Closed Shop or Agency Shop Agreements

Trade Union is a voluntary association of employees. Considerable number of employees can form a trade union; and they are required to abide by the Rules of the Association. For every new member who joins, the relationship between new member and union is contractual in nature [2] , where the new member agrees to abide by the rules of association [3] and union agrees to give the benefit of union, and the member can be expelled from the union on the breach of that contract.

Sometimes Trade Union creates monopoly over the employment, where the employer has to take workers from the union, it is called closed shop [4] . Lord Denning in Edwards v SOGAT [5] observed that ‘when a trade union operates a closed shop...for that means that no man can become employed or remain in employment with a firm unless he is a member of the union’. Justice B.N. Banerjee in Tulsidas Paul v Second Labour Court of West Bengal [6] rightly observed three things about the nature of closed shop, ‘1) a worker must be a member of a named trade union before he can be considered for employment, the membership being the only key to employment, 2) the agreement can impose trade union membership as a condition of employment, and 3) the employer must use a trade union as the sole agency for placing workers in his employment’ [7] .

Although section 19 [8] of the Trade Unions Act, 1926 has an overriding effect on the Indian Contract Act, 1872 (specially section 27 [9] ) [10] where the trade union’s agreement has protection from test of restraint of trade, but it was observed in Tulsidas Paul v Second Labour Court of West Bengal [11] that the closed shop agreement does not have enforceability under the Trade Unions Act, 1926; in other words, it does not have the protection of section 19 of Trade Union Act from the Indian Contract Act. This observation of High Court of Calcutta opens the discussion that whether the closed shop agreement is valid under the contract laws, because it does not have the protection under the Section 19 of Trade Union Act. So the contractual validity of closed shop agreement should be tested under Contract Laws.

Restraint of Trade and Closed Shop

Although all contracts put some restraint over either parties or both parties to contract [12] , section 27 of Indian Contract Act, 1872 makes such agreement void which restrains from exercising a lawful profession, trade or business. English Court also recognizes that restraint of trade makes the agreement void, if it is found unreasonable.

Closed shop agreement also puts some restrain over employment, and it is necessary under this system that the employer should take employees from the closed shop union. Lord Denning in Faramus v Films Artistes’ Association [13] found that the closed shop agreement amounts to unreasonable restraint of trade. There is need to check whether this agreement would be void under the Indian Contract Act section 27.

Section 27 of the Indian Contract Act says “every agreement, by which any one is restricted from exercising a lawful profession, trade or business of any kind, is to that extent void" [14] . This section clearly shows that parties to the contract should not suffer the unfair and unduly restriction on personal freedom [15] . Main elements of this section is that as interpreted by the courts and scholars are that, to make the agreement void under section 27, there should be ‘total bar or restrain’ [16] or ‘unconscionable or excessively harsh or unreasonable or one-sided’ [17] or ‘bar on future liberty’ [18] , or ‘bar on personal freedom’, and agreement is not found in the ‘advancement of trade’ [19] or in the ‘promotion of trade’ [20] . Then the test would be that, whether the closed shop agreement would come under the above observation of courts?

Closed shop agreement does not ‘totally bar’ the employer to do his business or select any worker and he is free to do his trade or business. What the closed shop agreement does that, it only put the restriction employer that they can select worker from the trade union. This also cannot be considered as unconscionable or one-sided, because closed shop does not have the protection and enforceability under section 19 of the Trade Union Act 1926, they are free to reject such type of agreement. This cannot be considered as the total restraint of trade. Employer is free to accept the terms which has the negative covenants in nature.

Another aspect of test is that whether the closed shop agreement are advancement of trade or promotion of trade Although in the Madhub Chunder v Rajcoomar Doss [21] , Couch CJ observed that section 27 is indented to apply even on partial restrain, but the all restrain cannot qualify for the section 27, as franchise agreement, was held valid in Gujarat Bottling Co Ltd v Coca Cola Co [22] because it was found that the negative covenant in this case is intended for the advancement of trade [23] or promotion of trade [24] .

