Chapter II - Of Contracts, Voidable Contracts and Void Agreements
Section 27
Section 27: Restraint of trade
Section 27 states the central rule against agreements restraining a lawful profession, trade or business, to the extent of the restraint. It contains a specific exception concerning a seller of business goodwill.
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Need advice on Section 27?
This article is for general information. Refer to the Indian Contract Act, 1872 official text for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
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.
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Rule and business relevance
The goodwill exception permits the seller to agree with the buyer not to carry on a similar business within specified local limits while the buyer or successor in title carries on a like business there, if the limits appear reasonable to the court having regard to the business's nature.
Limits and related provisions
Do not assume that adding a 'reasonable' label validates every employment or commercial non-compete. The goodwill exception has its own sale, similarity, locality and continuing-business conditions. Other statutory exceptions, including applicable partnership provisions, and distinctions between different kinds of covenants require separate advice.
Hypothetical business example
Hypothetical: a business buyer proposes a restraint after purchasing goodwill. The parties identify the actual goodwill sale, similar activity and local limits instead of copying a sweeping worldwide prohibition into the agreement and assuming it is valid.
Practical decision flow
Identify the activity restrained, when the restraint operates and the commercial transaction supporting it.
Check whether the goodwill exception or another applicable statutory provision actually applies.
Draft and assess the scope with legal advice rather than relying solely on a general reasonableness recital.
Check the applicable legal framework
This guide explains the central provision. Applicable State amendments, the agreement, transaction date and other governing laws can affect its application. Check the current legal framework before relying on it for a commercial decision.
Practical checklist
Do
- Identify the activity restrained, when the restraint operates and the commercial transaction supporting it.
- Check whether the goodwill exception or another applicable statutory provision actually applies.
- Draft and assess the scope with legal advice rather than relying solely on a general reasonableness recital.
Avoid
- Do not assume that adding a 'reasonable' label validates every employment or commercial non-compete. The goodwill exception has its own sale, similarity, locality and continuing-business conditions. Other statutory exceptions, including applicable partnership provisions, and distinctions between different kinds of covenants require separate advice.
Glossary
- Restraint of trade
- The contractual restriction on a lawful profession, trade or business addressed by Section 27.
- Goodwill sale exception
- The specific qualified exception for the person selling the goodwill of a business.
Frequently asked questions
Does calling a restraint reasonable always make it valid?
No. The statutory basis and all relevant conditions must be satisfied.
Does the goodwill exception allow any activity to be prohibited?
It addresses a similar business within specified local limits and the other stated conditions.
Should employment and goodwill-sale clauses be treated identically?
No. Their legal setting and the applicable provisions require separate assessment.
Need help applying this provision to your situation?
Contact BizeneedLast updated 10 October 2026