Agreement in Restraint of Trade (Sec. 27) of Indian Contract Act 1872
According to section 27, “Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.” An agreement which unnecessarily curtails the freedom of a person to trade is against public policy. Restraining a person from carrying on a trade generally aims at avoiding competition and has monopolistic tendency and this is both against an individual’s interest as well as the interest of the society and on that ground such restraints are discouraged by law.
Section 27, which declares an agreement in restraint of trade as void, does not allow any distinction between a total restraint or a partial restraint. Thus, whether the agreement imposes a total restraint or a partial, the agreement is void.
Exceptions to an agreement in restraint of trade
Sale of Goodwill
When there is a sale of business by a party along with its goodwill then the buyer may make an agreement with seller not to carry on the business in competition with the buyer.
Case Law- Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. Ltd. (1894) A.C. 535.
Exception under The Partnership Act, 1932
Sec. 11(2), Indian Partnership Act, permits the partners of a partnership firm to make a contract which provides that a partner shall not carry on any business other than that of the firm while he is a partner will not carry on their own business ignoring the partnership business.
Restraint by a contract of service
An agreement of service under which an employee agrees that he will serve a particular employer for a certain duration, and that he will not serve anybody else during that period, is a valid agreement. During the period of employment, the employer has an exclusive right to avail the services of his employee and, therefore, a restraint on the employee to serve somebody else at the same time is reasonable. Such an agreement is not hit by the doctrine of restraint of trade.
Case Law- Charlesworth v. Mac Donald I.L.R, (1898) 23 Bom. 103.
Sometimes, the traders or manufacturers combine together to eliminate competition as between themselves and makes agreements fixing minimum price, regulating the supply of goods and putting profits in the common pool and dividing the same amongst themselves. Such agreements are neither void on grounds of being opposed to public policy, nor are they deemed to be in restraint of trade.
Case Law- English Hop Growers v. Dering, (1928) 2 K.B. 174.
When the seller or the manufacturer of a certain product may agree that he will supply the whole of his product to a particular single buyer only, or, similarly, a buyer may agree that he will purchase all his requirements of a certain commodity from a particular seller or manufacturer only and none else. Such agreements are called Solus agreement.
Case Law- Sheikh Kalu v. Ram Saran Bhagat, (1908) 13 Cal. W.N. 388.