Restraint of Trade and Employment

Contract
Arindam Basu
Assistant Professor
Rajiv Gandhi School of Intellectual Property Law
IIT Kharagpur
What is restraint?
 Employer/Trader tries to limit the freedom of other party/parties
to the contract.

 The restraint may be partial or general.

 The covenantor:

 Tries to maximize his market advantage;

 Takes advantage of his bargaining skill;
 Tries to protect his legitimate business interests;
 Types of restraint?

Contracts of employment

Anti-poaching agreement

Garden-leave clause

Protection of trade secrets and confidential information

Breach of confidence

Sale of goodwill

Solus ties

Retain and transfer system

Some Examples:

 Price-Fixing

 Direct Price-Fixing Agreements

 Exchanging Price Information
 Controlling Output
 Regulating Competitive Methods

 Allocating Territories

 Exclusionary Agreements
 Some Examples:

Sale Price Maintenance

Non-price Vertical Restraints:

Allocating Territory
Exclusive Dealing Agreements
How far one can restrain other?
Section 27 of ICA

 Agreement in restraint of trade, void: Every agreement by which

any one is restrained from exercising a lawful profession, trade or
business of any kind, is to that extent void.

Exception:

Saving of agreement not to carry on business of which

goodwill is sold: One who sells 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 person
deriving title to the goodwill from him, carries on a like business
therein, provided that such limits appear to the Court reasonable,
regard being had to the nature of the business.
Negative and positive covenants

 In contracts containing negative obligations the

restraint is direct.

 A positive obligation when it limits freedom, imposes an

indirect restraint.

 Section 23 and Section 27.

Employment contract
 Restraint during employment

 Restraint after employment

 Some observations by the Court:

 Niranjan Shankar Golikari Case, 1967 - Restraint during

employment – Court granted injunction to the company
 Superintendence Company of India v. Krishna Murgai , 1980 –
Premature termination of employment – Company failed to
restraint the employee.
 Zaheer Khan Case, 2006

 VFS Global Services (P) Ltd. V. Suprit Roy, 2008 – Garden leave clause
– Court disagreed
 Protection of trade secrets and confidential information
Things to remember when drafting or reviewing:

 Definition of Confidential Information

 Explanation of Purpose for Disclosure

 Some common issues that one may face in drafting/negotiating a confidentiality

agreement include:

 whether or not to include a "best efforts" clause;

 whether to limit access of Recipient employees to a "need to know" basis;
 whether Recipient should merely agree to protect the confidential information in
a manner similar to the way the Recipient protects its own confidential
information.

 Careful drafting of exceptions

 Term
Goodwill – Limited exception

Retain and transfer system - Eastham v. Newcastle

United FC Ltd., 1964

Trade unions – Section 19 of Trade Unions Act,

1926

Solus ties

 Construction of terms – Strictly construed