Section 27 of the Contract Act, 18721 (ICA) dealing with agreement in restraint of trade

states ... provides that an agreement restraining a person from carrying on a lawful
profession, trade or business is void to that extent. However, an agreement not to carry
on within specified local limits, a business similar to the business of which goodwill is
sold, can be enforced, provided the limits of restraint are reasonable.

provision regarding restraint of trade has been lifted from David D. Field’s Draft Code for
New York which was based upon the old English doctrine of restraint of trade, as
prevailing in ancient times.

The Law Commission in its Thirteenth Report2 had recommended that the provision
should be suitably amended to allow such restrictions and all contracts in restraint of
trade, general or partial, as were reasonable, in the interest of the parties as well as of
the public. ...

Lord Birkenhead laid down two tests to decide whether an agreement is in restraint of
trade. They are: (a) Whether it is reasonable as between parties. (b) Whether it is
consistent with the intent of public. The Delhi High Court in Modicare Ltd. v. Gautam
Bali2, has explained the validity of Section 27 of ICA as:...

the right to practice any profession or to carry on any occupation, trade or business, the
status of a fundamental right, under Article 19(1)(g)...

In Navigators Logistics Ltd. v. Kashif Qureshi3, the Delhi High Court has explained the
validity of Section 27, ICA as: Section 27 of the Contract Act is as under: * * * The
interpretation of Section 27 of the Contract Act is not res integra....

High Court of Delhi in Arvinder Singh v. Lal Pathlabs (P) Ltd.4, has explained the
principle of Section 27, ICA as under: As per Section 27 of the Contract Act every
agreement by which any one is restrained from exercising a lawful profession, trade or
business of any kind is to that extend void. ...

n Percept D’Mark (India) (P) Ltd. v. Zaheer Khan5, the Supreme Court explained the
provisions of Section 27, ICA as under: If the negative covenant or obligation under
Clause 31(b) is sought to be enforced beyond the term i.e. if it is enforced as against a
contract entered into on 20-11-2003 which came into effect on 1-12-2003, then it
constitutes an unlawful restriction on Respondent 1’s freedom to enter into fiduciary
relationships with persons of his choice, and a compulsion on him to forcibly enter into
a fresh contract with the appellant even though he has fully performed the previous
contract, and is, therefore, a restraint of trade which is void under Section 27 of the
Contract Act....

Supreme Court in Gujarat Bottling Co. Ltd. v. Coca Cola Co.7, as:... condition restricting
the right of the franchisee to deal with competing goods is for facilitating the
distribution of the goods of the franchiser and it cannot be regarded as in restraint of
trade....

Esso Petroleum Co. Ltd. v. Harper’s Garage (Stourport) Ltd... Except in cases where the
contract is wholly one sided, normally the doctrine of restraint of trade is not attracted
in cases where the restriction is to operate during the period the contract is subsisting
and it applies in respect of a restriction which operates after the termination of the
contract....

n Niranjan Shankar Golikari v. Century Spg. and Mfg. Co. Ltd.9, the Supreme Court held
that restraint of trade may be good if shown to be reasonably necessary for freedom of
trade. The Court has held thus:... As to what constitutes restraint of trade is summarised
in Halsbury’s Laws of England (3rd edn.), Vol. 38, at p. 15 and onwards....

ecently, the Delhi High Court in Aakash Educational Services Ltd. v. Sahib Sital Singh
Bajwa11, reiterated the position of law on the scope of enforceability of negative
covenants in a commercial contract, holding that once a contract is terminated, a
negative covenant thereunder to restrict the trade, business or profession of any party
is hit by Section 27 of ICA. ...

A number of exceptions to Section 27, ICA have been incorporated in the Partnership
Act 1932 (IPA)... Such exceptions pertain to agreements between partners in four
situations: (a) during continuance of business; (b) at the time of any partner ceasing to
be a partner; (c) at time of dissolution of the firm; and (d) on sale of goodwill of the
firm...
Section 11 of IPA authorises the partners to determine their mutual rights and duties
themselves trough a mutual agreement, which may be express or implied....

