Interplay Between Restraint On Trade Clauses And Competition Law - Legal Challenges And Economic Perspective

Author: LawSphereX

Category: Competition Law

Published: 2026-08-23T20:22:45.917856+00:00

Updated: 2026-08-26T17:11:01.662+00:00

INTERPLAY BETWEEN RESTRAINT ON TRADE CLAUSES

AND COMPETITION LAW: LEGAL CHALLENGES AND

ECONOMIC PERSPECTIVE

Ruchitha R, School of Law, Christ (Deemed to be University)

ABSTRACT

Restraint of trade clauses have now become rather common in the body of business-to-business agreements. It may bar parties from undertaking competitive activities even if they try to protect legitimate commercial interests. However these are a greater source of competition law concerns when they place unreasonable restraints that affect market dynamics and consumer welfare. The article is a discussion of the relationship between restraint of trade provisions on one side and competition law on the other hand in terms of legal and economic issues, focusing on the difficulties these clauses present in a modern economic setting by conducting a comprehensive analysis of the most important judicial decisions, legislative frameworks, and economic theories pertinent to the assessment of restraint of trade clauses and reflects their impact on market competition, businesses, and consumers.

What is lost every time is the deeper analytical discussion by way of comparative insight into balance sought either by courts or other competition authorities between protection of legitimate business interests and prevention of anti-competitive practice. Keywords: Restraint of trade, Competition law, Non-compete clauses, Market dynamics, Consumer welfare

INTRODUCTION:

Restraint of trade clauses have been used extensively for the prevention of parties from engaging in particular actions that would damage the business interests of the other party in most kinds of business agreement. From the competition law perspective, these clauses pose serious issues because such clauses protect only legitimate commercial interests while excessive or unreasonable trade restraints may give rise to anti-competitive behavior, which may result in adverse consequences for consumers' welfare and market dynamics. Article briefly elaborates the legal and economic relationship relating restraint of trade provisions to competition law, evaluates the issues that such clauses entail in modern economic situations.

In addition, it gives a remarkably specific account of court decisions, legislative laws, and economic theories that are relevant to the judgment of restraint of trade clauses within contexts of competition law1. It analyzes fundamental judicial judgments, statutory provisions, and the economics of the case to give a deeper insight into what such restrictions of trade clauses are being evaluated within competition law frameworks and what might be the impact on business entities and consumers. Provisions in a contract falling within the gamut of “restraint of trade” clauses qualify the parties' rights to enter into particular commercial activities. They are prevalent in employment contracts, franchise contracts, and M and A contracts. Such clauses are basically protective tools for business interests: goodwill, trade secrets, and positions in the marketplace.

Examples include; Restrictive covenants These are covenants that enjoin one party not to engage in business with the other party in the same field or region for a certain period. Non-solicitation clauses An agreement which prevents a party from soliciting the workers or clients of another party. Prohibits one party from approaching customers or workers whom the other party is likely to hire. Exclusive Dealing Clauses These are typically designed to protect a continuing business relation, making it that the buyer can, at least for a certain period, buy only from a named supplier, or can sell products only to a specified buyer2. Although such clauses may be made in apparent good faith, their enforceability will depend on their reasonableness. Since they restrain competition and entry into the market, there is a

1 S M DUGAR, GUIDE TO COMPETITION ACT, 2002 (LEXIS NEXIS EDS., 8TH ED. 2020)

2 Ashish Kumar Srivastava, Cartel; Competition and Commerce, 10 RMLNLUJ 159, 170-174 (2017).

considerable history of case law holding that contracts which place unreasonable restraints upon trade are potentially against public policy.

COMPETITION LAW AND THE CONTROL OF RESTRAINT ON TRADE

Non-solicitation clauses provide for the prohibition against one party soliciting the potential customers or workers of the other party. Exclusive Dealing Clauses These clauses are often used to prevent a continuing business relationship from deteriorating between parties by compelling them to deal with a specific supplier or buyer exclusively. Though such an underlying reason for a requirement is laudable, always the exercise of such a right is subject to the reasonable requirement. Courts have long held that agreements imposing unjustifiable restrictions on trade may be against public policy and thus not enforceable because they frustrate competition and limit access to the market. 3 In India, the basic legal framework of anti-competitive acts, such as restraint of trade clauses, is the Competition Act, 2002.

