NON COMPETE CLAUSES IN A PARTNERSHIP DEED

A research paper submitted in fulfillment of the course Alternative Dispute

Resolution (ADR) for obtaining the degree B.B.A., LL.B. (Hons.) during the
academic session: 2020-21

Submitted by:

Pragya, B.B.A., LL.B. (Hons.)

Roll: 2029

Submitted to:

Mr. Hrishikesh Manu

Faculty of Law

April, 2021

Chanakya National Law University,

Nyaya Nagar, Mithapur, Patna-800001, Bihar

 DECLARATION
I Pragya, hereby declare that, the project work entitled, ‘NON COMPETE CLAUSES OF A
PARTNERSHIP DEED’, submitted to CNLU, Patna is record of an original work done by me
under the guidance of, Faculty Member, CNLU, Patna.

Pragya

B.B.A., LL.B. (Hons.)

Roll No. – 2029

3rd Semester

I
 ACKNOWLEDGMENTS

First and foremost, I would like to thanks my Faculty of Contracts II, Dr. Vijay Kumar Vimal,
for giving the opportunity to work on this project named – ‘NON COMPETE CLAUSES IN A
PARTNERSHIP DEED’. His guidance and support has been instrumental while making my
project on this topic.

I would like to all authors, writers and columnists whose ideas and works have been made use in
my Project. My heartfelt gratitude also goes to all staff and administration of CNLU for the
infrastructure in the form of library that was a great source of help in completion of this Project.

I also thank my friends for their precious inputs which have been very useful in the completion
of this Project. I would also like to thank my parents, my seniors, dear colleagues, and friends in
the University, who have helped me with ideas about this work.

I hope you will appreciate my true work which is indeed a hard work and a result of my true
research and work.

Pragya

B.B.A. LL.B. (Hons.)

Roll No. – 2029

3rd Semester

II
 TABLE OF CONTENTS

DECLARATION………………………...………………………………………………………. I
ACKNOWLEDGMENT………………………………………………………………………… II

1. INTRODUCTION....................................................................................................................1

2. CONTRACT............................................................................................................................3

3. PARTNERSHIP DEED...........................................................................................................5

Relationship Between Partners....................................................................................................5

Absence of a Partnership Deed....................................................................................................7

4. NON COMPETE CLAUSE.....................................................................................................8

EXCEPTIONS...........................................................................................................................10

5. CONCLUSION......................................................................................................................13
 NON COMPETE CLAUSES IN A PARTNERSHIP DEED

1. INTRODUCTION

A non-compete clause is well known under the Contractual Laws as the clause being made out
into any agreement between two parties where one party is the employer and the other party is
the employee. By virtue of this non-compete clause, the employee undertakes and gives his
acceptance to the condition of the employer that during the course of the employment or even
after the employee leaves the services/job of the employer, he will not be the competitor of the
employer in the form and nature of the employment of the employer. The Non-compete clause
finds place under the agreements and contracts throughout the globe. When we see the Indian
legal scenario about the non-compete clause, it is prohibited under the Law of Contracts.

Section 27 in The Indian Contract Act, 1872

Agreement in restraint of trade, void.—Every agreement by which any one is restrained from
exercising a lawful profession, trade or business of any kind, is to that extent void. —Every
agreement by which any one is restrained from exercising a lawful profession, trade or business
of any kind, is to that extent void." Exception 1.—Saving of agreement not to carry on business
of which goodwill is sold.—One who sells the goodwill of a business may agree with the buyer
to refrain from carrying on a similar business, within specified local limits, so long as the buyer,
or any person deriving title to the goodwill from him, carries on a like business therein, provided
that such limits appear to the Court reasonable, regard being had to the nature of the business.

In India, post-termination restrictive covenants, such as non-solicit and non-compete clauses are
routinely included in employment contracts. While Indian courts have upheld non-solicitation of
customer clauses, non-compete provisions which extend beyond the term of employment are not
enforceable. Companies generally retain post-termination non-compete clauses in the
employment contracts since they act as a deterrent to the employees.