Section 36, IPA, when a partner ceases to be a partner in the firm and his accounts are
settled, he may be required to make an agreement that after he ceases to be a partner,
he shall not carry on any business similar to that of the firm within a specified period or
within specified local limits....

Section 54 of IPA states that on dissolution of the firm, some of the partners may
procure an agreement from other partner(s), the latter agreeing not to carry on
business similar to that of a firm....(SHOLD BE REASONABLE)

Section 55, on the sale of goodwill there may be an agreement between the partners
and the buyer of goodwill, that the partners shall not carry on any business similar to
that of the firm within a specified period or within specified local limits. Such an
agreement has been held to be valid....
Hukmi Chand v. Jaipur Ice & Oil Mills Co.12, the Jaipur Bench of Rajasthan High Court
has upheld the validity of the agreement entered into between a retiring partner and
the other partners, wherein the former sold his share of goodwill and agreed not to
carry on similar business on the adjoining plot of land, which came to his share....
also held that the burden of proof that the restrictions imposed in any agreement of
restraint of trade are reasonable, is on the party which pleads them as reasonable. ...

he Delhi High Court in K.D. Campus (P) Ltd. v. Metis Eduventures (P) Ltd. India13, has
held that once the employer has treated the employment contract of the employee as
terminated, then he cannot proceed to enforce any negative covenant as against the
employee. ...

Superintendence Co. of India (P) Ltd. v. Krishan Murgai14, the Supreme Court has also
affirmed that any negative covenant beyond the termination of the service is void...
under sec 27 of ica.

DOCTRINE OF FRUUSTRATION:

 Initial impossibility [S.56]

Section 56 of The Indian Contracts Act, 1872 begins by laying down a
straightforward principle that “an agreement to do an act impossible in itself is
void”. For instance, an agreement to discover treasure by magic, because of its
impossibility of performance, is void.

Subsequent impossibility [S.56]

What if the parties enter into a contract and at that time of entering it was
possible to perform the contract but due to some supervening reason or factors
beyond the control of either of the parties the performance of the contract
becomes impossible or unlawful.

TAYLOR V CALDWELL – music hall destroyed

Krell v. Henry. watching the coronation procession
Sachindra Nath v. Gopal Chandra. In the case, the plaintiffs rented out certain
premises to the defendants for a restaurant at a rate higher than usual.

Supreme Court case of Ganga Saran v. Ram Charan Ram Gopal where
there was a contract of sale of certain quantities of cotton
manufactured by Victoria Mills, Kanpur. The object was to deliver
certain quantities of cotton irrespective of the existence or non-
functionality of the mill.not frustrated.
 Harnandrai Fulchand v. Pragdas the privy council famously held that “
the closing or even the destruction of the mills would not affect a
contract”.

Specific grounds for frustration: death or

incapacity his has been well-established in the case of Robinson v.
Davison

Government, legislative and administrative interventions he case

of Man Singh v. Khazan Singh, where certain parties agreed to the sale
of trees of a certain forest and the Government of Rajasthan passed an
order which forbade the cutting of the trees in that area. The contract
was held frustrated

KRELL V HENRY Non-occurrence of contemplated event

When the prices rise out of proportion from what could have
reasonably expected by the parties and making performance so
crushing to the contractor as to border virtually on impossibility, the
law would have to offer relief to the contractor in terms of price
revision. This was recognised in the case of Easun Engineering Co Ltd
v. Fertilizers and Chemicals Travancore Ltd.

