Restraint of Trade

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.
Exception: Every agreement by which any one 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.
Introduction

• Freedom of trade and commerce in the

Constitution of India. 19 (1) (g).
English Scenario and Indian Scenario
• English Scenario : Partial restraint is covered.
• Indian Scenario partial restraint will only cover
when it will be in the domain of exception which
been created by the judiciary or statute.
• S.K. Kalu vs. Ram Saran Bhagat.
 Nature of Section 27
• It is covered the partial restraint or general restraint?
• Madhub Chander v. Raj Coomera:
• 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.
• "Restraint from excessing lawful profession , trade, business is
not meaning absolute restriction, it also intended to apply the
partial restraint also.“
• Court only have to decide whether the contract is for the restrain of
trade or not? No need to decide the reasonableness.
 Religious services by priest is Trade,
Profession or business?
• Pothi Ram v. Islam Fatima
• Indian courts have not been rendered entirely sterile in the matter. Thus for
example, where it was necessary to do so, the high court of kuchh regarded
an agreement to monopolise the privilege of performing religious services
as being opposed to public policy and void under section 27, though it may
be doubted whether the words “profession, trade or business” as used in the
section were intended to cover the religious services of a priest. On the
other hand, Allahabad High court in Pothi ram v. Islam Fatima upheld as
valid a restrictive covenant on the ground that the activity restrained was
not in the nature of “Profession, trade or business”.
Bar Council Of India vs Mary Tresa on 21 March,
2006
Equivalent citations: 2006(2)KLT210, AIR 2006
KERALA 219,

• Priests and Nuns may or may not be engaged in profession, even

though, as mentioned above, professing religion is indeed a
profession. A complete ban for entry into the legal profession to a class
of clergyman would be wholly illegal. Before the bar created under
Rule 2(h) of the Rules is applied it shall have to be found out as to
whether a particular person professing religion is engaged in the same
or not. We have already held above that the word 'enagaged' means
gainfully employed, be it for remuneration, profit or salary.
Exception
• Statutory exception
• Sale of Good will :"Contract valid subject to
reasonable restriction".
• Ann Trego v. George Stadfort Hunt: the Restriction are
necessary but should be reasonable.
• Partnership Act
Exception created by the Judiciary
• Trade Combination:
• Bom Ice Co. V. S.B. Frazer Co.
• An agreement between certain ice-manufactures fixed
the minimum price for sale of ice, the proportion of the
manufacturer which each was to bear and of profits
which each was to receive.
• "Purpose carry business in organized way"
• Valid.
Knock out agreement
• An agreement between bidders at an auction or sale not to bid against
each other.
• Anti-corruption and social welfare orgnisation v. State of punjab
(1997)1 BC 262'
• Two people are doing the knockout agreement mutually then it will
not be void but if many people are preparing rings against
the government then it will be void agreement.
 Restriction for longer period
• MC Ellistream v. Bally Macellygott coop Agricultural and dairy :
• BIRKENHEAD in McEllistrim v. Ballymacelligott Coperative
Agricultural & Dairy Society, that “the respondents were
not entitled to be protected against mere competition.”,
and continued to say that “covenants restrictive of
competition which have been sustained have all been
ancillary to some main transaction, and have been found
justified because they were reasonably necessary to render
that transaction effective.
 M/S Gujarat Bottling Co.Ltd. & Ors. v. The Coca Cola Co. & Ors.

