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Restraint of Trade

Agreements that restrain trade are deemed void under Section 27, as demonstrated in the case of Madhub Chander v Raj Coomar, where a partial restraint was ruled invalid. The document discusses the implications of such restraints in employment contexts, noting that while employees can be restricted from sharing trade secrets, post-employment restrictions are often not upheld by courts. The general principle in both England and India is that all restraints of trade, whether partial or total, are void unless they fall within specific exceptions.

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28 views2 pages

Restraint of Trade

Agreements that restrain trade are deemed void under Section 27, as demonstrated in the case of Madhub Chander v Raj Coomar, where a partial restraint was ruled invalid. The document discusses the implications of such restraints in employment contexts, noting that while employees can be restricted from sharing trade secrets, post-employment restrictions are often not upheld by courts. The general principle in both England and India is that all restraints of trade, whether partial or total, are void unless they fall within specific exceptions.

Uploaded by

tanyamathew2006
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Restraint of Trade

Section 27
Agreements restraint of trade are void
Madhub Chander v Raj Coomar : Calcutta High Court
The plaintiff and the defendant were rival shopkeepers in a locality in
Calcutta. The defendant agreed to pay a sum of money to the plaintiff if
he would close his business in that locality. The plaintiff accordingly did
so, but the defendant refused to pay.
This irked the Plaintiff and he brough a suit against the defendant for the performance of the
terms of the Contract. It was also stated that the restraint was only partial as he was restrained
from exercising his profession only in one locality and that such restraints had been upheldin
Englishlaw The Court declared the contract void as it was a reastraint of trade. The Court
speaking thgough Cooch J., gave the reason that the wording of Section 27 is not intended
only for cases where absolute restraint of trade is there but also in cases where the restraint is
partial.
The learned judge drew support from the use of the word "absolutely"
in Section 28, which deals with restraint of legal proceedings. As this word
is absent from Section 27, therefore, he concluded, that it was intended to
prevent not merely a total restraint but also a partial restraint. This interpre
tation of the section has been generally accepted. "The section has abolished
the distinction between partial and total restraints of trade. Whether the
restraint is general or partial, unqualified or qualified, if the agreement is in
.the nature of a restraint of trade, it is void." Thus, an agreement to close a
mill for 3 months in a year,1 and an agreement that one party would sell
beef for 14 days in a month and the other for the rest of the month,have
been held void.
Both in England and in India the general principle is the same,
namely, that all restraints of trade whether partial or total, are void. The
only difference is that in England a restriction will be valid if it is reasonable.-
In India it will be valid if it falls within any of the statutory, or judicially created exceptions.

The question of reasonableness ofrestraint is outside the purview ofSection 27


of the Contract Act and need not be gone into. Therefore, the present case
has to be proceeded on the basis that an enquiry into reasonableness of
the restraint is not envisaged by Section 27.2

RESTRAINT OF TRADE ON EMPLOYEE BY THE EMPLOYER

Agreements of service often contain negative covenants preventing the employee from
working elsewhere during the period covered by the agreement. "Trade secrets, the names of
customers, all such things which in sound philosophical language are denominated as
objective knowledge—these may not be given away by a servant; they are his master's
property, and there is no rule of public interest which prevents a transfer of them against the
master's will being restrained.".
1
Khemchand Manekchand v Dayaldas Bassarmal, AIR 1942 Sind 114
2
Gujarat Bottling Co Ltd vCoca Cola Co,
A servant may, therefore, be restrained from.taking part in any business in
direct competition with that of his employer.3
In VPS Global Services (P) Ltd v Suprit Roy, it was held that a contract asking the employees
to not divulge trade secret is not restraint of trade because the employee is not thereby
restrained from carrying on any lawful profession, trade or business.
In Charlesworth vs Macdonald, A started working as an assistant under B and there was a
requirement that A cannot practice for 3 Years. A left the job in 1 years and claimed
injunction against the contract as he contended it as restraint of trade.
The Court held that it was not a restraint of trade. An agreement to serve exclusively for a
week, a day, or even for an hour, necessarily prevents the person so agreeing to serve from
exercising his calling during that period for anyone else than the person with whom he so
agrees.
The principle was applied by Kania AG CJ (as he then was) of the Bombay
High Court in V.N. Deshpande v Arvind Mills Co
The defendant took employment as a weaving master in a mill and
agreed not to serve inthat capacity for three years for anyone else in any
part of India. An injunction was granted to restrain him in terms of the
agreement.

RESTRAINT OF TRADE AFTER THE EMPLOYMENT ENDS


But an agreement to restrain a servant from competing w^ith his employer after the
termination
of employment may not be5 allowed by the courts.

In Brahmaputra Tea Co Ltd v E. Scarth, the contract restrained the employee from competing
against the employers after the end of his tenure. The Court held that thiswas a restrain to
ftrade since it cannot be done that a person is completely ousted from carrying out a specific
business which is also of similar nature of that of their former employees. The Court stated
that these kinds of contracts are well known in the English Law.

In Niranjan Shankar Golikari v Century Spg &Mfg Co Ltd., a collaboration between a


foreign company and a tyre cord yarn manufacturing country was carried out. It was also
stated that the Defendant had to work for the company for 5 years and it cannot work for
anywhere else even if he leaves the service.
The Court upheld this term and stated that since the injunction had specific time,a nature of
employment. It cannot be termed to wide and reasoneable to become void.
Interestingly, in Gopal Paper Mills Ltd v Surendra K. Ganeshdas Malhotra, there was a
requirement that for 20 years the employee cannot work anywhere else. The court stated that
this case was not similar to the previous one since there is a time of 20 span years which is
unconscionable.

3
Electrosteel Castings Ltd v Saw Pipes Ltd,

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