Restraint Of Trade Clause Must Be Reasonable For A Contract To Be Enforceable: Delhi Court

A Delhi Court has observed that for a contract to be enforceable, the restraint of trade clause included in it must be reasonable. It added that the reasonability can be ascertained on the grounds of time period, geographic location and scope of work.

Civil Judge Richika Tyagi of the Tis Hazari Courts was dealing with an application filed by the plaintiff under Order 39 Rule 1 & 2 CPC. The application sought restraint against the defendant in connection with right to trade, business and profession of the defendant.

Doing a legislative analysis of sec. 27 of the Indian Contract Act which states 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, the Court said:

"There is one exception to this rule-that if the goodwill of a business has been sold, an agreement to refrain from carrying on similar business, if it appears to the Court to be reasonable, would be protected and would be enforced."

Further touching upon the policy of the provision, the Court was of the view that interference with individual liberty of action in trading, and all restraints of trade of themselves are contrary to public policy, and therefore void.

However, adding that there are exceptions, the Court said that the restraints of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case.

"It is a sufficient justification, if the restriction is reasonable -reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is no way injurious to the public," the Judge added.

The Court also said that an employment contract generally includes restraint of trade clause to protect the interest of the employer after an employee leaves their organization or business for the reason that non-solicitation clause prevents the employee to solicit his former employer's clients for a reasonable period of time. It also added that non-recruitment clause prevents the employee to hire the former employer's employee for a reasonable period of time.

"Here, the word 'reasonable' is of significant importance. For a contract to be enforceable, the restraint of trade clause must be reasonable," the Court said.

It added "Moreover, negative stipulation during the period of employment still may be held to be valid and not in restraint of trade. However, post termination non-compete clauses in employment contracts are "restraint of trade" and it is impermissible under section 27 of the Act. Such agreements of restraint are void because of being unfair and depriving an individual of his or her fundamental right to earn a living."

Coming to the facts of the case, the Court took note of the fact that the plaintiff was seeking permanent restraint against the defendant from establishing or making contact with it's customers.

It also noted that there was no specific mention in the application that who were the customers and that no reasonable time and geographical area limit was specified by the plaintiff.

"In this case, the restraint cannot be allowed in such a form whereby it violates the fundamental right of the defendant to carry on his trade, business or profession. Moreover, the Court cannot restrain the defendant from using his own acumen or skills to compete with the plaintiff in the same kind of business. The restriction which the plaintiff is seeking to impose upon the defendant is of permanent and unlimited nature and is not reasonable," the Court said.

Accordingly, the plaintiff's application was dismissed.

Case Title: RAJESH KUMAR GANDHI VS. MUKESH DUTT

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