File Copyright Online - File mutual Divorce in Delhi - Online Legal Advice - Lawyers in India

Validity of Agreements restraining Liberty as per Indian Contract Act, 1872

The right to Liberty, to live life as per one's own wises, is one of the fundamental rights necessary for the development and progress of humanity. Part of the First generation of Human rights, it forms the very base on which subsequent rights find their footing. Thus, in the Indian Constitution the right to liberty has been given the paramount place, and it appears in the very preamble.

One of the Rights under Right to Liberty is the Right to make contracts and inter into covenants. However, certain reasonable restrictions are provided under the Indian Contract Act for the sake of public policy under section 26, 27 and 28; restricting certain contracts that are not expressly deemed illegal by the Act.

Section 26: Restraint of marriage

The law deems any contract that tries to put restriction on any parties right to marriage as void. The Principle has its origins in English law from the landmark case of Lowe v Peers(1768) decided by the king's bench. In the case, the plaintiff had entered into an agreement that upon marrying anyone other than the Defendant, he would have to pay her 1000 pounds within 3 months of the marriage. The court declared the agreement to be void because it was purely restrictive in nature.

The Aim behind it is that marriage plays a very important role in ensuring the continuance of mankind and can even be considered to be the building block of the Society. Thus, the law cant be used to enforce restrictions that are clearly against public policy. On top of that, each person has the right to see their lineage continue, and as such It is also against Individual rights.

The restraints can be either Absolute or partial. In England, only agreements putting absolute restraint on marriage are considered to be void. Agreements imposing partial Restraints are held to be valid.

Under Indian law, however, Partial as well as Absolute restraint are deemed to be void.

The Wording of the Section doesn't distinguish between partial or Absolute like the Section 28 does, therefore it's interpreted to apply to both degrees of restraint.

Penalty upon remarriage, however, is not considered a restraint on marriage. Thus, in the case of Suryanarayan Murthi v. P. Krishna Murthy (AIR 1957), it was held that the agreement between co-widows that upon remarriage, the party marrying would forfeit the share of property of their husband was valid.

Section 27: Restraint on Trade

The Constitution Under Article 19(1)(g) provides every person with the right to practice any profession or trade, subject to reasonable restrictions.

Thus, under Section 27 of the Indian Contract Act, agreements that try to restraint the practice of any lawful trade are held to be void. A further reason is that the government should not be deprived of the generating revenue from the works of its citizens.

The Principle in English law started taking ground following the case of Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd(1894), in which the gun inventor and manufacturer Nordenfelt sold their business to one Maxim, on the condition that Nordenfelt would not practice the same trade for 25 years or engage in any practice that would compete with maxim. The court held that the first part of the agreement was valid, as it protected the legitimate and lawful interest of Maxim. On the other hand, the court held the latter part of the agreement as void and unreasonable.

Agreements that restrain trade can only be allowed on conditions that:
  • Only Legitimate Interests are protected
  • Agreement is Reasonable from the perspective of the parties
  • Agreement is Reasonable from the perspective of public policy
Thus, in England, it is Reasonability that is used as the test to determine the validity of a contract trying to restrain the Right to trade.

In India, however, all restraints are held void. In Madhub Chunder v. Rajcoomar(1874), the Calcutta High court held that the section 27 puts a restriction of restraint on absolute as well as partial restrain. In this case, the plaintiff, according to the agreement with the defendant, a rival shopkeeper, agreed to close his shop for monetary consideration. The Agreement was held to be void.

However, there are certain exception that exist under The Indian Law. These are the: 1)Statuary exception created by the Parliament, and; 2)the Exceptions created due to the Judicial interpretation.

Statuary Exceptions
The Exception 1 of the Section 27 Provides for a way in which Freedom of trade can be restricted legally. Contracts Related to the sale of goodwill have been held valid under Indian Law. The Section contains the principle established in the Nordenfelt case, where the court had held the sale of goodwill to be valid, and subsequently the seller can't continue to use the name for business.

Goodwill is something that has an abstract existence, yet it's the very essence of a business. It's the brand of the business that took years to build, it is the trust of the public earned through hard work. Due to the Importance of it as such, its sale has been held to be valid.

Further exception are provided under the Provisions of the Indian Partnership Act.