The Act has been framed so that competition is promoted and anti-competitive practices that would have an impact on the market are prevented. Under this Act, an appreciable adverse effect on competition shall not arise out of any agreement. Anti-competitive agreements have also been particularly included under Section 3 of the Competition Act. This incorporates agreements on the horizontal level between competitors and between the different tiers of the supply chain, such as distributors and manufacturers, on the vertical level. Any type of agreement that impacts competition to any extent may be challenged under this clause. Section 3(1)4 catalogues the general prohibition on agreements that create an AAEC, including horizontal agreements like price-fixing, bid-rigging, and market-sharing.

Usually, contracts which comprise restraints of trade clauses, more particularly mergers, acquisitions or joint ventures come within the ambit of Section 3(4) of the Trade Agreements Act. Those involving exclusive dealing agreements, non-compete provisions, as well as other types of restrictive covenants would be looked at for determination whether they tend to

3 Shashwat Awasthi, Utkarsh Khandelwal, Flashlights Order: Changing Dimensions in Trade Association

Cartelisation, 1.6 62, 65-67 (2019).

4 The Competition Act, 2002, § 3(1).

restrain new entry or to foreclose the present ability and opportunity to deal. It scrutinises such clauses whether they involve unreasonable restraints prejudicing competition or are justified for protection of some other legitimate interests. The Indian courts have construed and applied clause of restraint of trade in addition to the competition law. For instance, CCI v. Thomas Cook (India) Ltd. ,(2018) 5where the CCI has been entrusted with the task of testing the validity of a non-compete clause in the amalgamation of two travel companies. The clause prevented sellers from engaging in business for an appreciably long period. Under the two-fold test, the CCI opined that the clause was glaringly restrictive and, in fact, resulted in market foreclosure and therefore restricted competition in travel business. An AAEC was evident through the clause, and it was, therefore, canceled.

The present case itself reveals in what way CCI ensures that clauses of non-compete in M&As do not unnecessarily restrain competition in relevant markets. Another relevant case is Excel Crop Care Limited v. Competition Commission of India (2017)6 wherein the Supreme Court has discussed the above mentioned concept of ancillary restraints. In particular, the Court held that although some restraints may be justified as reasonable on the grounds of protecting the legitimate interests of the buyer or business, they must not go beyond the threshold of what is necessary to achieve those objectives. Thus, the judgment confirmed the principle of proportionality and reasonableness in the assessment under the Competition Act of restraint of trade clauses.

LEGAL ISSUES RELATING TO CLAUSES OF RESTRAINT OF TRADE

This interface between a clause of restraint of trade and competition law gives rise to a multitude of legal issues in terms of the test for reasonableness and proportionality imposed. The courts and competition authorities are faced with the judge's dilemma whether some provision of restraint is necessary to cover proper corporate interests or whether it constitutes an unreasonable restraint of trade. Reasonableness Test: Even at common law, restraint of trade clauses were always subjected to the reasonableness test. It is entirely within the domain of the court to declare whether the length, breadth, and geography are reasonable. The stipulation that unduly restrains a person

5 CCI v. Thomas Cook (India) Ltd. 201810 SCC 744 (CCI).

6 Excel Crop Care Ltd. v. CCI, 2017 8 SCC 47.

from earning his livelihood or a business from competing within its market may well be considered to fall within the category of reasonableness. In Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. Ltd7. , the Supreme Court of India held such noncompete agreements to be valid if reasonably necessary to protect business interests of the employer. This decision itself has stood the test of time as the benchmark for reasonableness of restraint clauses in India. Market Power and Anti-Competitive Effects: Further issue is determining the level of market power between the parties. A restraint imposed by a market leader may have serious anticompetitive effects like exclusion of rivals as well as prevention of entry of new players in the market. Competition authorities are likely to be more stringent with the restraint clause as was Fast Track Call Cab Pvt. Ltd. v.

ANI Technologies Pvt. Ltd. (2017)8, where CCI considered the exclusivity clauses adopted by app-based taxi service providers in the fray of market foreclosure.

ECONOMIC PERSPECTIVE: EFFICIENCY VERSUS COMPETITION

From the viewpoint of economics, the trade restrictions may have both positive and negative impacts on the dynamics of the market. Most likely, one of the reasons why such provisions may become efficiency-enhancing is through the investment protection that also assures innovation for stability between corporations' partnership. Should such conditions become too burdensome, then it may then become detrimental to consumer choice, discourage new entrants, and decrease competition. Investment Protection: Restraint of trade clauses such as non-compete or non-solicitation clauses will allow businesses to protect the investment it has undertaken in intellectual property, trade secrets, and other invaluable human resources so that businesses can make longterm investments without worrying about poaching by competitors immediately taking away valuable employees or customers.

