Question 2 (d)
Restraint of trade: why such agreements are void, and the exceptions
9 marks
- Time to write
- About 18 minutes
- Notes
- Crux notes
Question
Question 2 (d) · 9 marks"Agreements in restraint of trade are void". Discuss this statement, setting out the exceptions, if any, to this rule.
Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- DiscussTie the answer to the quoted statement: say what it means first, and come back to it at the end.
Write it in this order
- Read; underline the asks; jot your points 1 min
- 1 Section 27 and its rationale 3 marks 6 min
- 2 Exceptions, with illustrations 5 marks 9 min
- 3 Conclusion 1 mark 1 min
- Check: every ask answered, key terms underlined 1 min
Short on time? Trim steps 1 and 2 evenly rather than skip one: each is capped at its own marks. End with step 3 in a line or two.
Try it first. About 18 minutes for 9 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
Discussion. Section 27 of the Indian Contract Act, 1872 lays down that “every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind is, to that extent, void”.
1Gopal offers Ravi a pouch of money never to sell sweets again—Ravi waves it away; that paper is already waste.
Section 27Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind is, to that extent, void.
2Selling the shop and its goodwill is different: with the keys, a no-competition promise can stand.
Sale of goodwillMay agree with the buyer to refrain from carrying on a similar business within specified local limits.
3The promise stops at the dotted line—past those limits, Ravi sets up his stall freely.
Local limitsThe local limits must be reasonable.
- Sale of goodwill (Exception 1 to s. 27): a person who sells the goodwill “of a business may agree with the buyer to refrain from carrying on a similar business within specified local limits”; the restraint applies only while the buyer, or a successor to the goodwill, carries on a like business within those limits, and the local limits must be reasonable.
- Outgoing partner (s. 36, Indian Partnership Act, 1932): an outgoing partner may agree with the continuing partners not to carry on a similar business within a specified period or local limits, if the restriction is reasonable.
- Partners during the partnership (s. 11, Partnership Act): an agreement between partners not to carry on any competing business while the partnership lasts is valid.
- Service agreements: an employee's undertaking not to compete with the employer during the term of the service is not a restraint of trade; for instance, a physician's assistant who agrees not to practise during a three-year engagement can be restrained by injunction.
- Trade arrangements: an agreement by a manufacturer to sell his whole production for a period to one wholesaler is not a restraint of trade.
Conclusion. The statement is true as the general rule of section 27, subject to the statutory exception for sale of goodwill and the recognised cases above.
Where the 9 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Section 27 and its rationale | 3 |
| 2 | Exceptions, with illustrations | 5 |
| 3 | Conclusion | 1 |
| Total | 9 |
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