Enforceability of Agreements, and Restraint of Trade

Section 18 is the answer, and it is why MU's topic 1.4, which names only "Criminal and Civil", nonetheless requires three sections to answer properly.

Some words this chapter uses

Restraint of trade means a restriction on a person's freedom to carry on his trade, profession or business, or here to dispose of his labour.

Void means of no legal effect at all; the agreement never had force. Voidable means valid until one party elects to avoid it.

Notwithstanding anything contained in any other law for the time being in force is a non obstante clause. It means the section prevails over any other law that would otherwise apply, which here is principally section 27 of the Indian Contract Act 1872.

Valid and enforceable are different. A valid agreement is one the law recognises. An enforceable agreement is one a court will compel performance of, or award damages for breaking. Section 18 makes certain agreements valid without making all of them enforceable.

Entertain, in the proviso, means to receive and deal with a proceeding. A court that may not entertain a proceeding must decline it at the threshold.

Section 18: the main provision

Notwithstanding anything contained in any other law for the time being in force, an agreement between the members of a registered Trade Union shall not be void or voidable merely by reason of the fact that any of the objects of the agreement are in restraint of trade.

Take the four elements.

The non obstante clause. "Notwithstanding anything contained in any other law for the time being in force" is what lifts the agreement clear of section 27 of the Indian Contract Act 1872, and of anything else to the same effect.

The agreement must be between the members of a registered Trade Union. Two limits are in those words. It must be an agreement between the members, so an agreement between the union and an outsider is not within the section. And the union must be registered, which is the same condition as in sections 16 and 17.

"Shall not be void or voidable." Both words are used, so the agreement is neither a nullity nor liable to be set aside at the election of a party.

"Merely by reason of the fact that any of the objects of the agreement are in restraint of trade." The word merely does the same work here that "on the ground only" does in section 16. The section removes one ground of invalidity. It does not validate an agreement that is bad for some other reason: an agreement between members which was procured by fraud, or which is unlawful on some other ground, remains bad, and section 18 has nothing to say about it.

Note also "any of the objects". It is enough that one object of the agreement is in restraint of trade; the agreement does not fail because that object sits alongside others.

The proviso, and the distinction that carries the marks

Provided that nothing in this section shall enable any civil court to entertain any legal proceedings instituted for the purpose of enforcing or recovering damages for the breach of any agreement concerning the conditions on which any members of a Trade Union shall or shall not sell their goods, transact business, work, employ or be employed.

This is where most answers go wrong, and the error is always the same: treating the proviso as an exception that makes the agreement void again. It does not. Read what it actually says.

The proviso is about the COURT, not about the agreement. It says that nothing in the section shall enable any civil court to entertain proceedings of a certain kind. The agreement remains perfectly valid under the main provision; what the proviso withholds is the assistance of a civil court.

Which proceedings are withheld? Those instituted for the purpose of enforcing or recovering damages for the breach of an agreement concerning the conditions on which any members of a Trade Union shall or shall not:

• sell their goods;
• transact business;
• work;
• employ; or
• be employed.

So the position after section 18, stated in one sentence, is this: the union's rules are valid, and they are not enforced through the civil courts.

Why the law arranges it that way, because an examiner may ask. Two reasons, and both are worth a line.

The first is that the union does not need a court. A union enforces its rules by its own machinery: a fine or forfeiture under the conditions its rules must contain by section 7(g), or ultimately expulsion under its rules. Its sanctions are internal and immediate, and they work better than litigation ever could among members earning daily wages.

The second is that the law is unwilling to lend the machinery of the State to compel a person to work, or not to work, on particular terms. An order enforcing an agreement about the conditions on which a person shall or shall not work comes uncomfortably close to compelling labour, and a court will not make one. Validity is one thing; the coercive power of the court is another.

And notice the symmetry. The list in the proviso covers agreements about whether members shall work or be employed, and equally about whether they shall employ. It applies as much to a registered employers' association, which is a Trade Union under section 2(zl), as to a union of workers.

How section 18 fits with the proviso to section 2(zl)

These two provisions are designed to work together, and seeing the pair is what turns a competent answer into a complete one.

Section 18 lifts a union's internal agreements clear of the restraint of trade doctrine. Left alone, that could be exploited. Any two parties whose bargain contained a restriction on trade could describe themselves as a combination, register, and claim that section 18 saved a covenant that section 27 of the Contract Act would otherwise void.

The proviso to section 2(zl) closes that door, by providing that the provisions of Chapter III shall not affect three kinds of agreement: an agreement between partners as to their own business; an agreement between an employer and those employed by him as to such employment; and an agreement in consideration of the sale of the goodwill of a business or of instruction in any profession, trade or handicraft.

