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Hukmi Chand Vs. Jaipur Ice and Oil Mills Co. and ors. - Court Judgment

LegalCrystal Citation
SubjectCommercial
CourtRajasthan High Court
Decided On
Case NumberCivil Special Appeal No. 78 of 1970
Judge
Reported inAIR1980Raj155; 1980()WLN200
ActsContract Act, 1872 - Sections 27; Partnership Act, 1932 - Sections 36, 54, 55 and 55(3); Evidence Act, 1872 - Sections 101 to 104; Transfer of Property Act, 1882 - Sections 40
AppellantHukmi Chand
RespondentJaipur Ice and Oil Mills Co. and ors.
Appellant Advocate S.K. Kashote, Adv.
Respondent Advocate P.N. Dutt and; P.D. Mathur, Advs.
DispositionAppeal dismissed
Cases Referred(vide Esso Petroleum Co. Ltd. v. Harper
Excerpt:
contract act - section 27--doctrine of restraint--defendant voluntarily entered into agreement containing restraint clause--taking goodwill share in dissolution of business conditions are reasonable held, restraint of trade is valid and close relatives of defendant are bound by it. its breach can be restrained by injunction.;the doctrine in restraint of trade is capable of applying where the restraint also relates to a particular piece of property. defendant(1) kalicharan had voluntarily entered into an agreement containing clause 13 of the dissolution deed (ex 2) that he was not carrying on the same kind of business, i.e., an ice factory within the area of land measuring 325' x 88'. he had done so after taking rs. 11001/- as his share in the goodwill. he or his assignees who had.....mahendra bhushan, j. 1. this is a defendant's special appeal under section 18 of the rajasthan high court ordinance against the judgment of the learned single judge dated december 9, 1969, and arises out of a suit for injunction.2. the jaipur ice and oil mills co., (hereinafter referred to as the company) was ordinarily composed of six partners, viz., kishanlal, mahadeo prasad, satya narayan, kalicharan, bishambhar dass and jeewan prasad, and a partnership deed was executed on feb. 28, 1947. it started manufacturing ice, oil and soap in bani park, jaipur. two of its partners, bishambar dass and jiwan prasad left the firm on april 27, 1949, and the rest of the four partners, above named, continued the partnership business up to march 31, 1958, on which date the firm was dissolved under a.....
Judgment:

Mahendra Bhushan, J.

1. This is a defendant's Special Appeal under Section 18 of the Rajasthan High Court Ordinance against the judgment of the learned single Judge dated December 9, 1969, and arises out of a suit for injunction.

2. The Jaipur Ice and Oil Mills Co., (hereinafter referred to as the Company) was ordinarily composed of six partners, viz., Kishanlal, Mahadeo Prasad, Satya Narayan, Kalicharan, Bishambhar Dass and Jeewan Prasad, and a partnership deed was executed on Feb. 28, 1947. It started manufacturing Ice, Oil and Soap in Bani Park, Jaipur. Two of its partners, Bishambar Dass and Jiwan Prasad left the firm on April 27, 1949, and the rest of the four partners, above named, continued the partnership business up to March 31, 1958, on which date the firm was dissolved under a dissolution deed (Ex. 2). The firm had acquired a plot of land No. 1-VII measuring 260' x 325' at Bani Park. Jaipur, on a part of which the factory had been constructed, and a residential house on a piece of this land measuring 325' x 88' with its own money. At the time of dissolution of the firm under the dispolution deed (Ex. 2) dated March 31. 1958. defendant No. 1 Kalicharan retired from the partnership and was paid Rupees 26,454.00 as a share of the capital invested by him, and over and abovethat he was also paid Rs. 11,001/- as his share of the price of the goodwill of the firm. At the time of dissolution of the firm, it was agreed between Kalicharan defendant (1), the retired partner, on the one hand, and Kishanlal, Mahadeo Prasad and Satya Narain, on the other, vide Clause 12 of the dissolution deed (Ex. 2), that the aforesaid land measuring 325' x 83' and the house standing thereon would be the exclusive property of Kalicharan defendant (1) with full rights of sale and mortgage and that Kalicharan would get a boundary wall constructed or have a wire fencing on this piece of land, open a separate door towards the road side, but would not have any entrance or exit towards the factory compound. It was also agreed (vide Clause 13 of Ex. 2) that Kalicharan would not carry on the same kind of business, i.e., Ice Factory, on the land in his possession. Kalicharan sold a piece of land measuring 88' x 162' out of 325' x 88', which was exclusively left to him under Ex. 2, to his father Ram Niranjan Lal for a consideration of Rs. 3168/- by a registered sale deed (Ex. A-18) dated January 12, 1959. Thereafter, by deed dated February 11, 1959 (Ex. P-23), Ramniranjan Lal entered into partnership with Smt. Genia Bai wife of Kalicharan and Hukum Chand son of Kalicharan for carrying on business of ice and also admitted Rajgopal Kanodia minor son of Kalicharan to the benefits of partnership. They also applied for a licence to put up an Ice Factory on the aforesaid land measuring 88' x 162' in their possession and started making further preparations in the direction of establishing an ice factory.

