Restraint of Trade: Emerging Trends

Varun Srinivasan1

Introduction

In the modern era, the concept of practicing one‟s trade, profession or business has evolved a
long way compared to how it was perceived in the yester years. The law has also as a matter of
public policy opposed any interference with respect to an individual‟s freedom of entering into
contracts and on imposing restraints on one‟s personal liberties. When the principle of restraint
of trade was incorporated in the Indian Contract Act in the year 1872, most individuals were
either employed in the manufacture or sale of goods and other commodities. But with the advent
of various technological advancements coupled with the huge impact of globalization in our
economy with companies investing millions of dollars in R&D, information technology, patents
and the like, the logical question is shouldn‟t it be reasonable to impose certain restrictions
against employees from pursing their trade, profession or business if it impinges and affects the
business or relationship of the employer with its customers or if it means using to their advantage
confidential information or secrets? Employees willingly sign Non-disclosure or Non-
confidentiality agreements at the time of joining any employment, but they mean nothing if the
same cannot be imposed post an employee‟s term with the company has ended, especially
considering the fact that s/he might have been privy to certain confidential or sensitive
information during his/her tenure. This piece, therefore, emphasizes the need to bring in a change
and do away with the theory of absolute restraint as discussed in Section 27 of the Contract Act,
and bring out a common ground to protect equally both the employers‟ and employees‟ rights.

History and Evolution of Section 27 in India

Section 27 of the Indian Contract Act, 1872 stipulates that every agreement by which an
individual is restrained from exercising any lawful profession, trade or business of any kind, as
void. However, this Section lays down an exception wherein any agreement not to carry on
business of which goodwill is sold is not considered a restraint. Section 27 which follows the
Field‟s Draft Code for New York, ironically was never adopted in New York but was adopted in

1
Varun Srinivasan is a Senior Associate with the law firm, NVS & Associates, Advocates & Legal Consultants,
headquartered at Chennai, where he handles complex legal issues dealing with Banking, IT, Arbitration, IPR and
other Corporate laws for domestic & international clientele pan-India. He was a former Law Clerk at the Supreme
Court India, for a period of two years under Hon‟ble Mr. Justice FMI Kalifulla. He is the Co-Revising Editor of the
premier and well-known commentary, Tannan‟s Banking Law & Practice in India, for the 25th Edition 2014 (3
Vols.) published by Lexis Nexis. He was one of the Business Delegates with the Indo Australian Chamber of
Commerce (IACC) to Australia in 2012, wherein he made presentations in Perth, Melbourne & Sydney, on the
Indian Legal System to a large corporate audience, highlighting the legal issues and opportunities for investment in
India. He has dealt with several intricate legal issues in Singapore and Malaysia for his clients. He has made
presentations on international commercial arbitration in Vienna. Varun has also contributed articles on diverse issues
of law for journals & magazines. The author would like to appreciate Ms. Vinithra Srinivasan, Partner NVS &
Associates for her support & guidance in reviewing this article. He can be contacted at varun@nvsassociates.com

Electronic copy available at: http://ssrn.com/abstract=2683982

four American States.2 The original draft of the Indian Law Commission did not contain any
specific provision on the subject. The provision was incorporated in this Act at a time between
the resignation of the Indian Law Commission and the enactment. The object appears to have
been to protect trade. It has been said that Indian trade is in its infancy and the legislature may
have wished to make the smallest number of exceptions to the rule against contracts whereby
trade may be restrained.3

The Section is general in its terms and unequivocally declares all agreements in restraint of trade
void pro tanto, except in the case specified in the exception. This Section lays down a very rigid
rule invalidating restraints, not only general restraints but also partial ones, and also restricts the
exception to narrow limits. Nevertheless, if the parties wish to implement it, they would not be
acting illegally and the Court cannot intervene to prevent them from doing so.4

Section 27 was enacted at a time when trade was underdeveloped and the object underlying the
Section was to protect the trade from restraints. But when trade in India has developed to a larger
extent, there is no reason why a more liberal attitude should not be adopted by acknowledging
such restraints as reasonable.5 In fact, the Law Commission of India recommended that this
Section be amended to permit reasonable restraint on the right to carry on trade, which
unfortunately was never implemented by the legislature.6 Even the Allahabad High Court has
observed that „it is unfortunate that Section 27…seriously trenches upon the liberty of the
individual in contractual matters affecting trade‟.7 But a 3 Judge Bench of the Supreme Court of
India in Superintendence Co. of India Pvt. Ltd. v. Krishan Murgai,8 while interpreting the
contours of Section 27, categorically arrived at the conclusion that the Section will have to be
interpreted literally and no two meanings can be attributed to it. According to the Court, all
restraints on an individual‟s liberty to practice any trade, profession or business of one‟s choice
is void and against public policy and the concept of reasonableness & fairness will be not be
applicable to agreements in India as compared to the United Kingdom.

