomar2, the parties were businessmen in Calcutta. The
defendant, Rajcoomar suffered loss due to the plaintiff’s competition and entered into an
agreement with the plaintiff that if he closed his business there, he would pay him all the
advances he had made to his workmen. When the defendant failed to pay, the plaintiff filed a suit
to recover the amount but failed to do so because it was an agreement in restraint of trade,
therefore not enforceable in a court of law.

Void Agreements:-

Void agreements are those agreements which are not enforced by law courts. Section 2(g) of the
Indian Contract Act defines a void agreement as, “an agreement not enforceable by law”. Thus
the parties to the contract do not get any legal redress in the case of void agreements.

Void agreements arise due to the non-fulfillment of one or more conditions laid down by Section
10 of the Indian contract Act. Ths Section states as follows:

All agreements are contracts if they are made with free consent of parties competent to contract,
for a lawful, consideration and with a lawful object, and are not hereby expressly declared to be
void.

Nothing herein contained shall affect any law in force in India, and not hereby expressly
replealed, by which any contract is required to be made in writing or in the presence of witness,
or any law relating to the registration of documents.

1
Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd, 1894 AC 535.
2
Madhub Chunder v. Rajcoomar, (1874) 14 Beng LR 76.

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From the above, it is quite clear that non-fulfillment of any of these conditions by one of the
parties to a contract shall make an agreement void. These conditions being:-

1. Free consent of the parties;

2. Competency of the parties to contract;
3. Existence of a lawful consideration;
4. Existence of a lawful object;
5. Agreement being not included in the list of those specially declared to be void by the
Indian Contract Act by its Section 26, 27, 28, 29, 30, and 56:
6. Completion of certain formalities required by any other law of the country like transfer of
Property, Act, Company Act, etc.

Difference between a Void Agreement and a Void Contract

Agreement shall be called a contract only when it fulfills all the conditions laid down by Section
10 of the Act.

The distinction between an agreement and a contract on the following basis:-

1.    Definition: void agreement is defined by Section 2(g) viz., an agreement not enforceable by
law is void agreement. Void contract is defined by Section 2(j) viz., a contract which ceases to be
enforceable by law is a void contract since the time it ceases to be enforceable.

Thus it is very clear from the two definitions that a void agreement is void from the very
beginning and does not create any legal effect, while a void contract is not void from the
beginning, it becomes void at a subsequent stage due to the occurrence of an event or change in
the original conditions. We may illustrate this with the help of an example. A, an Indian, enters
into a contract with B, a Pakistani national, to supply woolen a carpets after three months. After
some time war breaks out between India and Pakistan. The contract in between A & B shall
become void at the outbreak of war.

2.    Rights: A void agreement does not create any legal right or obligation upon the parties to the
agreement. On the other hand, a void contract does create a right and an obligation upon the
parties. A party to the void contract is within his rights to get back the benefit which he had
given to the other party in terms of money, goods or services and the other party enjoying such
benefit under a void contract is placed under an obligation to return that benefit to him. This is

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true in many cases but not in all cases e.g., a voidable contract being rescinded shall make, it
obligatory on the aggrieved party to return the benefit which he has already derived from the
contract. But if a contract becomes void due to supervening impossibility the benefit enjoyed by
the promisor shall not be returned to the promisee by him.

3.    Treatment: void agreements have been specifically stated in Chapter II of the act under
Sections 11, 20, 23, to 30, and 56. But no such specific mention is made for void contract in any
Chapter of the Act.

Importance of Section 27 of Indian Contract Act

Section 27 of Indian Contract Act states that “Agreement in restraint of trade, void Every
agreement by which anyone is restrained from exercising a lawful profession, trade or business
of any kind, is to that extent void”.
It states that an agreement, which restrains anyone from carrying on a lawful profession, trade or
business, is void to that extent. The main reason behind this section is 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, 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.
Exception 1 : Saving of agreement not to carry on business of which good will is sold – One who
sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar
business, within specified local limits, so long as the buyer, or any person deriving title to the
goodwill from him, carries on a like business therein, provided that such limits appear to the
court reasonable, regard being had to the nature of the business. 
Allahabad High Court in case of Pothi Ram v. Islam Fatima3 held that religious activity does not
fall under ambit of section 27 of Indian Contract act and held it as valid and will not fall under
Profession, Trade or Business.

3
Pothi Ram v. Islam Fatima, AIR 1915 AII 94 (2).

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Restriction for long period

The Doctrine of restraint of trade has been reconsidered by the House of Lords in Esso
Petroleum Co. Ltd vs. Harper’s Garage Ltd4. In this case their lordships struck down on
exclusive dealing agreement because it extended to a period of 21 years, which was
unreasonable. A five year period would have been held to be reasonable. They said that the
doctrine applied only if a man contracted to give up some existing freedom which he had.

