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

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

About this summary

A plain-English summary of what this provision requires, not a reproduction of it and not legal advice. Read alongside the bare Act, and take advice on anything turning on your own facts.