University Institute of Legal Studies

Panjab University, Chandigarh

LAW OF CONTRACT
Project Report (Semester 1)

Restraint of Trade
Submitted to: Dr. Amita Verma

Date: 19 November,2019 Pratibha

Ba llb (H)

Roll no. 152/19

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Acknowledgement

I would like to express my special thanks of gratitude to Dr. Amita

Verma as well as our Director Ratan Singh who gave me the golden
opportunity to do this wonderful project on the topic Restraint of
Trade , which also helped me in doing a lot of Research and I came
to know about so many new things I am really thankful to them.

Secondly, I would also like to thank my Friend who helped me a lot

in Finalizing this project within the limited time of frame.
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Index
Sr. No Topic Page No.
• 1 Introduction 3
• 2 Statutory Exception 4
• 3 Niranjan Shankar
• Golikar vs. the century
• Spinnig case 6
• 4 Brief Facts 6
• 5 Arguments 8
• 6 Ratio Decidendi 8
• 7 what was held 11
• 8 Bibliography 12
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Introduction
Part XIII of the constitution of India contains provision relating to
the freedom of trade, commerce and intercourse within the territory
of India. The provisions are laid down in articles 301-307. Just as the
Legislature cannot take away individual freedom of trade, wise versa
the individual cannot barter it away by agreement. “The principle of
law is this: Public Policy requires that every man shall be at liberty to
work for himself, and shall not be at liberty to deprive himself, by
any contract that he enters into.” So plains meaning of section 27 is
every agreement by which any one is restrained for exercising a
lawful profession, trade or business of any kind is to that extant void.

Section 27 of Indian Contract Act, 1872:

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 extant void.

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

good will 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 deserving
tittle to the goodwill from him, carries on a like business therein,
provide that such limits appear to the court reasonable, regard being
had tp the nature of the business.
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Statutory Exceptions
1. Sale of goodwill
The only exception mentioned in section 27 of the contract act is
relted to sale of goodwill. One who sells the goodwill of a business
may agree with the buyer of refrain from carrying on a similar
business, within specified local limits, so long as the buyer or any
person deriving tittle to the goodwill from him, carries on alike
business therein, provided that such limits appears to the court
reasonable, regard had to the nature of the business.

Meaning of goodwill- there should be real goodwill to be sold. The

goodwill which has been the subject of sale is nothing more than
probability that the old customer will resort to old place.

2. Partnership Act
According to section 11 the partnership act, 1932 partners during
the continuance of the firm to restrict none of them shall carry on
any other business than that of the firm. Section 36 the partnership
Act, 1932 is related to restrain an outgoing partner from carrying on
a similar business and specified local limits,

a. The agreement should specify the local limits or the periods of

restraints, and
b. The restriction imposed must be reasonable

Firm daulat Ram vs. Firm dharm chand, AIR 1934 Lah 110 ,
where two ice factory owners constituting a partnership agreed
that only one factory will be worked at a time its profits distributed
among them. The restraints was held to be justified.
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3. Restraints upon employees

Restraints during Employment

Agreement of service contains negative covenants id for
preventing the employee from working anywhere during period
covered by the agreement. Now a days trade secrets is main
contention for negative covenants. Employer’s wants to protect
his trade secrets because of that employment agreement with
negative covenants are generally used. Agreements for
protection of confidentially and trade secrets are not one sided
or unfair of unreasonable. Any breach of such clauses on the part
of employee can be clauses on the part of employee can be
treated as a misconduct.
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Niranjan Shankar Golikar vs The century

Spinning And Mfg. Co., 1967 AIR 1098
Decided on: 17 January 1967

The author of judgment: Shelat, J.M.

Bench: Shelat, J.M. and Bachawat, R.S.

Advocate for the appellant: k. sen, Rameshwar Dial and A.D.

Mathur.

Procedural History:

The present appeal to the Supreme Court is by special leave and it is

against the judgment and order of the High Court of Maharashtra
confirming an order injunction against the appellant.

Brief Fact:
The respondent company manufactures amongst other things tyre
cord yarn at its plant at kalian known as the century Rayon. Under an
agreement, Algemene Kunstizijde Unie of Holland (hereinafter
referred to as AKU) And Vereinigte Clanzstoff Fabrikan AG of west
Germany (hereinafter referred to as VSF) agreed to transfer their
technical knowhow to the respondent company to be used
exclusively for the respondent company’s tyre cord yarn plant at
kalian in consideration of 1,40,000 Deutsche Marks payable to them
by the respondent company.

