Agreements in restraint of trade refer to agreements that restrict a person’s freedom to carry on trade, business, or profession. Such agreements are generally considered void, but under certain circumstances, they may be valid.
It is important to note that the validity of agreements in restraint of trade depends on the reasonableness of the restriction. A restriction that is too wide or vague may be considered unreasonable and, therefore, void. The restriction must also be necessary for the protection of the party’s business interests.
Section 27 of the Indian Contract Act, 1872 provides that agreements that restrain a person from carrying on a lawful profession, trade, or business are void. However, this section also provides some exceptions where such agreements may be valid.
The exceptions to the rule against agreements in restraint of trade are:
- Sale of goodwill: When a person sells the goodwill of a business, they may agree with the buyer not to carry on a similar business within specified local limits. Such an agreement is valid if it is reasonable and necessary for the protection of the goodwill.
- Partnership agreements: Partners in a partnership may agree not to carry on a similar business as the partnership during the partnership’s existence or after its dissolution. Such an agreement is valid if it is reasonable and necessary for the protection of the partnership’s business.
- Employment agreements: When an employee agrees not to carry on a similar business as the employer during the employment or after its termination, such an agreement may be valid if it is reasonable and necessary for the protection of the employer’s business interests.
- Trade secrets and confidential information: An agreement that restricts a person from disclosing trade secrets or confidential information of a business may be valid if it is reasonable and necessary for the protection of the business interests.
Benefits of agreements in restraint of trade:
- Protection of trade secrets and confidential information: Agreements in restraint of trade can help protect a company’s confidential information and trade secrets. For example, if an employee has access to sensitive business information, such as customer lists or product designs, a restriction on their ability to disclose this information can be essential for protecting the company’s interests.
- Protection of goodwill: Agreements in restraint of trade can also protect the goodwill of a business. For instance, when a person sells a business, they may agree with the buyer not to carry on a similar business within specified local limits. This can be beneficial for the buyer as it prevents competition from the seller within a specific area, allowing the buyer to build up their business without undue competition.
- Protection of business interests: Agreements in restraint of trade can also protect the business interests of the parties involved. For example, an employer may include a non-compete clause in an employment contract to prevent employees from leaving the company and setting up a competing business in the same industry.
- Increased value of the business: Agreements in restraint of trade can also increase the value of a business. A prospective buyer may be willing to pay more for a business that comes with a non-compete clause because they can be assured that there will be no competition from the seller in the future.