Question 1 (a)
Void agreements; agreements in restraint of trade
6 marks
- Time to write
- About 12 minutes
- Notes
- Crux notes
Question
Question 1 (a) · 6 marksDefine what is meant by "void agreements"? Discuss, with suitable examples, those agreements that are in restraint of trade.
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
- Define…?Discuss…Two asks in one question: answer both.
- suitable examplesExamples are asked for: one short example with each point.
Write it in this order
- Read; underline the asks; jot your points 1 min
- 1 Meaning of void agreement (s. 2(g)) and the expressly void agreements 2 marks 3 min
- 2 Section 27: the rule against restraint of trade 1½ marks 3 min
- 3 Exceptions 1½ marks 2 min
- 4 Suitable examples 1 mark 2 min
- Check: every ask answered, key terms underlined 1 min
Easy marks
- Step 1 opens with the meaning: a one-line definition, the quickest mark in it.
Short on time? Trim steps 1–3 evenly rather than skip one: each is capped at its own marks. End with step 4 in a line or two.
Try it first. About 12 minutes for 6 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.
Void agreement. Under section 2(g) of the Indian Contract Act, 1872, an agreement not enforceable by law is said to be void. Such an agreement has no legal effect from the very beginning: it is void ab initio. The Act expressly declares several agreements void, among them agreements by incompetent parties (s. 11), agreements under a bilateral mistake of fact (s. 20), agreements with an unlawful object or consideration (ss. 23, 24), agreements without consideration (s. 25), agreements in restraint of marriage (s. 26), of trade (s. 27) and of legal proceedings (s. 28), uncertain agreements (s. 29) and wagering agreements (s. 30).
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.
Agreements in restraint of trade (section 27). Any agreement that prevents a person from carrying on a lawful profession, trade or business of any kind is void, to the extent of that restraint. The law protects every person's freedom to carry on a lawful calling, so a promise not to compete is, in general, unenforceable.
Exceptions. The rule does not apply in the following cases:
- Sale of goodwill. A seller of the goodwill of a business may agree with the buyer not to carry on a similar business inside a specified local area for as long as the buyer (or his successor) carries on a like business there, provided the limits are reasonable.
- Outgoing partner (s. 36, Indian Partnership Act, 1932): an agreement not to carry on a similar business within a specified period or local limits is valid if the restrictions are reasonable.
- Partners during the partnership (s. 11, Partnership Act): partners may agree not to carry on a competing business while the partnership continues.
- Service agreements. An employee's promise not to compete with the employer during the term of the employment is not a restraint of trade.
Examples. A, a physician, employs B as an assistant for three years and B agrees not to practise independently during that time: the agreement is valid, and B can be restrained by injunction. An agreement by a manufacturer to sell his entire production for a period to one wholesaler is also not a restraint of trade. By contrast, if a shopkeeper agrees, for payment, to close his shop and never trade in the town again, without any sale of goodwill, the agreement is void under section 27.
Where the 6 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Meaning of void agreement (s. 2(g)) and the expressly void agreements | 2 |
| 2 | Section 27: the rule against restraint of trade | 1.5 |
| 3 | Exceptions | 1.5 |
| 4 | Suitable examples | 1 |
| Total | 6 |
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