Restraints During and Post Employment

Section 27 has labeled all restraints as void. But the common law principle and judicial
interpretation have split restraints into two halves; restraints applicable during employment and
those applicable post-employment. Uniformly throughout various jurisdictions in the world all
restraints imposed on an employee during his employment are prima facie valid and cannot be
treated as void or against one‟s fundamental right to practice any trade, business or profession.
By principle, any agreement of service by which an employee binds oneself, during the term of

2
California, North & South Dakota, and Oklahoma
3
Haribhai Manekal v. Sharafali Isabki, (1897) 22 Bom 861 at 866
4
Boddington vs. Lawton (1994) ICR 478
5
Pollock and Mulla, The Indian Contract & Specific Relief Acts, 14th Edition at pages 621-22
6
Law Commission Of India, 13 report, 1959, para 55
7
Bholanath Shankar Dar vs. Lachmi Narain, AIR 1931 All 83.
8
AIR 1980 SC 1717

Electronic copy available at: http://ssrn.com/abstract=2683982

his/her agreement, not to compete with his/her employer, directly or indirectly, is not in restraint
of trade. This principle was validated by the Supreme Court in Niranjan Shankar Golikari vs.
Century Spg and Mfg. Co. Ltd.9 In this case, the respondent company entered into a collaboration
with a German company, which agreed for a consideration, to transfer their technical know-how
to be used exclusively for the company‟s tyre cord yarn plant. The agreement provided that the
company would keep the secret during the period of employment. Three years after this, all
technical information, knowledge, know-how experience, data and documents would be passed
by the German company to the respondent company. The coventor was appointed as shift
supervisor on the condition that he would have to sign a contract in the standard form for the
term of five years, which was accepted by him, the covenant being that the coventor would
devote wholly all his time and energy to the business and affairs of the respondent company and
shall not engage directly or indirectly in any business or serve in any capacity in any business
whatsoever other than that of the company, including his leaving the company before the expiry
of the contract. The coventor in this case, after receiving training, resigned and took a similar
employment with another company. The Court while granting injunction to the respondent
company held that the coventor was restricted only to the period of service not to work with
anyone else and it was, therefore, a reasonable and necessary restriction for the protection of the
employer‟s interest. The Court further held that there was nothing to show that the enforcement
of the covenant would lead him to a state of idleness or his being compelled to go back to the
employer and that it was not a valid consideration that in another employment the coventor
would get a lesser remuneration than the one paid by his new employee.

In contrast to the above principle expounded by the Court in Niranjan Shankar Golikari,10 the
Supreme Court in Krishan Murgai11 has had an opportunity to deal with covenants post-
employment, which principle till date has been followed by all subsequent decisions. The Court
in this case dealt with the enforceability of a service contract post-employment. As compared to
the case in Niranjan Shankar Golikari, which dealt with a restraint operating during employment,
the restrictive covenant here was to operate once the employee‟s service terminated with the
employer. The clause in this case read as follows “That you will not be permitted to join any firm
of our competitors or run a business of your own in similar lines directly and/or indirectly, for a
period of two years at the place of your last posting after you leave the company."

The Court while analyzing in depth the various facts and clauses relating to the case coupled
with the interpretation of various national and international decisions arrived at the conclusion
that all restraints imposed on an individual, post his employment with the employer, is prima
facie void and cannot be given effect to.