3. The Company filed the suit through its partner Mahadeo Prasad on November 29, 1961 in the Court of Munsiff (East) Jaipur City against Kalicharan, Hukmichand, Ramniranjan Lal, Genia Bai and Rajgopal, minor son of Kalicharan for issuing a permanent injunction restraining the defendants from putting up an ice factory on the disputed land measuring 88' x 162' and shown in green colour in the plan (Ex. 3) and prohibiting them to do any business of manufacturing of ice.

4. Kalicharan and Hukmichand filed separate written statements and took a number of pleas, but the suit was decreed by the trial Court and the appeal of the defendants was also dismissed. By the time, Hukmichand filed second appeal before this Court and it was heard by a learned single Judge the only point which survived was as to the effect of Clauses 12 and 13 of the dissolution deed (Ex. 2).

5. The conclusions arrived at by the trial Court were that Clause 13 of the dissolution deed (Ex. 2) did not impose unreasonable restraint of trade on the defendant Kalicharan and his transferees, and consequently the defendants were bound by the restrictive covenant, and were not entitled to put up an Ice Factory on the land in question in pursuance of that restraint clause. This finding was affirmed in appeal by the learned Senior Civil Judge (2). Jaipur City. The learned single Judge has also affirmed that finding and has held that restrictive covenant contained in Clause 13 of the dissolution deed (Ex. 2), in his opinion, is reasonable regard being had to the nature of the business and further that this restrictive covenant is binding on the transferees of Kalicharan, viz., Ramniranjan Lal.

6. The learned Advocate for the appellant has submitted that looking to the nature of the business, the restrictive covenant contained in Clause 13 of the dissolution deed (Ex. 2) is not reasonable, in as much as Kalicharan (defendant-1) has been restrained from exercising a lawful trade without any regard to time, and, therefore, is void. He further contends that the restrictive covenant at any rate is not a covenant running with the land, and, therefore, it is not binding on the transferees of Kalicharan defendant (1), viz., defendants 2 to 5, including the appellant.

7. We will first like to deal, as to whether the covenant in restraint of trade, contained in Clause 13 of the dissolution deed (Ex. 2) is reasonable or not? It will be useful to reproduce Clauses 12 and 13 of the dissolution deed (Ex. 2) :--

Clause 12 -- That the 1st party has constructed a residential bungalow on a piece of land measuring 325' x 88' (sketch attached herewith) out of the factory land mentioned as per Clause No. 2 and 5 of this Indenture, from his own capital and it has been mutually agreed by the parties that theland aforesaid and the Bungalow in question shall be sole property of the 1st party and he has full rights to sell or mortgage. The 1st party shall get a boundary wall constructed or fencing by wire, having a separate door towards the road side. No entrance-exit will be made through the factory compound and if made shall be treated as trespass.

Clause 13 -- That the 1st party shall not carry on the same kind of business, i.e.; Ice Factory, within the area of the land as per above Clause No. 12 in his possession.

8. Before we construe the above clauses of dissolution deed (Ex. 2) and express ourselves as to whether this agreement in restraint of trade is reasonable or not, we will like to deal with the law codified in Section 27 of the Indian Contract Act, 1872 (hereinafter referred to as the Contract Act) and Sections 36, 54 and 55 of the Indian Partnership Act, 1932 (hereinafter referred to as the Partnership Act).

Section 27 -- 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 1. -- 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, Section 36-- Partnership Act,

(1) An outgoing partner may carry on a business competing with that of the firm and he may advertise such business, but subject to contract to the contrary, he may not

(a) use the firm name,

(b) represent himself as carrying on the business of the firm, or

(c) solicit the custom of persons who were dealing with the firm before he ceased to be a partner.