RESEARCH METHODOLOGY

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 NON COMPETE CLAUSES IN A PARTNERSHIP DEED

This study is mainly based on secondary data. The data are collected from various sources
including books, journals, articles, research studies, various websites and newspaper articles. The
study main focuses on the non compete clauses in a partnership deed.

RESEARCH OBJECTIVES

The researcher has the following objectives:

1. To understand the meaning of a partnership deed.

2. Requisite for a valid partnership deed.
3. Non compete clauses in a partnership deed.

AREA OF LIMITATION

Area of limitations – Every study has own limitation due to the limited time, lack of sufficient
financial sources and limited area of survey/study of the subject matter.

SOURCES OF DATA

The researcher has used both primary as well as secondary sources of data.

MODE OF CITATION

The researcher follows the Blue Book mode of citation.

HYPOTHESES

The researcher has created the following hypotheses:

1. Partner of one firm cannot make or join another firm through another partnership deed.
2. Partners cannot leave the firm and are the owner of the firm.

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 NON COMPETE CLAUSES IN A PARTNERSHIP DEED

2. CONTRACT

A contract is basically an agreement between two parties creating a legal obligation for both of
them to perform specific acts. Each party is legally bound to perform the specified duties such as
rendering a payment or delivering goods. 

In order for the contract to be enforceable, each party must exchange something of value (called
“consideration”).

A contract may be used for various transactions, including the sale of land or goods, or the
provision of services. They may be either oral or written, though courts prefer that agreements be
put in writing.1

Requirements for a Valid Contract

In order for an agreement to be binding in a court of law, a contract must contain the following
elements:

a. Mutual Assent: Each party must have a shared understanding regarding what the subject
matter of the contract is. For example, for a delivery contract, both parties must
understand that the word “ship” does not refer to a sea vessel, but rather means “to
deliver”.    

b. Offer and Acceptance: One party must make an offer by clearly communicating their
intent to be bound in a contract. Likewise, the other party must render their acceptance in
unambiguous terms. 

c. Consideration: Thus, where both parties mutually exchange something of value in order
to make the agreement binding. The consideration may simply be a formality, such as
giving $1. Sometimes contracts can be enforced in a one-sided promise where only one
party renders consideration.

1
Bangia R K, Contract II Law of Contract 2 With Specific Relief Act, 2017.
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 NON COMPETE CLAUSES IN A PARTNERSHIP DEED

How can a Contract be Breached

Contract claims are best thought of in a timeline. The entire formation of the contract begins with
negotiations and may undergo several modifications before a final agreement is reached. This
means that there are several points in time when the contract may be breached. A breach of
contract means that one or both parties has failed to perform their duty. 

Some common types of breach include: non-performance of duties, impossibility (one party
makes the other party’s duties impossible to perform), breach of an implied duty, and
anticipatory breach.

A breach may either be total or partial, and each will yield different legal consequences. 

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 NON COMPETE CLAUSES IN A PARTNERSHIP DEED

3. PARTNERSHIP DEED

A partnership is a unique form of business in which partners work together to achieve common

goals. Due to this feature of partnerships, partners are allowed to decide the terms of
their relationship with each other. The documents which they do so are called partnership deeds.

Relationship Between Partners

The Indian Partnership Act, 1932 governs partnership forms of businesses in India. This law
contains several provisions defining rights, duties, liabilities, and powers of partners. These
provisions, however, are not always binding on them. Partners are free to bind themselves with
contrary provisions.

Most provisions of the Partnership Act are subject to a contract to the contrary. This means that
if partners have agreed to contrary understandings, they will prevail over the Act. For example,
although payment of salary to partners is prohibited by the Act, partners can still draw a salary if
they mutually agree.2

Partners are free to define the terms of their relationships, even if they go contrary to the Act in
certain cases. They can either decide on such terms with an oral agreement or a written one.

Partnership deeds, in very simple words, are an agreement between partners of a firm. This
agreement defines details like the nature of the firm, duties, and rights of partners, their liabilities
and the ratio in which they will divide profits or losses of the firm.3

Although the drafting of partnership deeds is not compulsory, it is always advised to do so. This
helps in ensuring that all terms agreed by partners exist in written form on paper. Doing so can
reduce disputes between partners and govern their functioning better.