All three are ordinary commercial or employment bargains containing restrictions on trade. By putting them outside Chapter III, the Code makes sure that section 18 rescues the union's rules and nothing else. The validity of an employer's non-compete covenant is decided where it always was, by section 27 of the Indian Contract Act 1872, and the parties cannot improve their position by registering as a Trade Union.

The three immunities, side by side

MU's topic 1.4 is answered completely only by all three. This table is the answer in one place.

Read down the last row of that table and the theme of the whole of MU's topic 1.4 appears: every one of the three immunities is limited, and the limit is where the marks are.

A worked example

The facts. The Wada Packaging Workers' Union is registered. Rule 14 of its rules, adopted by the members, provides that no member shall accept work at a rate below the rate fixed by the general body, and that a member who does so shall pay a fine of five hundred rupees. Rule 15 provides that no member shall take up work at a unit where a strike called by the union is in progress.

Are rules 14 and 15 void as restraints of trade? No. Both restrict how the members may dispose of their labour, so section 27 of the Indian Contract Act 1872 would ordinarily bite. Section 18 provides that an agreement between the members of a registered Trade Union shall not be void or voidable merely by reason that any of its objects are in restraint of trade, and the non obstante clause lifts it clear of the Contract Act. The rules are valid.

A member, Nitin, takes work at a lower rate. The union sues him in the civil court for damages for breaking rule 14. The suit cannot be entertained. The proviso to section 18 provides that nothing in the section shall enable any civil court to entertain proceedings instituted for the purpose of enforcing, or recovering damages for the breach of, any agreement concerning the conditions on which members shall or shall not work or be employed. Rule 14 is exactly such an agreement.

So has the union any remedy at all? Yes, but not from the court. It has its own machinery. Section 7(g) requires the union's rules to provide the conditions under which a fine or forfeiture may be imposed on a member, and rule 14 provides for a fine of five hundred rupees. The union may impose it under its rules. If Nitin says the fine was imposed irregularly, his remedy is not a civil suit either: a dispute between a member and his union regarding the administration or management of the union goes to the Tribunal under section 22(1)(b), and section 22(2) bars every other civil court.

Change the parties. The Wada Packaging Owners' Association, an employers' body registered as a Trade Union under section 2(zl), agrees among its members that none will pay above a stated rate. Section 18 applies to it in the same way, because it speaks of an agreement between the members of a registered Trade Union, and the proviso covers agreements about the conditions on which members shall or shall not employ.

Now a different agreement altogether. Two brothers running a dyeing unit make a partnership deed by which each agrees not to carry on a competing business. They register themselves as a trade union and argue that section 18 saves the covenant from section 27 of the Contract Act. The argument fails at the door. The proviso to section 2(zl) provides that the provisions of Chapter III shall not affect any agreement between partners as to their own business. Chapter III does not reach the deed at all, so section 18 cannot be used on it, and its validity is decided by the ordinary law.

The same answer, for the same reason, if an employer tries to use section 18 to save a non-compete clause in a contract of employment, that being an agreement between an employer and those employed by him as to such employment, and equally if a seller of a business tries to use it on a goodwill covenant.

What this does NOT mean

It does not mean the agreement is unenforceable in every sense. It is valid, and the union enforces it internally through the fines, forfeitures and expulsion its rules provide for under section 7(g). What the proviso withholds is the civil court.

It does not mean the proviso makes the agreement void. Validity and enforceability are different questions, and the section answers them differently on purpose.

It does not save an agreement bad on some other ground. The word is merely: section 18 removes one ground of invalidity and no other.

It does not apply to an unregistered combination. Like sections 16 and 17, it speaks of a registered Trade Union.

It does not apply to agreements with outsiders. It covers an agreement between the members.

It does not rescue ordinary commercial covenants. The proviso to section 2(zl) keeps partnership agreements, employment agreements and goodwill covenants outside Chapter III entirely.

Limits, criticism and amendments

The section is a re-enactment. It reproduces the substance of section 19 of the Trade Unions Act 1926, repealed on 21 November 2025, so the position has been the same for a century and there is little Indian authority on it, which is itself a sign that it works: a provision that removes a ground of invalidity is rarely litigated, because nobody bothers to take a point that is bound to fail.

The proviso is criticised as leaving the union without a remedy. That criticism is overstated once the union's own machinery under section 7(g) and section 22 is taken into account, but it has force where a member simply leaves the union after breaking the rule, since expulsion is then no sanction at all.