Therefore, what can be inferred from the above two decisions and principles is essentially as to
when the breach of contract or service is said to have been committed. If the breach of contract is
9
AIR 1967 SC 1098
10
Supra N 9
11
Supra N 8
during the course of one's employment with the company and if the terms of the contract are not
too unreasonable, then under such a circumstance law comes to the aid of protecting the
employer‟s interest as no person/individual can exploit his contractual duties which he is obliged
to perform or hold good for the reason of securing another employment or higher pay. But per
contra, as laid out in Section 27 of the Indian Contract Act and the interpretation laid down by
the Supreme Court in Krishan Murgai, all covenants that restricts anyone post-employment is
void, i.e., if the breach of contract or service even if committed post the termination or cessation
of one‟s employment cannot be a ground to challenge as the same is hit by Section 27 and it is an
individual‟s fundamental right to practice any trade, profession or business. All contracts which
per se restrict an individual‟s right to trade, profession or business can be identified as non-
compete contracts or clauses.

In fact the Delhi High Court in Wipro Ltd. v. Beckman Coulter International SA.,12 after a review
of all the decisions of the Supreme Court and the High Courts, summarized the principles of
Section 27 as follows:

“1) Negative covenants tied up with positive covenants during the subsistence of a contact be it
of employment, partnership, commerce, agency or the like, would not normally be regarded as
being in restraint of trade, business of profession unless the same are unconscionable or wholly
one-sided;

2) Negative covenants between employer and employee contracts pertaining to the period post
termination and restricting an employee's right to seek employment and/or to do business in the
same field as the employer would be in restraint of trade and, therefore, a stipulation to this
effect in the contract would be void. In other words, no employee can be confronted with the
situation where he has to either work for the present employer or be forced to idleness;

3) While construing a restrictive or negative covenant and for determining whether such
covenant is in restraint of trade, business or profession or not, the Courts take a stricter view in
employer-employee contracts than in other contracts, such as partnership contracts,
collaboration contracts, franchise contracts, agency/distributorship contracts, commercial
contracts. The reason being that in the latter kind of contracts, the parties are expected to have
dealt with each other on more or less an equal footing, whereas in employer-employee contracts,
the norm is that the employer has an advantage over the employee and it is quite often the case
that employees have to sign standard form contracts or not be employed at all;

4) The question of reasonableness as also the question of whether the restraint is partial or
complete is not required to be considered at all whenever an issue arises as to whether a
particular term of a contract is or is not in restraint of trade, business or profession.”

12
2006 (3) ARBLR 118 (Delhi)
Exceptions To The Principle of Restraint

An extensive analysis of the above points only goes to demonstrate that all agreements
restraining an individual‟s liberty to practice his trade, business or profession as void. This would
thereby imply that all other restraints such as non-solicitation, i.e. not to solicit customers or
employees or non-confidentiality clauses, i.e. not to disclose confidential information and the
like, cannot per se be held to be void, even if imposed post one‟s employment. Therefore, to
have an understanding on how this principle operates, it is imperative to demonstrate through
application of various provisions of law and judicial verdicts the several other exceptions that are
available besides the one provided in the Section itself.

The terms business, trade and profession have been explained by the Supreme Court in Sodan
Singh v. New Delhi Municipal Committee,13 as follows;

“‘Profession’ means an occupation carried on by a person by virtue of his personal and

specialized qualifications, training or skill….. ‘Trade’ in its wider sense includes any bargain or
sale, any occupation or business carried on for subsistence or profit, it is an act of buying and
selling goods and services. It may include any business carried on with a view to profit whether
manual or mercantile. ‘Business’ is a very wide term and would include anything which occupies
the time, attention and labour of a man for the purpose of profit. It may include in its form trade,
profession, industrial and commercial operations, purchase and sale of goods, and would
include anything which is an occupation as distinguished from pleasure.”

In fact the Constitution of India itself provides protection to all individuals to practice their
choice of trade, occupation, business or profession as per Article 19(1)(g). But this is of course
subject to the reasonable restriction imposed in Article 19(6),14 which implies that no right is
absolute. If this principle is adopted in interpreting contracts, then why can‟t certain restrictions
be imposed if they are reasonable in nature, especially if they don‟t impinge upon one‟s right to
practice any trade, profession or business? When an employee signs a contract or agreement that
very clearly mentions that s/he is not supposed to solicit any customers of the employer either
pre or post-employment or; not disclose any confidential information or trade secret; or not use
for his/her benefit or profit any copyrightable/patentable/trademarkable information or data, then
logically, all these points cannot be considered as restraints. The law only protects an individual
from practicing his trade, profession or business, but if the same is practiced while infringing