• GBC entered into an agreement in 1993 with Coke for grant of franchisee to prepare, bottle,
sell brands of latter, but not to be concerned with the beverages of any other brand during the
subsistence of the agreement and of 1 year period notice for its termination (Para 14) Under
the agreement, GBC also had right to discontinue supplying syrup on effective transfer of
control of GBC by transfer of shares or any other indicia without the prior express consent of
Coke (Para 19). In all, 1993 agreement was for grant of license to GBC under common law by
Coke.
• GBC, however entered into another agreement with Coke in 1994 where under it was required
to make an application to register the agreement under the statute as Registered User
Agreement. Though the period of termination notice was reduced to 90 days but no similar
provision as that of Para 14 of 1993 agreement was stipulated and neither was 1993 agreement
expressly substituted.
• The shareholding of GBC was transferred subsequently to Pepsi and it served Coke with a
notice of 90 days to terminate 1994 agreement, and as a matter of abundant precaution, as 1
year notice terminating 1993 agreement, notwithstanding the contention that 1993 stands
replaced by 1994 agreement. Coke sought GBC to be refrained from dealing with the
beverages of Pepsi for the period of 1 yr. of termination notice.
 Judgements
• In India: “A contract in restraint of trade is one by which a party restricts his
future liberty to carry on his trade, business or profession in such manner and
with such person as he chooses” (Superintendence Company of India v.
Krishan) unless such a restriction is in furtherance or promotion of trade in
which he is presently voluntary engaged (GBC v. Coca Cola).
• Under S.27 of ICA, no distinction, whatsoever, exists between the contracts
whether in partial or in general restraint of trade; such that every such
agreement is void. Further, no test of reasonableness in such a restraint, as
applied in UK, is applicable according to literal interpretation of S.27 in
Indian context, such that notwithstanding whether a restraint of trade is
reasonable/conscionable or not, it is nevertheless void according to S.27.
Krishanrao v. Shankar 1994 SCC Online
Bom.
• Agreement should specify the local limits or the
period of restraint.
• The restriction imposed must be reasonable.
Solus or exclusive dealing agreements
• Souls or exclusive dealing agreement are not the
restraint in fact it is encouraged to exercise his
business because he is assured of certain market
for the products of his labour.
• Abdul Krim v. S. K. Dabur AIR 1931 All 539.
• (should not be generation to generation: Sheikh
Kalu v. Ram Saran Bhagat).
Restraint upon employees
• Restraint during employment : Charlesworth v. MacDonald
(Practicing case)
• V. N. Deshpande v. Arvind Mills Co. Ltd (weaving mill case- 3 years)
• Agreements for the protection of confidentiality is not one sided and
unfair in its nature.
Moon lighting (Gulbahar v. Presiding
Officer/)
It is against the law for any adult worker to work in
a factory on a day when they have already worked
in another workplace, as stated in Section 60 of the
Factories Act, places a strong emphasis on
exclusive service, mandating that employees not
work against the interests of the industrial
establishment in which they are employed and not
accept any other jobs that might jeopardise the
interests of their employer. In the context of the
draft Model Standing Orders for Service Sector,
2020, as outlined in Clause 22, a worker is
prohibited from working against the interests of
their industrial establishment or taking up
additional employment that could adversely affect
their employer’s interests. It should be mentioned,
though, that these orders have not yet been
notified. Furthermore, as per Section 9 of the Delhi
Shops and Establishments Act, 1954, an individual
is not permitted to engage in the operations of one
or more establishments, a factory, or both for
longer than the time frame that they are lawfully
engaged under this Act.
Validity of Non-compete Clause
• A non-compete clause is a provision in an employment agreement to
prohibit employees from engaging in a similar business or profession
during the course of employment or following the termination of
employment for a specified period of time in order to protect the
employers' business.
• Pre-Termination Non-Compete Clauses
• The pre-termination non-compete provision is only effective throughout the
period of the employment contract. On pre-termination violation of a non-
compete clause, the law is established: the enforceability of this condition
has been affirmed in several court rulings.
• In the case of Percept D'Mark (India) Pvt. Ltd. v. Zaheer Khan and
Anr., the Apex Court observed,
• "Under Section 27 of the Contract Act:
• A restrictive covenant extending beyond the term of the contract is void and
not enforceable.
• The doctrine of restraint of trade does not apply during the continuance of
the employment contract and is applied only when the contract comes to an
end.
• As held by this Court in Gujarat Bottling v. Coca Cola, this doctrine is not
confined only to contracts of employment, but is also applicable to all other
contracts.
• Post-Termination Non-Compete Clauses
• Post-termination non-compete clause is included in employment
agreements wherein an employee agrees not to compete with his or her
employer in any way following the termination of employment.
Furthermore, it is evident that non-compete provisions benefit
employers more and show contempt for the employee's circumstances
by restricting his job options. As a result of this circumstance, the
workers argue that such terms violate Article 19 (1) (g) of the
Constitution and Section 27 of the Act, and hence cannot be enforced.
• The Supreme Court of India, in Superintendence Company of India
(P) Ltd. v. Sh. Krishan Murgai raised the question that whether a
post-service restrictive covenant would fall within the mischief of
section 27 of the Contract Act. The court held that a contract, which
had for its object a restraint of trade, was prima facie void. (2 years
from last posting not allowed to do job)
• Foods Ltd. and Others v. Bharat Coca-cola Holdings Pvt. Ltd. & others observed,
• "It is well settled that such post-termination restraint, under Indian Law, violates
Section 27 of the Contract Act. Such contracts are unenforceable, void, and against
public policy. What is prohibited by law cannot be permitted by Court's injunction."
• In Niranjan Shankar Golikari v. The Century Spinning and Mfg. Co. Ltd., the
Hon’ble Supreme Court has provided a liberal arrangement to Contract Act’s section
27, further explaining that all non-compete clauses cannot be preserved to be non-
effective after the termination of the employment agreement, nor can such a clause be
declared prima facie prohibited and held, to be unenforceable. (training case 5 years)
• Bombay High Court in the case of Tapas Kanti Mandal v. Cosmos Films Ltd, held that negative
restrictive covenant post-employment period is not enforceable. In this case, the defendant took
employment as a manager in the Research and Development department in a multinational
company supplier of BOPP, before the employment the defendant entered into a service contract,
bond and secrecy agreement. The secrecy agreement provided for a non-compete clause for a period
of 3 years. However, the defendant after long years of service abruptly resigned and was to take
employment against the non-compete clause. The plaintiff submitted that the defendant, by virtue of
his employment, had acquired in-depth knowledge of the products of the company and had also
come in possession of confidential process and knowledge of manufacture of its product. He had
also been knowledgeable of various projects of the company, formulae, patterns, complexion,
programs, devices, methods, techniques and processes of the plaintiff company. Future plans of the
plaintiff company have been known to him and he has also been aware of unique ideas, discoveries
and inventions of the plaintiff company. Such knowledge as well as trade secrets, unique ideas,
discoveries, inventions, processes, projects are intellectual property of the plaintiff and by virtue of
his position in employment, the defendant had come across the same and had been in possession of
the same and he is under obligation not to divulge the same to any other person, partnership,
company, corporation as per the contractual obligations incurred by him. However, the Court did
not consider the argument and held that any clause restraining the right of profession of an
employee is non-enforceable.
• In light of this, it can be said that the Court did not apply reasonableness as an exception and took a
strict approach with regard to enforceability of non-compete clauses.
• (formula case)
Present Scenario
• Employees have an inherent right to resign from their employment and
they cannot be restrained from joining another organisation as that
would amount to “restraint of trade” in violation of Section 27 of the
Indian Contract Act, 1872. Having said that, it is also a settled
principle that unilateral resignation by the employee would not
automatically result in the cessation of employment – the employer
needs to accept the resignation in order to effectuate cessation of
employment.