Section 27: Agreement in restraint of trade, void

Leading cases

• Superintendence Company of India (P) Ltd. v. Krishan Murgai (1980)A covenant barring the employee from competing for two years 'after you leave the company' did not apply where the employer terminated his services, so no injunction could issue; the appeal was dismissed.
• Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. Ltd. (1967)A negative covenant barring an employee from similar work elsewhere during the term of employment is not a restraint of trade under Section 27, Contract Act, unless the contract is one-sided or unconscionable; it may be enforced by limited injunction.

Questions on this section

7 questions in 28 of our papers cite Section 27. Try these from the free papers:

1. 1. In Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. Ltd., AIR 1967 SC 1098, the Supreme Court held that a negative covenant in a contract of employment, operative only during the term of the employment:

   A.is void under Section 27 of the Contract Act, since it prevents the employee from workingB.is not a restraint of trade under Section 27 of the Contract Act and may be enforcedC.can be enforced only by damages, since a contract of personal service is involvedD.is valid only if the employer pays the employee in full for the restricted period
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2. 2. P and Q run competing grocery shops in the same market. In return for Rs. 50,000 paid by P, Q agrees not to run any grocery shop in that market for five years. P does not buy Q's shop or its goodwill. Q later reopens his shop in the market and P sues to enforce the agreement. Under Section 27 of the Indian Contract Act, 1872, the agreement is:

   A.enforceable, since the restraint is confined to one market and five yearsB.void, since it restrains Q's lawful business and no exception covers itC.enforceable, since Q received valuable consideration for the restraintD.voidable at the option of Q, who was induced to agree by the payment
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3. 3. Match List I (agreement in restraint of trade valid under the Indian Partnership Act, 1932 despite Section 27 of the Indian Contract Act, 1872) with List II (provision): List I A. A contract between partners that a partner shall not carry on any business other than that of the firm while he is a partner B. An agreement by a partner that on ceasing to be a partner he will not carry on a similar business within a specified period or local limits C. An agreement by partners, in anticipation of dissolution, not to carry on a similar business within specified local limits D. An agreement by a partner with the buyer of the firm's goodwill not to carry on a similar business within a specified period List II 1. Section 54 2. Section 11(2) 3. Section 55(3) 4. Section 36(2)

   A.A-3, B-4, C-1, D-2B.A-2, B-1, C-4, D-3C.A-2, B-4, C-1, D-3D.A-4, B-2, C-3, D-1
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