(2) A partner may make an agreement with his partners that on ceasing to be a partner he will not carry on any business similar to that of the firm within a specified period or within specified local limits; and notwithstanding anything contained in Section 27 of the Indian Contract Act, 1872, such agreement shall be valid if the restrictions imposed are reasonable. Section 54 -- Partnership Act.

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 notwithstanding anything contained in Section 27 of the Indian Contract Act, 1872, such agreement shall be valid if the restrictions imposed are reasonable.

Section 55 -- Partnership Act.

(1) In settling the accounts of a firm after dissolution the goodwill shall, subject to contract between the partners, be included in the assets, and it may be sold either separately or along with other property of the firm.

(2) Where the goodwill of a firm is sold after dissolution, a partner may carry on a business competing with that of the buyer and he may advertise such business, but subject to agreement between him and the buyer, he may not

(a) use the firm name,

(b) represent himself as carrying on the business of the firm, or

(c) solicit the custom of persons who were dealing with the firm before its dissolution.

(3) Any partner may, upon the saleof the goodwill of a firm make anagreement with the buyer that suchpartner will not carry on businesswithin specified local limits, and, notwithstanding anything contained inSection 27 of the Indian Contract Act,1872, such agreement shall be valid ifthe restrictions imposed are reasonable.

9. A perusal of Section 27 of the Contract Act will show that it makes every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind to that extent void, unless it is covered by the Exception. The Exception is applicable to a case where one sells the goodwill of a business and the seller of the goodwill of the 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 like business therein; provided that such limits appear to the Court reasonable regard being had to the nature of the business. 'Limits' means 'local limits' and the duration of the restraint is so long as the buyer or any person deriving title to the goodwill from him carries on the like business. Under Section 36(1) of the Partnership Act, an outgoing partner has a right to carry on a business competing with that of the firm, and to use the firm name, but under Subsection (2) of Section 36, the partners can enter into an agreement in restraint of trade and can bind themselves not to carry on any business similar to that of the firm within a specified period or within the specified local limits and notwithstanding anything contained in Section 27(1) of the Contract Act, such an agreement shall be valid if restrictions imposed are reasonable. The agreement not to carry on similar business may be with regard to the local limits or for a specific period. Similarly, partners upon dissolution of the firm may make an agreement under Section 54 of the Partnership Act that some or all of them will not carry on a business similar to that of the firm within a specified period, or within the specified local limits, and such an agreement shall be valid if restrictions imposed are reasonable. Under Section 55(1) of the Partnership Act, goodwill is included in the assets in settling the accounts of a firm after dissolution, no doubt, subject to the contract between the partners, and it may be sold either separately or along with the other property of the firm. Notwithstanding that the goodwill of a firm is sold after dissolution, a partners may carry on business competing with that of the buyer, but subject to agreement between him and the buyer, he cannot use the firm name, represent himself as carrying on the business of the firm or solicit the custom of persons, who were dealing with firm before its dissolution. But, under Sub-section (3) of Section 55 of the Partnership Act, any partner upon the sale of the goodwill of a firm may make an agreement with the buyer that he will not carry on business within the specified local limits, and notwithstanding anything contained in Section 27 of the ContractAct, such agreement shall be valid, if the restrictions imposed are reasonable.

10. In the instant case, a look at Clause 4 of the dissolution deed (Ex. 2) will show that Kalicharan (defendant-1), when he separated from the partnership, besides being paid Rs. 26,454.00 p. as the share of his capital, invested, as per books, was also paid a sum of Rs. 11001/- as a goodwill making a total of Rs. 37,455.00 p. It, therefore, amounts to the sale of his share of the goodwill by Kalicharan outgoing partner of the firm in favour of the other partners. Clause 13 of the dissolution deed (Ex. 2), extracted above, will make it clear that Kalicharan, the outgoing partner entered into an agreement with the other partners, the buyers of his share, that he shall not carry on the same kind of business, i.e., Ice Factory, within the area of land, as per Clause 12, in his possession, viz., 325' x 88', which includes 88' x 162', which was transferred by Kalicharan in favour of the other defendants including the appellant. Under Exception (1) to Section 27 of the Contract Act in case of sale of goodwill of a business, the seller may agree with the buyer to refrain from carrying on a similar business within the specified local limits so long as the buyer or the transferee of the goodwill from him carries on the like business. In Section 36(2) of the Partnership Act, agreement in restraint of trade can be with regard to the specified period, or within the specified local limits, and similarly also in Section 54 of the Partnership Act, but it is not without significance that under Sub-section (3) of Section 55 of the Partnership Act, which relates to agreement in restraint of trade in case the goodwill is sold after dissolution, the agreement in restraint of trade has to be only within the specified local limits and there is no mention that it can also be relating to a specified period. Either under Exception-1 to Section 27 of the Contract Act or under Sections 36, 54 and 55 of the Partnership Act the agreement in restraint of trade can only be valid., if the restrictions imposed are reasonable.

