“An agreement in restraint of trade is void”. Examine this statement mentioning exceptions, if any.

Agreement in Restraint of Trade: Void or Valid?

1. Introduction:

• Restraint of trade refers to an agreement between parties that restricts one party's freedom to carry on trade, business, or profession with another party or in a specified area or within a specified period.
• The general rule is that agreements in restraint of trade are void as they are considered contrary to public policy. However, there are exceptions and instances where such agreements may be considered valid.

2. Legal Principles:

• The principle that agreements in restraint of trade are void is based on the idea that such agreements tend to create monopolies, restrict competition, and hinder economic freedom.

3. Exceptions to the Rule:

a) Sale of Goodwill:

• An agreement by which a seller of a business agrees not to carry on a similar business within a specified local limit is valid if the buyer pays a genuine price for the goodwill.

• Example: A sells his restaurant business to B and agrees not to open another restaurant in the same area. This agreement is valid if B pays a genuine price for the goodwill of the business.

  b) Trade Secrets and Confidential Information:

• An agreement that restricts the use of trade secrets or confidential information is valid.

• Example: An employee signs a confidentiality agreement with their employer not to disclose company secrets to competitors. This agreement is valid to protect the employer's confidential information.

  c) Reasonable Restrictions:

• Agreements containing reasonable restrictions in terms of duration, geographical area, and nature of the trade are valid.

• Example: A software company may restrict its employees from working for a direct competitor for a reasonable period after leaving the company.

  d) Restraints in Sale of Business:

• Agreements that restrain a seller of a business from carrying on a similar business within a specified local limit are valid if reasonable.
• Example: A seller of a pharmacy agrees not to open another pharmacy within a specified area for a certain period. This agreement is valid if it is reasonable in terms of duration and geographical limit.

4. Case Law:

• Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd: In this case, the House of Lords held that a covenant by Nordenfelt, the seller of a business, not to engage in the manufacture of armaments for a certain period was valid because it was reasonable in scope.

5. Conclusion:

• While the general rule is that agreements in restraint of trade are void, there are exceptions where such agreements may be considered valid. These exceptions include agreements relating to the sale of goodwill, protection of trade secrets, reasonable restrictions, and restraints in the sale of a business. Courts will generally assess the reasonableness of the restraint in terms of duration, geographical area, and the nature of the trade when determining the validity of such agreements.