Innovation and Research: High-tech firms must apply doctrines of restraint in order to protect investments in R&D. For instance, in the pharmaceutical business, companies that have

7 Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. Ltd., 1967 SCC Online CCI 48.

8 Fast Track Call Cabs (P) Ltd. v. ANI Technologies (P) Ltd., Case No. 74 of 2015 (CCI).

invested millions of dollars in R&D will use restrictive covenant clauses to ensure that erstwhile employees do not transfer proprietary knowledge to competitors immediately9.

INTERNATIONAL PERSPECTIVE: EU AND US COMPETITION LAW

It is seen that, like India, the European Union (EU) as well as the United States (US) have elaborate legal provisions relating to the control of restraint of trade clauses under competition laws. Article 101 TFEU states that agreements between undertakings or decisions by associations of undertakings which may affect trade between Member States and which have as their object or effect the prevention, restriction, or distortion of competition within the internal market shall be prohibited. This clause examines restraint of trade clauses and other restrictive contracts of agreements, especially in cases of mergers and acquisitions. Some agreements-even restraint clauses-have the block exemption granted on them by the European Commission if they are ancillary and proportionate to the commercial transaction.

In most cases, though, overly broad non-compete clauses will be held anti-competitive and thus struck down. For instance in E. ON/GDF (2009), in assessing the undertaking between two companies offering energy, the EC considered a decision between the two companies to abstain from competing an agreement likely to affect competition and could affect trade between the Member States by stifling new entry into the market. The parties were thus advised to resubmit the agreement. Part 1 of the Sherman Antitrust Act of the US prohibits agreements in restraint of trade. The US courts also discovered that just like in India and the EU, it uses the rule of reason test to determine restraint clauses. A restraint clause may be found to be so restrictive that it prevents competition not only in an industry but also in a geographical area.

At such a time, the clause is called anti-competitive and is struck down. In the landmark case of United States v. Addyston Pipe & Steel Co. in 1899,10 the US Supreme Court had held that some restraint clauses, as being intended to suppress competition, were void. Global Best Practices in Regulating Restraint of Trade Clauses. Identifying the play between the clauses of restraint of trade and the competition law, best international practices emphasize that there should be a proportionality between legitimate

9 S M DUGAR, GUIDE TO COMPETITION ACT, 2002 (LEXIS NEXIS EDS., 8TH ED. 2020)

10 United States v. Addyston Pipe & Steel Co, No. 15 Cr. 201 (N.D. Cal).

business interests and competition in the markets. Thus, best international practices permit noncompete and other restrictive covenants to the extent that they are narrowly tailored for protection of business interest without much foreclosure of competition. Proportionality: Restraint of trade clauses must be proportionate to the objective sought to be achieved. The more overbroad a restraint, whether in terms of duration or territorial reach, the less likely that it will survive tests in courts and competition authorities. Justifiability: The company must show that the restraint is necessary in order to avoid leakage of trade secrets or intellectual property or customer relationships. If only to avoid competition, then it will not pass muster11.

Review Period: The fact that the nature of an industry is changing per se may make the restraint of trade clauses both outdated as well as unduly restrictive. There would be a need to review such clauses periodically in an efficient manner to check compliance with competition law and changing market conditions.

ECONOMIC THEORIES AND THE IMPACT OF RESTRAINT OF TRADE ON

MARKET DYNAMICS

From an economic perspective, a restraint of trade clause can encourage and discourage market dynamics simultaneously. On the one hand, there might be encouragement of business efficiency due to the existence of these clauses since investments on intellectual property, trade secrets, and human capital are protected. That is, businesses can make long term investments without worrying about the fact that employees or partners would immediately turn around to compete using the inside information. However, if the restraint clauses are too broad or too wide, then extreme anti-competitive behavior is the result. Over-restrictive trade clauses have the following adverse effects on economic efficiency12: Market foreclosure: A restraint clause may bar new entrants from competing in that market, making entry extremely arduous. Low levels of competition have a tendency to raise the price

11 Richard Wish and David Bailey, Competition Law (Oxford eds., 9th ed. 2018)

12 Giorgio Monti, Eu competition law and economics (Cambridge University Press 2007).

increases given to consumers and the innovation rate is comparatively low. Choking off Innovations: Extravagant provisions are likely to stifle competition, especially in sectors where innovative capacity is specifically critical. For example, in software and pharmaceutical, among many other sectors, the resort to non-competitive clauses scares away talented employees from being transferred to other firms in ways that reduce the overall innovative capacities of the sector13. Consumer Welfare: Pro-competitive effects are by nature long-run and indirect; hence they very rarely materialize during an anticompetitive practice that may even cause consumers to lose when the choice available to them is restricted, and prices are high.