But there can be other line of argument that employer has to right to select the employee, [25] and this right is related with right to carryon trade. Then in that situation the employer can challenge the closed shop agreement in contravention of section 27.

So the test of total bar is depend on the term of closed shop agreement, and is can be void or valid, which would be depend on the circumstance of case.

Closed Shop as Restraint of Trade from the Perspective of Employee

Lord Denning in Faramus v Films Artistes’ Association [26] observed that the closed shop agreement amounts to unreasonable restraint of trade. This could be true, but essentially the closed shop agreements are the agreement between the trade union and the employee; and the employee (who is not the part of trade union) would be a stranger to the contract and doctrine of privity of contract cannot allow the stranger to challenge the closed shop agreement.

But employee can challenge the agreement between the employee and him [27] . So the test of restraint of trade that whether the employment agreement results in ‘total bar or restrain’ or ‘unconscionable or excessively harsh or unreasonable or one-sided’, and agreement is not in the advancement of trade or the promotion of trade? The terms of the employment agreement may result into the termination of job or there can be ‘bar on future employment’, if the employee is not taken from the trade union and. So the element of unconscionable bargain and total restraint of trade are present in the closed shop.

On conclusion one can say that the closed shop agreement (between trade union and employer) is not a void agreement, but the impact of such closed shop agreement on the terms of contract of employment may make the contract of employment void to extent where the terms are in the restraint of trade.

Free Consent Theory and Closed Shop

Although till now closed shop agreement was not tested against the principle of free consent by the court, but in Lee v The Showmen’s Guild [28] , Lord Denning found that in closed shop agreement the employee has no choice but to be a member of a particular union. Justice B.N. Banerjee in Tulsidas Paul v Second Labour Court of West Bengal [29] also observed that such agreements are coercive in nature [30] . From the above two case it is clear that closed shop agreement has some amount of coercion, so there is a need to check that whether such agreement amounts to coercion (or economic duress or unconscionable bargain).

Closed Shop Agreement as a Economic Duress on Employment Contract

Economic Duress has been established in USA and UK; [31] and in India economic duress was discussed in Dai-ichi Karkaria Pvt Ltd v ONGC [32] . Black Law Dictionary defines economic duress as “an unlawful coercion to perform by threatening financial injury at a time when one cannot exercise free will" [33] . In the economic duress the victim has no option or alternative but to accept the terms of the contract due to economic or commercial pressure [34] . High Court in Dai-ichi Karkaria Pvt Ltd v ONGC observed that now India has started to bring the Economic Duress within the scope of section15; and under this situation, according to R.G. Padia, the effect of economic duress would be voidable [35] .

Closed Shop Agreement, which is basically an agreement between trade union and employer, put the obligation on employer that he has to take employees from the closed shop trade union. To prove the closed shop agreement is influenced by economic duress, one has to establish that employer has no option, but to accept the term of trade union, which would be depend on the circumstance. If the situation is so harsh that all workers, related to that industry, become a member of closed shop trade union, and if the employer does not sign closed shop agreement, then there would be chance that he would not any get the employee. So there would be an economic pressure on the employer to sign the contract.

But even if closed shop agreement would be signed under the economic duress, the employee would be third party to closed shop agreement and he cannot challenge the validity of contract. So, employer has to take initiative to the challenge the validity of the closed shop agreement for his employee.

But he can challenge his service contact. Under the closed shop arrangement, the employee has ‘no option’ but to sign the agreement. This ‘no option’ hinders the ‘free consent’ and it may result in economic duress and unconscionable bargain, which ultimately fall under the provision of coercion in the Contract Act.

Section 23 and Closed Shop

Closed shop agreement was also found to be against public policy in English Courts. Lord Denning in Faramus v Film Artistes’ Association [36] also observed that closed shop agreements are contrary to public policy. In Indian Contract Act, 1872 section 23 speaks about public policy and freedom of contract, which may be given broader meaning to cover closed shop agreement.

