Agreement in Restraint of Trade

Certain types of agreements are declared as void by statues. Those agreements are harmful to Society and they are called 'Agreements Opposed to Public Policy'. Out of them, agreement in restraint of trade is one.

What is agreement in Restraint of Trade

The agreements which restrict trade business or profession are called agreements in restraint of trade. One citizen cannot restrict lawful business of the other.

  • A case on this point is Madhav Vs Rajkumar.
  • Another case on this point is Cohen Vs Wilken. In this case A is owner of a theater and B is a dancer. According to their Contract B has to Conduct his dance programs at A`s theater only throughout life. Thereafter B breaches the Contract and A Sue`s. Court decides that it is agreement in restraint of trade and therefore A cannot take any legal action.

What are the exceptions for Restraint of Trade

The following are some occasions on which agreement in restraint of trade attains Validity.

Sale of Goodwill: In case where sale of Goodwill takes place, the person who has paid for Goodwill can restrict the other on reasonable base from doing the business concern.

With retiring Partner: At the time of retirement of the partner, the existent partners can restrict the retiring partners from carrying on the same business.

Among Partners: Partners of a firm may enter into an agreement in restraint of trade according to which no one of them should carry-on the same business individually. It is Valid.

At the time of dissolution: Partners of a firm can make an agreement in restraint of trade at time of dissolution of firm according to which no one of them should do the same business without prior permission from others.

Elimination of Competition: An agreement in restraint of trade can be made to eliminate competition on reasonable basis. In Madav Vs Rajkumar the objective of their agreement is elimination of competition but it is not on reasonable basis. Hence it is held to be Void.

Trade Unions: A trade Union may restrict an entrepreneur or an enterprise from doing certain business for the purpose of labor welfare. It is Valid but it should be a registered trade union.

Analysis as per England Law

In accordance with England law, agreement in restraint of trade attain validity if it is reasonable restraint. Absolute restraint is Void.

  • A case on this point is Nordenfelt Vs Maxim Nordenfelt Gun Company. In this case B purchases A`s gun manufacturing business. Thereafter, by means of an agreement, B restricts A from carrying on production of guns for a period of 10 years. This agreement is breached and a suit is filed by B. England Court decides that as restriction is of reasonable nature, it is Valid and B should not do the same business till expiry of agreed period.


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