Freedom of trade and commerce is a fundamental right. Under Section 27 of the Indian Contract Act, 1872, agreements that restrict a person's liberty to exercise a lawful profession, trade, or business are declared void.
1. The Strict Indian Rule
Section 27 states: "Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void."
Note the phrase "to that extent void." If a contract has several valid clauses and one clause restraining trade, only the restraining clause is void; the rest of the contract remains valid.
Unlike English Law (which allows "reasonable restraints" of trade), the Indian rule is absolute. In India, any restraint of trade—reasonable or unreasonable—is void, unless it falls under the statutory exceptions.
2. Statutory Exception: Sale of Goodwill
The only statutory exception listed in Section 27 is the Sale of Goodwill. If a person sells the goodwill of their business, the buyer can restrict the seller from opening a competing business within specified local limits, provided the restriction appears reasonable to the court.
3. Judicial Exceptions
Indian courts have carved out specific practical exceptions to protect business interests:
- Service Agreements (Negative Covenants): An employee can be restricted from working for a competitor during the term of their employment. However, any restriction preventing them from competing *after* they leave the job is completely void.
- Partnership Act Covenants: Under the Indian Partnership Act, partners can agree not to carry on a competing business while they are partners.