Restraints in contracts
24/06/2003 The Star Articles of Law with Bhag Singh
AGREEMENTS and contracts govern almost every facet of our lives. And for practical
purposes it may be said that they mean one and the same thing. Technically,
however, contracts are agreements that are legally enforceable. If they are
unenforceable, they remain merely agreements.
Apart from the fact that there are legal elements which
must be fulfilled in order to make what has been agreed constitute a binding
arrangement, there exist elements which would make an agreement void or voidable.
There are also other restraints.
These are restraints which create limitations on the rights
of one party to impose conditions, yet at the same time, allow some restrictions
to be created. These relate to marriage, trade and legal proceedings.
Restraint of marriage
The Contracts Act expressly prohibits any agreement that
curtails a person’s right to marry. It says: “Every agreement in restraint
of the marriage of any person, other than a minor during his or her minority,
is void”.
Thus, a contract cannot lawfully prevent an adult, competent
person to exercise his rights to get married. This does not prevent agreements
to restrain a minor from marriage till he reaches the statutory age of majority.
Restraint of trade
In the ordinary course of business transactions, there
may arise a peculiar kind of agreement which is in restraint of trade. A contract
in restraint of trade may be defined as one which imposes unreasonable and
undue restrictions on a person’s right to carry on his trade or business by
restricting him in the work he may do for himself or others or any arrangements
which he may make with other parties outside of such contract.
The Contracts Act says: “Every agreement by which anyone
is restrained from exercising a lawful profession, trade, or business of any
kind, is to that extent void”. To this there are exceptions.
“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 person deriving title
to the goodwill from him, carries on a like business therein: Provided that
such limits appear to the court reasonable, with regards to the nature of
the business.
“Exception 2 – Partners may, upon or in anticipation of
a dissolution of the partnership, agree that some or all of them will not
carry on a business similar to that of the partnership within such local limits
as are referred to in Exception 1.
“Exception 3 – Partners may agree that some or all of them
will not carry on any business, other than that of the partnership, during
the continuance of that partnership.”
Therefore, restraint of trade in any agreement is void.
The whole contract is not invalidated by the words “to that extent”. Apart
from the exceptions, all classes of contracts in restraint of trade are prohibited.
The words “every agreement” are wide enough to cover not only commercial agreements,
but also agreements of societies, trade unions and virtually every kind of
agreement by which the lawful exercise of a trade or profession is restrained.
In Wringglesworth v Anthony, the defendant was an advocate
and solicitor who entered into an agreement of service with the plaintiff,
the sole proprietor of a legal firm in Kota Baru at that time. In the agreement,
the defendant agreed that he would not, for a period of two years after the
termination of his engagement by the plaintiff, practise as an advocate and
solicitor within a radius of five miles (eight kilometres) from Kota Baru
town without first obtaining the written consent of the plaintiff.
The court held that, except in respect of the three exceptions,
every agreement by which anyone is restrained from exercising a lawful profession
is to that extent void.
The rule does not apply to two categories of contracts
in restraint of trade. Exception 1 holds as valid an agreement where a seller
of a business agrees to restrain himself from competing with his purchaser
within “specified local limits” and within the duration the purchaser carries
on that business.
The extent of the area of the restraint is regulated by
the words “specified local limits”, which means an area specified by the parties
within the country. Thus, within the country, the parties can choose the area
to which the limits could apply.
However, the exception has a proviso to the limit that
they “appear to the court reasonable, regard being had to the nature of the
business”. As to the limit of the area to which the restraint can apply, the
courts have to use a test of reasonableness based on whether, with regard
to the nature of the business, the limits imposed are reasonable.
With regard to the duration to which the restraint can
be applied, this is ruled by the words “so long as the buyer ... carries on
a like business”. This is quite clear. As long as the buyer is working the
purchased business, the restraint is enforceable on the seller.
Exception 2 seems to be unusual. Partners can be restrained
from carrying on a similar business on dissolution of the partnership. If
such an agreement is upheld, it simply means that all the former partners
cannot do what they have been doing. Although, as mentioned above, they may
restrain each other from “carrying on a business similar to that of the partnership”,
it may not include working as an employee in a similar business.
Exception 3 is also very restrictive in that the partners,
during a partnership, can restrain each other from carrying on any other business
apart from that of the partnership. If such an agreement is enforced, it will
not be conducive to trade.
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