Why an agreement in restraint of trade is void?


An agreement that interferes with the liberty of a person to engage himself in any lawful profession, trade (or) Business of any kind is called ‘An Agreement in restraint of trade’. The general principle of law is that all restraints of trade are void. But in India, it is valid if it falls within any of the statutory exceptions. The following are the exceptions to the rule that “An Agreement in restraint of trade is void” -  a) Sale of goodwill. b) Partner’s agreement. c) Trade combinations. d) Service agreements.

a) Sale of goodwill: A seller of the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within the specified local limits, so long as the buyer carries on a like business, provided that such limits are reasonable. In such a case an Agreement in restraint of trade is valid.

b) Partner’s agreement: in case of a partnership, the partner may agree that: i. A partner shall not carry on any business other than that of the firm while he is a partner. ii. An outgoing partner may agree with his partners not to carry on a business similar to that of the firm within a specified period (or) within the specified local limits. iii. Any Partners may, upon the sale of the goodwill of the firm, make an agreement with the buyer that such partners will not carry on any business similar to that of the firm within a specified period (or) within specified local limits.

c) Trade combinations: An agreement in the nature of a business combination between traders (or) manufacturers does not amount to a restraint of trade and is perfectly valid. But if an agreement attempts to create a monopoly it would be void.

d) Service contracts: An agreement of service by which an employee binds himself, during the term of his agreement, not to compete with his employer is valid and does not amount to restraint of trade.

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