Contract Law

Percept D'Mark (India) Pvt. Ltd. v. Zaheer Khan

(2006) 4 SCC 227

Facts

Cricketer Zaheer Khan entered into a management and promotion agreement with Percept D’Mark.
Percept was authorised to manage his endorsements, advertisements and commercial appearances for a specified contractual period.
The agreement contained a right of first refusal clause.
Under that clause, after the original agreement expired, Zaheer was required to:
disclose any third-party offer received by him;
give Percept an opportunity to match that offer;
refrain temporarily from contracting with the third party.
After expiry of the agreement, Zaheer entered into negotiations with another management agency.
Percept sought to enforce the right of first refusal and restrain him from dealing with the new agency.
Zaheer argued that the clause operated after the contract had ended and restricted his ability to carry on his profession and commercial affairs.

Whether a right of first refusal operating after expiry of the management agreement was void under Section 27 as a restraint of trade.

Section 27 adopts a strict rule: every agreement restraining a lawful profession, trade or business is void to the extent of the restraint, subject to the statutory exception concerning sale of goodwill.
A negative covenant operating during the subsistence of a contract may be valid.
A restrictive covenant extending beyond termination or expiry ordinarily constitutes restraint of trade.
Indian law does not generally adopt the wider English approach of enforcing a restraint merely because it appears reasonable.
The form of the restriction is not decisive. A right of first refusal may amount to restraint where it restricts freedom to contract after expiry.

Percept argued that Zaheer was not absolutely prevented from entering another agreement.
It claimed that he was only required to offer Percept an opportunity to match the third-party terms.
The Supreme Court examined the practical effect of the clause.
Even after the management relationship ended, Zaheer would remain obliged to:
disclose negotiations with competitors;
delay accepting another offer;
give the former manager a preferential opportunity.
This burden limited his commercial freedom after expiry.
The clause was therefore not merely an administrative mechanism.
It continued Percept’s control over Zaheer’s professional endorsements beyond the contractual term.
The Court distinguished Golikari:
in Golikari, the covenant operated while the employment contract was still alive;
here, the restriction became operative after the agreement had expired.
Percept could have protected itself by negotiating a longer contractual term.
It could not achieve the same result indirectly through a post-expiry restriction.
The Court therefore treated the clause as a restraint of trade and refused enforcement.

The Supreme Court held that the post-contractual right of first refusal was void under Section 27.
Percept was not entitled to restrain Zaheer from engaging another agency after expiry.
Use this case for: post-termination restrictions, including rights of first refusal that restrict future professional dealings, are ordinarily void under Section 27.