Report No. 199

Section 27 of the Indian Contract Act: Restraint in Trade:

Section 27 of the Indian Contract Act, concerns a special category of contracts which the law treats as void, namely, an agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind and is to that extent, the agreement is void. However in India (unlike UK), an agreement not to carry on, within the specified local limits, a business similar to the business of which goodwill is sold, can be enforced, provided the limits of the restraints are reasonable. This special provision is contained in section 27.

Section 27 reads as follows:

"Section 27: Agreement in restraint of trade void: Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.

Exception 1:Saving of agreement not to carry on business of which goodwill is sold:

One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carrying on a like business therefrom, provided that such limits appear to the Court reasonable, regard being had to the nature of the business.

An agreement which unnecessarily curtails the freedom of a person to carry on a trade is against public policy. Restraining a person from carrying on a trade generally aims at avoiding competition and has a monopolistic tendency and this is both against an individual's interest as well as the interest of the society and thus such restraints are discouraged by law. The agreement is void whether it imposes total restraint or partial restraint. However in UK, all agreements in restraint of trade are void unless there is some justification for the restraint which could make it reasonable.

If the restriction was reasonable in the interest of the contracting parties and also in the interest of public, the agreement would be valid. The Indian law, however, is stricter. The agreement would be valid if it fell within any of the statutory or judicially created exceptions. Any agreement which is not covered by any one of the recognized exceptions would be void.

The Apex Court in the case of Gujarat Bottling Co. Ltd. V. Coca Cola (1995) (5) SCC 545 has pointed out the difference in the position of law in regard to restraint of trade in India and that in England. The rule now in England is that the restraints of trade whether general or partial, may be good if they are "reasonable and necessary" for the purpose of freedom of trade. In India, the question of reasonableness of restraint is outside the purview of section 27 of the Indian Contract Act. The courts have only to consider the question whether the "contract" itself is or is not in restraint of trade. The facts in the above were as follows:

The agreement in question here was for the grant of franchise by Coca Cola to GBC to manufacture, bottle, sell and distribute various beverages for which the trade marks were acquired by Coca Cola. It was thus a commercial agreement whereunder both the parties had undertaken obligations for promoting the trade in beverages for their mutual benefit. The purpose of the negative stipulation contained in the agreement was that GBC will work vigorously and diligently to promote and solicit the sale of the products/beverages produced under the trade marks of Coca Cola. This would not be possible if GBC were to manufacture, bottle, sell, deal or otherwise be concerned with the products, beverages or any other brands or trade marks/trade names.

Thus, the purpose of the said agreement was to promote the trade and the negative stipulation sought to achieve the said purpose by requiring GBC to wholeheartedly apply itself to promoting the sale of the products of Coca Cola. Moreover, since the negative stipulation was confined in its application to the period of subsistence of the agreement and the restriction imposed therein was operative only during the period the agreement was subsisting, the said stipulation, it was held, could not be treated as being in restraint of trade so as to attract the bar of section 27 of the Indian Contract Act.

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