The Constitution of India guarantees the freedom of trade and commerce to every citizen and therefore Section 27 declares “every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extend void.” Thus no person is at liberty to deprive himself of the fruit of his labour, skill or talent, by any contract that he enters into.
It is to be noted that whether restraint is reasonable or not, if it is in the nature of restraint of trade, the agreement is void always, subject to certain exceptions provided for statutorily.
An agreement whereby one of the parties agrees to close his business in consideration of the promise by the other party to pay a certain sum of money is void, being an agreement is restraint of trade, and the amount is not recoverable, if the other party fails to pay the promised sum of money (Madhub Chander vs. Raj Kumar).
But agreements merely restraining freedom of action necessary for the carrying on of business are not void, for the law does not intend to take away the right of a trader to regulate his business according to his own discretion and choice.
As agreement to sell all produce to a certain party, with a stipulation that the purchaser was bound to accept the whole quantity, was held valid because it aimed to promote business and did not restrain it (Mackenzie vs. Striramiah). But where in a similar agreement the purchaser was free to reject the goods (i.e., was not bound to accept the whole quantity tendered) it was held that the agreement was void as being in restraint of trade (Sheikh Kalu vs. Ram Saran).
Exceptions: An agreement in restraint of trade is valid in the following cases:
1. Sale of goodwill:
The seller of the ‘goodwill’ of a business can be restrained 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 the restraint is reasonable in point of time and space (Exception to Sec. 27).
(a) A, after selling the goodwill of his business to B, promises not to carry on similar business “anywhere in the world.” As the restraint is unreasonable, the agreement is void.
(b) C, a seller of imitation jewellery in London, sells his business to D and promises that for a period of two years, he would not deal: (a) in imitation jewellery in England, (b) in real jewellery in England, and (c) in real or imitation jewellery in certain foreign countries. The first promise alone was held lawful. The other two promises, namely (b) and (c), were held void as the restraint was unreasonable in point of space and the nature of business (Goldsoll vs. Goldman).
2. Partners’ agreements:
An agreement in restraint of trade among the partners or between any partner and the buyer of firm’s goodwill is valid if the restraint comes within any of the following cases:
(a) An agreement among the partners that a partner shall not carry on any business other than that of the firm while is a partner [Section 11(2) of the Partnership Act],
(b) An agreement by a partner with his other partners that on retiring from the partnership he will not carry on any business similar to that of the firm within a specified period or within specified local limits, provided the restrictions imposed are reasonable [Section 36(2) of the Partnership Act],
(c) An agreement among the partners, upon or in anticipation of the dissolution of the firm that some or all of them will not carry on a business similar to that of the firm within a specified period or within specified local limits provided the restrictions imposed are reasonable (Section 54 of the Partnership Act).
(d) An agreement between any partner and the buyer of the firm’s goodwill that such partner will not carry on any business similar to that of the firm within a specified period or within specified local limits, provided the restrictions imposed are reasonable [Section 55 (3) of the Partnership Act].
3. Trade combinations:
As pointed out earlier, an agreement, the primary object of which is to regulate business and not to restrain it, is valid. Thus, an agreement in the nature of a business combination between traders or manufacturers e.g., not to sell their goods below a certain price, to pool profits or output and to divide the same in an agreed proportion, does not amount to a restraint of trade and is perfectly valid (Fraser & Co. vs. Bombay Ice Company). Similarly, an agreement amongst the traders of a particular locality with the object of keeping the trade in their own hands is not void merely because it hurts a rival in trade (Bhola Nath vs. Lachmi Narain). But if an agreement attempts to create a monopoly, it would be void (Kameshar Singh vs. Yasin Khan). Agreements tending to create monopolies are now also governed by the provisions of the Monopolies and Restrictive Trade Practices Act, 1969, which forbids certain types of trade agreements.
4. Negative stipulations in service agreements:
An agreement of service by which a person binds himself during the terms of the agreement, not to take service with anyone else, is not in restraint of lawful profession and is valid. Thus a chartered accountant employed in a com may be debarred from private practice or from serving elsewhere during the continuance of service (Maganlal vs. Ambica Mills Ltd.). But an agreement of service which seeks to restrict the freedom of occupation for some period, after the termination of service, is void. Thus, where S, who was an employee of Brahmputra Tea Co. Assam, agreed not to employ himself or to engage himself in any similar business within 40 miles from Assam, for a period of five years from the date of the termination of his service, it was held that the agreement is in restraint of lawful profession and hence void (Brahmputra Tea Co. vs. Scarth).