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Sale of goodwill

A seller of goodwill of a business may be restrained from carrying on a similar business within the specified local limits so long as the buyer or his assignee carries on a similar business provided it is regarded reasonable by the Court.

 

Example

C, a seller of imitation jewellery in Mumbai. Sells his business to D and promises that, for a period of two years, he will not deal (i) in imitation jewellery in Maharashtra.(ii) In real jewellery in Maharashtra and (iii) in real or imitation jewellery in certain other states.. In a suit, only the first portion has been held lawful. The other portions have been held void, as the restraint is unreasonable in point of place and nature of business.

 

Thus from the above case it can be understood that an agreement of sale of goodwill is valid if the following conditions are met.
  • It should for specified local limits
  • It should be regarding similar business
  • The restraint is valid so long as the buyer deriving the goodwill operates a like business
  • The limits imposed should be reasonable taking into account the nature of business

Partners agreement

A seller of goodwill of a business may be restrained from carrying on a similar business within the specified local limits so long as the buyer or his assignee carries on a similar business provided it is regarded reasonable by the Court.
  • Sec 11 of Indian Partnership Act 1932 states – The partners may mutually agree that a continuing partner shall not carry on any business other than that of the firm, while he is a partner of the firm.
  • Sec 36(2) of Indian Partnership Act 1932 states - An outgoing partner may agree with his partners not to carry on a business similar to that of the firm’s within a specified period or limits
  • Sec 54 of Indian Partnership Act 1932 states - Partners may, upon or in anticipation of dissolution of the firm, may 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 reasonable local limits
  • Sec 55(3) of Indian Partnership Act 1932 states - Any partner may, on the sale of goodwill of the firm, make an agreement with the buyer that such a partner will not carry on any business similar to that of the firm within a specified period or limits

Note: Such agreements in restraint of trade are valid if the limitations with regard to time and place are reasonable.

Restraint in trade combinations

Trade combination which have been formed to regulate the business or to fix the price is valid. An agreement between the manufacturers and traders not to sell the goods below a certain price, to pool profits and to divide business profits in certain proportion is perfectly valid. If the agreement is an attempt to create monopolies, it is void as it is opposed to public policy.
 
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Service agreements

The service agreement may restrain the employees from working elsewhere during the period of employment is not void. Any agreement which prohibits a person not to engage anywhere else, after he has left the employment is not valid. The restriction imposed by the employer must be reasonable. The reasonableness of the restriction depends upon the facts and circumstances of each case.
 
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