The section is silent about the union's agreements with the employer. A settlement with an employer is not an agreement "between the members", so section 18 does not touch it; settlements and awards are dealt with separately, in sections 57 and 58, and belong to Module II.

And the drafting of the proviso is dense. Five verbs, "sell their goods, transact business, work, employ or be employed", carry the whole of its scope, and a reader who skims them will not notice that the section covers employers' associations as squarely as it covers unions of workers.

Quick revision

• Section 18, main provision: notwithstanding any other law, an agreement between the members of a registered Trade Union shall not be void or voidable merely by reason that any of its objects are in restraint of trade.
• The non obstante clause lifts it clear of section 27 of the Indian Contract Act 1872.
• The proviso withholds the civil court, not the validity: no civil court may entertain proceedings to enforce, or recover damages for the breach of, an agreement concerning the conditions on which members shall or shall not sell their goods, transact business, work, employ or be employed.
• Valid but not enforceable through the courts. The union enforces internally: fines and forfeitures under section 7(g), and a dispute about administration or management goes to the Tribunal under section 22(1)(b), with civil courts barred by section 22(2).
• The proviso to section 2(zl) keeps three ordinary bargains outside Chapter III entirely: partners' agreements as to their own business; agreements between an employer and those employed by him; and agreements in consideration of the sale of goodwill or of instruction in a profession, trade or handicraft. So section 18 rescues the union's rules and nothing else.
• All three immunities require a registered union, and all three are limited: "on the ground only" in 16, "unless an agreement to commit an offence" in 17, "merely by reason" plus the proviso in 18.

Test yourself

1. What problem does section 18 solve? That a trade union's rules are, on their face, agreements in restraint of trade. The members agree not to work below a rate, not to accept unapproved terms, and to stop work when the union decides, each of which restrains their freedom to dispose of their labour. Under section 27 of the Indian Contract Act 1872 such agreements would be void, which would leave the union unable to hold its own members to anything, dissolving the combination from within. Section 18 provides that such an agreement between the members of a registered Trade Union shall not be void or voidable merely because any of its objects are in restraint of trade.

2. State the proviso and explain precisely what it takes away. The proviso is that nothing in the section shall enable any civil court to entertain any legal proceedings instituted for the purpose of enforcing or recovering damages for the breach of any agreement concerning the conditions on which any members of a Trade Union shall or shall not sell their goods, transact business, work, employ or be employed. It takes away the assistance of the civil court, not the validity of the agreement. The agreement remains valid under the main provision; what the union cannot do is sue on it.

3. A member breaks a union rule about accepting work below the agreed rate. What can the union do? It cannot sue him in a civil court, because the proviso to section 18 prevents a civil court from entertaining proceedings to enforce, or recover damages for the breach of, an agreement concerning the conditions on which members shall or shall not work. It can use its own machinery: section 7(g) requires the union's rules to provide the conditions under which a fine or forfeiture may be imposed on a member, and the rules may also provide for expulsion. If the member disputes the way the union has proceeded, that is a dispute regarding the administration or management of the union, which goes to the Tribunal under section 22(1)(b), civil courts being barred by section 22(2).

4. Can an employer use section 18 to save a non-compete clause in a contract of employment? No. The proviso to section 2(zl) provides that the provisions of Chapter III shall not affect any agreement between an employer and those employed by him as to such employment. Chapter III, and therefore section 18, does not reach such an agreement at all, and its validity falls to be decided by the ordinary law, principally section 27 of the Indian Contract Act 1872. The same answer applies to a partnership agreement as to the partners' own business and to a covenant given in consideration of the sale of goodwill.

5. Why is it wrong to say the proviso makes the agreement void? Because validity and enforceability are distinct. The main provision makes the agreement valid by removing one ground of invalidity. The proviso is addressed to the court, saying that nothing in the section shall enable a civil court to entertain certain proceedings. An agreement that a court will not enforce is not thereby a nullity, and the union's internal sanctions operate on it perfectly well.

6. MU's topic says "Immunities in trade disputes: Criminal and Civil". How many sections does a complete answer need, and why? Three. Section 17 answers the criminal impediment, the offence of conspiracy. Section 16 answers the civil impediment in tort, the suit for inducing a breach of the contract of employment and for interference with trade or business. But there was a third impediment, and it was neither criminal nor tortious: the rule that an agreement in restraint of trade is void, which made the union's own rules unenforceable and so destroyed it from within. Section 18 answers that, and an answer that gives only two immunities has left out the one that attacked the union internally.