11. The law is settled that the onus to prove that the restrictions imposed in an agreement in restraint of trade are reasonable is on the party, which pleads that they are reasonable. Inthis connection, a reference may be made to Niranjan Shanker Golikari v. Centuary Spinning and . AIR 1967 SC 1098 in which their Lordships of the Supreme Court have held as follows :--

'Where an agreement is challenged on the ground of its being a restraint of trade, the onus is upon the party supporting the contract to show that the restraint is reasonably necessary to protect his interests. Once this onus is discharged, the onus of showing that the restraint is nevertheless injurious to the public is upon the party attacking the contract.'

Therefore, because the defendants challenged Clause 13 of the dissolution deed (Ex. 2) on the ground of its being in restraint of trade, the onus definitely was upon the plaintiff, who supported the contract to show that the restraint is reasonably necessary to protect his interests. All the courts, in the instant case, have held that the plaintiff has discharged the burden placed on him and has satisfied the court that Clause 13 of the dissolution deed (Ex. 2) is reasonably necessary to protect the interests of the plaintiff.

12. It is submitted by the learned Advocate for the appellant that no time has been specified in Clause 13 of the agreement and the restraint being indefinite in time is void. But, to our mind, there is nothing indefinite, in as much as, firstly we have already said above that in case of sale of goodwill after dissolution under Sub-section (3) of Section 55 of the Partnership Act, the agreement in restraint of trade by the seller of goodwill with the buyer is that he will not carry on similar business within the specified local limits, a condition in the agreement of not carrying similar business by the out-going partner only on the adjoining premises, which fell to his share under the dissolution deed appears to be reasonable in order to safeguard the interests of the buyer of the goodwill. Secondly, even under Exception-1 to Section 27 of the Contract Act, the restraint on carrying on similar business can only be till such time as the buyer of the goodwill of a business or a person deriving title to the goodwill from him carries on a like business. Therefore also, it cannot be said that there is no time limit and, therefore, the restraint is unreasonable, becausethe time limit is inherent, inasmuch as it will come to an end the moment the purchaser of a goodwill or any person deriving title to the goodwill from him ceases carrying on like business.

13. Before, we take up the English Law and the American Law in relation to the restraint of trade, it will be useful to refer to the Indian decisions on Section 27 of the Contract Act. In Chandrakanta Das v. Parasullah Mullick (1921) ILR 48 Cal 1030 : (AIR 1922 PC 167), which was a case of the sale of goodwill of a business, it was held as follows :--

'Their Lordships are of opinion that this transaction amounted to sale of a real goodwill, and they are unable to agree with the view expressed in the judgment of the High Court. They entertain no doubt that what took place was a sale of the goodwill, within the meaning put on the expression in such cases as Churton v. Douglas ((1859) John 174), Trego v. Hunt ((1896) AC 7) and Inland Revenue Commrs. v. Muller (1901 AC 217) and as used in the same sense in Section 27 of the Indian Contract Act.'

In Shaikh Kalu v. Ram Saran Bhagat (1909) 13 Cal WN 388, it has been observed that Section 27 of the Indian Contract Act was reproduced from Section 833 of the draft of the Draft Civil Code of the State of New York and Exceptions l and 2 of the Indian Contract Act are taken with slight variations from the two sections immediately following Section 833, which lay down the exceptions in favour of sales of goodwill and of partnership arrangements. Dealing with the reasonableness, it has been observed, 'The substance of the matter, therefore, is that contracts which impose an unreasonable restraint upon the exercise of a bust-ness, trade or profession are void, but contracts in reasonable restraint thereof are valid. Whether the limits prescribed in the contract are reasonable or not depends upon the kind of business to protect which the contract is made, and the reasonableness of the restraint imposed must be ascertained in every case by reference to the nature of the business in question and to the situation of the parties.'

