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Indian Contract Act, 1872 · Chapter II: Of Contracts, Voidable Contracts and Void Agreements · Void agreements

Section 27: Agreement in restraint of trade, void

In plain words

Every agreement that restrains anyone from carrying on a lawful profession, trade or business is void to that extent.

  • Exception: a person selling the goodwill of a business can agree with the buyer not to carry on a similar business within specified local limits, so long as the buyer carries on a like business there, if the court finds the limits reasonable.

A simplified explanation, prepared with AI assistance from the official text below and checked automatically against it for numbers and cross-references. The official text is the law and prevails over this summary. Not legal advice.

Read the in-depth explanation, with key Supreme Court rulings ↓

Official text

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.

1 * * * * *.

Source: India Code (indiacode.gov.in), the consolidated text published by the Legislative Department, Government of India. Text as updated on India Code on 15 October 2026. Words in square brackets [ ] were inserted or substituted by later amending Acts, and *** marks words omitted by an amendment. The amendment footnotes are not reproduced here. Official text on India Code.

Understanding this section

Section 27 makes void, to that extent, every agreement restraining anyone from carrying on a lawful profession, trade or business. Indian law is stricter than English law: there is no general test of reasonableness, and the only express exception is for the sale of goodwill.

No reasonableness test

In English law, a reasonable restraint can be valid. Under section 27, a restraint is void unless it falls within the statutory exception. Partial restraints are not saved merely because they are reasonable.

During versus after the contract

A negative covenant operating during the term of a contract, such as an employee agreeing not to work for a competitor while employed, is generally not a restraint of trade. A covenant restraining the person after the contract ends is void.

Commercial exclusivity

Exclusive dealing terms that facilitate distribution during a contract, such as a franchisee agreeing not to deal in competing products, are not restraints of trade.

The goodwill exception

A seller of goodwill can agree not to carry on a similar business within specified local limits, so long as the buyer carries on the business there, if the limits are reasonable.

Key Supreme Court rulings

  • Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. AIR 1967 SC 1098

    Negative covenants operative during the period of employment, when the employee is bound to serve exclusively, are generally not restraint of trade; restrictions after termination stand on a different footing.

  • Percept D'Mark (India) Pvt. Ltd. v. Zaheer Khan 2006 INSC 161

    A clause binding the cricketer after the agreement expired to give the agent a right to match other offers was a restraint of trade void under section 27; neither a reasonableness test nor a partial restraint principle applies.

  • Gujarat Bottling Company Ltd. v. The Coca Cola Co. 1995 INSC 441

    A condition restricting a franchisee from dealing in competing goods during the franchise, to facilitate distribution, was not a restraint of trade.

Common mistakes

  • Applying the English reasonableness test.
  • Upholding post-employment non-compete clauses.

Read with: Section 23 Indian Contract Act, 1872, Section 28 Indian Contract Act, 1872

Prepared with AI assistance as a study aid. Every ruling listed was checked against the Supreme Court's own judgments on this site, and quoted words appear in those judgments; linked names open the full judgment. Read the judgments themselves before relying on them. Not legal advice.

Supreme Court judgments citing the section 27