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A CRITICAL ANALYSIS ON LAW OF CONTRACTS: WITH SPECIAL REFERENCE TO RESTRAINT TO TRADE.
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A CRITICAL ANALYSIS
ON LAW OF CONTRACTS: WITH SPECIAL REFERENCE
TO RESTRAINT TO TRADE.
AUTHORED BY - ARSHDEEP SINGH
5 BBA LLB A
2050471
DECEMBER,2022
FACULTY, SCHOOL OF LAW
1.
INTRODUCTION-
The concept of agreements and contracts have existed in the society
way before laws and rules
came into picture. Contracts and agreement trace its existence through
the notion of social- contract theory
as propounded by Thomas Hobbes, John Locke and Jean Jacques Rousseau.
Foreshadowing Hobbes, Locke and Rousseau, Socrates argues through the
laws that he is obligated to follow because
he himself is the one
who has entered into an agreement in respect to obligation
to laws. After reflecting on his life in Athens, Socrates comes to the
conclusion that, by voluntarily
deciding to live there; he automatically comes into an agreement with the state/sovereign to abide by their laws.
This contract is thus renewed on daily basis as he continues to reside
within the territory of the sovereign for 70 years of his life.
Fast forwarding to the renaissance period and afterwards, the ideals that
each of the contract theorist apply
in their own theories have varied radically on the position of certain
elements; despite that, the one thing that unifies the social contract theorists is a common belief that de
jure civil authority can be
justified by a theory that explains how human beings have moved on from the State
of Nature to a Civil State by entering into a social contract
with each other.
2.
RESEARCH OBJECTIVES-
? To analyze
the role of judiciary in resolving contract disputes
? To make a comprehensive study on restraint
to trade Legislation
? To evaluate
the problems faced by the parties
due to the dilemma provided
by section 27
3.
RESEARCH METHODOLOGY-
This paper has been encircled by the researcher using the doctrinal and
analytical method. Both descriptive
and exploratory analysis have been used. The primary source of research
includes legislations, directions,
case laws, reports published by the parliamentary standing committee, draft policies and rules. The secondary sources
will include books, research articles,
law commission reports
and websites. All the sources
have been appropriately
recognized.
4.
RESEARCH QUESTIONS-
1)
Whether section
27 of the Indian contracts act provides uncontestable immunity?
2)
Whether the parties are able to get the judicial remedy within reasonable time?
3)
Whether the provision
in relation to restraint to trade has been able to achieve its objectives?
5.
WHAT
IS A
CONTRACT?
In layman terms a contract can be defined as an agreement coupled with
the aspect of enforceability by law.
Thus, a contract is an agreement which is enforceable by law or has legal backing.
Essentials of a valid contract
1.
Offer: When one person signifies
to another his willingness to do or to abstain from doing anything, with a
view to obtaining the assent
of that other to such act or abstinence, he is
said to make a proposal.
2.
Acceptance: When the person
to whom the proposal has been made signifies his assent thereto, the offer is said to be
accepted. Thus, the proposal when accepted becomes a promise.
3. Intention to create
a legal relationship: for a contract to be binding, both the parties must have the intention
to create a legal relationship thus
leading to an agreement.
4. Legal
intent: the parties to a contract must have a legal intent so comeforth into a contract.
That is the objective of the parties
must not be in violation to law
or shall not be illegal.
5.
Competency: the parties
to the contract must be competent according to the law.
6.
Consideration: When, at the desire of the promisor,
the promisee or any other person has done
or abstained, from doing or does or abstains from doing, or promises to do or
to abstain from doing something, such act or abstinence or promise is called a consideration for the promise.
6.
AGREEMENT IN RESTRAINT TO TRADE
Section 27 of the Indian contracts act 1872, deals with the restraint to trade.
