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Published : January 22, 2015 | Author : Rohit Singh
Category : Company Law | Total Views : 33771 | Rating :

Rohit Singh
4th year law student at Dr. RML National Law University, Lucknow.

Exceptions of agreement in restraints of trade with reference to Indian and English case laws

“And while the law of competition may be sometimes hard for the individual, it is best for the race, because it ensures the survival of the fittest in every department.”

A non-compete clause or a covenant not to compete is a term used in contracts under which the employee agrees to not pursue a similar profession, trade or business in competition against the employer. Apart from the regular employment agreements, such covenants are also at times included in the agreements relating to sale of goodwill of business or professional practice, employment exit and other exclusive dealings and service arrangements.

The Indian Contract Act, 1872, which provides a framework of rules and regulations, governing the formation and performance of a contract in India deals with the legality of such non-compete covenants. It stipulates that an agreement, which restrains anyone from carrying on a lawful profession, trade or business, is void to that extent. Under section 27 of the Indian Contract Act, 1872 agreements in restraint of trade are void.

Agreement in restraint of trade is defined as the one in which a party agrees with any other party to restrict his liberty in the present or the future to carry on a specified trade or profession with other persons not parties to the contract without the express permission of the latter party in such a manner as he chooses. Providing for restraint on employment in the employment contracts of the employees in the form of confidentiality requirement or in the form of restraint on employment with competitors has become a part of the corporate culture.

However, the researcher in his paper will be dealing with the exceptions for the same, which has also been provided in the later part of the same section i.e. 27 of the Indian Contract Act, 1872.

Every agreement by which anyone is restrained from exercising a lawful profession or trade or business of any kind, is to that extent void.

EXCEPTION: One who sells goodwill of a business with a 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 business.

Both in India and England the general Principle is almost same, namely, that all restraints of trade whether partial or total, are void. The only difference is that in England a restraint 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. To the extent to which these exceptions are an embodiment of the situations in which restraints have been found reasonable in England, the two laws are identical and not “widely dissimilar”. The English law may be a little more flexible as the word ‘reasonable’ enables the court to adapt it to changing conditions. As LORD WILBERFORCE remarked in Esso Petroleum Co Ltd v. Harper’s Garage(Stourport) Ltd “the classification(of agreements inn restraint of trade) must remain fluid and the categories can never be closed”.

The following passage in a judgment of the Supreme court shows the effect of absence of the test of “reasonableness”;

“The question of reasonableness of restraint is outside the purview of section 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. On that view, instead of being required to consider two questions as in England, the courts in India have only to consider the question whether the contract is or is not in restraint of trade”

“Profession, Trade or Business”:
But the 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”.

“Two landlords in the same neighbourhood, in order to avoid competition, agreed that a market for sale of cattle shall not be held on the same day on the lands of both of them.

The High court said: “It seems us that a landlord who in return for tolls or fees, allows a cattle market to be conducted on his land is not thereby exercising trade or business of selling cattle. He is only a landholder and an agreement on his part not to use the land on a certain day for a certain purpose does not amount to restraint of profession, trade or business”, the performance of religious services is.

The Madras High court took the lead provided by the Allahabad High court and came to the conclusion that submission of tenders for the purpose of obtaining a contract is not “a trade or calling”.

A Postal authority invited tenders for license for carrying mails. The Plaintiff, a bus owner, abstained from tendering on the promise of the defendant, another bus owner, to pay him some money. The latter obtained the contract but refused to pay the money.

The court said that the tendering to obtain a contract is not in the nature of a trade or calling. The court compared the case with an agreement between intending bidders and said that such an agreement was considered as being not opposed to public policy in few previous cases. Special Stress was laid upon a decision of the Privy Council where it was held that a court sale by public auction does not become void if a person had deterred others from bidding. But it is submitted with respect, that the decision is not an authority for the proposition that the collusion agreement between the bidders is itself valid and enforceable.

When the High court of Madras faced a problem of this kind again in a subsequent case, it reluctantly held that “the precedents are far too numerous to be got over, even if one should be disposed to disagree with the underlying reasoning therein”. The facts were that on an auction sale of fishery, the villagers colluded that only one of them shall bid for all of them and thereby the public authority was misguided as to the real value of the fishery. The agreement between the villagers was held to be valid.