Section 23 of the Indian Contract Act, 1872, talks about ‘what consideration and object are lawful and what are not’; and Section 24 makes agreement void, if the consideration of the agreement is unlawful. Under section 23 the consideration, which is ‘immoral’ or ‘opposed to public policy’, will be illegal consideration. Supreme Court in Central Inland Water Transport Corp Ltd v Brojo Nath Ganguly [37] observed that opposed to public policy are those matter which apprehend public good and public interest. According to Twelfth Edition of Mulla Indian Contract and Specific Relief Act, ‘agreement which affect personal liberty’ [38] , or ‘agreement tending to create monopolies’ [39] , or ‘unconscionable agreement’ [40] , or ‘economic duress’ [41] can be the considered as illegal by the court under the public policy.

In the terms of closed shop system may affect personal liberty of employer and employee. But to the test of ‘agreement which affect personal liberty’, there is need to see that whether such consideration or condition of such agreement is so harsh that the one party of the contract come to a situation as slave of other. The close shop agreement between the employer and trade union may limit the interest of employer in such a way that employer would depend only on the trade union for the supply of labour. Whereas in the case of employment contract between employee and employer, which has the impact of trade union, may make the employee slave of trade union rather than a member of it. Because in the closed shop system the employee can get job without being a member of close shop trade union; and if he become a member in order to get job, the trade union may impose any command or demand which may be harsh in nature and which may be not liked by the employee; and if he refuse to fulfil such command or demand and if he is thrown out of the trade union, he may lose his job, which make a compulsion on the part of employee to stick to the trade union, and this situation would make the employee a slave of trade union.

The test of ‘agreement tending to create monopolies’ is clearly found similar to the closed shop agreement. This agreement creates the monopoly over the employment and it also affects the fundamental right to carry on trade or business (Article 19(1)(g) of the Constitution). So employer can challenge the agreement on this ground.

It can also be said that the closed shop agreement amount to economic duress for the employment contract between the employer and employee, because the term of employment contract make compulsion on the employee to stick to the closed shop trade union. Employee has no choice but accept the agreement of employment.

In addition to all above test, there would be another test that whether these matter apprehends public good and public interest or not. If the particular circumstance pass any of above test and also pass the public good test and public interest test, then the court may held it as oppose the public policy, which make the agreement void.

Closed Shop Agreement and the Collateral/Ancillary Employment Contract

In above chapters the doctrine of privity of contract clearly indicates the employee would be stranger to the closed shop agreement, and he cannot challenge the agreement in the case of void or voidable agreement. But there can be some counter agreement for that if the agreement is found illegal.

In England, the Unfair Contract Terms Act, 1977 section 10 say

“A person is not bound by any contract term prejudicing or taking away rights of his which arise under, or in connection with the performance of, another contract, so far as those rights extend to the enforcement of another’s liability which this Part of this Act prevents that other from excluding or restricting."

This provision, although would not be applicable in India, but applicable in England, can be used as contention by the employee. The employee may say that the closed shop agreement is between trade union and employee, and the employment agreement is ancillary to this agreement, so even if he cannot challenge the closed shop agreement, he can challenge his employment agreement, if the earlier agreement is intended to take away his right [42] .

In India similar technique is used by the Indian Supreme Court in Khardah Co Ltd v Raymon [43] and in Firm of Pratapchand Nopaji v Firm of Kotrike Venkatta Setty [44] under section23 of the , where it was held that if one contract is void as being forbidden by law, every ancillary or collateral agreement which are would also be invalid. [45] Under this basis if the employee can show that the closed shop agreement is forbidden by law under the section 23 of Indian Contract Act, then the employee employer contract would also be void. He can use the doctrine of severability to save the other terms of contract which is not void and helpful for him, as in the Central Inland Water Transport Corp Ltd v Brojo Nath Ganguly [46] the Supreme Court save the other terms of contract and struck down only those part which is void under the section 23.

Conclusion

The closed shop agreement are found to be void under the tests of section 23; whereas agreements under section 27 is slightly weaker, the agreement is depend on the circumstance of the case to consider that whether the restrain is of the nature of ‘total bar’ or not. But the economic duress under the section 15, makes the closed shop agreement voidable.

It is also clear that the employee is the stranger to the closed shop agreement because he is not the party to contract, be he can very well defend his employment if it is hampered by the closed shop agreement.