Agreements in Restraint of marriage and Restraint of Trade
Some agreements have been specifically declared void by the Indian Contract Act, 1872 even if they fulfill the essentials required for the valid contract. Such agreements are discussed from section 26 to section 30 and section 56 of Indian Contract act, 1872.
In this article only two of those Void agreements will be discussed i.e. Agreement in restraint of Marriage (Section 26) and Agreement in restraint of Trade (Section 27).
Agreement in Restraint of Marriage
Section 26 of the Indian Contract act, 1872 says, “Every agreement in restraint of Marriage of any person other than minor is void”. In simple words any agreement which constraints a person’s freedom to marry or to marry any person of his choice is void. This can be understood with the help of an important case of Lowe v Peers in which a person promises to marry Mrs. Lowe and if he married anyone else then he will pay some fixed amount. It was held by the court that it was against the public policy and was declared void by the court. Here the agreement was not only to marry a particular person but was a restrictive agreement of not to marry anyone else. Even if an agreement puts partial restrictions on the freedom of right to marry is to be declared void. In the famous case of Lafatunissa v Shaharbanu, it was held that if an agreement contains a condition in a wakf that a widow would lose her right of maintenance if she remarriages, then it is not in restraint of marriage.
Agreement in Restraint of Trade
Section 27 of the Indian Contract act, says, “Every agreement by which one is restrained from exercising a lawful profession, trade or business of any kind is to that extent void”. So any agreement which unnecessarily curtails the freedom of trade is to be declared void. Restraining anyone from carrying lawful trade is not good for individual interest but also affects the society in a large. It is also to be noted that Section 27 does not discriminate whether the restraint is full or partial. Thus if an agreement imposes a full restriction or partial restriction in both the cases agreement will be declared void. However in Har Bilas v Mahadeo Prasad it was held that an agreement in restraint of trade of is void only to the extent it imposes restraint. It means if a part of agreement does not imposes restraints whereas the second part imposes restrictions then the agreement maybe void as regards the second part of it. Agreement in restraint of Trade has certain exceptions which are discussed below.
Exceptions to an agreement in Restraint of trade
• Sale of Goodwill
When a person sells his business to someone else along with its goodwill, then the buyer may make an agreement with the seller that latter will not carry on the business in competition with the buyer. Such agreements are valid are not against the public policy. Exception 1 to section 27 of Indian Contract act allows such an agreement on the sale of goodwill. This exception states, “One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business within a specified local limits so long as the buyer, or any person deriving title to the goodwill from him, carried on a like business therein, provided that such limits appear to the court reasonable, regard being had to the nature of the business.”
However it is to be noted that if the agreement in essence is a agreement against competition rather than that of the sale of goodwill, it would be void.
• Exceptions under Indian Partnership act, 1932
Indian Partnership act, 1932 provides four situations which does not withstand with the rule provided in Section 27 of Indian Contract act.
1) Section 11(2), of Indian Partnership act, allows the partners of a partnership firm to formulate a contract which provides that a partner shall not carry any business other than that of the firm while he is a partner.
2) Section 36(2) of Indian Partnership act, provides another exception. The section states that “A partner may make an agreement with his partners that on ceasing to be a partner, he will not carry on any business similar to that of the firm within a specified period or within specified local limits; and not withstanding anything contained in section 27 of Indian Contract act, 1872, such agreement shall be valid if the restrictions imposed are reasonable.”
3) Section 54 of Indian Partnership Act, 1932 provides another exception to the rule. This section permits an agreement to be made upon the dissolution of firm. So when a firm is dissolved and the business as well as goodwill has been bought by some of the partners or any third party. Here those partners who got payment for the sale of goodwill may then agree that they will not carry on similar business within a specified period or within the specified local limits.
4) Section 55(3) of Indian Partnership act, 1932 provides with another exception. The section states, “Any partner may, upon the sale of the goodwill of the firm, make an agreement with the buyer that such partner will not carry on same business similar to that of the firm……”
• Restraint by a contract of Service
This is another exception to section 27 of Indian Contract Act. According to it an agreement of service under which an employee agrees that he will serve only a particular employer and will not serve anyone else during that period of employment is a valid agreement.
• Trade Combination
There are situations where various traders come together to eliminate competition among themselves and make agreements fixing minimum price, regulating the supply of goods and earning common profits. These kinds of agreements are not void nor are opposed to public policy. They are also not deemed to be restraint in trade.
• Solus Agreement
There are situations when a manufacturer or Trader might agree that he will sell all his goods to a particular buyer only, or in the same way buyer may agree that he will buy all his goods solely from the particular seller only and no one else. These kinds of agreements are called Solus agreement. There is nothing unreasonable in this and these kinds of agreement are not considered to be in restraint of trade.
There are certain agreements which fulfill all the essentials required for valid contract even then they are declared void by the Indian Contract act. The two of such agreement has been discussed here in this article. Although these void agreements are enough in numbers but in the same it provides certain exceptions especially when it comes to restraint of trade.
Author: Dheeraj Diwakar,
Dr. Ram Manohar Lohia National Law University Lucknow. 1st year