2. Restitution under frustration (S.65)

Section 65: Obligation of person who has received advantage under
void agreement, or contract that becomes void.—When an agreement is
discovered to be void, or when a contract becomes void, any person who has
received any advantage under such agreement or contract is bound to
restore it, or to make compensation for it to the person from whom he
received it.DEVINDER SINGH V SHIV KAUR – MINOR COULD RECOVER SHOP

Any benefit that has been delivered under the valid contract has to be
returned once this valid contract becomes void. In the case of Fibrosa Spolka
Akeyjna v. Fairbairn Lawson Combe Barbour Ltd , of Jagadish Prosad Pannala
v. Produce Exchange Corpn Ltd

The doctrine of frustration as provided under Section 56 of The Indian

Contracts Act, 1872 is an exception to the general rule of contracts where
compensation is provided in case of a loss.
the ‘Doctrine of estoppel’, mentioned in section 115 of Indian Evidence act, a
person is prevented or ‘estopped’ from contradicting his previous statements made,
which was believed to be true. This principle is applicable in the laws relating to
partnership too. The ‘Doctrine of liability of holding out’ is an application of the
principle of estoppel. Section 28 of Indian Partnership Act, 1932 –
Holding Out simply means that where a person,

1. Represents himself or
2. Allows partner to do it ,and
3. Upon the faith of this representation credits may have acted
BEVAN V. NATIONAL BANK LTD. ; Porter v. Incell, 1905–defendant was
held liable as a partner by holding out not by his words but by way of his
conduct.

The notice can be given either by the retiring partner of the firm or by
the existing partner of the firm. Scarf V. Jardine (1882) is an important case
which highlights the importance of notice of retirement.

Exceptions to the doctrine of holding out on retirement without

giving public notice are as follows –
DECEASED PARTNER Venkatasubbamma Vs. Subba Rao, AIR 1964 AR 462’ ,
INSOLVENT PARTNER; SLEEPING PARTNER

n Smith vs. Bailey, it was decided that the liability extends only on account of
credit given to the firm and not to civil wrongs committed on behalf of the firm.

1. Snow White Food Products (p) Ltd. V. Sohanlal Bagla It was held that
Sohanlal represented himself as a partner of the firm during a
transaction with Snow White Ltd. His representation was
acknowledged by Snow White Ltd. Therefore Sohanlal was held
liable to pay Snow White Ltd on the basis of the doctrine of holding out.
2. Tower Cabinet Co. V. Ingram held that Ingram was not liable because he
had not ‘knowingly’ represented himself as a partner of the firm after the
retirement. Also, plaintiff had no previous dealing with the partnership firm
before and so there is no evidence that the defendant knew of the
representation.
  Section 28, Indian Partnership Act, 1932
 Bevan v. National Bank Ltd., (1906) 23 T.L.R. 65
 Colonel A.R. Porter V. W. Incell,1905 Cal(154 & 155 of 1905)
 Scarf vs. Jardine, 1882 7 APP CAS 345
 K. Venkatasubbamma And Ors. vs K. Subba Rao Nuna Venkatarami,
AIR 1964 AP 462
 Smith vs. Bailey, 2 QB 432.
 Snow White Food Products (p) Ltd. V. Sohanlal Bagla ,AIR 1964 Cal
209
 Tower Cabinet Co., Ltd v. Ingram (1949) 1 KBD 1032

Section 53A of TPA, 1882 is that when a party has taken possession under
a contract or already being in possession continues his possession and that
party is willing to perform his/her portion of the contract or that party has
done some act in furtherance of the contract, the other party can not
remove him/her from possession of the property.
Section 53A is given only when a few ingredients are satisfied, as stated in Madan
Mohan v. Gauri Shanker and Anr. (1987)

Section 2(47(v) of the Income Tax Act, 1961; covers within its scope any
transaction involving the allowing of the possession of any immovable property to
be taken or retained in part performance of a contract of the nature referred to in
section 53A of the Transfer of Property Act, 1882.
Dwarka Das Kapadia v. CIT [2003]/180CTR (Bom.)107/260ITR491(Bom)/[2003]; the essence of
Section 2(47) (v) may be considered, when there is transfer of complete control over the asset by
the owner to the developer.