All these matters should now be taken in the light of the provision in Section 33(1) (jb) of the monopolies and Restrictive Trade Practices Act, 1969 to the effect that an agreement as to making of bids, or excluding a person from bidding, at an auction for selling goods, shall be restrictive trade practice and, therefore, void unless it is necessary in public interest as spelled out in Section 38 of the act.

Now by the virtue of this clause, such collusive agreements can be held to be void unless they are necessary in Public interest within the meaning of Section 38. The clause is wide enough to cover cases of secret agreements as to participation in auction according to pre-planned terms. Though collusive tendering has not been specifically included in the clause, it is likely to be covered by the wide ambit of the clause because it is often difficult to distinguish an auction from a tender when a secret bids are invited in the shape of tenders.

There are two kinds of exceptions to the rule, those created by the statutes and those arising from judicial interpretations of Section 27.

1. Sale of goodwill :–
The only section mentioned in the proviso to Section 27 of the contract act is that relating to sale of goodwill. It is thus stated:

One who sells goodwill of a business with a 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 business.

Provided that such limits appear to the court reasonable, regard being had to the nature of business. Apparently the object is to protect the interest of a purchaser of a goodwill.

“It is difficult to imagine rhat when the goodwill and trade of a retail shop were sold, the vendor might the next day set up a shop within a few doors and draw off all the customers.” Therefore, some restrictions on the liberty of the seller becomes necessary. Indeed, the restriction is the only “means by which a saleable value is given to the goodwill of a business”. Far from being adverse to public interest, the restriction, by giving a real marketable value to the goodwill of a business, operates as an additional inducement to individuals to employ their skills and capital in trade and thus tend to the advantage of public interest.

Meaning of goodwill – There should be a real goodwill to be sold. “Goodwill” being an abstract property, is not easy to define. In the words of Lord ELDON :

The goodwill which has been the subject of sale is nothing more than the probability that the old customer will resort to old place

But in the opinion of Lord Macnaghten, as expressed in a subsequent case, goodwill means much more than this:

Often it happens that goodwill is the very sap and life of the business, without which the business would yield little or no profits. It is the whole advantage, whatever it may be, of the reputation and connection of firm, which may have been built up by years of honest work or gained by lavish expenditure of money.

These opinions were adopted by the judicial Committee in an appeal from a decision of the Calcutta High court.

The Plaintiff and the defendant were carrying on business as carriers of passengers by boats. The Plaintiff sold his business to the defendant for a sum of money and agreed to abstain from carrying on a boat business there for a period of three years.

The suit was brought to recover the promised sum. Allowing the Plaintiff’s action LORD HALDANE said “Their Lordships entertain no doubt that what took place was the sale of goodwill within the meaing put on the expression in such cases as Trego v. Hunt.”

Where the aim of an agreement is prevention of competition, it will be void even if its nakedness is concealed behind the “imposing facade of a sale” of goodwill. An attempt of this kind was in evidence in Vancouver Malt & Sake Brewing Co v. Vancouver Breweries Ltd.

A Company was licensed to manufacture liquor and beer but it confined its business to produce only “sake”, Japanese liquor made from rice. Its only customer was the government. It entered into an agreement with another wine and beer manufacturing company by which it sold its business and goodwill of manufacturing wine and beer, but not the right to produce sake.

The agreement was held to be devoid of any content. “The only business in which it was engaged was the brewing of sake and the goodwill of its licence so far as relating to sake was expressly excluded from sale. It had no goodwill to sell so far as regard the brewing of beer. Nothing has been sold. It is simply a case of the appellant undertaking to the respondent on consideration of a sum of money that it will not for 15 years varying on a particular branch of business. If there was any sale, it was a sale by the appellant of its liberty to brew beer and a purchase by the respondent of protection against the possible competition of the appellant in the brewing of beer.” LORD MACMILLAN then referred to the judgment of Lord Chancellor 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.

The agreement has to specify the local limits of the restraint. The seller can be restraint within certain territorial or geographical limits and the limits must be reasonable. Reasonableness of restrictions will depend upon many factors, for example, the area in which the goodwill is effectively enjoyed and the price paid for it.