Unlike similar documents like articles of association of companies, partnership deeds need not be
registered mandatorily. However, registration can ensure the prevention of legal challenges to its

2
See supra note 2.
[Link]
3

Contract+Of+Service+And+Restrictive+Covenants
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 NON COMPETE CLAUSES IN A PARTNERSHIP DEED

validity when disputes arise. An ideal partnership deed is comprehensive and clear about all
details pertaining to the functioning of a firm. It should not contain any ambiguities.

Contents of Partnership Deeds

Although there is no specific format prescribed for drafting a partnership deed, a typical deed
contains the below mentioned clauses.4

1. The name of the firm

2. Name and details of all partners

3. Date of commencement of business

4. Duration of the firm’s existence

5. Capital contributed by each partner

6. Profit/loss sharing ratio

7. Interest on capital payable to partners

8. The extent of borrowings each partner can draw

9. Salary payable to partners, if any

10. The procedure of admission or retirement of a partner

11. The method used for calculating goodwill

12. Preparation of accounts of the firm

13. Mode of settlement of dues with a deceased partner’s executors

14. The procedure followed in case disputes arise between partners.

4
S.S. Srivastava, Law Of Contract I & II, 2016.
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 NON COMPETE CLAUSES IN A PARTNERSHIP DEED

Absence of a Partnership Deed

In case partners do not adopt a partnership deed, the following rules will apply:

a. The partners will share profits and losses equally.

b. Partners will not get a salary.

c. Interest on capital will not be payable.

d. Drawings will not be chargeable with interest.

e. Partners will get 6% p.a. interest on loans to the firm if they mutually agree.5

5
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 NON COMPETE CLAUSES IN A PARTNERSHIP DEED

4. NON COMPETE CLAUSE

A non-compete clause or a covenant not to compete is a term used in contracts under which the
employee agrees to not pursue a similar profession, trade or business in competition against the
employer. Apart from the regular employment agreements, such covenants are also at times
included in the agreements relating to sale of goodwill of business or professional practice,
employment exit and other exclusive dealings and service arrangements.6

The Indian Contract Act, 1872, which provides a framework of rules and regulations, governing
the formation and performance of a contract in India deals with the legality of such non-compete
covenants. It stipulates that an agreement, which restrains anyone from carrying on a lawful
profession, trade or business, is void to that extent. Under section 27 of the Indian Contract Act,
1872 agreements in restraint of trade are void.7

SECTION 27; Every agreement by which anyone is restrained from exercising a lawful
profession or trade or business of any kind, is to that extent void.

EXCEPTION: One who sells goodwill of a business with a buyer to refrain from carrying on a
similar business, within specified local limits so long as the buyer, or any person deriving title to
the goodwill from him, carries on a like business therein provided that such limits appear to the
Court reasonable, regard being had to the nature of business.

GENERAL PRINCIPLE IN INDIA AND ENGLAND RELATED TO SECTION 27 OF

THE INDIAN CONTRACT ACT, 1872;

Both in India and England the general Principle is almost same, namely, that all restraints of
trade whether partial or total, are void. The only difference is that in England a restraint will be
valid if it is reasonable. In India it will be valid if it falls within any of the statutory, or judicially
created exceptions. To the extent to which these exceptions are an embodiment of the situations
in which restraints have been found reasonable in England, the two laws are identical and not
“widely dissimilar”. The English law may be a little more flexible as the word ‘reasonable’
6
[Link]
7
See supra note 4.
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 NON COMPETE CLAUSES IN A PARTNERSHIP DEED

enables the court to adapt it to changing conditions. As LORD WILBERFORCE remarked in

Esso Petroleum Co Ltd v. Harper’s Garage(Stourport) Ltd “the classification(of agreements inn
restraint of trade) must remain fluid and the categories can never be closed”.
The following passage in a judgment of the Supreme court shows the effect of absence of the test
of “reasonableness”;

“The question of reasonableness of restraint is outside the purview of section 27 of the contract
act and need not be gone into. Therefore, the present case has to be proceeded on the basis that
an enquiry into reasonableness of the restraint is not envisaged by section 27. On that view,
instead of being required to consider two questions as in England, the courts in India have only
to consider the question whether the contract is or is not in restraint of trade”.

