Dr RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY

LUCKNOW

A RESEARCH PROJECT ON
EXCEPTIONS TO RESTRAINT OF
TRADE STUDY OF INDIAN AND ENGLISH CASE LAWS

Submitted to

Submitted by

Dr. Visalakshi Vegesna

Gayathree P Thampi

Associate Professor

Roll Number 58

Law of Contracts

Semester II - BA LLB

27TH March 2014

ACKNOWLEDGEMENT

This Project is a bonafide record of all the data collected pertaining to the topic. I hereby
acknowledge the help and support of our university Vice Chancellor Prof. Gurdip Singh, my
guide and teacher Dr. Visalakshi Vegesna, and the staffs of the library for their timely help and
suggestions. I thank all the teachers who have taught me. I also thank my friends for their sincere
support. Last but not the least; I thank my parents for all that they have given me and God
almighty for keeping me in best condition to finish this project in time and best of my abilities.

TABLE OF CONTENTS

Acknowledgement..1
Introduction....... 3
Research Project....4
Chapter 1 Restraint of trade..4
Chapter 2 Exceptions to restraint of trade.......7
Chapter 3 English case laws based on exceptions to restraint of trade....10
Chapter 4 Indian case laws based on exceptions to restraint of trade.12
Chapter 5 Why exceptions to restraint of trade?...............15
Research Methodology16
Coverage...16
Sources..16
References.17

Introduction
One of the fundamental problems today in India is the unethical practice of one company
soliciting employees of its competitors. It does not take a wise man to guess that the primary
motivation for such solicitation is to obtain the confidential information or trade secrets of the

company through its employees (particularly if the employee is senior in the organization). One
of the major differences in Indian law and English law on restraint of trade is thought to be the
fact that a reasonableness enquiry is not mandated by Indian law. Under Section 27 of the Indian
Contract Act, 1872, a plain reading suggests that all restraints of trade are void; it does not say
that only unreasonable restraints are void.
A recent paper by Shantanu Naravane, available on SSRN, argues through an analysis of the
case-law on the point (particularly, Niranjan Shankar Golikari and Krishan Murgai) that a
reasonableness enquiry is possible under Indian law as it stands. The abstract says, In this paper,
I challenge the assumption that a reasonableness inquiry finds no place in the Indian law on
restraint of trade, on the basis that the supposed statutory departure from common law has been
misunderstood, and the Supreme Court decisions on the issue have been misinterpreted. In other
words, it is the thesis of this paper that the common law on restraint of trade is not rendered
inapplicable by section 27. Given the commercial necessity of incorporating a reasonableness
inquiry, and the possibility of doing so even in the current statutory framework, this paper thus
argues that reasonableness can and should occupy a central role in the restraint of trade
jurisprudence in India.[1]

[1]

< http://legaldevelopments.blogspot.in/2010/03/place-of-reasonableness-in-restraint-of.html>, last accessed 03/03/2014

Restraint of trade
Restraint of trade is a common law doctrine relating to the enforceability of contractual
restrictions on freedom to conduct business. In an old leading case of Mitchell v Reynolds (1711)
Lord Smith LC said,[2]
"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. If the law has regulated

or restrained his mode of doing this, the law must be obeyed. But no power short of the general
law ought to restrain his free discretion."
A contractual undertaking not to trade is void and unenforceable against the promisor as contrary
to the public policy of promoting trade, unless the restraint of trade is reasonable to protect the
interest of the purchaser of a business. [3] The English law of restraint of trade is the direct
predecessor to modern competition law.[4] Its current use is small, given modern and
economically oriented statutes in most common law countries. Its approach was based on the two
concepts of prohibiting agreements that ran counter to public policy, unless the reasonableness of
an agreement could be shown
A restraint of trade is simply some kind of agreed provision that is designed to restrain another's
trade. To consider whether or not there is a restraint of trade in the first place, both parties must
have provided valuable consideration for their agreement. The restraint of trade doctrine is based
on the two concepts of prohibiting agreements that run counter to public policy, unless
the reasonableness of an agreement could be shown. A restraint of trade is simply some kind of
agreed provision that is designed to restrain another's trade.
The common law evolved with changing business conditions. So in the early 17th century case
of Rogers v Parry[5] it was held that a promise by a joiner not to trade from his house for 21 years
was enforceable against him since the time and place was certain. It was also held (by Chief
Justice Coke) that a man cannot bind himself to not use his trade generally.