13
(1989) 4 SCC 155
14
Article 19(6): Nothing in sub clause (g) of the said clause shall affect the operation of any existing law in so far as
it imposes, or prevent the State from making any law imposing, in the interests of the general public, reasonable
restrictions on the exercise of the right conferred by the said sub clause, and, in particular, nothing in the said sub
clause shall affect the operation of any existing law in so far as it relates to, or prevent the State from making any
law relating to,
(i) the professional or technical qualifications necessary for practising any profession or carrying on any occupation,
trade or business, or
(ii) the carrying on by the State, or by a corporation owned or controlled by the State, of any trade, business,
industry or service, whether to the exclusion, complete or partial, of citizens or otherwise
someone else‟s rights, it cannot and should not come under the purview of Section 27. When an
employee for instance works as a Project Manager and his role involves interacting and
corresponding with all the customers of his employer and is aware of all the pricing strategies,
business models and the like, there is no reason why he should not be restrained post-
employment from either soliciting with them or exploiting the information, especially
considering the fact that he would not have acquired this information or relationship had he not
joined the employer. Similar is the situation of that of an employee dealing with confidential
information or trade secret, and the like, let‟s say in a pharma or IT company or the like. When
companies spend millions in investments, which are either used to build customer relationships
or to developing a unique product, software, process, etc., the employee should not be allowed to
hide under the garb of Section 27 and misuse it to his/her benefit. The law should protect an
employee only for his/her innate skills and that s/he has acquired through experience and not for
capitalizing on those things which s/he might not have a right over to start with. Therefore, all
covenants that do not restrict an individual‟s right to trade, profession or business should not be
void.

In fact, although the law has not evolved with the changing times and nor has the legislature
taken any serious effort in ensuring a revisit to this provision, especially after the Law
Commission‟s recommendation dating back to more than five decades,15 internationally most
jurisdictions have evolved this concept quite early on either by incorporating it in their laws or
by applying judicial precedents. Even though in India there is still no legislative change, the
Courts have attempted to interpret this Section taking into consideration the varying periods and
provided certain exceptions. These can be categorized as follows;

(i) Non-Solicitation of Customers and Employees

A non-solicitation clause prevents an employee or a former employee from indulging in business

with the company‟s employees or customers. When an employee signs this kind of an agreement
or clause, s/he thereby agrees not to solicit the employees or clients of the company for his/her
own benefit during or after his/her employment. This principle of interpreting solicitation clauses
was initially dealt by the Delhi High Court in Wipro Ltd. v. Beckman Coulter International SA.16
In this case, Wipro worked as a sole and exclusive canvassing representative and distributor for
Beckman Coulter International, S.A., for a period of 17 years. Subsequently, Beckman Coulter
decided to operate directly in India and issued advertisements seeking employment from people
and giving preference to candidates having experience in having handled Beckman‟s or similar
products. Wipro approached the Court seeking injunctive relief and damages alleging that such
advertisements were in violation of the non-solicitation clause signed between the parties. The
Court after considering all the relevant facts and circumstances arrived at the conclusion that
since the restrictions had not been imposed on the employees but on Wipro and Beckman

15
Supra N 6
16
Supra N 12
Coulter, Section 27 would not be attracted and thus the agreement was held not in restraint of
trade.

Similarly in Desiccant Rotors International Pvt. Ltd v Bappaditya Sarkar & Anr.,17 the Delhi
High Court while dealing with the enforceability of solicitation clauses, allowed an injunction
against the manager prohibiting him from soliciting Desiccant‟s customers and suppliers to stand
in effect. The Court however, held that a marketing manager could not in the course of his
employment be deemed to possess or be privy to any confidential information and that his
written declaration to that effect in his employment agreement was meaningless and
subsequently rejected Desiccant‟s claim to enforce the confidentiality obligations on the
manager.

The Calcutta High Court in the case of Embee Software Pvt. Ltd. v. Samir Kumar Shaw,18 has
brought out the growing importance in protecting client information. The Court while granting
injunctive relief held that “acts of soliciting committed by former employees takes such active
form that it induces the customers of the former employer to break their contract with the former
employer and enter into a contract with the former employee, or prevents other persons from
entering into contracts with the former employer” cannot be permitted. The Court in fact went on
to opine that client information under certain circumstances can even be considered as a trade
secret and therefore, be of high value to an employer. This decision in fact, echoes the decision
in Crowson Fabrics Ltd. v. Rider,19 wherein the English Courts held that acts of an employee by
retaining various documents such as customer and supplier contact details during employment
did not amount to a breach of confidentiality, but such „illegitimate‟ actions constituted a breach
of employees‟ duty of fidelity.

