Agreements in restraint of trade
Agreements in Restraint of Trade
1. Meaning
An agreement restricting a person from carrying out a trade, profession, or business is called an agreement in restraint of trade.
Example: A person agrees not to start a business similar to his former employer for 2 years in the same city.
2. Legal Provision
Section 27, Indian Contract Act, 1872:
“Every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, is to that extent void.”
Exceptions: Only restraint reasonable in the interest of parties or public is enforceable.
3. Types of Restraint
Absolute Restraint – Completely prevents a person from trade or profession forever or unreasonably.
Always void under Sec. 27.
Example: “A agrees never to start any business anywhere.”
Partial/Reasonable Restraint – Restriction for time, territory, or trade type, considered valid if reasonable.
Example: “A shall not carry on similar business within Delhi for 2 years.”
Courts often enforce if:
Necessary to protect goodwill or trade secrets.
Limited in time and place.
4. Key Principles (from case law)
Restraint must be reasonable – Courts examine:
Duration (time)
Geographical area (place)
Nature of trade restricted
Protection of legitimate interest – Reasonable restraint is valid only to protect legitimate business interest, not to stifle competition.
Public Policy Consideration – Absolute restraint is void as against public policy.
5. Case Laws
| Case | Facts | Principle |
|---|---|---|
| Niranjan Shankar Golikari v. Century Spg. & Mfg. Co. Ltd. (1967) | Employee agreed not to join rival company for 6 months. | Restraint of trade reasonable for protecting employer’s business; enforceable. |
| Balkrishna v. Bhogilal (1960) | Agreement completely prohibited trade indefinitely. | Void as absolute restraint; against Sec. 27. |
| R.K. Garg v. Union of India (1991) | Restraint on consultancy for 1 year after retirement. | Valid if limited and protects legitimate interest. |
| K.K. Verma v. Union of India (1970) | Complete ban on government employee from private trade. | Absolute restraint is void; partial reasonable restraint enforceable. |
6. Exceptions under Section 27
Sale of goodwill of business – The seller may agree not to start similar business in same locality for reasonable period.
Partnership dissolution – Partners may agree not to compete in same trade within a certain area for a limited time.
Employment contracts – Reasonable post-employment restrictions may be valid.
7. Summary Table
| Aspect | Rule / Principle |
|---|---|
| Legal provision | Section 27, Indian Contract Act, 1872 |
| Absolute restraint | Void, unenforceable |
| Partial restraint | Valid if reasonable in time, place, and trade; protects legitimate interest |
| Purpose | Protect business goodwill, trade secrets, or legitimate interest |
| Public Policy | Agreements cannot unreasonably stifle competition |
| Key Cases | Niranjan Shankar Golikari v. Century Spg., Balkrishna v. Bhogilal |
✅ In short:
Agreements in restraint of trade are generally void under Section 27, but courts enforce reasonable restrictions that protect legitimate business interests, are limited in time and space, and do not violate public policy.
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