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 - reasonable, that is, in reference to the interests of
the parties concerned and reasonable in reference to the interests of the public, so framed and so
guarded as to afford adequate protection to the party in whose favour it is imposed, while at the
same time it is in no way injurious to the public."
The onus of showing that the restraint goes no further than is reasonably necessary to protect the
interests of the person in whose favour the restraint operates lies on the party seeking to support
the restraint as reasonable: Herbert Morris Limited v Saxelby (1916) 1 AC 688 at 707.
4

Under English law, restraining clauses in employment contracts are enforceable if:

There is a legitimate interest which needs to be protected. Examples of such interests

include business connections and business secrets.

The restraint is reasonable, i.e. sufficiently protects the interest and goes no further.

Generally, if a restraining clause is found to be unreasonable, then it will be void. In certain

circumstances though the court may uphold it either by construing ambiguities or by severance.
Severance consists of the application of what is known as the "blue pencil test"; if individual
words which make the clause excessively wide are able to be crossed out and the clause still
makes grammatical sense, without altering the nature of the obligations, then the courts may be
willing to sever the illegal aspects of the clause and enforce the remainder.
Though the restraint of trade doctrine is still valid, the current use has been limited by modern
and economically oriented statutes of competition law in most countries.
In India, restraint of trade is not exceptionally popular. The nature of contracts which are in
restraint of trade generally and which exist merely because of the undue influence of one party
over the other party are considered void contracts under Section 27 of the Indian Contract Act.
To elaborate, Section 27 of the Indian Contract Act states that "every agreement by which
anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that
extent void.
In recent times, contracts which restrain trade and specifically restrain employees in any manner
have come under immense scrutiny by the judiciary. Effect of restraining trade in any manner.
However, there is an exception provided to the general rule under Section 27. This exception
applies when a person sells his business along with goodwill to another person and that person
may enter into an agreement with the seller restraining the seller from engaging in the same
business for a specific period of time or within a specified territory. Further, the Act provides a
rider which states that the conditions on restraint of trade must be reasonable given the nature of
the business.

Law treats agreements in restraint of trade as invalid contracts; as such contracts would appear
to be unfair, impose unreasonable restrictions on the other party and generally, conflict with
public interest.
The argument for expanding the scope of exceptions to Section 27 can be crystallized in just two
words "confidential information" or " trade secrets".
The existing exception to Section 27 that of purchase of goodwill forms only one part of
countless parts in the world of transactions. Obviously this exception would find no place in an
employer-employee relationship where there is no sale or purchase of goodwill but there is
definitely enough justification to cull out another exception to the principle of restraint of trade.[6]

[2]

Mitchell v Reynolds (1711) 1 P Wms 181

[3]

Nordenfelt v Maxim, Nordenfelt Guns and Ammunition Co [1894] AC 535

[4]

(1414) 2 Hen. 5, 5 Pl. 26

[5]

Rogers v Parry (1613) 2 Bulstr 136

[6]

Restraint of Trade, manupatra online web journals, < http://www.manupatrafast.com/articles/PopOpenArticle.aspx?ID=a6cfd61d-d7de-48a7-a0933f14098affb5&txtsearch=Subject:+Contract>, last accessed on 03/03/2014

Exceptions to restraint of trade

Restraint of trade is not a very much encouraged provision in Indian Contract Act. Therefore you
can find a number of exceptions to it. There are mainly three exceptions to the restraint of trade.
Exception 1 One who sells 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
person deriving title to the goodwill from him, carries on a like business therein: Provided that
such limits appear to the court reasonable, with regards to the nature of the business. The rule
does not apply to two categories of contracts in restraint of trade.
6

