Agreements in restraint of Trade are void under the Indian Contract Act
Table of Contents
- Q. Agreements in restraint of Trade are void. Explain with leading cases.
- Q. What is a wagering agreement? What are its essential elements?
Q. Agreements in restraint of Trade are void. Explain with leading cases.
Section 27 “Agreement is restraint of trade, void” says thus,
Every agreement by which any one is restrained from exercising lawful trade, business, or profession of any kind is to that extent, void.
Exception: Saving of agreement not to carry on business, of which goodwill is sold.
Mahbub Chander vs Raj Koomar 1874 – Two shopkeeper entered into an agreement that one will pay the other to close his business in that locality. One closed the shop but the other refused to pay. It was held that the agreement was void. Since the wordings of section 27 do not do not use the word “absolute” as in section 28, even if the restraint is partial, it will be void.
Nordenfelt vs Maxim Nordenfelt Guns and Ammunition co ltd. 1894 – Inventor sold the goodwill of a gun company to a buyer. The agreement was – Seller will not practice the same trade for 25 and the seller will not do any business that will compete with the business carried on by the buyer at that time. It was held that the first part is valid because it is reasonable but the second part is invalid because it is unreasonable.
English law tests reasonability while Indian law sees if it is allowed under statutory exceptions or exceptions created by judicial decisions.
Collusion between Bidders and Tenderers
In general mutual arrangements between bidder so as to affect the final bid price are not considered in restraint of trade.
Mohd Isack vs Daddepaneni AIR 1946 – Two persons entered into an agreement where by one would not bid on a tender floated by Postal service and the other would pay him for that. The other person got the contract but refused to pay. It was held that it was a valid contract.
However, now such matters should be considered with respect to Monopolies and Restrictive Trade Practices Act 1969, which forbids such collusions.
Freedom of Press
An agreement that puts a restraint of press not to publish on the conduct of a person is void because it is opposed to public policy.
Restriction on Lease
Vidya Wati vs Hans Raj AIR 1993 – Lesor of a property can put a restriction on what kind of business can be done on the property. It is an outlet of carrying business and not a restraint.
Exceptions
1. Sale of goodwill
2. Partnership: Under Partnership Act, partners of a firm may restrict their mutual liberty to do any trade other than within their firm. An outgoing partner may also be restricted from carrying on similar trade for a period of time.
3. Trade Combinations: Companies doing business in the same field may regulate their trade practices for example opening and closing time of business even if they marginally put restraint. However, restraints on employment are not allowed in disguise of regulation.
Korus Mfg vs Koluk Mfg 1959 – Companies made an agreement that they would not hire anybody who has worked in the other company in the past 5 yrs. Held void.
4. Exclusive dealing agreements
5. Restraint upon employees
Niranjan Shankar Golkari vs Century Spinning and Manufacturing Co 1976 – A company was offered collaboration by a foreign company on the condition that they will maintain complete secrecy. A person was employed in the company on the condition that he will not work for any other company in the same business for 5 years. SC held the agreement valid.
Q. What is a wagering agreement? What are its essential elements?
Section 30 – Agreement by way of Wager, void. –
Agreements by way of wager are void and no suit shall be brought for recovering anything alleged to be won, or entrusted to anybody to abide by the result of an game or uncertain event on which a wager is made.
Exception – Any amount more than 500 rs can be paid to the winner or winners of any horse race.
Nothing in this section shall deem to legalize any transaction connected to horse racing to which provisions of section 294-A of IPC apply.
Definition of wager was first given in Carlill vs Carbolic Smoke Ball Company 1892. It held that a wager contract is one in which parties professing opposing views on the result of an uncertain event, mutually agree that depending on the outcome of such event, one will pay or hand over a sum of money or other stake. Neither party has any other interest in the event other than their stake that they may lose or win.
Essential elements –
- Event must be uncertain : Outcome of an event cannot be predicted.
- Each party must either win or lose depending on the result of an event
Baba Saheb vs Raja Ram 1940 : Two wrestlers agreed that if one fails to appear for a match he will pay Rs 500 to the other and the winner will take Rs 1125 out of the gate money. Defendant failed to appear and the plaintiff sued for Rs 500. It was held that it was not wager because had the defendant appeared for the match no one would have lost.
- Parties should not have any control on the event
- There should be no other consideration except the amount that one can win or lose – This is the difference between a wagering agreement and an insurance agreement.
Speculative Transactions – An agreement to pay the difference between current market price and a speculative price on a certain date is a wagering agreement. Such agreements are usually disguised as regular trade agreement and situation and facts of the case has to be looked into to decide whether it is a wager or not. In the case of Kong Yee Lone vs Lowjee Namjee 1901, a trader promising to deliver 199000 bags of rice while he had no such capacity was held a wagering agreement.
Effects of wagering agreement – Such an agreement being void, it cannot be enforced by the court.
Collateral Transactions – Wagering agreement is only void but not necessarily illegal, thus any agreement such as a loan given to a person to pay a wagering debt can be enforced.
Gherulal Parek vs Mahadeodas Maiya AIR 1959 – A partnership to participate in wagering agreement is not illegal and a parter who paid for wagering loses could sue other partners for contributing proportional funds.
Exceptions
1. Horse Race
2. Crosswords – Anything that requires skills to win. However, betting on a game being played by other people is wagering.
Moore vs Elphic 1945 – Literary competitions which involve skill and effort is made to select the best and most skillful competitors are not wagers.
Keywords: Agreements in restraint of Trade in India, Concept of Agreements in restraint of t Contract of Guarantee, Agreements in restraint of Trade are void under the Indian Contract Act
Click here to read the Indian Contract Act 1872
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