In FLSmidth Pvt.Ltd. v M/s.Secan Invescast (India) Pvt.Ltd.20 the Madras High Court while
dealing with a non-solicitation clause with the customers held that merely approaching a
previous employer‟s customers does not amount to solicitation until orders are placed by such
customers based on such approach. The Madras High Court laid down the standard to establish
non-solicitation:

“…solicitation is essentially a question of fact. The appellant should prove that the respondent
approached their erstwhile customers and only on account of such solicitation, customers placed
orders with the respondent. Mere production of quotation would not serve the purpose. It is not
as if the appellant is without any remedy. In case the Court ultimately holds that the appellant
has got a case on merits, they can be compensated by awarding damages. The supplies made by
the respondent to the erstwhile customers of the appellant would be borne out by records. There

17
Desiccant Rotors International Pvt Ltd v Bappaditya Sarkar & Anr., Delhi HC, CS (OS) No. 337/2008 (decided
on July 14, 2009)
18
AIR 2012 Cal 141.
19
[2007] EWHC 2942.
20
(2013) 1 CTC 886.
would be no difficulty to the appellant to prove that inspite of entering into a non-disclosure
agreement, respondent have solicited customers and pursuant to such solicitation they have
actually supplied castings. When there is such an alternative remedy, question of issuing a
prohibitory injunction does not arise.”

The principles mentioned above were similarly resonated in the case of Vogueserv International
Pvt. Ltd. Vs Rajesh Gupta,21 wherein an injunction was granted by the Delhi High Court
restraining former employees from soliciting with customers.

(ii) Non-Disclosure of Confidential Information/Trade Secrets

Similar to the non-solicitation clauses restraining an employee from approaching customers and
employees, there are various instances where an employee is required take all reasonable steps in
ensuring the confidential information is maintained with the utmost secrecy, except and to the
extent when disclosure is mandatory under any law in force. In Escorts Const. Ltd v. Action
Const.,22 the Delhi High Court restrained Escorts from manufacturing, selling or offering for sale
the Pick-N-Carry Mobile Cranes that were a substantial imitation or reproduction of the
industrial drawings of the Plaintiffs, or from using in any other manner whatsoever, the technical
know-how. Similarly, in Burlington Home Shopping Pvt. Ltd.v. Rajnish Chibber,23 the Delhi
High Court again restrained an employee from carrying on of any business including mail order
business by utilizing the list of clientele or customers included in the database of the petitioner.
The Court went on to hold that such database in fact amounted to a copyright and thereby
deserved protection.

In Diljeet Titus v. Mr. Alfred A. Adebare and Others,24 the defendant was an advocate working at
the plaintiff‟s law firm. On termination of employment, the defendant took away important
confidential business data, such as client lists and proprietary drafts, belonging to the plaintiff. It
was contended by the defendants that they were the owners of the copyright work as it was done
by them during their employment and the relation between parties was not that of an employer
and employee. The Delhi High Court while rejecting this plea went on to hold that the plaintiff
had a clear and definitive right in the material taken away by the defendant and accordingly
restrained the defendant from using the information taken away illegally. The essence of this
decision is that the restraint imposed on the defendants was only with respect to not using the
confidential information they acquired from their employment and not with respect to carrying
on a similar service. It should be noted that the Delhi High Court did not prohibit the defendants
from carrying on a similar service. The Court felt that such a partial restraint was a necessity in
protecting the plaintiff‟s interest else, it would lead to him suffering an irreparable loss or injury.

21
CS(OS) 1436/2012 Delhi High Court
22
AIR 1999 Delhi 73.
23
61(1995)DLT6
24
2006 (32) PTC 609 (Del).
Similarly, the Calcutta High Court in Hi-Tech Systems & Services Ltd vs Suprabhat Ray &
Ors.,25while dealing with an injunction application in order to restrain the respondents from
divulging or using in any manner the petitioner's computer database containing confidential
information and trade secrets and to procure a breach of contract of the plaintiff with its existing
customers or suppliers, held as follows:

“A trade secret or a business secret may relate to financial arrangement, the customer list of a
trader and some of the informations in this regard would be of a highly confidential nature as
being potentially damaging if a competitor obtained such information and utilized the same to
the detriment of the giver of the information. Business information such as cost and pricing,
projected capital investments, inventory marketing strategies and customer's list may qualify as
his trade secrets. The Court needs to find out if the informations that were acquired during the
course of their employment are now being used as the spring board to enable the said
respondents to exploit such database in the course of their business. Since I have held that the
said respondents have acted in breach and are in the process of utilizing such trade secrets and
confidential informations the said respondents are restrained from acting as a selling agent of
Hora, Germany or Sales representatives for three years from January, 2014.”