14. Now, we will refer to the English Law on the contract in restraint of trade. The history of developmentof the doctrine of restraint on trade in England shows that it has undergone a change from time to time. The earliest view was to avoid all contracts 'to prohibit or restrain any person to use a lawful trade at any time, or at any place,' as being against the benefit of the common wealth. But, this view Underwent a change and it became clear that the public interests would not suffer, if a man who sold the goodwill of a business bound himself not to enter into immediate competition with the buyer. A rule thus became established that contracts in general restraint of trade were invalid, but that contracts in partial restraint, if reasonable, and not contrary to the public interests would be upheld. But as trade expanded and the dealings of an individual ceased to be confined to the locality in which he lived, the distinction between general and partial restraint began to appear anomalous and gradually disappeared. The House of Lords went on to express the view that the division of agreements in restraint of trade into two classes--general and partial (the former being necessarily void in all cases, the latter only if unreasonable or injurious to the public interests) can no longer be sustained as a rule of common law. Lord Macnaghten's speech in the Nordenfelt case (1916) Bulst 136 is the foundation of the modern law on the subject and as a result of it and later cases in which it has been elucidated. Anson in his Law of Contract (24th Edn.) has laid down certain propositions of law at page 350 to the following effect:--

1. All restraints of trade, in the absence of special justifying circumstances, are contrary to public policy, and therefore void.

2. It is a question of law for the decision of the Court whether the special circumstances adduced do or do not justify the restraint; and if a restraint is not justified, the Court will, if necessary, take the point, since it relates to a matter of public policy, and the Court does not enforce agreements which are contrary to public policy.

3. A restraint can only be justified If it is reasonable (a) in the interests of the contracting parties, and (b) in the interests of the public.

4. The onus of showing that the restraint is reasonable between the parties rests upon the person alleging that it is so, that is to say, upon the covenantee. That onus of showing that, notwithstanding that a covenant is reasonable between the parties, it is nevertheless injurious to the public interest and therefore void, rests upon the party alleging it to be so, that is to say, usually upon the covenantor. But once the agreement is before the Court it is open to scrutiny in all its surrounding circumstances as a question of law.

15. Traditional categories of agreements in restraint of trade according to Anson are two and one of them is an agreement between the buyer and seller of a business together with its goodwill, whereby the seller elects not to carry on a business which will compete with that of the buyer.

16. The factual situation which invites the application of the doctrine must need change with prevailing economic and social conditions, and it is important to bear in mind that reference to cases can be only by way of illustration and not exhaustive; 'the classification must remain fluid and the categories can never be closed.' But at this point of time, when economic theory results -- from the point of view of the public -- than a non-competitive economy, it is tempting to define a contract in restraint of trade as being one which is designed to restrict competition, although it must be admitted that there is no judicial authority for this formulation,

17. The law concerning restraint of trade has also changed from time to time, both in form and in spirit, in response to changes in conditions of trade. (Anson's Law of Contract p. 347 para 5).

18. Chitty on Contracts -- General Principles (24th Edn.) in paras 961, 968, 984 and 985 has summarised the subject of restraints of trade as follows :--

961 -- All covenants in restraint of trade are prima facie unenforceable at common law and are enforceable only if they are reasonable with reference to the interests of the parties concerned and of the public. Unless the unreasonable part can be severed by the removal of either part or the whole of the covenant in question, its inclusionrenders the covenant or the entire contract unenforceable. The doctrine of restraint of trade is probably one of the oldest applications of the doctrine of public policy; cases go back to the second half of the 16th century and as early as 1711 it was laid down in Mitchel v. Reynolds ((1711) 1 P Wms 181) that a bond to restrain oneself from trading in a particular place, if made upon a reasonable consideration, is good, though if it be upon no reasonable consideration or to restrain from trading at all, it is void.

968 -- While all restraints of trade to which the doctrine applies are prima facie unenforceable, all whether partial or total, are enforceable if reasonable. As was said by Lord Macnaghten in Nordenfelt v. Maxim Nordenfelt Co. (1894) AC 535, 565 : 'It is a sufficient justification, and indeed it is the only 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 in no way injurious to the public.' Even if the restraint is unlimited in time or in space it will be upheld if it is reasonable, although the absence of such a limit 'is a remarkable feature prima facie needing justification.' Worldwide restrictions have passed muster in the Courts, but only where the restrictions to be reasonably effectual had to be worldwide.'

