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Commercial Law

Notes
Example: (i) A promises to render services for the conduct of litigation in consideration
of payment of 50 per cent of the amount recovered through court. The agreement is legally
enforceable.
(ii) A, a financier, promises to spend ` 30,000 for the consideration that a part of the estate

recovered through litigation will be conveyed to him, the value of which amounted to ` 90,000.
Though the agreement bonafi de, it would not be enforced, the reward being extortionate and
unconscionable.

1.6.1 Agreement in Restraint of Trade

Section 27 provides that “every agreement by which any one is restrained from exercising a lawful
profession, trade or business of any kind is, to that extent, void”. All agreements in restraint of
trade, whether general or partial, qualifi ed or unqualifi ed, are void. It is, therefore, not open to
the courts to enter into any question of reasonableness or otherwise of the restraint [Khemchand
vs. Dayaldas, (1942) Sind, 114].

Example: (i) 29 out of 30 manufacturers of combs in the city of Patna agreed with R to
supply him with combs and not to any one else. Under the agreement, R was free to reject the
goods if he found there was no market for them. Held, agreement amounted to restraint of trade
and was thus void [Shaikh Kalu vs. Ram Saran Bhagat (1909) 13 C.W.N.388].
(ii) J, an employee of a company, agreed not to employ himself in a similar concern within a
distance of 800 miles from Chennai after leaving the company’s service. Held, the agreement was
void [Oakes & Co. vs. Jackson (1876) 1 Mad.134].
(iii) A and B carried on business of readymade garments in a certain locality in Calcutta.
A promised to stop business in that locality if B paid him ` 900 which he had paid to his workmen
as advances. A stopped his business but B did not pay him the promised money. Held, the
agreement was void and, therefore, nothing could be recovered on it [Madhab Chander vs. Raj
Coomar (1874) 14 Beng L.R. 76].
1.6.2 Restraint of Legal Proceedings (S.28)

Every person has a right to have recourse to the usual legal proceedings. Therefore, S.28 renders
void an agreement by which a party is restricted absolutely from enforcing his legal rights arising
under a contract by the usual legal proceedings in the ordinary tribunals.

Example: A contract contains a stipulation that no action should be brought upon it in case
of breach. Such a stipulation would be void because it would restrict both parties from enforcing
their rights under the contract in the ordinary tribunals.
However, an exception to S.28 provides that an agreement to refer disputes to arbitration is valid
as this stipulation itself would not have the effect of ousting the jurisdiction of the courts.

Example: (i) A contract whereby it is provided that all disputes arising between the parties

should be referred to an arbitrator, whose decision shall be accepted as final and binding on both
parties of the contract, is not invalid.
(ii) A contract contains a double stipulation. Firstly, any dispute between the parties would be
settled by arbitration. Secondly, neither party would enforce his rights under the contract in a

court of law. In such a situation, the first stipulation is valid, but the second one is void.

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