“Profession, Trade or Business”:

But the Indian courts have not been rendered entirely sterile in the matter. Thus for example,
where it was necessary to do so, the high court of kuchh regarded an agreement to monopolise
the privilege of performing religious services as being opposed to public policy and void under
section 27, though it may be doubted whether the words “profession, trade or business” as used
in the section were intended to cover the religious services of a priest. On the other hand
Allahabad High court in Pothi ram v. Islam Fatima upheld as valid a restrictive covenant on the
ground that the activity restrained was not in the nature of “Profession, trade or business”.8

The court said that the tendering to obtain a contract is not in the nature of a trade or calling. The
court compared the case with an agreement between intending bidders and said that such an
agreement was considered as being not opposed to public policy in few previous cases. Special
Stress was laid upon a decision of the Privy Council where it was held that a court sale by public
auction does not become void if a person had deterred others from bidding. But it is submitted
with respect, that the decision is not an authority for the proposition that the collusion agreement
between the bidders is itself valid and enforceable.

8
[Link]
[Link]
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 NON COMPETE CLAUSES IN A PARTNERSHIP DEED

EXCEPTIONS

Sale of goodwill :–

The only section mentioned in the proviso to Section 27 of the contract act is that relating to sale
of goodwill. It is thus stated:

One who sells goodwill of a business with a buyer to refrain from carrying on a similar business,
within specified local limits so long as the buyer, or any person deriving title to the goodwill
from him, carries on a like business therein provided that such limits appear to the Court
reasonable, regard being had to the nature of business. Provided that such limits appear to the
court reasonable, regard being had to the nature of business. Apparently the object is to protect
the interest of a purchaser of a goodwill.

Partnership Act;9

There are four provisions in the Partnership act which validate agreements in restraint of trade.
Section 11 enables partners during the continuance of the firm to restrict their mutual liberty by
agreeing that none of them shall carry on any business other than that of the firm . Section 36
enables them to restrain an outgoing partner from carrying on a similar business within a
specified period or within specified local limits. Such agreement shall be valid if the restrictions
imposed are reasonable. A similar agreement may be made by partners upon or in anticipation of
dissolution by which they may restrain each other from carrying on business similar to that of the
firm.10
It is necessary for the validity of a restraint under Section 36 or 54 that;

1. The agreement should specify the local limits or the period of restraint, and
2. The restrictions imposed must be reasonable.

An agreement by a retiring partner not to carry on similar business on the land belonging to him
and adjoining the factory of the firm, has been held to be reasonable and binding on the persons
buying the land from him.

9
See supra note 4.
10
Kailash Rai, Contract- I And Specific Relief Act, 2017.
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 NON COMPETE CLAUSES IN A PARTNERSHIP DEED

Trade Combinations;

It is now almost a universal practice for traders or manufacturers in the same line of business to
carry on their trade in an organised way. Thus, there are combinations of ice manufacturers,
grain merchants, sugar producers, etc. The primary object of such associations is to regulate
business and not to retrain it. Combinations of this kind are often desirable in the interest of trade
itself and also for the promotion of public interest. They bring about Standardised goods, fixed
prices and eliminate ruinioous competition. Thus, “regulations as to the opening and closing of
business in the market, licensing of traders, supervision and control of dealers and the mode of
dealing are not illegal,”11 even if there is incidental deprivation of trade liberty. But the courts
would not allow a restraint to be imposed disguised as trade regulations. Thus, an agreement
between certain persons to carry on business with the members of their cast only, and an
agreement to restrict the business of sugar mill within zone allotted to it, have been held void. An
agreement between two companies that one would not employ the former employees of the other
has been held to be void by reason of its generality. This was the situation in Kores Mfg Co Ltd
v. Kulok Mfg Ltd.12