The seller can only be restrained from carrying on a similar business and also only for such period for which the business sold is actually carried on either by the buyer or by any person deriving title to the goodwill from him.

2. Partnership Act;
There are four provisions in the Partnership act which validate agreements in restraint of trade. Section 11 enables partners during the continuance of the firm to restrict their mutual liberty by agreeing that none of them shall carry on any business other than that of the firm . Section 36 enables them to restrain an outgoing partner from carrying on a similar business within a specified period or within specified local limits. Such agreement shall be valid if the restrictions imposed are reasonable. A similar agreement may be made by partners upon or in anticipation of dissolution by which they may restrain each other from carrying on business similar to that of the firm

It is necessary for the validity of a restraint under Section 36 or 54 that;
1. The agreement should specify the local limits or the period of restraint, and
2. The restrictions imposed must be reasonable.

An agreement by a retiring partner not to carry on similar business on the land belonging to him and adjoining the factory of the firm, has been held to be reasonable and binding on the persons buying the land from him.

1. Trade Combinations;
It is now almost a universal practice for traders or manufacturers in the same line of business to carry on their trade in an organised way. Thus, there are combinations of ice manufacturers, grain merchants, sugar producers, etc. The primary object of such associations is to regulate business and not to retrain it. Combinations of this kind are often desirable in the interest of trade itself and also for the promotion of public interest. They bring about Standardised goods, fixed prices and eliminate ruinioous competition. Thus, “regulations as to the opening and closing of business in the market, licensing of traders, supervision and control of dealers and the mode of dealing are not illegal,” even if there is incidental deprivation of trade liberty. But the courts would not allow a restraint to be imposed disguised as trade regulations. Thus, an agreement between certain persons to carry on business with the members of their cast only, and an agreement to restrict the business of sugar mill within zone allotted to it, have been held void. An agreement between two companies that one would not employ the former employees of the other has been held to be void by reason of its generality. This was the situation in Kores Mfg Co Ltd v. Kulok Mfg Ltd.

Both Companies were engaged in manufacturing similar products involving technical process in which the employees were likely to acquire knowledge of trade secrets and confidential information. The companies agreed that neither would employ, without the written consent of the other, any person who had been the employee of the other for any time during the previous five years.

Though the agreement was between the two employers who were dealing at arm’s length and on equal terms, it was held to be void. It prohibited the appointment of any person by any company or the other who had been in the service of one or the other for any period, however short, and in any capacity, however humble. The ban was applicable as much as to an unskilled manual labourer who ,might have been employed even for a single day as to a highly skilled and long term employee, as much to a dismissed servant as to one who might have resigned; as much to a lay employee as to one who might have acquired confidential knowledge.

Agreements as to regulations of prices and output are generally upheld as valid. Thus, in a Bombay case.

Four grinning factories entered into an agreement fixing uniform rate for grinning cotton, and pooling their earnings to be divided between them in certain proportions.

The action was for division of profits and their being nothing in the agreement against Section 27, it was allowed.

Referring to the other part of the agreement, which fixed uniform rates, FARREN CJ said that an agreement of this description whereby traders agree amongst themselves to sell their wares at a fixed price, or labourers so as to agree to labour only at the stipulated wage have in the English courts usually been held void. But CANDY J. disagreed with him. He believed that the apparent objective was to prevent competition.

The question again arose in S.B.Fraser & Co v. Bombay ice Mfg Co.

An agreement between certain ice manufacturers fixed the minimum price for sale of ice, the proportion of the manufacture which each was to bear and of profits which each were to receive, some of them were restrained from selling at Poona and some other at streamers.

RUSSEL J. held that the agreement was not within the terms of Section 27, the whole object being to regulate business and not to restrain it.

Finally, the Allahabad High court faced the problem in Bhola Nath shaker das v. Laxmi Narain

The rules of an association of traders and weigh men provided that members shall not deal with outsiders, the penalty for breach being fine and expulsion. The legality of the association was attacked o the ground that its object and methods were unlawful as it aimed at the creation of a monopoly by shutting out all competition and was a defiance of the spirit of Section 23 and 27.

