Section 27 of the Indian Contract Act, 1872 — Restraint of Trade Is Void

The text of Section 27

27. Agreement in restraint of trade, void.— Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. Exception 1.— Saving of agreement not to carry on business of which good-will is sold.— One who sells the good-will of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the good-will 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.

What the section does

• Every agreement by which a person is restrained from exercising a lawful profession, trade or business of any kind is, to that extent, void.
• The single exception in the section is the sale of goodwill: a seller may agree not to carry on a similar business within specified local limits, so long as the limits are reasonable having regard to the nature of the business.
• Indian courts have consistently read the section as making post-employment non-compete restraints void, in contrast to jurisdictions where reasonableness saves them.
• A restraint that operates during employment stands on a different footing from one that operates after it ends, and confidentiality and non-solicitation obligations are assessed on their own terms rather than as automatic casualties of the section.

Effect

Void to that extent. The rest of the agreement can survive; the offending restraint does not.

Where people go wrong

• Copying a non-compete from a US or UK precedent, where a reasonableness test can save it.
• Assuming a long notice period or garden leave has the same problem — it does not necessarily, because it operates during employment.
• Dropping confidentiality clauses because the non-compete failed. They are separate obligations.
• Relying on the goodwill exception in an employment contract. It applies to the sale of a business, not to an employee leaving one.

Common questions

Is a non-compete enforceable in India after employment ends?

Generally no. Section 27 makes an agreement restraining a person from exercising a lawful profession, trade or business void to that extent, and Indian courts have applied it to post-employment non-competes without a reasonableness saving.

What is the exception to section 27?

The sale of goodwill. A seller of the goodwill of a business may agree to refrain from carrying on a similar business within specified local limits, provided those limits are reasonable given the nature of the business.

Are confidentiality and non-solicitation clauses also void?

They are assessed separately. A properly drawn confidentiality obligation protects information rather than restraining trade, and is not void merely because a non-compete in the same agreement is.

Act on this

• Section 73 — what a breach is worth
• Non-disclosure agreement template

• Section 73 — what a breach is worth
• Non-disclosure agreement template

Other provisions

• Section 73, Indian Contract Act
• Section 2(y), Code on Wages
• Section 53, Code on Social Security
• Section 53, Code on Social Security
• Section 35, Indian Stamp Act
• Section 50, Central Goods and Services Tax Act

• Section 73, Indian Contract Act
• Section 2(y), Code on Wages
• Section 53, Code on Social Security
• Section 53, Code on Social Security
• Section 35, Indian Stamp Act
• Section 50, Central Goods and Services Tax Act

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Maintains the law explainers, calculators, templates and blog posts on vidhisar.in: checks them against the statute text and updates them when the law changes. Errors and changes in the law can be reported to legal@vidhisar.in.

• Official text: The Indian Contract Act, 1872 (India Code)
• Report an error or a change in the law: legal@vidhisar.in

About this summary

The section in its own words, with a plain-English explanation of what it requires. Not legal advice: take advice on anything turning on your own facts.