984 -- Where the goodwill of a business is sold, there being no express agreement as to the vendor's refraining from future competition, the vendor may set up a rival business, but he is no! entitled to canvass the customers of the old firm, and may be restrained by injunction from soliciting any person who was a customer of the old firm prior to the sale to continue to deal with the vendor, or not to deal with the purchaser. The ground of this may be either that a man may not derogate from his own grant, or that the vendor had impliedly contracted not to solicit his former customers, or that it would be fraudulent to do so. 'It is not right', observed Lord Macnaghten, 'to profess and to purport to sell that which you do not mean the purchaserto have, it is not an honest thing to pocket the price and then to recapture the subject of sale, to decoy it away or call it back before the purchaser has had time to attach it to himself and make it his very own.' For the same reason the vendor of a business may not represent that he is carrying on business in continuance of, or in succession to, the business carried on by his former firm.

No such covenant can be implied on the part of a bankrupt where the business is sold by the trustee in bankruptcy, because the alienation is compulsory; this is the case even though the bankrupt agreed to aid in realising the business. A purchaser of a business and goodwill of a bankrupt has therefore no right to restrain the bankrupt from setting up a fresh business or from soliciting customers of the old business and this even though the bankrupt has joined in the conveyance to the purchaser. This rule applies also to the sale of a debtor's business by a trustee of a deed of arrangement for creditors. This is also regarded as a compulsory alienation.

985 -- Upon similar principles, including that of Trego v. Hunt, ((1896) AC 7) just referred to, restrictive covenants which operate upon the dissolution of a partnership are valid, if they impose no wider restraint than the circumstances reasonably require. A fortiori, such restrictive covenants are generally valid during the continuance of the partnership; thus, an agreement by one of the proprietors of a theatre not to write plays for any other theatre is good. In the absence of any express covenant an ex-partner on dissolution of the partnership may carry on a similar and competing business in his own name and may deal with customers of his former firm. But he may not directly or indirectly canvass them or persuade them to deal with himself and not with the old firm, nor may he carry on his business in the name of the old firm or represent his business as still being that of the old firm.

An ex-partner may, however, advertise himself as having been connected with the business sold. The principle of Trego v. Hunt extends to the executors of a vendor who are executing a contract for the sale of the goodwill, and the executors of a deceased partner will be restrained from soliciting the customers of the old firm.

19. In the United States of America, the law relating to 'bargains in restraint of trade' as given in 'Reinstatement of the Law of Contract of the American Law Institute (1932 Edn.) (Vol. II)' has been summarised thus :--

'A bargain is in restraint of trade when its performance would limit competition in any business or restrict a promisor in the exercise of a gainful occupation, A bargain in restraint of trade is illegal if the restraint is unreasonable. A restraint of trade is unreasonable, in the absence of statutory authorisation or dominant social or economic justification, if it

(a) is greater than is required for , the protection of the person for whose benefit the restraint is imposed, or

(b) imposes undue hardship upon the person restricted, or

(c) tends to create, or has for its purpose to create, a monopoly, or to control prices or to limit production artificially, or

(d) unreasonably restricts the alienation or use of anything that is a subject of property, or

(e) is based on a promise to refrain from competition and is not ancillary either to a contract for the transfer of goodwill or other subject of property or to an existing employment or contract of employment. The following instances of reasonable restraint have been given under Section 516 of that book. --

(1) A bargain by the transferor of properety or of a business not to compete with the buyer in such a way as to injure the value of the property or business sold;

(2) A bargain by a partner not to interfere by competition or otherwise with the business of the partnership while it continues, or subject to reasonable limitations after his retirement.

The following illustrations given In that book may be quoted with advantage. --

1. A sells B the assets of A's business and the goodwill thereof, and agrees never to engage in a similar business in that town in competition with B. B's business extends throughout the town. Though the agreementis unlimited in time, its limitation in space makes it reasonable.

2. A, B and C form a mercantile partnership for a term of 10 years. Each agrees with the others that he will not engage individually in the business of the partnership during its continuance, and that if the business is continued by the other two members of the partnership after its termination, he will not compete with the business as carried on by those two. The restraint of trade is reasonable.'