Rejecting the contention, Sen J. quoted Baron ALDERSON in Hilton v. Eckersley as saying: “prima facie it is the privilege of a trader in a free country in all matters not contrary to law, to regulate his own mode of carrying it on according to his own discretion and choice.”

2. Solus or Exclusive dealing agreements;
Another business practice in vogue is that a producer or manufacturer likes to market his goods through a sole agent or distributor and the latter agrees in turn not to deal with the goods of any other manufacturer. A producer may, for example, agree to sell all his outputs to one consumer who, in turn, agrees not to buy his requirements from any other source. As long as the negative stipulation is nothing but an ordinary incident of or ancillary to the positive covenant, there is hardly anything obnoxious to Section 27. Indeed in “one sense, every agreement for sale of goods whether in esse or in posse is a contract in restraint of trade for, if AB agrees to sell goods to CD, he preludes himself from selling them to anybody else”. Thus, an agreement by a manufacturer of dhotis to supply 1,36,000 pairs of certain description to the defendant and not to sell goods of that kind to any person for a fixed period. An agreement by a person to sell all the salt manufactured by him to a firm for five years. An agreement by a person to send all the mica produced by him to the plaintiffs, and not to send them to any other firm, nor to keep any in stock and an agreement by a buyer of goods for Calcutta market, not to sell them in Madras, have all been held to be outside the scope of Section 27 and therefore valid. Such negative stipulations do not have the effect of restraining the manufacturer. “On the contrary, he is encouraged to exercise his business because he is assured of a certain market for the products of his labour.”

But where a manufacturer or supplier after meeting all the requirements of a buyer, has surplus to sell to others, he cannot be restrained from doing so. The buyer cannot restrain the seller from dealing with others unless he can acquire the whole stock during the period of the agreement. The court may not countenance the agreement particularly where the buyers intend to corner or monopolise the commodity so that he may resell at his own price or where he binds the seller for an unreasonable period of time. Thus, in Shaikh Kalu v. Ram Saram Bhagat.

A seller of combs entered into an agreement with all the manufacturers of combs in the city of Patna whereby the latter undertook during their lifetime to sell all their products to R.S., and to his heirs and to sell the same to anyone else.

Holding the agreement void under Section 27, the court said : “It bound the manufacturers from generation to generation; it was unrestricted both as to time and place; it was oppressive; it was intended to create monopoly.”

The House of Lords has held that twenty one year period of exclusive dealing would be unreasonably wrong. The case before their lordship was Esso Petroleum co v. Harper’s Garage(Stourport)Ltd.

Esso co had an agreement with two garages which was to bind one for about four and a half years and the other for 21 years. During this period they had to buy the whole of their requirements from esso and to operate the garages in accordance with Esso co-operation plan. The garage which was bound for 21 years was also mortgaged to Esso against a loan which was repayable in instalments lasting for 21 years and not earlier.

The House of Lords unanimously held that the agreement fell within the sphere to which the doctrine of restraint applies and the period of 21 years being not reasonable, it was void, but the tie with other garage for 4 years and 5 months was reasonable. LORD PEARCE laid down:

The doctrine does not apply to ordinary commercial contracts for the regulation and promotion of trade during the existence of the contract provided that any prevention of work outside the contract viewed as a whole is directed towards absorption of the parties services and not their sterilisation. Sole agencies are a normal and necessary incident of commerce, and those who desire the benefit of sole agency must themselves the opportunity of other agencies. So too, in the case of a film star who may tie himself to a company in order to obtain from them the benefits of stardom.

Where a contract is reasonable and fair at the beginning, but circumstances have arisen which show that it is being enforced by one party in a manner which is prejudicial to the interest of other, the courts will hold the agreement to be unenforceable. Though not void or invalid. This opinion has been expressed by the court of appeal in shell U.K. Ltd v. Lostock garages.

A Petrol Pump was tied to shell for a period which the court found to be reasonable. Subsequently, on account of a sharp rise in petrol prices sales suffered in order to counteract this, some of the petroleum companies. The shell company did not do so, but instead adopted a support plan to compensate their pumps for losses suffered by them in selling at competitive prices. This support plan did not apply to lostock because his sale had not suffered to the extent contemplated by the support plan. Lostock attempted to get supplies from other companies and an injunction was sought against him. No injuction was, however, granted.