1. Every agreement through which one is restrained from
carrying out any lawful profession, business or trade of any kind is
to that extent be void
An
exception to section 27 of ICA is Saving
of agreement not to carry on a business of which the goodwill is sold. Regarding that such limit appears to the court
reasonable, regard being
held to the nature of
the business.
the provision regarding the restraint to trade has been lifted from David
D. Field’s draft code for New York which was based upon the old English doctrine
of restraint to trade, as prevailing in the ancient times. In the process of
drafting of section 27 of the Indian contracts act, the high courts in India held that the test of
reasonableness along with the provision of the restraint being partial or reasonable in upheld by a case governed
under section 27 of the ICA, unless it falls within the exception thus
provided.
The courts; thus establish a clear demarcation and intelligible differentia so as the decide what falls within
the scope and blanket of exception to section 27.
Legal stance in respect of section 27 Ica,1872
7.
CASE LAWS ASSOCIATED WITH AGREEMENTS IN RESTRAINT OF TRADE-
a. AIR 1995 SC 2372 Para no.22 and 23:-
"22. While construing the provisions of Section 27, the High Courts in India have held that neither the test of
reasonableness, nor the principle that the
restraint being partial or reasonable are applicable to a case governed
by Section 27, of the Contract Act, unless it falls within
the exception. The law commission in its 13th report has recommended that the provision should be suitably
amended to allow
such restrictions and all contracts in restraint of trade,
general or partial, as were reasonable, in the interest of the parties as well as of the public. No action has,
however been taken by parliament on
the said recommendation.
23. We do not propose to go into the question, whether reasonableness of restraint
is outside the purview of Section 27 of the Contract Act and for the purpose of the present case, we will
proceed on the basis that an inquiry into
the reasonableness of the restraint is not envisaged by Section 27. On that view instead
of being required
to consider two questions as in England,
the courts in India have only to consider the question whether the
contract is or is not in restraint of trade."
b. AIR 2006 Supreme Court 3426 - para no.57:-
"The legal position with regard to post contractual covenants or restrictions has been consistent, unchanging and completely settled in our country. The legal position
clearly crystallized in our country
is that while construing the provisions of Section 27 of the Contract Act, neither the test of reasonableness,
nor the principle of restraint being partial is applicable, unless it
falls within the express
exception engrafted in Section 27. "
c. AIR 1980 Supreme Court 1717:-
"25.
While the Contract Act, 1872, does not profess to be a complete code dealing with
the law relating to contracts, we emphasise that to the extent the Act deals with a particular subject, it is exhaustive
upon the same and it is not permissible to import
the principles of English Law dehors the statutory provision, unless the statute
is such that it cannot
be understood without
the aid of the English
Law. The provisions of Section 27 of the Act were
lifted from Hom. David D. Field's Draft Code
for New York based upon the old English doctrine of restraint of trade, as prevailling in ancient times. When a rule of English Law receives statutory
recognition by the Indian Legislature, it is the language of the Act which determines the scope, uninfluenced by the manner in which the analogous
provision comes to be construed
narrowly, or, otherwise modified, in order to bring the construction within the scope and limitations of the
rule governing, the English doctrine of restraint of trade.
26. It has often been pointed out by the Privy Council and
this Court that where there is
positive enactment of Indian Legislature the proper course is to examine the language of the statute and ascertain
its proper meaning uninfluenced by any consideration derived
from the previous
state of the law - or the English Law upon which
it may be founded. In Satyabrata
Ghosh v. Mugnee Ram Bangor,
1954 SCR 310 Mukherjee, J., while
dealing with the doctrine of frustration of contract observed that the Courts in India are to
be strictly governed by the provisions of Section 56 of the
Contract Act and not to be influenced by the prevailing concepts of the English Law, as it has passed
through various stages of development since the enactment of the Contract
Act and the principles enuhciated in the various decided cases are not easy
to reconcile. What he says of the doctrine of frustration under Section 56 of the
Contract Act, is equally true of the doctrine of restraint of trade under
Section 27 of the Act.
27.
Now, so far as the present case is concerned, the law is to be found in Section 27 of the Contract
Act, 1872 which reads :
"27.