(iii) Application of Criminal Laws

Any breach of the contractual provisions signed by the employee attract appropriate civil
remedies either in the nature of specific relief, i.e., specific performance of the
contract/agreement or by way of granting injunctive relief or awarding of damages to the extent
of loss or injury suffered. But this does in no way imply that there are only civil remedies
available at the disposal of an employer against an employee. The criminal legislation in India
also comes to the aid of employers who are inclined to take appropriate and necessary legal
action, which thereby would attract penal consequences, for all those found guilty of any
illegality or malpractice. There are a plethora of provisions either it be in the Indian Penal Code
of 186026 or the Information Technology Act of 2002 to punish all those wrongdoers in the case
of breach of confidentiality and disclosure provisions and thereby attract and allow appropriate
criminal prosecution and imprisonment or fine or both. As per the Information Technology Act,
remedies have been provided to deal with hacking,27 causing damage to computer system,28
tampering with computer source document,29 punishment for violation of privacy policy,30 etc.

25
In the High Court of Calcutta, G.A.No. 1738 of 2014 & C.S.No. 192 of 2014
26
IPC provisions like Section 381(Theft by clerk or servant which is punishable with imprisonment which may
extend to 7 years and fine); Section 403(Dishonest misappropriation of property which is punishable with
imprisonment which may extend to 2 years or fine or both); Section 405 (Criminal breach of trust which is
punishable with imprisonment which may extend to 3 years or fine or both); Section 408(Criminal breach of trust by
a clerk or servant which is punishable with imprisonment which may extend to 7 years and fine); Section
415(Cheating which is punishable with imprisonment which may extend to 1 year or fine or both); can also be
resorted to by the employers in case of breach of confidentiality on part of the employees post-employment period.
27
Section 66
28
Section 43
29
Section 65
and these may also be considered by the employer as remedies against the employee in case of
breach of confidentiality and disclosure provisions.31

The Supreme Court in Pyarelal Bhargava v. State of Rajasthan,32 dealt with the issue of an
alleged theft of confidential information by an employee who had removed it from the
government department and passed it along to a friend who in turn substituted the documents.
This friend further removed certain documents while substituting them with others and returned
the file the next day. The Court while convicting the employee for theft under Section 378 of the
Indian Penal Code held that even a temporary removal of documents with a dishonest intention
could cause loss or harm and hence, would be considered as theft.

In case of Abhinav Gupta v. State of Haryana,33 the accused was an ex-employee of a Company
and had resigned and joined another Company after his final clearance. During his course of exit
interview he had continuously maintained that he would not be joining any company which was
in direct competition with his employers. He further agreed that all the confidential information
acquired by him during his tenure at work shall be kept confidential at all times. However, two
weeks later, it came to the knowledge of his employer that he had joined the competitor. It was
also later discovered that the accused had transferred or downloaded various confidential
information of his employer into his personal e-mail id. Screenshots of the mail id of the accused
was produced by employer which showed that such information was passed on to the competitor
company. The Court while holding that the actions of the employee amounted cheating and
dishonestly inducing of property under Section 420 and criminal breach of trust under Section
406 of the Indian Penal Code also amounted to the act of hacking as under Section 66 of the
Information Technology Act.

(iv) Other Exceptions

The Supreme Court had in fact derived an exception that related to the restrictions on a
franchisee‟s right to deal with competing products during the subsistence of the franchise
agreement. The Court in M/S Gujarat Bottling Co. Ltd. vs. The Coca Cola Co.,34 held that some
terms of commercial contracts have passed into the accepted currency of contractual or
conveyancing relations, and aim at promoting trade and business. Such terms due to their nature
and purpose cannot be said to enter into the field of restraint of trade. The Court while arriving at
its conclusions held that a negative stipulation in a franchising agreement, restraining the
franchisee from dealing with competing goods, during the subsistence of the franchising
agreement, could not be regarded as restraint of the franchisee‟s right to trade.