LORD DENNING MR first remarked that “It is now settled beyond doubt that a solus agreement is a contract in restraint of trade. As such it comes within that special class in which the courts can investigate the terms of the contract and see whether they are fair and reasonable. If they are unfair and unreasonable, the court may refuse to accept them.” His Lordship found that there was nothing unreasonable in the contract, it being only for 5 years. “At that time the parties did not anticipate that circumstances would arise in which Shell would subsidise neighbouring garages to such an extent as to force lostock to trade at a loss. The contingency was so improbable and extravagant that it would not invalidate the tie at the time it was made.” His Lordship then laid down that the court should not enforce a covenant in restraint of trade if circumstances afterwards arise in which it would be unreasonable or unfair to enforce it.

An agency for sale of goods of a german company in India which carried a term restraining the Indian Company from selling goods for 5 years after the termination of contract was held to be not enforceable. An agreement of this kind was okayed by the Supreme court where it was confined to the currency of the agreement. The case before the court was Gujrat Bottling Co ltd v. Coca Cola Co..

An agreement for grant of franchise by Coca Cola Co. To Gujrat Bottling Co. To manufacture, bottle, sell and distribute beverages under trademarks held by the franchiser contained the negative stipulation restraining the franchise to “manufacture, bottle, sell, deal or otherwise be concerned with the products, beverages of any other brands or trademarks during subsistence of this agreement including the period of one year notice.” It was held that the negative stipulation was intended to promote the trade. Moreover, operation of the stipulation was confined only to subsistence of the agreement and not after termination thereof. Hence stipulation could not be regard as in restraint of trade.

The court proceeded as follows”
“A stipulation in a contract which is intended for advancement of trade shall not be regarded as being in restraint of trade. Similarly, except in cases where the contract is wholly one sided, normally the doctrine of restraint of trade is not attracted in cases where is the restriction is to operate during the period the contract is subsisting and it applies in respect of a restriction which operated after the termination of the contract.”

“There is a growing trend to regulate distribution of goods and services through franchise agreements providing for grant of franchise by the franchiser on certain terms and conditions to the franchisee. Such agreements often incorporate a condition that the franchise shall not deal with competing goods. Such a condition restricting the right of the franchisee to deal with competing goods is for facilitating the distribution of the goods of the franchiser and it cannot be regarded as in restraint of trade.

The agreement in this question in this case was an agreement for grant of franchise by coca cola to GBC manufacturer, bottle, sell and distribute the various beverages for which the trade marks were acquired by Coca Cola. It was thus, a commercial agreement where under both the parties have undertaken obligations for promoting the trade in beverages for their mutual benefit. The purpose of the negative stipulation contained in the agreement was that GBC will work vigorously and diligently to promote and solicit the sale of the products produced under the trademarks of coca cola. This eold not be possible if GBC were to manufacture, bottle, sell, deal or otherwise be concerned with the products, beverages or any other brands or trade mark names. Thus, the purpose of the said agreement is to promote the trade and the trade negative stipulation seeks to achieve the said purpose by requiring GBC to wholeheartedly apply to promote sale of the products of Coca cola. Moreover, since the negative stipulation is confined in its application to the period of subsistence of the agreement and the restriction imposed therein is operative only during the period the agreement is subsisting, the said stipulation cannot be held to be in restraint of trade so as to attract the bar of Section 27 of the Contract Act.”

3. Restraint Upon Employees;
RESTRAINT DURING EMPLOYMENT; 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.” A servant may, therefore, be restrained from taking part in business in direct competition with that of his employer. Thus, in Charlesworth v Macdonald:

A agreed to become assistant for three years to B who was a physician and surgeon practising at Zanzibar. The appointment was subject to the clause against practising. A left the services within a year and began to practise there on his own account.

But he was restrained from doing so during the period of three years. FARRAN CJ. explained the principle thus:

“An agreement of this class does not fall within Section 27. If it did, all contracts of personal service for a fixed period would be void. 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 Ltd.