Clause 4 of that agreement provided that the century Royan

should keep secret until the termination of the agreement and
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during three years thereafter all technical information,

knowledge know-how , experience , data and documents passed
on by the said AKU and VCF and the century Rayon should
undertake to enter corresponding secrecy arrangements with its
employee.
The respondent company thereafter invited application for
appointments its said plant include appointments as shift
supervisors. On December 3, 1963, The appellant sent his
application stating therein his qualification. By its letter dated
march 1, 1963, the respondent company offered the appellant
the post of a shift supervisor in the said tyre cord division stating
that if the appellant were to accept the said offer he would be
required to sing a contract in standard from for a term of five
years. On march 5, 1963, he joined the respondent company and
executed on that day the said contract.
The appellant received training from March to December 1963
and acquired during that training knowledge of the technique,
processes and the machinery evolved by the said collaborates as
also machinery evolved by the said collaborators as also of
certain documents supplied by them to the respondent company
which as aforesaid were to be kept secret and in respect of
which the respondent company had undertaking to obtain
secrecy undertaking from its employee. According to evidence,
the appellant as a shift supervisor was responsible for the
running of shift work, control of labour and in particular with the
specification given by the said AKU.
It is clear from evidence that October he was negotiating’ with
Rajasthan Rayon Company at kotah which also manufacturing
tyre cord yarn and got himself employed there, at a higher salary
of Rs. 560/- Month than what he was getting from the
respondent company.
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The respondent company thereupon filed a suit in the court at

kalian claiming inter alia an injunction restraining the appellant
from serving in any capacity whatsoever or being associated with
any person, firm or company including the said Rajasthan Rayon
till march 15, 1968. The company also claimed Rs. 2410/- as
damages being the salary for six months, under clause 17 of the
said agreement and a perpetual injunction restraining him from
divulging any or all information, instruments documents, reports,
trade secrets, manufacturing process, knowhow, etc. which may
have come to his knowledge.

Appellants Arguments:
1. That the said agreement constituted a restraints on trade and
was therefor opposed to public policy.
2. That in order to be valid and enforceable the covenant in
question should be reasonable in space and time and to the
extant necessary to protect the employer’s right of property
and
3. That the injunction to enforce a negative stipulation can only
be granted for the legitimate purpose of safeguarding the
trade secrets of the employer. He argued that these condition
were lacking in the present case and therefor the respondent
company was not entitled to the enforcement of the said
stipulation.

Ratio Decidendi:
The evidence established that the appellant had been
imparted training for about nine months during the course of
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which information regarding the special processes and details

of the machinery evolved by the said collaborators had been
divulged to him.
It also found that as a result of his getting himself employed in
the said rival company, not only the benefits of training given
to him at the cost of the respondent company would be lost
to it but that the knowledge acquired by him in regard to the
said continuous spinning process intended for the exclusive
use of the respondent company was likely to be made
available to the rival company spinning process of tyre cord.

Rajasthan Rayon started production of tyre cord yam from

January 1965, that is, two or three months after the appellant
joined them along with two other employee of the
respondent company, that the cumulative effect of the
evidence was that the appellant had gained enough
knowledge and experience in the specialized continuous
spinning process in the tyre cord yarn division of the
respondent company and that it was evident that he left the
respondent company’s employment only because the said
Rajasthan Rayon promised him a more lucrative employment.

Clauses 9 and 17 related only to the business in the tyre cord

division and therefore restraints contained in those clauses
meant prohibition against divulging information received by
the appellant while working in that division and that clause 17
also meant a restraints in relation to the work carried on in
the said spinning department. Therefore the inhibitions
contained in those clauses were not blanket restriction.
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There was no indication at all that if the appellant was

prevented from being employed in similar capacity elsewhere
he would be forced to idleness to go back to the company
which would indirectly result in specify performance of the
contract of personal service.

The attitude of the court as regards public policy however has

not been inflexible. The rule now is that restraints whether
general or partial may be good if they are reasonable. A
restraints upon freedom of contract must be shown to be
reasonably necessary for the purpose of freedom of trade. A
restraints reasonably necessary for the protection of the
covenantee must prevail unless some specify ground of public
policy can be clearly established against it.

A person may be restrained from carrying on his trade by

reason of an agreement voluntarily entered into by him with
that object. In such case the general principle of freedom of
trade must be applied with due regard to the principle that
public policy requires for men or full age and understanding
the utmost freedom of contract and that it is public policy to
allow a trader to dispose of his business to a successor by
whom it may be efficiently carried on and to able assistants
and the opportunity to instruct them in his trade and its
secrets without fear of their becoming his competitors.

The negative covenant in the present case restricted as it is to

the period of employment and to work similar or substantially
similar to the one carried on by the appellant when he was in
the employ of the respondent company was reasonable and
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necessary for the protection of the company interests and not

such as the court would refuse to enforce.

The injunction in the terms in which it is framed should have

been granted. There is no doubt that the court have a wide
discretion to enforce by injunction a negative covenant. Both
the courts below have concurrently found that the
apprehension of the respondent company that information
regarding the special processes and the special machinery
imparted to and acquired by the appellant during the period
of training and thereafter might be divulged was justified; that
the information and knowledge disclosed to him during this
period was different from the general knowledge 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 required protection.

But the rule against severance applies to cases where the

covenant is bad in law and it is in such cases that the court is
precluded from severing the good from the bad. But there is
nothing to prevent the court from granting a limited
injunction to the extant that is necessary to protect the
employer’s interests where the negative stipulation is not
void.

Held: The appeal fails and is dismissed with costs.

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Bibliography

• www.legalservicesindia.com
• http://indiankanoon.org
• http://taxguru.in
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