AGREEMENT IN RESTRAINT OF TRADE
“Agreement in restraint of the trade is void”. Explain the given statement in light of the provisions of the Indian Contract Act 1872. Also, state the exceptions to this general rule.
According to Section 27 of the Indian Contract Act, Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.
Exception 1.Saving of agreement not to carry on business of which good-will is sold- One who sells the good-will 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 good-will 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.
In the case of Superintendence Company of India Private Limited vs. Krishan Murgai (1979), A contract of employment stated that the employee would not work for any of his employer’s opponents in Delhi or start a nearly equivalent business in Delhi for two years after the respondent’s employment ended. On the terms and conditions of the contract, the respondent worked for the appellant’s firm as the branch manager of the New Delhi office. After seven years, the respondent’s employment came to an end. In Delhi, the respondent started his own firm, which is identical to the former appellant’s business. Now, the appellant has sued in this matter, demanding damages of Rs. 55,000 for violating the employment contract.
Restraint on trade after an employment contract has ended was found to be void and unenforceable in this case. The agreement was declared invalid and unenforceable against the respondent.
In the case of Madhub Chunder Poramanik v. Rajcoomar Doss and Others (1874), the plaintiff and defendant were both running the same business in Calcutta’s same locality. Since the defendant had experienced a loss, he suggested the plaintiff to close his firm in exchange for a particular sum of money. The plaintiff filed a lawsuit against the defendant after the defendant failed to pay the agreed-upon sum.
The plaintiff’s claim was rejected by the High Court of Calcutta because the agreement was in the form of trade restraint. This lawsuit is a turning point for fair competition protection.
The concept of trade restraint was established in India as a result of this decision. It clarified all doubts and ambiguity around this concept.
In the case of Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. (1874), Nordenfelt, the defendant, was a Swedish national at the time of the lawsuit. The defendant’s business is dealing with quick-firing guns. He sold his firm to the plaintiff for Euros 2,87,500. He enters into a restrictive covenant as follow
He is prohibited from engaging in any identical activity for the next 25 years unless it is on behalf of an organisation.He should not engage in any business that is in any way competitive with the plaintiff’s company.
Later, Nordenfelt reached a deal with another gun manufacturer. The appellants stated that trade restraint is maintained and that it is reasonable to be held.
The House of Lords was convened to hear the case. The Court found the first clause of the covenant to be reasonable because the defendant sold the company for a large sum of money and the order was issued. However, the second condition preventing the defendant from engaging in any other rival company is unjust and unreasonable.
Exceptions to Section 27 i.e., where agreement in restraint of trade is valid-
- Sale of Goodwill–
• A company’s goodwill is a non-tangible asset. It’s a company’s name and reputation.
• When a person sells the goodwill of his business to another party on the condition that the person will not enter another identical business, this is a restraint of trade on the seller’s part that is valid for the buyer’s interest in buying the goodwill for which he has paid a particular sum.
• The main purpose is to uphold the interest of the buyer who has purchased the goodwill.
In the case of, Cruttwell vs. Lye (1810), Lord Eldon said that the goodwill that is sold to the other party is nothing more than the possibility that the old customer will return to the same old place. - Partnership Act,1932-
• Partnership businesses are an exception that was added to the Partnership Act of 1932. Such exclusions can be found under Sections 11, 36, 54, and 55 of the Act.
• According to Section 11 of 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 of the Partnership Act,1932 is related to restraining an outgoing partner from carrying on a similar business within the specified period and specified local limits.
In the case of Firm Daulat Ram vs. Firm Dharm Chand (1934), two ice factory owners formed a partnership and agreed that only one plant would be run at a time and that the earnings would be shared equally. The constraint was found to be justified by the courts.
- Trade combinations-
• Trade combinations formed to control business or fix prices are not void, but trade combinations that aim to create monopolies and are detrimental to the public interest are void.
In the case of Kores Manufacturing Co Ltd vs. Kolok Manufacturing Co Ltd, two companies whose businesses employed similar industrial processes meant that their employees were largely interchangeable. When for a period they operated from neighboring premises putting the two companies in at least potential competition for the same employees, they formed a binding agreement not to employ any person who had recently been an employee of the other firm. Such an agreement was held void by the court
- Exclusive dealing agreements-
• Agreements where one party will only deal with a specific manufacturer or producer’s products and not with anybody else. Such contracts are known as Solus or exclusive dealing agreements.
• Such an agreement is lawful if it is reasonable for the parties’ advantage; however, such an agreement is void if it tries to force unfair restrictions on the other party to monopolise trade. - Restraint during employment-
• Negative clauses in a service agreement restrain the employee from working anywhere else during the period agreed upon in the contract.
• The purpose of such negative covenants is to protect trade secrets as an employer might sell precious information about the company or business to an opponent putting them at a disadvantage.
• Therefore, to keep the confidentiality of secret formulas and methods of product designs and distributions and constituents, these agreements are held justified and not unreasonable or one-sided.
In the case of Niranjan Shankar Golikar vs. Century Spg & Mfg Co. Ltd. (1967), the defendant was hired for five years based on the deal that he would not work at a different place even if he left before 5 years.
The court held that such an agreement was valid and not in violation of Section 27 of the Indian Contract Act 1872.
