Section 27 of Indian Contract Act

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.

Final Thoughts

Introduction

Section 27 of the Indian Contract Act, 1872, deals with agreements that restrict a person from practicing a lawful profession, trade, or business. Such agreements are generally considered void because they restrain an individual’s freedom to work and earn a livelihood.

Meaning of Restraint of Trade

A “restraint of trade” means any contract or agreement that limits a person’s right to carry on their profession, trade, or business. For example, if a person agrees not to work in a certain field or place, that is a restraint on their trade.

Provisions of Section 27

The section clearly states:

• General Rule: Every agreement that restrains a person from carrying out any lawful profession, trade, or business is void (i.e., not legally enforceable).
• Exception: If someone sells the goodwill of their business, they may agree not to carry on a similar business within a certain area for a certain time, but only if the buyer or someone deriving title from the buyer continues the business there. This exception must be reasonable.

Why Agreements in Restraint of Trade Are Void

Such agreements are void because they go against public policy. The law protects free trade and individual freedom to work. Restricting a person’s right to earn can harm both the individual and society by limiting competition and innovation.

Exception Under Section 27

When someone sells the goodwill of their business (the reputation or customer base), the buyer purchases not just physical assets but also the customer connections. To protect the buyer’s interests, the seller may agree not to start a similar business in the same area, so the goodwill remains valuable.

Explanation of the Exception

• The seller agrees to refrain from competing in the same business locally.
• This agreement must be limited in time and geographical area.
• The restriction applies only while the buyer or their successor carries on the business.
• If the restriction is too broad or unreasonable, it will be void.

Reasonableness Test

The court will decide if the limitation is reasonable by considering:

• The nature of the business sold.
• The area where the restriction applies.
• The duration of the restriction.
• Whether the restriction is necessary to protect the buyer’s goodwill.

If the court finds the terms reasonable, the agreement is valid; otherwise, it is void.

Conclusion

Section 27 of the Indian Contract Act ensures free trade and protects individuals from unfair restrictions. However, it balances this freedom by allowing reasonable restrictions when goodwill of a business is sold, safeguarding buyers’ investments. This section promotes fair competition while respecting contractual freedom within limits of reasonableness.