The Common Law Doctrine of Restraint of Trade and Its Relationship with Competition Law

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It is a well settled notion in common law that agreements which impose restraints on trade are not enforceable. This notion was developed further in the late 19th century and late 20th century and made applicable to what we call ‘competition law’ in the USA. It is important to note that the enactment of the Sherman Anti-trust Act, 1890 was a reason for this development.

What is the correlation between ‘restraint of trade doctrine’ and ‘modern competition law’? This article seeks to examine the relationship between the two by tracing back cases when the Sherman Act was newly enacted and the interpretation given by the US Supreme Court. The article has two parts. Part I deals with the doctrine of restraint of trade in order to have a clear understanding of it before stepping into part II where the correlation between the doctrine and competition law is analysed. Part III discusses the various provisions in different legislations enacted in India which deal with agreements in restraint of trade.

Part- I
The Common Law doctrine of ‘Restraint of Trade’

Limitations on freedom of contract:
Public Policy imposes certain limitations on the freedom of persons to contract. An ostensibly valid contract may be tainted with illegality. The source of the illegality may arise by statute or by virtue of the principles of common law.

Agreements in Restraint of Trade:
The doctrine of restraint of trade is a rule of public policy developed by the common law. It is a general principle of the common law that a person is entitled to undertake a lawful trade when and where he wishes. The common law does not favour agreements that prohibit or restrain a person in the exercise of a lawful trade, employment or profession. It protects the right of individuals to work and prevents them from disabling themselves from earning a living by an unreasonable restriction by the doctrine of restraint of trade. A principal aim of this doctrine is to prevent agreements which unreasonably restrict competition.

Defining agreements in restraint of trade:
An agreement in restraint of trade has been defined as ‘one in which a party (the convenantor) agrees with any other party (the convenantee) to restrict his liberty in the future to carry on trade with other persons not paries to the contract in such a manner as he chooses.’ Anson is of the opinion that “…today, when economic theory indicates that a competitive economy produces more beneficial 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…” Also in Esso , it was said that the doctrine of restraint of trade: “does not apply to ordinary commercial contracts for the regulation and promotion of trade during the existence of the contract, provided that any prevention of work outside the contract, viewed as a whole, is directed towards the absorption of the parties’ services and not their sterilisation.”

Reasonableness as a test to justify restraints:
All restraints of trade, in the absence of special justifying circumstances, are contrary to public policy and do not give rise to legally binding obligations, and in that sense are void. 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 does not enforce such agreements as they go contrary to public policy.

A restraint can only be justified if two conditions are satisfied: a.The restraint has to be reasonable in the interests of the contracting parties b.The restraint has to be reasonable in the interest of the public.

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. The onus of showing that, notwithstanding that a covenant is reasonable...
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