20. It can, therefore, be said that according to American Law also, emphasis is about the reasonableness of the restraint in trade. If a bargain in restraint of trade is unreasonable, then it is illegal. As per that law, a partner can enter into an agreement not to compete with the business of the partnership either directly or indiectly, but such agreement must be ancillary to the contract of partnership itself or to a contract by which a partner disposes of his business at the time of his retirement; provided again if it is reasonable in its limit.

21. Halsbury's Laws of England (3rd Edn.) (Vol. 38) at page 15 and onwards has dealt as to what constituted restraint of trade. It is the general principle of the common law that a man is entitled to exercise any lawful trade or calling as and where he wills and the law has always regarded jealously any interference with trade, even at the risk of interference with freedom of contract, as it is public policy to oppose all restraints upon liberty of individual action which are injurious to the interests of the State. Dealing with this subject in Golikari's case (AIR 1967 SC 1098) (supra) the Supreme Court observed as follows :--

'The rule now is that restraints whether general or partial may be good if they are reasonable, A restraint upon freedom of contract must be shown to be reasonably necessary for the purpose of freedom of trade. A restraint reasonably necessary for the protection of the covenantee must prevail unless some specific ground of public policy can be clearly established against it. (Underwood (E) & Sons Ltd. v. Barker (1899) 1 Ch 300). A person may be restrained from carrying on his trade by reason of an agreement voluntarily entered into by him with that object. In such a case the general principle offreedom, of trade must be applied with due regard to the principle that public policy requires for men of full age and understanding the utmost freedom of contract and that it is public policy to allow a trader to dispose of his business to a successor by whom it may be efficiently carried on and to afford to an employer an unrestricted choice of able assistance and the opportunity to instruct them in his trade and its secrets without fear of their becoming his competitors. (Fitch v. Dewes, ((1921) 2 AC 158 at pp. 162-167).'

22. The submission of the learned Advocate for the appellant is that in Section 36(2) and Section 54 of the Partnership Act, the word 'or' appearing in between the words 'specified period' and 'within specified local limits' should be read as 'and' and, therefore, before these provisions, which permit reasonable restraint of trade can apply it is necessary that clauses putting reasonable restraint must not only be for a specified period, but should also be within specified local limits. We may observe that the case being of sale of goodwill by defendant (1) outgoing partner in favour of the other partners, the case falls under Sub-section (3) of Section 55 of the Partnership Act, which only provides an agreement in restraint of trade within the specified local limits, and the word 'or' has not been used. This argument has, therefore, no force. Even otherwise, to our mind, it is absolutely not necessary to read the conjunction 'or' as 'and' in the above provisions of the Partnership Act.

23. We have still to consider another submission of the learned Advocate for the appellant that the covenant contained in Clause 13 of the dissolution deed (Ex. 2) in the present case does not run with the land and, therefore, at any rate defendants (2) to (5), who are the transferees from defendant (1), and derived title to the land from him cannot be bound down by the persona] covenant entered into by defendant (1). The submissions of the learned Advocate that Section 11 and Section 40 of the T. P. Act which deal with the covenants running with the land do not apply in this case. In support of his contention, the learned counsel has relied upon Maharaj Bahadur Singh v. Balchand. AIR 1922 PC 165; Matilal Daga v. Ishwar Radha Damodar, AIR 1936 Cal, 727; Zetland v. Driver, (1938)2 All ER 158 and Harihar v. Kamta Prasad, AIR 1944 Oudh 35.

24. The contention of the learned counsel for the respondent on the other hand is, that the restraint covenant in the present case is a negative covenant and is a benefit of an obligation arising out of contract annexed to the ownership of immoveable property and such a right or obligation can be enforced against a transferee with a notice thereof. He contends that the defendants (2 to 5) are near relations Of Kalicharan defendant (1), and it can be said that they had the notice of the covenant contained in Clause 13 of the dissolution deed (Ex. 2) entered into by Kalicharan with respondent (1). In support of his contention, the learned counsel has relied upon Lord Strathcona Steamship Co. v. Dominion Coal Co. Ltd., 1926 AC 108; Tulk v. Moxhay (1848) 41 ER 1143; Ram Briksh v. Shyam Sunder, AIR 1958 Pat 467. Dhanmilal v. Bansidhar, AIR 1929 Pat 349 and Lodna Colliery Co. v. Bepin Behary, AIR 1028 Pat 383 (2).

