Restraint of Trade

a. (i) Explain what is meant by ‘restraint of trade’ and the exceptions as provided in Contracts Act 1950. (4 marks)

(ii) State the agreements which are declared void by the Contracts Act 1950. (4 marks)

b. N/A Sale of Goods Act 1957.

c. Malaysian law can be classified into written and unwritten law. Explain the term ‘unwritten law’. (4 marks)
(MIA QE 2008/9 Q1, 20 marks)

(a) (i)
Earlier post on "Restrictive Covenents in Employment Contract" is a good reference here.

Retraint of trade is asking the promisee to NOT engage in certain trade for a return of certain consideration.

Definition by is:

"Restraint of trade means any activity which tends to limit trade, sales and transportation in interstate commerce or has a substantial impact on interstate commerce. Antitrust law prohibits most of these types of practices. The main antitrust law is the Sherman Act. To prevent trusts from creating restraints on trade or commerce and reducing competition, Congress passed the Sherman Antitrust Act in 1890. The Sherman Act aims to eliminate restraints on trade and competition. States also have laws against restraints of trade that have strictly local impact."

Generally, restraints of trade or marriage or employment are prohibited by law as it is against freedom of choice and anti competition.

S.28 Contracts Act 1950 Agreement in restraint of trade void.
'Every agreement by which anyone is restrained from exercising in a lawful profession, trade, or business of any kind, is to that extent void.'

Only in three conditions below that restraint of trade are allowed:

Saving of agreement not to carry on business of which goodwill is sold
Exception 1—One who sells the goodwill of a business may agree with the buyer to refrain 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.

For example:
Ali and Anthony are partners in a bakery. One day, Anthony wanted to quit because there are some family matters to settle and he is in need of money. Ali offers a handsome sum to Anthony to buys over the part of Anthony. However, the condition is that subsequently, Anthony cannot engage in similar bakery business in the same town. Anthony agreed to the proposal with condition that it is within a period of two years that he refrain from similar bakery business.

Here, there is goodwill of business reputation, and period of two years. Hence, it is a valid contract.

of agreement between partners prior to dissolution
Exception 2—Partners may, upon or in anticipation of a dissolution of the partnership, agree that some or all of them will not carry on a business similar to that of the partnership within such local limits as are referred to in exception 1.

For Example:
Ali and Anthony are partners in a bakery. One day, Anthony wants to retire and offers to sell off his shares of the business to Ali. Ali would have to pay a handsome sum to acquire the business, and he needs assurance that Anthony will not operate in the same business for reasonable time in the future.
or during continuance of partnership
Exception 3—Partners may agree that some one or all of them will not carry on any business, other than that of the partnership, during the continuance of the partnership. 

For example:
Ali and Anthony are partners in a bakery. However, Anthony is doing odd jobs in a biskut factory during his off time. This has caused the bakery being neglected. So, Ali asked Anthony that if he agrees to take full responsibility of the bakery and not go to work elsewhere if he (Ali) were to increase his share of the salary. Anthony agrees that he refrain from working elsewhere if Ali pays more.


S.28 Contracts Act, 1950. on 'restraint of trade', available at