Agreement In Restraint of Profession and Employment
Contract:-
According to Section 27 of
the Indian Contract Act 1872 , Agreement in restraint of trade is defined as
"every agreement by which anyone is restraint from exercising a lawful
profession trade or business of any kind is to that extent void"
It is a general practice to
place restrictive terms in the contract of employee’s. This may include
restriction to practice any other employment during the contract term. Along
with this there may be clauses that indicate that employee is restrained from
practicing a business or profession after his services are terminated or
discontinued or after the lapse of contract of employment. Let us analyze the
legal standing of these points.
As held in Madhav chander v
Rajkumar by The Honorable Calcutta High Court
"Every man should have
unfettered liberty to exercises power and capacities for his own and the
communities benefit". In the above mentioned case plaintiff and dependent
where Rival shopkeepers in our locality in Calcutta. The defendant agreed to
pay a sum of money to the plaintiff if he would close his business in that
locality the plaintiff accordingly did so but the defendant refuse to pay.
The court held the agreement
to be void and laid down that the word “restrained from exercising a lawful
profession business or trade” do not mean total restriction and it intended to
apply to a partial restriction limited to some particular place. The Court
further pointed out that it is drawing its conclusion also from section 28
where the word “absolutely” is used. In section 27 there is no such
qualification used. Thus it includes both Total and Partial Restraint.
In Khemchand Manekchand v
Dayaldas, it was held that Section 27 abolishes the distinction between Total and
Partial restraint of trade. Whether the restraint is General or Partial,
Unqualified or Qualified, if the agreement is in nature of a restraint of
trade, it is void.
Again in the case of Muhammad
versus Ona Mohammed Ibrahim, Agreements like closing the mail for 3 months in
the near and selling be for 14 days in a month only in restraint of trade hence
void.
Restraint upon employees in
is one of the judicial exceptions of the rule under section 27. They can be
divided into two categories:-
a) During Employment:-
Negative Covenants are the
clauses in the agreement where there are restraints placed on the employee, to
practice business or profession other than that of the master’s during
employment terms.
It is a well-established
legal principle that trade secrets, the name of the customers, all other things
that can be denominated as objective knowledge, may not be given away by a
servant. They are his master’s property and there is no rule of public interest
that allows there easy transfers to other against master’s will. So they can be
restrained.
A servant may therefore be
restrained from taking part in any business in direct competition with that of
his employer, in the case of Charles worth vs McDonald, “A” Agreed to become
assistant for 3 years to “B” who was a physician surgeon practicing at Zanzibar
the appointment was subject to a clause against practicing. “A” left the
service within a year and begin to practice there on his own account but he was
restrained from doing so during the period of 3 years, As he was still under
agreement of employment.
Farran chief justice explain
the principle that an agreement of this class does not fall within section 27
if it did all contracts of personal service for a fixed period would be covered
under the same umbrella and there will be no use of them. An Agreement to serve
exclusively for a week or a day or even for an hour necessary prevent the
person so agreeing to serve from exercising his calling during that period for
anyone else than the person with whom he is so agrees. This principle was
applied by Bombay High Court in the case of Deshpande vs Arvind Mills ltd.
B) After Period of
Employment:-
An agreement to restrain a
servant from competing with the employer after the termination of employment
may not be allowed by Court, In Brahmaputra Company Limited versus Scarth an
attempt was made to restrain a servant from completing for 5 years after the
period of service the court is disallowed it.
Supreme Court again laid down
in Superintendence Company of India vs Krishna Murugan, Restraint beyond the
terms of service would be prima facie void and the only ground on which it
could be justified is by bringing it within the scope of the exception that is
by showing that it is necessary for the protection of employer’s goodwill. The
court also pointed out that even if such restraint is valid it will be only
apply after expiry of the term in its natural course and not when the employees
is wrongful dismissed earlier.
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