30
Section 66E
31
Section 72A Information Technology Act
32
AIR 1963 SC 1094
33
2008 CriLJ 4356
34
1995 (5) SCC 545
Besides the exceptions derived from various judicial perceptions and interpretations, the
Competition Act, 2002 also deals with Anti-Competitive Agreements under Section 3. Section
3(1) & (2) are as follows;

“(1) No enterprise or association of enterprises or person or association of persons shall enter

into any agreement in respect of production, supply, distribution, storage, acquisition or control
of goods or provision of services, which causes or is likely to cause an appreciable adverse effect
on competition within India.

(2) Any agreement entered into in contravention of the provisions contained in sub-Section (1)
shall be void.”

What can be seen is that Section 3(1) is very similar in its intentions when compared to Section
27 of the Contract Act. But although being similar in nature, the Act has also provided for
exceptions to such agreements which are mentioned in Section 3(5) as follows:

“(5) Nothing contained in this Section shall restrict—

(i) the right of any person to restrain any infringement of, or to impose reasonable conditions, as
may be necessary for protecting any of his rights which have been or may be conferred upon him
under:

(a) the Copyright Act, 1957 (14 of 1957);

(b) the Patents Act, 1970 (39 of 1970);

(c) the Trade and Merchandise Marks Act, 1958 (43 of 1958) or the Trade Marks Act, 1999 (47
of 1999);

(d) the Geographical Indications of Goods (Registration and Protection) Act, 1999 (48 of 1999);

(e) the Designs Act, 2000 (16 of 2000);

(f) the Semi-conductor Integrated Circuits Layout-Design Act, 2000 (37 of 2000);

(ii) the right of any person to export goods from India to the extent to which the agreement
relates exclusively to the production, supply, distribution or control of goods or provision of
services for such export.”

What can be seen from the above points is that although it can be argued that most of the
exceptions dealt with are rendered by way of judicial interpretation, Section 3(5) of the
Competition Act, which is a subsequent legislation to the Contract Act, clearly has taken into
consideration the changing times and have recognized and protected the employer‟s interest.
Therefore, the Courts while interpreting Section 27 of the Contract Act should also make
reference to Section 3 of the Competition Act and see if the same is applicable to the facts and
circumstances of a particular case.

Conclusion: The Way Forward

What can be discerned from the above observations is that the misconception that restraint as per
Section 27 of the Act is applicable as a general rule in all cases post the cessation of the jural
relationship between an employer and employee is highly inappropriate and misconstrued. A
plain reading and application of the Section only goes to show that any restraint is with respect to
preventing any individual from practicing one‟s choice of profession, trade or business,
specifically only post-employment; irrespective of whether the employee leaves voluntarily or as
a result of his services being terminated.35 Therefore, with the changes in these turbulent times,
the intervention of the judiciary in taking cognizance of the exceptions, as extrapolated above, as
legitimate grounds to award protection is very much appreciated, but having said this, it is about
time the legislature takes accountability in assessing the significance of this Section and ensures
that it maintains its ideals in projecting India as a Global Investment Hub for many companies.
By revising this particular provision to include the principle of reasonableness and fairness and
allowing partial restraints to exist post-employment, would only go a far way in protecting trade
and business India, considering the present era is experiencing phenomenal changes in the
economy, industrial processes and technological advancements. The parliament while having a
relook at this Section should draw a middle playing ground and equally protect both the
employer‟s and employee‟s interests. With the Law Commission of India having made its
recommendations more than five decades back, it is about time the government seriously
contemplates making relevant changes, especially considering that internationally various
countries have already incorporated these changes in their respective laws long back. The
Supreme Court‟s approach in Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan & Anr.,36 seems
to be the most appropriate approach to address concerns arising out of restrictive covenants:

“……Somewhere there must be a line between those contracts which are in restraint of trade and
whose reasonableness can, therefore, be considered by the Courts, and those contracts which
merely regulate the normal commercial relations between the parties and are, therefore, free
from doctrine…..”

The relevance of inserting restrictive covenants in all kinds of contracts has evolved over a
period and gained significant importance specifically due to growing trend of employer-
employee disputes. In such times, it is only apt that such a legal hurdle does not come in the way
of contracts/agreements signed and entered by individuals of their free will and volition.

**********

35
Supra N 8
36
AIR 2006 SC 3426