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Unit 3: Capacity to Contract

Cases in which restraint of trade is valid. The following are the exceptions to the above rule that Notes
a restraint of trade is void:
1. Sale of goodwill of a business. The seller of 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 one deriving title to the goodwill from him carries on a like business,
provided that such limits are reasonable (s.27).

Example: S, a seller of imitation jewellery, sells his business to B and promises not to carry
on business in imitation jewellery and real jewellery. Held, the restraint with regard to imitation
jewellery was valid but not regarding real jewellery [Golds Roll v. Goldman (1915) 6 Ch. 292].
2. Partners’ agreement. Partners may agree that: (i) a partner shall not carry on any business

other than that of the firm while he is a partner [s.11(2) of Indian Partnership Act, 1932];
(ii) a partner on ceasing to be a partner will not carry on any business similar to that of the

firm within a specified period or within specified local limits. The agreement shall be valid

if the restrictions are reasonable [s.3 (2) of Indian Partnership Act, 1932]; (iii) partners may,

upon or in anticipation of the dissolution of the firm, make an agreement that some or all
of them will not carry on a business similar to that of the firm within a specified period or

within specified local limits and such agreement shall be valid if the restrictions imposed

are reasonable [s.54 of Indian Partnership Act, 1932]; (iv) a partner may, upon the sale of
the goodwill of a firm, make an agreement that such partner will not carry on any business

similar to that of the firm within a specified period or within specified local limits; and
such agreement shall be valid if the restrictions imposed are reasonable [s.55 of Indian
Partnership Act, 1932].
3. Restrictive trade agreements. The trade combinations and restrictive trade practices are
not treated as void simply because they restrain some party or the other from freedom of
occupation. For instance, if a few manufacturers of a particular product want to regulate the
sale price, by an agreement, but it is not against the public interest, then such an agreement
would not be void. Sometimes a restrictive trade practice or agreement may be in the
public interest. Section 33 of the Monopolies and Restrictive Trade Practices Act, 1969,
states that every agreement falling within one or more of the categories mentioned therein
shall be deemed, for the purpose of that Act, to be an agreement relating to restrictive trade
practices and shall be subject to registration under s.35 of that Act. Further, s.37 empowers
the Director General of Investigation and Registration to order either the modifi cation, or
the termination, of such agreements if they go against public interest.
4. Service agreements. An agreement of service by which a person binds himself during the
term of the agreement not to take service with anyone else or directly or indirectly take part
in or promote or aid any business in direct competition with that of his employer is valid.
Like any other contract, damages can be claimed for breach of contract of service. Section
73 (first two paragraphs) provides that the party suffering by breach of contract is entitled

to receive, from the party breaking the contract, compensation for loss or damage of the
specifi ed category.
Service bonds. These days, it is a common practice to appoint management trainees. The
organisations spend a lot of time, money and energy in training them in the management
techniques. So, it will be very unfair to these organizations if trainees left for other organizations
immediately after training. Therefore, a service bond is normally got signed by the trainee,
containing a provision that he shall not leave the organization before the expiry of a specifi ed
period and further, that if he does so, then he shall have to pay a particular sum of money to the
organization. This is just to indemnify the organization which has incurred some expenditure on
the training of the trainee. But if the amount of the bond is excessive and disproportionate, the
court has jurisdiction to reduce that amount.

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