According to Section 28 of the Contract Act 1950
According to Section 28 of the Contract Act 1950, Agreement in restraint of trade void. Any agreement where anyone is restrained from practicing a lawful profession, trade, or business of any kind, is to that extent void. It is commanded by law that an individual, should have the privilege to work for himself, and any agreement that deprive a person of the fruit of his labour, skill or talent is void agreement. An individual can engage freely in any trade of his choice, thus an agreement that obstruct him to do that goes against public policy and the law of the land. An individual has the inherent right to use his labour or skill to the benefit of himself and the society, and barring him to do that is against the interest of both. There are three exception to the general rule that are provided in section 28, namely;
1) One who sells the goodwill of a business may agree with the buyer to refrain 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: On the condition or understanding that such limits appear to the court as reasonable, in regards being had to the nature of the business.
2) Upon or in anticipation of a cessation of the partnership, partners may, 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 stated in exception 1.
3) Other than that of the partnership, partners may agree that some one or all of them will not carry on any business, during the continuance of the partnership.
The principle of enforcement:
There must be an interest to protect
Common law will give the employer a degree of protection where there is no covenant:
i) using or disclosing legal trade
ii) soliciting the employer’s customers
iii) using or disclosing confidential information
Employer trade secrets, know-how and trade connection
1) Trade secrets
Trade secrets are including secret formulae, processes and confidential information (but excluding information which is confidential only in the sense that during employment the employee must not reveal it).
Know-how is considered as not within legal protection, given commercial application and potential is likely to be protected.
3) Trade connection
An employer is entitled only for protection in cases where the employee was likely to have come into contact with clients or customers and to have acquired influence over them.
The restraint must be reasonable
Agreement between an employer and an employee will be held unreasonable as regards the public interest. The court will only enforce restraint covenants which does not exceeds than is reasonably necessary to protect the employer’s interest. The court will not validate a contract which seeks to protect employer’s activities which the employee was not involved in. In Attwood v Lamont 1920 3 KB 571, a restrictive covenant was obtrude on a former employee of a tailor, which averted him working as a tailor, dressmaker, general draper, milliner, hatter, haberdasher, gentleman’s, ladies’ or children’s outfitter within 10 miles of his former employer’s shop. The geographical area was reasonable but the scope restriction was not, because it went beyond working as a tailor to include other business that did not compete with the former employer’s business.
a. Area of restraint
To some extent an employer may actually protect himself against competition from an employee because the law allows a restraint preventing an employee from setting up in business- to prevent exploitation of trade secrets or trade connection within a given (reasonable) area for a given reasonable time. An area restraint will be struck down as void if it covers an area wider than is necessary for the protection of the employer’s interest.
b. Duration of the restraint
The court will consider the nature of business to be protected when determining reasonableness as to duration.
Other interests meriting the protection
New interests are ‘commercial’ interests and that an expressly drawn covenant be needed to protect them whereas, at common law, the other interests, to a limited extent, are protected in the absence of a covenant.