"Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind is to that extent void." Discuss the statement along with the circumstances in which such agreements have been considered valid by the courts.
The statement reflects Section 27 of the Indian Contract Act, 1872, which renders void agreements in restraint of trade, profession, or business to that extent. The rationale lies in public policy: fostering competition, preventing monopolies, and ensuring individuals’ freedom to pursue lawful livelihoods. The philosophy is that contractual restraints on one’s economic liberty harm both the individual and society.
However, Section 27 is not absolute. Courts and statutes recognize limited exceptions where restraints are valid, provided they are reasonable and serve legitimate interests.
1. Sale of Goodwill (Exception to Section 27):
A seller may agree not to carry on a similar business within specified local limits as long as the buyer continues business there, provided the restraint is reasonable. This protects the value of goodwill. Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. Ltd. (1894) established the reasonableness test.
2. Partnership Agreements (Indian Partnership Act, 1932):
- Section 11: Partners may restrict themselves from engaging in competing business during partnership.
- Section 36: A retiring partner may agree not to carry on similar business within specified limits.
- Section 54: Partners may, upon dissolution, agree not to carry on similar business within specified limits.
All such restraints must be reasonable.
3. Trade Combinations:
Agreements regulating prices, output, or profit-sharing are not void if they merely regulate business and do not impose undue monopoly. (Fraser & Co. v. Bombay Ice Manufacturing Co., 1904).
4. Employment Contracts:
Restraints during employment (e.g., no competing work) are valid. Post-employment non-compete clauses, however, are generally void unless narrowly drawn to protect trade secrets or confidential information (Niranjan Shankar Golikari v. Century Spinning & Mfg. Co. Ltd., 1967).
Conclusion: While the default rule is invalidity, restraints are upheld when they protect legitimate interests and are reasonable in scope, duration, and area, thereby balancing freedom of trade with contractual autonomy.
Answered By:
Sakshi Negi
Sakshi Negi is a Delhi-based journalist and content specialist with expertise in educational content and digital media, focusing particularly on government exam preparation and career guidance. With a degree in Journalism and Mass Communication from NRAI School of Mass Communication and her background as a Kendriya Vidyalaya alumna, she brings unique insights into the Indian education system and government sector opportunities.
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