“Agreement of restraint of trade is void”

 

State and explain the law relating to agreement in restraint of trade or profession in the light of leading cases.

“Agreement of restraint of trade is void”. Examine this statement stating exceptions

“Agreement of restraint of trade is void”. Discuss.

Write short note on agreements in restraint of trade.

The Constitution of India guarantees to all citizens fundamental right to practise any profession, or to carry on any occupation, trade or business under Article 19(1) (g). In tune of this provision, the Contract Act in section 27 has provided as under-

27. Agreement in Restraint of Trade, Void- 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 Goodwill is Sold. One who sells the good-will 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 good-will 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.

Pollock and Mulla said that this section, like the last, unfortunately follows the New York draft Code, which has been the evil genius of this Act. The first paragraph is taken almost word for word from s. 833 of that production.

The original draft of the Indian Law Commission did not contain any specific provision on the subject. The New York draftsmen were of opinion that “contracts in restraint of trade have been allowed by modern decisions to a very dangerous extent.”

Anson said that ‘the law concerning restraint of trade has also changed from time to time both in form and spirit in response to changes to in conditions of trade’.

In Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. Ltd., [1894] AC 535 Thorsten Nordenfelt had established a valuable business in the manufacture of machine guns, operating in Sweden and England. His customers included most national governments across the world. He sold the business to a company, which then transferred it to Maxim Nordenfelt. At that time Thorsten Nordenfelt entered into an agreement with Maxim that he (Thorsten) would not for a term of 25 years engage in the manufacture of guns, explosives, etc, other than on behalf of the company.

Thorsten broke this covenant, alleging that it was unenforceable as being in restraint of trade. The House of Lords affirmed the decision of the Court of Appeal that the covenant, though operating as a world-wide ban, was not wider than was necessary to protect the interests of Maxim Nordenfelt. Lord Macnaghten stated that the public have an interest in every person’s carrying on his trade freely- so has the individual.

All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule.

But there are exceptions: restraints of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case. It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public.

In Schroeder Music Publishing Co. Ltd. v. Macaulay, [1974] 3 All ER 616 the plaintiff was a young and unknown songwriter who entered into a standard form agreement with music publishers (the defendants). The copyright in all the plaintiff’s compositions for the next five years was assigned to the defendants, with an automatic extension for a further five years if royalties exceeded £5,000.

The defendants could terminate the agreement on one month’s notice, but there was no similar power for the plaintiff. The defendants were under no obligation to publish any of the plaintiff’s work. The plaintiff sought a declaration that the agreement was in restraint of trade and void.

The House of Lords held that, where there was unequal bargaining power, a standard form agreement has to be looked at to see if, amongst other things, the restrictions it contains only go so far as is reasonably necessary to protect legitimate interests. In this case, the contract was in unreasonable restraint of trade because, whereas the plaintiff was totally committed to the defendants, the defendants were not obliged to publish anything.

Exceptions of Agreement in Restraint of Trade, Void:

The above rule that agreement in restraint on trade is void does not apply all the time. There are certain cases in which restraint of trade is valid in India. These are called the exceptions of the above rule which are as under-

Sale of Goodwill:

The seller of 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 one deriving title to the goodwill from him carries on a like business, provided that such limits are reasonable.

This provision is contained in Exception 1 attached to Section 27. For example- A, a seller of Care & Lovely in Guwahati, after selling the goodwill of his business to B promises not to carry on similar business “only in Guwahati for five years only.” As the restraint is reasonable the agreement is not void.

This exception deals with a class of cases which had a leading part in causing the old rule against agreements in restraint of trade to be relaxed in England.