Solus or Exclusive dealing agreements;

Another business practice in vogue is that a producer or manufacturer likes to market his goods
through a sole agent or distributor and the latter agrees in turn not to deal with the goods of any
other manufacturer. A producer may, for example, agree to sell all his outputs to one consumer
who, in turn, agrees not to buy his requirements from any other source. As long as the negative
stipulation is nothing but an ordinary incident of or ancillary to the positive covenant, there is
hardly anything obnoxious to Section 27. Indeed in “one sense, every agreement for sale of
goods whether in esse or in posse is a contract in restraint of trade for, if AB agrees to sell goods
to CD, he preludes himself from selling them to anybody else”. 13 Thus, an agreement by a
manufacturer of dhotis to supply 1,36,000 pairs of certain description to the defendant and not to
sell goods of that kind to any person for a fixed period. An agreement by a person to sell all the

11
ibid
12
[Link]
13
[Link]
3f14098affb5&txtsearch=Subject:%20Contract
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 NON COMPETE CLAUSES IN A PARTNERSHIP DEED

salt manufactured by him to a firm for five years. An agreement by a person to send all the mica
produced by him to the plaintiffs, and not to send them to any other firm, nor to keep any in
stock and an agreement by a buyer of goods for Calcutta market, not to sell them in Madras, have
all been held to be outside the scope of Section 27 and therefore valid. Such negative stipulations
do not have the effect of restraining the manufacturer. 14 “On the contrary, he is encouraged to
exercise his business because he is assured of a certain market for the products of his labour.”

Restraint Upon Employees;

Agreements of service often contain negative covenants preventing the employee from working
elsewhere during the period covered by the agreement. “Trade secrets, the names of customers,
all such things which in sound philosophical language are denominated as objective knowledge-
these may not be given away by a servant; they are his master’s property, and there is no rule of
public interest which prevents a transfer of them against the master’s will being restrained.” A
servant may, therefore, be restrained from taking part in business in direct competition with that
of his employer. Thus, in Charlesworth v Macdonald: A agreed to become assistant for three
years to B who was a physician and surgeon practising at Zanzibar. The appointment was subject
to the clause against practising. A left the services within a year and began to practise there on
his own account.15

14
See supra note 1.
15
Ibid.
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 NON COMPETE CLAUSES IN A PARTNERSHIP DEED

5. CONCLUSION

A non-compete clause or a covenant not to compete is a term used in contracts under which the
employee agrees to not pursue a similar profession, trade or business in competition against the
employer. Apart from the regular employment agreements, such covenants are also at times
included in the agreements relating to sale of goodwill of business or professional practice,
employment exit and other exclusive dealings and service arrangements.

The Indian Contract Act, 1872, which provides a framework of rules and regulations, governing
the formation and performance of a contract in India deals with the legality of such non-compete
covenants. It stipulates that an agreement, which restrains anyone from carrying on a lawful
profession, trade or business, is void to that extent. Under section 27 of the Indian Contract Act,
1872 agreements in restraint of trade are void.

Agreement in restraint of trade is defined as the one in which a party agrees with any other party
to restrict his liberty in the present or the future to carry on a specified trade or profession with
other persons not parties to the contract without the express permission of the latter party in such
a manner as he chooses. Providing for restraint on employment in the employment contracts of
the employees in the form of confidentiality requirement or in the form of restraint on
employment with competitors has become a part of the corporate culture.

13
 BIBLIOGRAPHY

BOOKS REFERRED

 Bangia R K, Contract II Law of Contract 2 With Specific Relief Act, 2017.

 S.S. Srivastava, Law Of Contract I & II, 2016
 Kailash Rai, Contract- I And Specific Relief Act, 2017

ONLINE SOURCES

 [Link]
Contract+Of+Service+And+Restrictive+Covenants
 [Link]
 [Link]
 [Link]
[Link]
 [Link]
 [Link]
a093-3f14098affb5&txtsearch=Subject:%20Contracts