The defendant took employment as a weaving master in a mill and agreed not to serve in that 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 AFTER TERMINATION OF EMPLOYMENT; But an agreement to restrain a servant from competing with his employer after the termination of employment may not be allowed by the courts. Thus, in Brahmaputra Tea Co v E. Scarth, where an attempt was made to restrain a servant from competing for five years after the period of service, the court observed:

Contracts by which persons are restrained from competing, after the team of their agreement is over, with their former employers within reasonable limits, are well known in English Law, and the omission to make any such an exception to the general prohibition contained in Section 27 indicates that it was not intended to give them legal effect in this country.

The principles thus established have been approved by the Supreme Court in Niranjan Shanker Golikari v. Century spinning & Manufacturing Co Ltd.

A Company manufacturing tyre cord yarn was offered collaboration by a foreign producer on the condition that the company shall maintain secrecy of all the technical information and that it should obtain corresponding secrecy arrangements from its employees. The defendent was appointed for a period of 5 years, the condition being that during this period he shall not serve anywhere else even if he left the service earlier.

SHELAT J. held the agreement to be valid. The defendant was accordingly restrained from serving anywhere else during the currency of the agreement.

The evidence is clear that the appellant has torn the agreement to pieces only because he has been offered a high remuneration. Obviously he cannot be heard to say that no injunction should be granted against him to enforce the negative covenant which is not opposed to public policy. The injunction issued against him is restricted as to time, the nature of employment and as to are and cannot therefore be said to be too wide or unreasonable or unnecessary for the protection of the interest of the respondent company.

The learned judge distinguished the case from the decision of A.N. Ray J of the Calcutta High Court in Gopal Paper Mills Ltd v. Surendra k. Ganesh Das Malhotra where an injunction to enforce a negative covenant during the period of employment was refused as the agreement was for a period of twenty years and its term were also unconscionably. SHELAT J. said:

“The period of contract there was as much as 20 years and the contract gave the employer an arbitrary power to terminate the service without notice... such a contract would clearly be held void as being one sided”.

A Service contract carried a clause to the effect that the employee was not to disclose confidential information to any person after cessation of employment with the employer and was not to take up any employment or involve himself with any other person a body corporate in similar field of activity which was of competitive nature. This was held to be contrary to the provision of Section 27. An order of injunction could not be granted to enforce it at the interim stage itself.

I England the position of such restrictive covenants has been described to be “still an uncertain field”. LORD WILBERFORCE observed in the Esso Petroleum case:

Certain Contracts of employment, with restrictions appropriate to their character against undertaking other work during their currency may be acceptable. Here too, however, if it is found that the restriction is purely limitative or sterilising, it may be subject to examination.

The agreement was that the employee would put in service for a period of five years after returning from training abroad at the cost of the employer. An indemnity clause quantified damages at Rs 30,000 if the service was left earlier. The employee left after 18 months. The trial court awarded to the employer the whole amount of Rs 30,000. The High court reduced the amount to Rs 20,000 keeping in mind the proportionate recovery already effected during the actual period of service. Such agreements, the court said, are for the benefit of employees because training provided to them increases their acceptability in the job market. There is no restraint also because the employee is free to go away after paying unrecovered potion of expenses of training.

Protection of trade secrets;

One of the principles is that a master is not entitled to restrain his servant after the termination of employment from offering competition, but he is entitled to reasonable protection against exploitation of trade secrets. In Mason v. Provident Clothing Co the house of Lords did not allow an employer to restrain his canvasser for a period of three years after the termination his service. Viscount HALDANE LC pointed out that capacity for canvassing is a natural gift and not due to special training provided by the employer.

Had they been content with asking him to bind himself not to canvass within the area where he had actually assisted in building up the goodwill of their business, or in an area restricted to places where the knowledge which he had acquired in his employment could obviously have been used to their prejudice, they might have secured a right to restrain him within these limits.

On the other hand, in Fitch v. Dewes the House of Lords allowed a covenant by which a solicitor’s clerk was retrained from practising within 7 miles of the city, it being reasonably necessary for protecting the interest of both parties. But in no case the court would allow covenants against competitions. In Attwood v. Lamont the employer was running several departments in connection with tailoring etc. And the employee was the superintendent only of the tailoring department. The agreement with him was that after ceasing to be an employee he would not engage himself within 10 miles in any of the business being run by the employer in addition to tailoring. The court of Appeal held the agreement not only to be unnaturally wide but also in restraint of competition. YOUNGER LJ cited the following passage from the speech of LORD PRAKER in Morris v. Saxelby.

