Meaning and Concept
An agreement in restraint of trade refers to any agreement that restricts a person from exercising a lawful profession, trade, or business of any kind. Such agreements are generally considered void under the Indian Contract Act, 1872, as they go against public policy and the freedom of trade. The law ensures that every individual has the right to earn a livelihood without unreasonable restrictions. Restraints may be total (completely prohibiting trade) or partial (limiting trade in some way), but both are invalid unless they fall within recognized exceptions. The basic principle is that contracts restraining trade interfere with economic freedom and competition, which are essential for a healthy market and personal liberty.
Legal Provision – Section 27 of the Indian Contract Act, 1872
According to Section 27 of the Indian Contract Act, 1872, “Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.” This section declares such agreements void ab initio, meaning they have no legal effect from the beginning. However, certain exceptions exist—such as when goodwill of a business is sold, and the seller agrees not to compete within reasonable limits of time and place. Similarly, partnership-related restrictions under the Indian Partnership Act, 1932 (Sections 11(2), 36, and 54) are valid when they are reasonable. Thus, while the law generally prohibits restraint of trade, it allows limited exceptions in the interest of fairness and business protection.
Scope and Judicial Interpretation
The scope of Section 27 has been interpreted by courts to balance individual liberty with business necessity. Indian courts follow a strict view that even partial restraints are void unless they fit into the statutory exceptions. The leading case Madhub Chander v. Raj Coomar (1874) established that all restraints on trade, whether total or partial, are void. However, modern interpretations allow reasonable restrictions—for example, to protect trade secrets or goodwill. Indian law differs from English law, which accepts reasonable restraints based on fairness. Hence, the principle ensures that while business interests can be safeguarded, economic freedom remains the rule, and restraint is the exception.
Real-Time Example
Suppose A, a renowned tailor, sells his tailoring business to B and agrees not to open another tailoring shop in the same city for three years. This agreement is valid because it falls within the exception under Section 27, as it protects the goodwill purchased by B. However, if A had agreed never to open a tailoring shop anywhere in India, the restraint would be void since it unreasonably restricts his right to trade. Similarly, if an employer forces an employee not to work in the same industry after leaving the job, such clauses are generally void unless necessary to protect trade secrets or confidential information.
Easy Mnemonic
Use the mnemonic “T-R-A-D-E” to remember the rule about Agreements in Restraint of Trade:
- T – Total or partial restraint → Generally void.
- R – Reasonable restraint (goodwill, partnership) → Allowed.
- A – Absolute restriction → Invalid under Section 27.
- D – Doctrine of freedom of trade → Protected by law.
- E – Exceptions exist (sale of goodwill, partnership limits).
Think of “TRADE” — it reminds you that the freedom of trade is a fundamental legal principle, and restraints are allowed only when reasonable and lawfully justified under Section 27 of the Indian Contract Act, 1872.
About lawgnan:
To master topics like Agreements in Restraint of Trade under Section 27 of the Indian Contract Act, 1872, visit Lawgnan.in. Lawgnan offers comprehensive and student-friendly summaries, case law explanations, and mnemonics that make LLB studies easier. Whether you’re revising for exams or preparing assignments, you’ll find well-structured notes designed for clarity and accuracy. Learn how Indian law protects trade freedom while allowing reasonable exceptions. Enhance your legal knowledge, save study time, and prepare confidently with Lawgnan’s expertly crafted materials. Explore Lawgnan.in today — your trusted online companion for LLB success.
