Just as the Legislature cannot take away individual freedom of trade, wise versa the individual cannot barter it away by agreement. Section 27 of Indian Contract Act, : 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. 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.
Madhub Chander vs. Raj Coomar is the first case in which scope of the section came up for consideration before the Calcutta High Court. Here in this case restraint was only partial as he was restrained from exercising his profession only in one locality and that such restraints had been upheld in English law.
Section 27 of the Indian Contract Act, 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.
In this case, their Lordships struck down an 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. Zaheer Khan vs. In Petrofina Great Britain Ltd. Martin 5 , Diplock L. In the same case, Lord Denning M. It is invalid unless it is reasonable as between the parties and not injurious to the public interests.
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.
Although laws and other federal, state, and local regulations may create obstacles for business owners, individuals are not allowed to restrain each other's business activities. Anyone who does lose business due to someone else restraining their activities may have a tort case against the person or company whose behavior economically injured them. The concept of restraint of trade was established in English common law under the Clayton Act, the Federal Trade Commission Act, and numerous antitrust laws.
The federal Sherman Antitrust Act of makes it illegal to participate in unreasonable economic restraints. In fact, some state laws consider restraint of trade to be a crime, and any party that participates in the restraint can be sued in civil court.
The Sherman Antitrust Act specifically includes a section on restraint of trade and declares it illegal. The act also affects other trade restraints, including non-compete clauses , particularly if they are used to fix prices or drive out other businesses.
The essential line of distinction is that the purchaser is entitled to protect himself against competition on the part of his vendor, while the employer is not entitled to protection against mere competition on the part of his servant.
A restrictive covenant ancillary to a contract of employment is likely to affect the employee's means or procuring a livelihood for himself and his family to a greater degree than that of a seller, who usually receive ample consideration for the sale of the goodwill of his business. Similarly, in the case of Polaris Software Lab. Limited Case AIR SC , the Supreme Court while disfavouring a restrictive covenant of the employer held that in order to validate a restrictive covenant, an employer must establish that the covenant i operates for a restricted period and areas, ii pertains to information that is exclusive and shared with the confidence that the employee shall use such information only for the benefit of the employer and maintain fidelity, and iii the restraint will not tantamount to restraining the employee from using his own acumen or skill sets.
Therefore, in order to validate negative covenants in employment agreements or contracts the following reasonable restrictions may be imposed: Restricted territorial limit: If the restriction is within certain territorial or geographical limits; Restricted time limit: If the time frame is within a specified limit; Trade Secrets: If the information shared is exclusive and shared with confidence that the employee shall use such information only for the benefit of the employer; or The restriction falls within Exception 1 to Article 27 of the Act: restraint of trade on the sale of goodwill.
Angelina Talukdar. The Ministry of Labour and Employment introduced four Bills in to amalgamate 29 central laws related to labour laws thereby simplifying and modernizing the labour regulations in a labour intensive country, like India.
India's law on prevention of workplace sexual harassment continues to gain traction in spite of the Covid lockdown and employees working remotely. The need for such legislation was observed first time by the Supreme Court, in Vishaka v State of Rajasthan.
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Aviation Finance. Aviation Regulation. Mondaq Advice Centres. Arbitration, Litigation and Conciliation. More MACs. Usually, time periods of restraints will be limited to three to twelve months, but recent case law indicates that the courts are open to enforcing longer time periods in particular circumstances.
During the Restraint Period, each Restricted Person must not, within the Restricted Area directly or indirectly, either on their own account or as an employee, member, shareholder, unitholder, director, consultant, adviser, contractor, principal, agent, manager, beneficiary, partner, associate, trustee, nominee, custodian, financier, representative, salesperson or in any other capacity whatsoever for any other person, firm, association or corporation except as is expressly permitted by this agreement :.
One factor that makes this case unique is that it involved a sale of shares. The courts have a greater tolerance of restraint of trade clauses in contracts for the sale of business as opposed to employment contracts. This is because the courts consider that a purchaser of goodwill is entitled to protection of that goodwill. If an employee sells a substantial shareholding of the business, then a long-term restraint is more likely to found to be reasonable.
There are a number of steps you can take to maximise the protection afforded by a restraint of trade clause:. What is a reasonable restraint of trade clause?
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