article restrainn of trade valid or not

7/21/2019 Article Restrainn of Trade Valid or Not

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Agreement in restraint of trade after termination is void or not? - Pankaj Jain

Restraints whether general or partial may be good if they are reasonable. A restraint upon

freedom of contract must be shown to be reasonably necessary for the purposes offreedom of trade. A restraint reasonably necessary for the protection of the covenant must

prevail unless some specific ground of public policy can be clearly established against it.

However, to what extent a particular restraint ought to be in persistence is a matter ofcontroversy which needs to be discussed.

The courts in India have interpreted the issue of restraint of trade which is apparent to beappropriate in its view at various intervals. The inception of the present issue transpired

from since the year 1!" when the #upreme $ourt for the first time discussed the same in

%iran&an 'oli(ari)s case. In this case i.e. %iran&an #. 'oli(ari v. $entury #pinning $o.,

*1+ Respondent had employed the Appellant in its manufacturing business under anagreement. $lause 1" of the said agreement provided that In the event of the employee

leaving abandoning or resigning the service of the company in breach of the terms of the

agreement before the expiry of the said period of five years he shall not directly orindirectly engage in or carry on of his own accord or in partnership with others the

business at present being carried on by the company and he shall not serve in any

capacity, whatsoever or be associated with any person, firm or company carrying on suchbusiness for the remainder of the said period and in addition pay to the company as

li-uidated damages an amount e-ual to the salaries the employee would have receivedduring the period of six months thereafter and shall further reimburse to the company any

amount that the company may have spent on the employee)s training. The #upreme $ourthas held that the negative covenant in the present case is restricted as it is to the period of

employment, and to wor( similar or substantially similar to the one carried on by the

appellant when he was in the employ of the respondent company was reasonable andnecessary for the protection of the company)s interests and not such as the court would

refuse to enforce. There is therefore no validity on the contention that the negative

covenant contained in clause 1" amounted to a restraint of trade and therefore againstpublic policy. The $ourt has further held that the apprehension of the respondent

company that information regarding the special processes and the special machinery

imparted to and ac-uired by the appellant during the period of training and thereaftermight be divulged was &ustified that the information and (nowledge disclosed to him

during this period was different from the general (nowledge and experience that he might

have gained while in the service of the respondent company and that it was against his

disclosing the former to the rival company which re-uired protection. The $ourt held thatthe in&unction issued against him is restricted as to time the nature of employment and as

to area and cannot therefore be said to be too wide or unreasonable or unnecessary for the

protection of the interests of the respondent company.


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Though the issue was set forth that it was reasonable to restrain the appellant during the

term of the contract after the termination of the employment, the $ourt (ept it open onthe issue whether after the termination of employment and also after determination of the

period of contract, the covenant can be enforced on such other person.

In #uperetendence $o. of India v. rishan /urgai,*0+ the aforesaid issue was discussed.

However, in this particular case, the respondent was employed by the appellant company

as branch manager under letter of appointment. $lause 1 of the letter of appointmentprovided that he will not be permitted to &oin any firm of appellant competitors or run a

business of his own in similar lines directly and 2 or indirectly, for a period of two years

at the place of his last posting after he leave the company. Thereafter the respondent

started its own business on lines identical with or substantially similar to that of theappellant company after its termination of contract. In this case, 3ustice A. 4. #en has

observed that the decision in %iran&an 'oli(ari)s case is of little assistance to the

appellant. It is not see(ing to enforce the negative covenant during the term of the

employment of the respondent but after the termination of his services. The $ourt heldthat the restraint contained in clause 1 of the agreement is obviously in restraint of trade

and therefore illegal and unenforceable under section 0" of the $ontract Act. It has beenfurther held that the -uestion whether an agreement is void under section 0" must be

decided upon the wording of that section. There is nothing in the wording of section 0" to

suggest that the principle stated therein does not apply when the restraint is for a limitedperiod only or is confined to a particular area. #uch matter of partial restriction has effect

only when the facts fall within the exception to the section.

A contract which has for its ob&ect a restraint of trade is prima facie void. #ection 0" ofthe $ontract Act is general in terms and unless a particular contract can be distinctly

brought within 5xception 1 there is no escape from the prohibition. 6rom the aforesaid

case, it has been made explicitly clear that any contract which provides restraint after thetermination of the term of the contract is void and to which there is no need of entering

into its reasonability.

In Taprogge 'esellschaft /7H v. IA5$ India 8td.,*9+ the defendant entered into an

agreement of agency with 4laintiff. :nder $lause 19.1 of the said agreement it was

provided that, the agent must not recommend, offer, sell or represent products in

competition with the covered products. The same applies to the introduction of ownproducts and2or other industrial activities of the agent as well as to indirect or direct

participation in third enterprises or companies inside or outside of the agency territory;.

The 4laintiff sought to enforce the above negative covenant clause which the


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years at the place of his last posting. $lause 1 was operative for a period of two years

after he left the company. The service of the employee was terminated by the employer.

The single 3udge of the of his &udgment concluded that

the negative covenant against wor(ing during the term of the contract is not in restraint of

trade and that the doctrine of restraint of trade never applies during the continuance of thecontract. In 4ara 1 and 0, his 8ordship considered %iran&an 'oli(ari)s case and finally

in 4ara 09, held that %iran&an 'oli(ari)s case was not applicable. The $ourt held that in

the result the restrictive covenant which the plaintiff see(s to enforce in this suit clearlyfalls within the prohibition of section 0" of the Act. The $ourt followed the &udgment of

the #upreme $ourt in rishan /urgai as its ratio applies to this case. Having regard to

the rule laid down in rishan /urgai ?4ara 1" of this 3udgment@, the negative covenant

embodied in $lause 19.1 of the contract is void.

In /2s. 'u&arat 7ottling $o. 8td. v. $oca $ola $ompany.,*+ the appellant were

restrained by the Respondent and $ourt was in favour of invo(ing the negative covenant

clause against the appellant. The $ourt held that the negative stipulation operates onlyduring the period the agreement is in operation because of the express use of the words

during the subsistence of this agreement including the period of one year ascontemplated in paragraph 01,; in paragraph 1. 5xcept in cases where the contract is

wholly one sided, normally the doctrine of restraint of trade is not attracted in cases

where the restriction is to operate during the period the contract is subsisting and itapplies in respect of a restriction which operates after the termination of the contract.

Thus we find that in 'u&arat 7ottling)s case, the present issue i.e. restrain after the

termination of the contract did not arise and hence had not been discussed.

In 3et Airways ?I@ 8td v. r. 3an 4eter Ravi arni(.,*B+ the


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In Faheer han v. 4ercept

article restrainn of trade valid or not

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