Section 27 of the Indian Contract Act, 1872

 

Section 27 of the Indian Contract Act, 1872:

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📜 Section 27 — Agreement in Restraint of Trade

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📝 What does Section 27 say?

• Section 27 of the Indian Contract Act, 1872 states:

“Every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, is to that extent void.”

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📌 Meaning

• Any contract or agreement that restricts a person from practicing their lawful trade, profession, or business is void and unenforceable by law.

• The law favors freedom to carry on lawful business or profession.

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⚖️ Exceptions

• The law allows reasonable restrictions in certain contracts, like:

  • Sale of goodwill of a business (non-compete clauses for a reasonable period and area)

  • Employment contracts with reasonable restrictions on working with competitors for a limited time and area (subject to judicial scrutiny)

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💡 Purpose

• To protect trade liberty and prevent monopolies.

• To ensure that contracts do not unfairly restrict personal freedom to earn a livelihood.

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🧩 Examples

• An agreement that someone will not carry on a business anywhere in India forever = void.

• A seller of a business agreeing not to start the same business within a certain city for 2 years = generally valid if reasonable.

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🧑‍⚖️ Judicial Interpretation

• Courts examine whether the restriction is reasonable in terms of time, place, and scope.

• Unreasonable restrictions are held void under this section.