Exception 1 holds as valid an agreement where a seller of a business agrees to restrain himself
from competing with his purchaser within specified local limits and within the duration the
purchaser carries on that business.
The extent of the area of the restraint is regulated by the words specified local limits, which
means an area specified by the parties within the country. Thus, within the country, the parties
can choose the area to which the limits could apply.
However, the exception has a proviso to the limit that they appear to the court reasonable,
regard being had to the nature of the business. As to the limit of the area to which the restraint
can apply, the courts have to use a test of reasonableness based on whether, with regard to the
nature of the business, the limits imposed are reasonable.
With regard to the duration to which the restraint can be applied, this is ruled by the words so
long as the buyer ... carries on a like business. This is quite clear. As long as the buyer is
working the purchased business, the restraint is enforceable on the seller. [7]
Exception 2 Partners may, upon or in anticipation of a dissolution of the partnership, agree
that some or all of them will not carry on a business similar to that of the partnership within such
local limits as are referred to in Exception 1.[8]
Exception 2 seems to be unusual. Partners can be restrained from carrying on a similar business
on dissolution of the partnership. If such an agreement is upheld, it simply means that all the
former partners cannot do what they have been doing. Although, as mentioned above, they may
restrain each other from carrying on a business similar to that of the partnership, it may not
include working as an employee in a similar business.
Exception 3 Partners may agree that some or all of them will not carry on any business, other
than that of the partnership, during the continuance of that partnership. Exception 3 is also very
restrictive in that the partners, during a partnership, can restrain each other from carrying on any
other business apart from that of the partnership. If such an agreement is enforced, it will not be
conducive to trade.[8]

Indian Perspective
Section 27 of the Indian Contract Act, 1872 specially provides that every agreement by which
anyone is restrained from exercising a lawful profession, trade or business of any kind, is to the
extent void. Section 27, does not draw any distinction between partial (reasonable) and complete
restraint. Thus whether the agreement imposes a total restraint, e.g., it says that A shall not carry
on a trade anywhere in the country during his lifetime, or it imposes a partial restraint requiring
A not to trade with a certain area or for a certain duration, the contract is void. Point to be noted
in this regard is that in India even reasonable restraint are void unless they fall under two kinds
of exceptions that are upheld, first category is of this which are specifically mentioned in the
statues and the second is of those which are created by the judiciary by its judgments. It is quite
pertinent to note at this juncture that the Indian Contract Act owes its origin to the English
Contract Act where contracts in restraint of trade are upheld if the degree of restraint is
reasonable.

There are many exceptions to the rule, some of them are created by statutes and some are arising
from judicial interpretation of section 27. The exceptions are as follows:
a)
Sale of goodwill: One who sells 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 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 the business.
b)
Partnership: Under Partnership Act, partners of a firm may restrict their mutual liberty to
do any trade other than within their firm. An outgoing partner may also be restricted from
carrying on similar trade for a period of time.
c)
Trade Combinations: Companies doing business in the same field may regulate their trade
practices for example opening and closing time of business even if they marginally put restraint.
However, restrain on employment are not allowed in disguise of regulation. This was seen in the
case of Kores Mfg Co Ltd v. Kolok Mfg Co Ltd [9] where the Companies made an agreement that
they would not hire anybody who has worked in the other company in past 5 yrs. The agreement
was held void.

d) Restraint upon employees: The restraint upon employees can be seen in the case
of Niranjan Shanker Golkari v. Century Spinning and Manufacturing Co Ltd- A company were
offered collaboration by a foreign company on the condition that they will maintain complete
secrecy. A person was employed in the company on the condition that he will not work for any
other company in the same business for 5 years. SC held the agreement valid.

[7]

<http://www.lawyersclubindia.com/articles/print_this_page.asp?article_id=3625>, last accessed on 03/03/2014

[8]

<http://www.hba.org.my/articles/bhag_singh/page03/restraints_in_contracts.htm>, last accessed on 03/03/2014

[9] Kores Manufacturing Co. Ltd. v. Kolok Manufacturing Co. Ltd. [1959] Ch. 108

English case laws based on exceptions to restraint of trade

There are numerous cases pertaining to the exceptions in restrint to trade. Few of them are
enumerated here.