The reason and the only reason for upholding such a restraint on the part of an employee is that the employer has some propriety right, whether in the nature of the trade connection or in the nature of the trade secrets, for the protection of such restraints, is, having regard to the duties of an employee, reasonably necessary. Such a restraint has never been upheld, if directed only to the prevention of competition or against the use of the personal skill and knowledge acquired by the employee in his employer’s business.

The Law Commission of India in its 13th Report, way back in 1958, strongly recommended that section 27 be amended, since the constraints that it imposes on Indian business and contracts is commercially undesirable. More than five decades after that Report, and in the face of a legislative reluctance to accept the Law Commission’s recommendation, it appears that an amendment is not the only means to make the Indian position on restraint of trade commercially appropriate, and that the law as it stands, also permits and mandates a ‘reasonableness’ inquiry.

Whenever the issue of restraint of trade comes up in the Indian context, the first aspect highlighted is that the Indian position differs from the common law, by precluding a reasonableness inquiry. Therefore, the researcher wants to conclude that instead having depended only on Section 27 of Indian contract act, there must be some provision made to include ‘reasonableness’.
# Gujarat Bottling co Ltd v. Coca Cola Co, (1995) 5 SCC 545: (1995)84 Comp Cas 618.
# Sandhya Organic Chemicals p Ltd v. United Phosphorus Ltd, AIR 1998 Guj 177, where the court observed that the principle of English comman law can be used where the statutory provision cannot be understood without the aid of English law, but not beyond that.
# Rewashankar Samji v.Vedji, AIR 1951 Kutch 56
# AIR 1915 All 94
# Mohd Isack v. Daddapaneni, AIR 1946 Mad 289
# Pattipati Ramalingaiah v. nagulanganta subbarami AIR !951 Mad 390
# Foowing this, it has been held by the P & H High court in Sujan Singh v. Mokhan chand, AIR 1983 P&H 180, that an agreement between two bidders not to bid against each other with an understanding that the successful bidder would convey half the property to the other is not against the public policy
# LORD MACNAGHTAN in Trego v. Hunt, (1896) AC 7
# D.W. Achuterlonie v. Charles Bell,(1868) 4 Mad HCR 77,79.
# Cruttwell v. Lye
# Parasullah Malik v. Chandrakanta Das,(1917)21 CWN 979
# [1994] 1 All ER 188)
# AIR 1934 PC 101
# (1919) AC 548, 563 HL
# In Daulat Ram v. Dharam Chand, AIR 1934 Lah 110, where two ice factory owners constituting a partnership agreed that only factory will be worked at a time and its profits distributed among them. The restraint was held to be justified.
# Section 54, Partnership act
# In Krishna v. Shankar, (1954)56 Bom LR 973, where DESAI J explained the rules as to reasonableness of restrictions at pp. 978 -79
# Hukmi chand v. jaipur Ice and oil mills, AIR 1980 Raj 155
# Bom ice Co v. S.B Fraser & co., (1904)6 Bom LR23
# Bhola nath Shankar das v. Laxmi narain, (1931)29 All LJ 84
# Municipal committee v. Kaluram hiralal, AIR 1944 Nag 73
# Vaithelinga v. saminanda, ILR(1872)2 Mad 44
# Carew & co Ltd v. North Bengal Sugar mills, ILR(1951)2 Cal 386
# (1959) Ch 108; (1958)2 WLR 858
# Haribhai v. Sharaf Ali; (1897)22 ILR Bom 861.
# (1904) 29 ILR Bom 107
# AIR 1964 All 383
# 6 E. & B. 47
# Carliles Nephews & co v. Ricknauth Bucktermull, ILR(1882)8 Cal 809
# Mackenzie v. Striramiah (1890) 8 Mad 472
# Abdul karim v. SK Dubar
# Har Bilas v. Mahadeo Pd, AIR 1939 ALL 539
# (1908)8 CWN 388
# (1968) AC 269
# Gaumont British Picture Corpn Ltd v. Alexander, (1932) 2 ALL ER 1686
# (1977) 1 ALL ER 481, CA.
# Taprogge Gesellschaft MBH v. IAEC India Ltd, AIR 1988 Bom 157
# (1995)5 SCC 545
# Herbert Morris Ltd v Saxelby, (1916) 1 AC 688, 714, per Lord SHAW.
# Electrosteel Castings Ltd v Saw Pipes Ltd, (2005) 1 CHN 612 (Cal), where an employee agrees with his employer, e.g. to work with him faithfully for five years and not to work with any competitor during that period, the clause is a good clause. The court said:

