Question 2 (b)
Agreements in restraint of trade and the exceptions
6 marks
- Time to write
- About 12 minutes
- Notes
- Crux notes
Question
Question 2 (b) · 6 marks"Agreements in restraint of trade are void". Comment on it. Also state what exceptions there are 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
- Comment…State…Two asks in one question: answer both.
- CommentA statement to judge: take a stand on it in your first line, and come back to it at the end.
Write it in this order
- Read; underline the asks; jot your points 1 min
- 1 The rule in section 27 1½ marks 1 min
- 2 Comment on the statement 1½ marks 3 min
- 3 Exceptions 3 marks 6 min
- Check: every ask answered, key terms underlined 1 min
Easy marks
- The rule in section 27 (step 1, 1½ marks): state the rule and its section exactly. It earns its marks before you apply it to the facts.
Short on time? Keep step 1 short. Trim steps 2 and 3 evenly rather than skip one: each is capped at its own marks.
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.
The rule. Section 27 of the Indian Contract Act, 1872 provides 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.
Comment. The statement is correct as a general rule. The law favours freedom of trade, and a promise not to carry on a lawful calling is unenforceable even if the restraint is partial or reasonable, because section 27 does not draw that distinction; the restraint is void "to that extent". The statement is incomplete, though, because the rule has exceptions.
- Sale of goodwill (Exception 1 to s. 27): 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 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 reasonable.
- Partners during the partnership (s. 11, Partnership Act): an agreement not to carry on a competing business while the partnership continues is valid.
- Service agreements: an employee's promise not to compete with the employer during the term of employment is not a restraint of trade. For example, an assistant engaged by a physician for three years may be restrained by injunction from practising independently during that term.
Where the 6 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | The rule in section 27 | 1.5 |
| 2 | Comment on the statement | 1.5 |
| 3 | Exceptions | 3 |
| Total | 6 |
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