The specific types of contracts allowed under the Partnership Act are:
  • Section 11(2): A partner, while he is in the firm, shall not carry other business.
  • Section 36(2): On leaving the firm, the partner will not carry a similar business.
  • Section 54: On desolation of the firm, the partners will not carry similar business within specified time or local limits.
  • Section 55(3): Upon sale of goodwill of a firm, the partners will not carry similar business within specified time or local limits.
Judicial Interpretations
Certain exceptions likewise have been created due to the Judicial Interpretations of the law, these are:
  1. Solus Agreements: These are Exclusive dealing agreements, in which the producer enters into an agreement to only sell his goods to a certain dealer or distributor, who in turn agrees to only procure the good from the producer. These types of agreement are held outside of the Scope of the Section 27, as far from restricting business, they provide the Producer with an assured market for his products.
  2. Trade combinations: Traders and Manufacturers enter into associations so to conduct business in a uniform and organised manner. The object of these are to regulate business, and not necessary to restrict them. Even if some inconvenience and inflexibility is caused to some parties, it is justified as the outcome is in favour of both the producers and Consumers.
  3. Restraint on Employment: Employer can enter into an agreement with their employees that would prevent the latter from working anywhere but under the Employer for the period of the Agreement. The Reason behind this is that the trade secrets and business practices are the property of the employer and the Employee doesn't have the authority to share them with others. Thus, an agreement limiting Employment makes sure that the employee doesn't transfer the Knowledge he learned from the employer to his Competitor. This was held in Charleseworth v MacDonald(1898), in which the employee, an assistant to a Doctor, left the service before the three-year period for which he was appointment, and started practising in contravention of the clause which stated against practice. The court prevented him.
In Niranjan Shankar Golikari v Century Spg &Mfg Co Ltd. (AIR 1967), Golikari was appointed for five year as a shift manager in the company, with the terms stating that the employee will not serve anywhere else for that period. He subsequently left the Company and started working with a competitor. The Court upheld the Injunction against him that was previously ordered, as the period of Contract was still subsisting.

The Employee can be restrained for the period of employment still remaining, in case he leaves before. But the Agreement can't be restrained after the period of employment is over, as that would be unreasonable.

Section 28: Restraint of Legal Proceeding

For a civilized society, it is Justice that differentiates it from Barbarism and despotism. Thus, the Right to approach the court of law can't be taken away from a person by way of contract.

Section 28(a) declares all agreements void which try to put an absolute restrain on any person's right to enforce his rights.

Partial Restraints, however, are not held to be void. The parties, for example, have the option to choose between two courts of equally competent jurisdiction. They can oust the jurisdiction of one such court for that of another. Such a clause is called Ouster Clause. The parties, however, can not confer jurisdiction upon a court which has not been given jurisdiction by The Law.

Further, Any agreement that discharges any party from any liability or takes away any right after a limited period of time is also considered void under Section 28(b). Thus, under the Limitation Act of 1963, an action for breach of contract may be brought within 3 years, but an agreement can't fix the time period for any period less than that.

Exception 3 however provides an Exception for Financial institutions in relation to agreements of guarantee.

These three sections that restrict the individual liberty to enter into agreements, as seen above, are justified on the ground that they only do so to protect other Rights. They prevent the Law of Contracts and the legal apparatus to be used to deprive others of their other rights. Therefore, no one can deprive someone of their Right to marriage by grace of Section 26. No one can be prevented from exercise their Right of lawful occupation by section 28, or under section 28 be prevented from seeking legal remedy. These reasonable Restrictions are thus essential for the sake of Public Policy.

Law Article in India

Ask A Lawyers

You May Like

Legal Question & Answers

Lawyers in India - Search By City

Copyright Filing
Online Copyright Registration


How To File For Mutual Divorce In Delhi


How To File For Mutual Divorce In Delhi Mutual Consent Divorce is the Simplest Way to Obtain a D...

Increased Age For Girls Marriage


It is hoped that the Prohibition of Child Marriage (Amendment) Bill, 2021, which intends to inc...

Facade of Social Media


One may very easily get absorbed in the lives of others as one scrolls through a Facebook news ...

Section 482 CrPc - Quashing Of FIR: Guid...


The Inherent power under Section 482 in The Code Of Criminal Procedure, 1973 (37th Chapter of t...

The Uniform Civil Code (UCC) in India: A...


The Uniform Civil Code (UCC) is a concept that proposes the unification of personal laws across...

Role Of Artificial Intelligence In Legal...


Artificial intelligence (AI) is revolutionizing various sectors of the economy, and the legal i...

Lawyers Registration
Lawyers Membership - Get Clients Online

File caveat In Supreme Court Instantly