Mitchell v Reynolds (1711) 1 P Wms 181

This was perhaps one of the most important cases in the history of law of contracts. This was a
landmark case in deciding the aspects of restrain to trade and its exceptions. This case is often
cited for the promise of restraint from a particular business. The judgment says that a bond
or promise to restrain the vendor of a business from trading in a particular place, if made upon
a reasonable consideration, is good
The defendant sold his baker's business in the parish of St. Andrew, Holborn, to the plaintiff for
five years, and agreed not to exercise the trade of a baker within the said parish for the period of
five years, under a penalty of 50. On breach of the covenant, the plaintiff sued for the 50. Held,
he was entitled to recover damages.[10]
Nordenfelt v. Maxim, Nordenfelt Guns and Ammunition Co [1894] AC 535
(1414) 2 Hen. 5, 5 Pl. 26
Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 is a 19th-century
English case decided by the House of Lords. It defines the "Blue pencil doctrine" as a method for
deciding whether contractual obligations can be partially enforced when the obligation as drafted
in the contract has an element of illegality. The dispute was about restraint of trade. A patentee
and manufacturer of guns and ammunition for purposes of war covenanted with a company to
which his patents and business had been transferred that he would not for twenty-five years
engage except on behalf of the company either directly or indirectly in the business of a
manufacturer of guns or ammunition:
Held, affirming the decision of the Court of Appeal ([1893] 1 Ch. 630), that the covenant though
unrestricted as to space was not, having regard to the nature of the business and the limited
number of the customers (namely the Governments of this and other countries), wider than was
necessary for the protection of the company, nor injurious to the public interests of this country;
that it was therefore valid and might be enforced by injunction.[11]
Dyers case
The Dyers case, (1414) 2 Hen. V, fol. 5, pl. 26, is perhaps the earliest common law case dealing
with that issue. In that 15th century case, the defendant had entered into an apprenticeship
agreement whereby his debt was to be forgiven if he did not engage in his trade for a half of a
10

year. The plaintiff, who apparently was a no-show at trial, filed an action and Judge Hull angrily
responded with A ma intent vous purres avec demurre sur ley que lobligation est voide ce que
le condition est encounter common ley et per Dieu se le plaintiff fuit icy il irra al prison tanque il
ust fait fine au Roy (On my action, you could claim a demurrer, on the plea that the obligation is
void, or that the contract is contrary to common law; and on Oath, if the plaintiff were present,
he would be put in close confinement and pay a fine to the King).[12]

Esso Petroleum v Harper's Garage (Stourport) Ltd [1968] 2 AC 269

The defendant ran two garages under solus agreements with the plaintiffs
who complained when the defendants began to purchase petrol from
cheaper alternative sources. The House was asked whether the solus
agreements were be regarded in law as an agreement in restraint of trade.
Held: An agreement in restraint of trade is not generally unlawful if the
parties choose to abide by it: it is only unenforceable if a party chooses not
to abide by it. It was necessary to ascertain the legitimate interests of the
landlords which they were entitled to protect and to discover whether those
restraints exceeded what was adequate for that purpose.[13]
[10] <http://www.insitelawmagazine.com/ch13illegaility.htm>, last accessed on 03/03/2014

[11] <http://en.wikipedia.org/wiki/Nordenfelt_v_Maxim,_Nordenfelt_Guns_and_Ammunition_Co_Ltd>, last accessed on

03/03/2014

[12] <http://calcorporatelaw.com/2012/09/court-says-no-way-to-no-hire/>, last accessed on 03/03/2014

[13] <http://swarb.co.uk/esso-petroleum-co-ltd-v-harpers-garage-stourport-ltd-hl-1968/>, last accessed on 03/03/2014

Indian case laws based on exceptions to restraint of trade

11

In India, restraint of trade is not viewed well. Therefore exceptions are more prominent than the
rule itself. There are numerous cases related to restraint of trade and its exceptions. A few are
listed below.

