July 19, 2012

Reasonableness of Non- Compete Clause under Section 27

Contracts which impose an unreasonable restraint upon the exercise of a business, trade or profession are void, but contracts in reasonable restraint are therefore valid. Whether the limits prescribed in the contracts 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.

Certain tests may be noted here:
(a) The generality of the covenant, whether as to time and space may render it unreasonable, i.e., a covenant is not necessarily valid because restricted as to time, but may be void because it is not so restricted:

(b) Different degrees of protection are reasonable in different cases;

(c) The reasonableness of the restriction must be judged by the character and nature of the business or of its customers. That is to say, the question is whether the restraint is such only as to afford a fair protection to the interest of party in favour of whom it is given and not so large as to interfere with the interests of the public; whatever restraint is larger than the necessary protection of the party can be of no benefit to either; it can only be oppressive, and if oppressive, it is in eye of law, unreasonable.[1]

[1] Shaikh Kalu v. Ram Saran, 13 CWN 388; citing Honter v. Graves, 7 Bing 735.

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