25. In Tulk v. Moxhay (supra), the plaintiff, the owner of a vacant piece of land and all houses surrounding it had sold the vacant piece of ground to a person who covenanted that, he would keep the same in its then form in an open state uncovered with buildings, and the defendant bought land from that person with notice of the covenant. It was held that the covenant was enforceable against the defendant, who had notice thereof and, therefore, he was not entitled to build on the land. In that case, though the covenant was affirmative in terms, but was really of a negative character, viz, not to build upon the land. Thus under Section 40 of the Transfer of Property Act, an obligation of the nature of (negative covenant), that is to say, an obligation arising out of restricted covenant may be enforced against a transferee with notice thereof.

26. Anson in his Law of Contract dealing with the subject of restricted covenants of land at pages 361-362 has referred to the reasons of Lord Reid at page 362 as follows :--

'Restraint of trade appears to me to imply that a man contracts to give up some freedom which otherwise he would have had. A person buying or leasing land had no previous right to be there at all, letalone to trade there, and when he takes possession of that land, subject to a negative restricted covenant, he gives up no right of freedom which he previously had.'

27. The same author at page 397 deals with the subject in the following words :--

'English law has always drawn a distinction between the principles applicable to real and to personal property; so, where contracts concerning land are concerned, somewhat different rules prevail. If A leases land to B, B's lease is enforceable by and against subsequent purchasers of the reversion, even though they were not parties to the original contract. Also under the principle of equity known as the rule in Tulk v. Moxhay ((1848) 41 ER 1143), it is possible for a vendor of freehold land to attach to the land restrictive covenants as to its use which will bind all subsequent owners who take with notice of the covenants. In such a case, however, the person seeking to enforce the covenant must retain in the vicinity land capable of being benefited by its observance; he must have a permanent proprietary interest in its enforcement.

Similar principles are also applied to certain other interests concerning land, such as easements, contractual licences, and options to purchase.'

Relying on the rule in Tulk v. Moxhay (supra) it can be said that the benefit of a negative restricted covenant with regard to contracts concerning land may be assigned, and so third parties may acquire such rights under a contract to which they were not privy. If a person acquires interest in land from another, either by purchase or lease or at the time of dissolution of the partnership, upon terms which bind him to observe certain covenants respecting the land, the assignee will take the rights and obligation of that person and as such will be bound by the restrictive negative covenant, if the conditions imposed under an agreement are reasonable. Chitty on Contracts (24th Edn.) in para 993 has summarised the subject in these words :--

Restraint affecting commercial use of land. -- Where a restraint affecting the commercial use of land is accepted by one who enjoyed his interest in the land before the making of the arrangement under which the restraint wasimposed, it is clearly established that the doctrine of restraint of trade applies to the same extent as it otherwise would (vide Esso Petroleum Co. Ltd. v. Harper's Garage Stourpart Ltd., 1968 AC 269.)

28. It can, therefore, be said that the doctrine in restraint of trade is capable of applying where the restraint also relates to a particular piece of property. Defendant (1) Kalicharan had voluntarily entered into an agreement containing Clause 13 of the dissolution deed (Ex. 2) that he would not carry on the same kind of business, i.e., an Ice Factory, within the area of land measuring 325' x 88'. He had done so after taking Rs. 11,001/- as his share in the goodwill. He or his assignees, who had purchased a part of this land calling notice of the covenant contained in Clause 13 of Ex. 2 cannot be permitted to use the land in a manner inconsistent with the contract entered into by Kalicharan with the plaintiffs while separating from the partnership business. Otherwise, the original purchaser or the partner separating from the partnership even upon the sale of a goodwill of a firm will be able to sell the property the next day for a greater price in consideration of the assignee being allowed to escape from the liability which he (partner) had himself undertaken. Therefore, the defendants (2 to 5) who are none else but the close relations of Kalicharan (defendant 1) are also bound by Clause 13 of Ex, 2.

29. It can hardly be disputed that if a covenant in restraint of trade is valid, i.e., the conditions imposed are reasonable, a breach of it can be restrained by injunction,

30. In view of what has been discussed and stated above, we are of the opinion that this special appeal has no force and we hereby dismiss it with costs.


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