The entry or expansion of competitors in a given market reduces variety goods and services available for purchase to consumers and weakens price pressure as a result of price competition. It raises the prices of all the goods and services offered to the consumers.

JUDICIAL INTERPRETATION AND KEY CASES

Such facts have been held important also in defining the limits of the restraint of trade clauses by judicial decisions. The courts balance business interests with policy considerations doing so. In India, courts have permitted the restraint clause on such facts if held reasonable and necessary to protect business interests but struck down the unreasonable and over-broad restraints. For instance, in the celebrated case of Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. Ltd. (1967), the Supreme Court of India had declared as valid the noncompete clause wherein it found at the relevant time to be a reasonable restraint for protecting the business interest of the employer from service by the employee. However, in other cases, when these clauses are regarded as blanket clauses, such as in .

The courts have been harsher because they believe that there ought to be a balance between the freedom to carry on business and protection of business interests. Competition law has further made the non-compete clauses and restrictive covenants of the CCI more stringent and scrupulous under mergers and acquisitions and joint ventures.

13 Ashish Kumar Srivastava, Cartel; Competition and Commerce, 10 RMLNLUJ 159, 170-174 (2017).

For example, in CCI v. Thomas Cook (India) Ltd. (201814), the CCI held that a non-compete clause under an M&A transaction was ex facie too restrictive inasmuch as sellers were absolutely debarred from undertaking tourism related activities for a significant period and accordingly had appreciable adverse effect on competition in the market.

CONCLUSION

Restraint of trade clauses and competition law is a dynamic twin of challenges in terms of legal and economic burdens for both businesses and regulators. Proposed despite their aim of safeguarding legitimate business interests such as intellectual property, trade secrets, customer relationships, and investments, are carefully crafted to ensure such clauses should neither cause undue restraint nor restrict the reach to market access. The challenge lies in striking the right balance-in terms of not letting business interests overwhelm or kill off market competition-so that these clauses do not, unwittingly, harm consumer welfare or stifle innovation. Courts and competition authorities worldwide, and here in India, have strictly held to the principle of maintaining balance when evaluating restraint of trade provisions.

The questions of reasonableness, proportionality, and necessity begin to become very pertinent when deciding whether such clauses can be held to be enforceable. For example, it will be upheld if deemed crucial for a business to protect its legitimate interest, and limited to scope and duration. Conversely, clauses that are overly broad or overly restrictive in preventing competitors or blocking entry into the market will more likely be challenged and, in many cases, struck down. Such provisions should not impact competition significantly within sectors that are critically influenced by choice, pricing, and innovation. In India, restraint of trade clauses are governed by the principles as well as the Competition Act, 2002.

The Competition Act is geared toward thwarting practices adverse to competition and to enhancing fair access to the market in general, and by prohibiting agreements that have an appreciable adverse effect on competition (AAEC). Restraint clauses, particularly M&A, noncompete, or exclusive dealing arrangements, are most commonly examined in this perspective to ascertained whether they unduly restrain competition or are legitimate because they involve

14 CCI v. Thomas Cook (India) Ltd. 201810 SCC 744 (CCI).

protection of business investment. In the business environment, the scrutiny of restraint of trade clauses has become more salient with technological advancement and globalization's vicissitude. With digital markets and e-commerce, there are quite attendant data-driven industries that complicate assessments on such clauses as new forms of competition and innovation. In such a scenario, restraint provisions, including intellectual property or non-solicitation in high-tech industries, are held up to rigorous examination so that they would not operate as a means for markets' foreclosure and anti-competitive practices. Furthermore, the global character of business transactions has fostered comparative studies on restraint of trade clauses within different legal jurisdictions.

Hence, different countries have set varying standards of law for measuring how legal such clauses are, and businesses dealing with cross-border transactions have to get through many different legal frameworks to ensure that they remain in accordance with the law. While EU jurisdictions do not tolerate restraint clauses, the United States has competition laws that subject a very rigorous test to make sure that restraint clauses do not cause harm to market competition with high emphasis on proportionality and necessity. Restraint of trade clauses thus fulfill the purpose by guarding such legitimate business interest, though they have to be designed and implemented with care.

Evolving legal and economic scenario, primarily in India under the Competition Act, 2002, which therefore requires continuous vigil during drafting and enforcement so that they do not unduly restrict competition or harm consumer welfare. As the markets expand and the technology innovations play through the industries, restraint of trade clauses will continue to be brought under the microscope in order to ensure fair and competitive markets for all in question.