# The clause is a good one, because it is not in restraint of any profession, trade or business. The restriction against working with a competitor during the period of one’s parent employment is not a restriction against profession but it is a restriction against breach of faith and loyalty. A whole-time employee, if he is to be diligent and loyal, can obviously serve only for master. The clause only enforces this condition of employment and is not in reality restrictive.

# ILR (1898) 23 Brom 103. See further Sociedade De Fomento Industrail Ltd v Ravindranath Subraya Kamat, (2000) 1 Mah LJ 148, a contract of retainership contained a clause that up to the currency of the engagement the employee would not undertake directly or indirectly by himself or by family members or by any person as his agent any activity competing with the business of the plaintiff companies; this was held not to be void.

# ILR (1898) 23 Bom. 103. See for further study: J. Finch, Restraint Clauses in General Medical Practitioner’s Partnership, 132 New LJ 27.
# AIR 1946 Bom 423. See also Lalbhai D. & Co v Chittaranjan, AIR 1966 Guj. 189: (1967) 2 SCR 378.

The Ag. Chief Justice reviews at pp.425-28 all the leading English cases on the subject. For other illustration see Pragji v Pranjiwan, (1903) 5 Bom LR 878; Madras Rly Co v Rust, (1890) 4 Mad 18; Shubha Naidu v Haji Badshah, (1902) 26 Mad 168; Burn & Co v Mc Donald, (1909) 36 Cal 354 : 9 Cal LJ 190; In this case as engineer Macdonald was brought by the company from England to work for them for five years. In the case of his leaving employment earlier he was to pay damages of $ 100. He left employment and refused to pay damages. The court did not permit him to continue his work with the new employer . The Court opied that the employee, could not act in such an overbearing manner. The Court proceeded on the illustrations (c) and (d) of S. 57 of the earlier Specific Relief Act, 1877. It did not advert to Section 27 to all. Niranjan Shanker Golikari v Century Spg & Mfg Co Ltd, AIR 1967 SC 1098: (1967) 2 SCR 378, a restraint during five years’ term of service \, held reasonable Numeric Power Systems Ltd v Mohd. Muzaffar, (2006) 4 Mad LJ 698, a covenant can be enforced during the continuance of the employment and it continues for this purpose till the employer is released. The stipulation in the contract that the negative covenant was to bind the employee for one year after termination of employment was not forced. Nazir Maricar v Marshalls Sons & Co (India) Ltd, (2005) 1 Mas LJ 659, section comes comes into play even when there is only a partial restriction. Justifiable restrictions are permissible. Training expenses were incurred, employee put on 5 year term, Rs 30,000 payable if he left earlier. He worked for 18 months. Rs 30,000 would have to be reduced proportionally.

# ILR (1885) 11 Cal 545.
# 1967 SCR (2) 378
# AIR 1962 Cal 61
# Sanmar Speciality chemicals Ltd. V. Dr. Biswajit Roy, AIR 2007 Mad 237.
# [1976] QB 801
# Nazir maricar v. Marshalls Sons & Co(India) Ltd,(2005)2 CTC 478
# [1913] AC 724
# [1913] AC 724
# [1920] 3 KB 571
# [2006] EWHC 286 (Ch)


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Article Comments

Posted by Niharika Sacheti on July 10, 2015
where a manufacturer or supplier after meeting all the requirements of a buyer, has surplus to sell to others, he cannot be restrained from doing so. The buyer cannot restrain the seller from dealing with others unless he can acquire the whole stock during the period of the agreement. The court may not countenance the agreement particularly where the buyers intend to corner or monopolise the commodity so that he may resell at his own price or where he binds the seller for an unreasonable period of time.

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