Agreement in restraint of trade void - Every agreement by which any one is restrained from exercising a lawful
profession, trade or business of any kind is to that extent void.
Exception 1
:- 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 other person
deriving title to the goodwill
from him, carries
on a like business there in;
provided that such limits appear to the Court reasonable, regard
being had to the nature of the
business".
The section is general in terms,
and declares all agreements in restraint void pro tanto, except in the
case specified in the exception.
28.
The
question whether an agreement is void under Section 27 must be decided upon the wording of that section. There is
nothing in the wording of Section 27 to suggest
that the principle stated therein does not apply when the restraint is for a limited period only or is confined to a
particular area. Such matters of partial restriction have effect only when
the facts fall within the exception
to the section.
29.
A contract,
which has for its object a restraint of trade, is prima facie, void. Section 27 of the Contract Act is general in
terms and unless a particular contract can be distinctly brought within Exception 1 there is no escape
from the prohibition. We have nothing
to do with the policy
of such a law. All we have to do is to take the words
of the Contract Act and put upon them the meaning which they appear plainly to bear. This view of the section
was expressed by Sir Rchard Couch C.J. , in the celebrated judgment
in Madhub Chunder v. Rajcoomar Doss (1874) 14 Beng LR 76 at pp. 85-86, laying
down that whether the restraint was general or
partial, unqualified or qualified, if it was in the nature of a restraint
of trade, it was void".
8.
WHAT
IS GOODWILL-
An important aspect that needs to be kept in mind
is the type and nature
of goodwill.
Goodwill of a business is deemed to be an
independent asset, though intangible, is different from a tangible asset.
According to the Black’s law dictionary, tangible
and intangible assets have been defined differently.
Intangible Asset: Any non-physical asset or
resource that can be amortized or converted to cash. Such as patents, Goodwill and computer programs or a right to
something such as services paid for in advance.
Tangible Asset:
Any asset that has a physical
existence and is capable of being assigned a value.
In simpler terms any asset the value of which
is known or can be known or can be weighed in
monetary terms. The term "goodwill" has been defined by the
Hon'ble Division Bench of the Bombay
High court in judgment reported in AIR 1957 Bombay 111, wherein in para no.8,
it was held that "the goodwill
of a business is inclusive of positive advantages, such as carrying on the commercial undertaking at a particular
place and in a particular name and also its business connections, its business prestige and several other intangible
advantages, which a business may acquire.
9.
CONCLUSION-
If we analyze the current legislations and
provisions relating to agreement in restraint of trade, a fair conclusion can be derived
that the provision for agreement in restraint to trade is very stringent and strict. There
is no scope for ambiguity so as to what can be covered
within the scope of section
27 of Indian Contract Act. The lawmakers
have derived the concept from the english
common law. In the context of Indian needs the
provision as of the date is able to equate the parameters of disputes
and is able to resolve
them. The loophole
comes into play as to when there is uncertainty regarding what shall be constituted as a transaction involving
goodwill. The exception to section 27 is when the goodwill of a certain
property is sold, section 27 is void.
Goodwill is defined as an intangible asset, thus the
jurisprudentia of transfer of property implies that the buyer than shall have the
sole right to have beneficial
interest upon the property unless
stated otherwise,
BIBLIOGRAPHY
JOURNALS
1.
McNair, A. D. (1924). Agreements in Restraint of Trade. Economica, 11, 176–185.
2.
Whiteman, P. G. (1966). Agreements in Restraint of
Trade. The Modern Law Review, 29(1), 77–82.
3.
“No Restraint of Trade.” Scientific American, vol. 79, no. 25, 1898, pp. 388–388.
JSTOR, WEBLIOGRAPHY
Article Information
A CRITICAL ANALYSIS ON LAW OF CONTRACTS: WITH SPECIAL REFERENCE TO RESTRAINT TO TRADE.
Authors: ARSHDEEP SINGH
- Journal IJLRA
- ISSN 2582-6433
- Published 2023/04/25
- Volume 2
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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