Doctor A employed Doctor B for 3 years with agreement that after termination, B shall not practice within 3 kms for 3 years or pay Rs. 50,000 as liquidated damages. B started practice next door. A sues for Rs. 50,000. Decide

Doctor A vs Doctor B: The Restraint Clause and the Claim for Rs. 50,000

The central question before the court is not merely whether Doctor B has broken a promise. The deeper question is whether the promise itself was one the law permits to be made. And that is where Section 27 of the Indian Contract Act, 1872 enters — quietly but decisively — and changes the entire outcome of this dispute.

The Agreement and What It Contains

Doctor A employed Doctor B for three years. The employment agreement carried a post-service restraint clause: upon termination of employment, Doctor B was not to practise within 3 kilometres for three years, failing which he would be liable to pay Rs. 50,000 as liquidated damages. Doctor B, apparently undeterred, set up practice right next door. Doctor A now sues for the stipulated sum of Rs. 50,000.

At first glance, the agreement looks reasonable — the area is modest (3 kilometres), the time is not unreasonable (3 years), and there is even a monetary alternative built into it. One might assume this is a perfectly sensible commercial arrangement between two professional men. But Indian contract law, as we shall see, refuses to be guided by appearances of reasonableness alone.

Section 27: The Fatal Provision

Section 27 of the Indian Contract Act declares in unambiguous terms: "Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void." The only exception carved out in the section concerns the sale of the goodwill of a business — which is plainly not the situation here.

The pivotal distinction that Section 27 draws is between restraints that operate during the subsistence of a contract of employment, and restraints that operate after its termination. Indian courts have consistently upheld the former and struck down the latter. "A service covenant extending beyond the term of service is void, where in similar cases the English law would allow restraint which is reasonable." This is the hard and uncompromising rule of Indian law, and no amount of reasonableness in terms of area or duration can rescue a post-employment restraint from the void that Section 27 creates.

The clause in Doctor A's employment agreement with Doctor B is unambiguously a post-service restraint — it is only triggered upon termination. The moment Doctor B's employment ended, Section 27 came into operation. The restraint against practising within 3 kilometres, however modest it may appear, is void under Indian law.

The English Law Contrast and Why It Does Not Help Here

One must pause here to appreciate just how different the Indian position is from the English one. Under English law, as settled by the House of Lords in Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd (1894 AC 535), the test is one of reasonableness. A partial restraint — reasonable in area, time, and legitimate interest — will be upheld. Courts there ask: is the restraint no more than necessary to protect a legitimate proprietary interest of the employer, such as trade secrets or business connections?

Under that English framework, a covenant by a medical assistant not to practise within a short radius after leaving employment would very likely pass the reasonableness test, particularly if the employer could show that the assistant had cultivated the employer's patient connections. This is exactly what was decided in Charlesworth v MacDonald (ILR 1898 23 Bom 103), where the Bombay High Court enforced a restraint against a medical assistant during the period of his three-year contract, relying on the principle that restrictions operative during the employment term are valid. But that case — and this point is critical — involved a restraint during the employment period, not after its termination.

Indian law, however, is not governed by reasonableness in the context of Section 27. Neither the test of reasonableness nor the principle of restraint being partial apply to a case governed by Section 27 of the Contract Act, unless they fall within the exception of that section." The exception — sale of goodwill — has no application here. Doctor A is not selling his practice; he is trying to prevent competition from his own former employee.

The Landmark Authority: Superintendence Company of India Ltd v Krishan Murgai

The Supreme Court addressed this question authoritatively in Superintendence Company of India Ltd v Krishan Murgai (AIR 1981 SC 1518, (1981) 2 SCC 246). The court laid down emphatically that a restraint beyond the term of service is prima facie void under Section 27, and the only basis on which it could conceivably be justified is by bringing it within the statutory exception — that is, by showing it is necessary to protect the goodwill of the employer's business in the manner the exception contemplates. An employer cannot simply invoke a post-service covenant and claim it is reasonable. No such test of reasonableness exists in Indian law for such covenants.

This ruling conclusively settles the matter for Doctor A's case. The restraint against Doctor B practising within 3 kilometres after the termination of his employment falls squarely within the mischief that Section 27 targets.

The Brahamputra Tea Co v E Scarth Principle

Even before the Supreme Court's pronouncement, the principle was well-established. In Brahamputra Tea Co v E. Scarth, a court refused to enforce a restraint against a servant competing for five years after the period of service. The court was unmoved by the fact that the restraint was partial and limited in scope. The principle drawn from that decision, subsequently approved by the Supreme Court in Niranjan Shankar Golikari v Century Spinning & Manufacturing Co Ltd (AIR 1967 SC 1098), is that a negative covenant in a contract of employment, when it operates only during the period of employment and is reasonable, may be enforced. But the moment it stretches beyond the employment, it attracts Section 27's bar without any saving grace of reasonableness.

What About the Rs. 50,000 Liquidated Damages Clause?

Doctor A might argue: even if the restraint itself is unenforceable, why not enforce the monetary alternative? The logic would be — Doctor B had a choice between restraining himself or paying Rs. 50,000. He chose to practise, so he should pay.

This argument has a superficial appeal, but it does not survive scrutiny. The court in Madhub Chander v Raj Coomat (1874 XIV Bengal Law Reports 76) — the very first case that authoritatively interpreted Section 27 — established that where the underlying agreement is void, there is no enforceable consideration for the alternative monetary promise either. The whole transaction, being indivisible, falls together. A liquidated damages clause built upon a void restraint clause cannot be enforced independently because it is designed to be the price of the breach of an agreement that the law refuses to recognise. To allow recovery of such a sum would, in substance, enforce the void clause indirectly — something the law will not permit.

This principle is further reinforced by the understanding in Mulla's commentary that "if the agreement on the part of the plaintiff is void, there is no consideration for the agreement on the part of the defendants to pay the money and the whole contract must be treated as one which cannot be enforced." The alternative of paying Rs. 50,000 was never a free-standing, independent obligation; it was always conditional upon the premise that there existed a valid restraint. Since the premise is void, the condition fails.

Decision

Doctor A's suit must fail. The post-service restraint clause in his agreement with Doctor B — prohibiting the latter from practising within 3 kilometres for three years after termination — is void under Section 27 of the Indian Contract Act, 1872. It falls outside the only exception the section recognises (sale of goodwill), and Indian law does not save post-employment restraints on the grounds of reasonableness or partial operation. Since the underlying restraint is void, the claim for Rs. 50,000 as liquidated damages for breach of that void covenant is equally unenforceable — the entire clause collapses together. Doctor B is free to practise next door, and Doctor A has no remedy under contract law for this state of affairs.

The law here may appear harsh to Doctor A, who invested time and resources in Doctor B. But as the courts have consistently recognised, the policy behind Section 27 is to protect individual liberty to earn a livelihood and to ensure that the community is not deprived of skilled professionals. Medical practice next door, however inconvenient for Doctor A, is precisely the kind of lawful competition that this provision was designed to protect.