Superintendence Company Of India v. Krishan Murgai 1980 AIR 1717, 1980 SCR (3)1278,
Civil Appeal No. 1933 of 1979.
The appellant company carries on business as valuers and surveyors undertaking inspection of
quality, weighment analysis, sampling of merchandise and commodities, cargoes, industrial
products, machinery, textiles etc On March 27, 1971, the respondent was employed by the
appellant company as the Branch Manager of its New Delhi office on terms and conditions
contained in the letter of appointment issued to him on the same date. Clause (10) of the terms
and conditions of employment placed the respondent under a post service restraint that he shall
not serve any other competitive firm nor carry on business on his own in similar line as that of
the appellant company for two years at the place of his last posting. Thereafter, respondent
started his own business under the name and style of "Superintendence and Surveillance
Inspectorate of India" at E-22 South Extension New Delhi on lines identical with or substantially
similar to that of the appellant company. On April 19, 1979 the appellant company brought a suit
in the Delhi High Court on its original side, claiming Rs. 55,000/- as damages on account of the
breach of negative covenant contained in clause (10);
It was held that Agreements of service, containing a negative covenant preventing the employee
from working elsewhere are not void under section 27 of the Contract Act, on the ground that
they are in restraint of trade. Such agreements are enforceable, the reason being that the doctrine
of restraint of trade never applies during the continuance of a contract of employment and
applies only when the contract comes to an end.

While during the period of employment the Courts undoubtedly would not grant any specific
performance of a contract of personal service, nevertheless Section 57 of the Specific Relief Act
clearly provides for the grant of an injunction to restrain the breach of such a covenant, as it is
not in restraint of, but in furtherance of trade.[14]
12

Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. Ltd, 1967
INDLAW SC 383
The appellant joined the service of the respondent company as Shift Supervisor and was given
training in the manufacture of tyre cord yarn. The contract was for five years and it was
stipulated that during the said period the appellant would not work in similar capacity in any
other concern and would maintain secrecy as to the technical aspects of his work. However,
shortly after completing his training the appellant joined a rival concern at higher emoluments.
The respondent company thereupon filed a suit for an injunction against the appellant restraining
him from working elsewhere as a shift Supervisor in the manufacture of tyre cord yarn or in
similar capacity and from divulging the trade secrets of the respondent company. The injunction
was granted. His appeal before the High Court having failed, the appellant came to this Court
under Art. 136 of the Constitution.
It was contended on his behalf that the covenant was against public policy within the meaning of
s. 27 of the Indian Contract Act, that it was unreasonable, and that it was unnecessary for
Safeguarding the trade interest of the company.[15]

Damodar Laxman Lele v Kashinath Waman lele, (1906) 9 BOM LR 312; Dev Sharma v
Laxmi Narain, AIR 1956 punj 49
In this case the defendant was the owner of a printing press at Wai and from that press he
published a paper called "Modavritta" and he also published a supplement to that paper which
consisted of a translation of a certain portion of a Sanskrit book called "Devibhagwat" into the
Marathi language.
On the 9th January 1903, the plaintiff and defendant entered into two agreements. One was that
say that defendant is to write a certain number of articles every week for the paper and further
defendant was to go on giving translations of " Devibhagwat" from week to week and in
consideration of that he was to get Rs. 25 per month from the plaintiff. Another is says that he

13

has no right or interest whatever in the printing and copyright in respect of the newspaper and in
the Devibhagwat.
Defendant ceased translating the portions of "Devibhagwat" for the plaintiff and on the 16th
November 1903 defendant announced his intention of translating the "Devibhagwat" in
connection with a paper called "Dharma," which he had started himself after the sale of the
"Modavritta. The Court doth perpetually restrain the respondent Kashinath Waman Lele, his
servants and agents, from issuing any notice to the former subscribers of " Modvritta " to the
prejudice of the plaintiff's rights therein and from publishing any translation of "Devibhagwat"
except for the plaintiff. So far as the damages are sought the claim fails.[16]

[14] < http://indiankanoon.org/doc/1186410/>, last accessed on 03/03/2014

[15] < http://www.indiankanoon.org/doc/452434/>, last accessed on 03/03/2014

[16] < http://www.indiankanoon.org/doc/1924933/>, last accessed on 03/03/2014

Why exceptions to restraint of trade?