Statutory Exceptions
1. Sale of Goodwill
The only exception mentioned in Section 27 of the Contract Act is related to sale of goodwill.
One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a
similar business, within specified local limits, so long as the buyer, or any person deriving title to
the goodwill from him, carries on a like business therein, provided that such limits appear to the
court reasonable, regard being had to the nature of the business.

Meaning of Goodwill :- There should be real goodwill to be sold. The Goodwill which has been
the subject of sale is nothing more than the probability that the old customer will resort to old
place.

2. Partnership Act

According to Section 11 the Partnership Act,1932 partners during the continuance of the firm to
restrict none of them shall carry on any other business than that of the firm. Section 36 the
Partnership Act,1932 is related to restrain an outgoing partner from carrying on a similar
business within the specified period and specified local limits,

a. The agreement should specify the local limits or the period of restraint, and

b. The restriction imposed must be reasonable.

3. Restraint upon employees

Restraint during Employment

4
Esso Petroleum Co. Ltd vs. Harper’s Garage Ltd, 1968 AC 269.

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Agreement of service contain negative covenants is for preventing the employee from working
anywhere during period covered by the agreement. Now a days trade secrets is main contention
for negative covenants. Employer’s wants to protect his trade secrets because of that employment
agreement with negative covenants are generally used. Agreements for protection of
confidentiality and trade secrets are not one sided or unfair or unreasonable. Any breach of such
clauses on the part of employee can be treated as misconduct. “A servant may, therefore, be
restrained from taking part in any business in any competition with that of any employer. Thus
was in case of Charlesworth v. Mcdonald.5

Post-Employment Covenant 

According to Indian laws any agreement which is related to restraint of trade and profession shall
not be binding on the parties and the same shall be null and void. By using the term void ab
initio, for such type of agreements it has shown that it has kept such non-compete clause in the
agreements beyond consideration. Indian courts have also consistently refused to enforce post
termination non-compete clauses in employment contracts as “restraint of trade” is
impermissible under Section 27 of the Indian Contract Act 1872, and have held them as void and
against the public policy because of their potential to deprive an individual of his or her
fundamental right to earn a living.

Conclusion

Article 21 of the Constitution of India guarantees the right to livelihood and this is fundamental
right. Nobody can take away fundamental right because of this to enforce non-compete clauses
in India even more difficult. But if we consider the global market and new upcoming conditions
with new opportunities we need to adopt few legal changes. Therefore, the need to find balance
between rights of the employer and the right of employee.

It is believed that the factor of “reasonableness” would be the right covenant between employer
and employee interests.

The law commission of India in its 13th Report, way back in 1958, strongly recommended that
section 27 needs amendment, since the restrictions it imposes on India business and Contracts

5
Charlesworth v. Mcdonald, ILR (1898) 23 BOM 103.

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are undesirable. Whenever the issue of restraint of trade comes up in the India Context, the first
aspect highlighted is that the Indian position on restraint of trade.

Therefore, the researcher wants to conclude that instead having depended only on section 27 of
Indian Contract Act, there must be some provisions with ‘Reasonableness’

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 Bibliography: -
Bare Act: -

Indian Contract Act, 1872

Specific Relief Act, 1877

Case laws: -

Madhub Chander v Raj Coomar (1874) 14 Beng LR 76.

Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co.1894 AC 535.

Esso Petroleum Co Ltd v Harper Garage (Stourport) Ltd 1968 AC 269.

Pothi Ram v Islam Fatima AIR 1915 AII 94(2).

McEllistrim v Ballymacelligott Coop Ag

ricultural & Diary Society 1919 AC 1548(HL).

Charlesworth v MacDonald ILR (1898) 23 BOM 103.

Books: -

Indian Contract Act by Dr.R.K.Bangia,

Contract and Specific Relief by Avtar Singh

MULLA Indian Contract Act by Sir Dinshaw Fardunji Mulla.

Online resource: -

https://taxguru.in/corporate-law/restraint-trade-exceptions-2.html (Last Visited On:- 10 April

2019, 09:00 PM)

https://littlelawbook.com/section-27-indian-contract-act/ (Last Visited On:- 11 April 2019, 06:00

PM)

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http://www.manupatrafast.com/articles/PopOpenArticle.aspx?ID=a6cfd61d-d7de-48a7-a093-
3f14098affb5&txtsearch=Subject:%20Contract (Last Visited On:-12 April 2019, 08:00PM

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