Section 27 of the Indian Contract Act, 1872 (IC Act) stipulates that an agreement, which
restrains anyone from carrying on a lawful profession, trade or business, is void to that extent.
The reasoning behind this section is that agreements of restraint are unfair, as they impose an
undue restriction on the personal freedom of a contracting party. However, as an exception, if a
14

party sells his goodwill to another he can agree with the buyer that he will not carry on a similar
business within the specified local limits.
As can be seen from the foregoing provision, Indian law is rigid and invalidates all restraints,
whether general or partial. Neither the test of reasonableness, nor that of partial restraints applies
to a case governed by section 27 of the IC Act, unless the restraint falls within the exception of
that section. Upon a literal construction, section 27 of the IC Act invalidates all agreements that
impose a total bar on the exercise of a lawful business. The Supreme Court of India has held that
to the extent the IC Act deals with a particular subject, importing principles of English law
dehors the statutory provisions cannot be permitted, unless the statute is such that it cannot be
understood without the aid of the English law. The question whether an agreement is void under
section 27 of the IC Act must be decided upon the wording of that section alone.
Since the underlying principle governing all contracts in restraint of trade was the same, the
principle not only applied to contracts of employment but to other contracts as well. The court,
however, ruled that a negative stipulation contained in a franchise agreement restraining the
franchisee from dealing with competing goods was to facilitate the distribution of the goods of
the franchiser and could not be regarded as a restraint of a right to trade. On many occasions ,
business exigencies require impositions of certain restraints. The attitude towards public policy
has always been subject to change in tandem with the change and development in trade and
economic thought. Therefore, the general principle applicable to agreements in restraint of trade
needs to be suitably modified.

Research Methodology
Coverage

15

This project covers the fundamental aspects of the doctrine of restraint in trade.and exemptions
to it. It also studies in detail few important cases which are often cited while dealing with the this
doctrine and its exemptions.
Sources
This project is made using both primary sources like books and newspaper
articles and secondary sources like internet.

References

< http://indiankanoon.org/doc/1186410/>, last accessed on 03/03/2014

< http://www.indiankanoon.org/doc/452434/>, last accessed on 03/03/2014

16

< http://www.indiankanoon.org/doc/1924933/>, last accessed on 03/03/2014

<http://www.insitelawmagazine.com/ch13illegaility.htm>, last
accessed on 03/03/2014

<http://en.wikipedia.org/wiki/Nordenfelt_v_Maxim,_Nordenfelt_Guns
_and_Ammunition_Co_Ltd>, last accessed on 03/03/2014

<http://calcorporatelaw.com/2012/09/court-says-no-way-to-nohire/>, last accessed on 03/03/2014

<http://swarb.co.uk/esso-petroleum-co-ltd-v-harpers-garagestourport-ltd-hl-1968/>, last accessed on 03/03/2014

<http://www.lawyersclubindia.com/articles/print_this_page.asp?article_id=3625>,
last accessed on 03/03/2014

<http://www.hba.org.my/articles/bhag_singh/page03/restraints_in_contracts.htm>,
last accessed on 03/03/2014

Kores Manufacturing Co. Ltd. v. Kolok Manufacturing Co. Ltd. [1959] Ch. 108
Mitchell v Reynolds (1711) 1 P Wms 181
Nordenfelt v Maxim, Nordenfelt Guns and Ammunition Co [1894] AC 535
(1414) 2 Hen. 5, 5 Pl. 26
Rogers v Parry (1613) 2 Bulstr 136
Restraint of Trade, manupatra online web journals,
<http://www.manupatrafast.com/articles/PopOpenArticle.aspx?ID=a6cfd61d-d7de48a7-a093-3f14098affb5&txtsearch=Subject:+Contract>, last accessed on 03/03/2014

< http://legaldevelopments.blogspot.in/2010/03/place-of-reasonableness-in-restraintof.html>, last accessed on 03/03/2014

17