Section 27 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 27 says every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind is void to that extent. Its single exception, for one who sells the goodwill of a business, lets the seller agree not to carry on a similar business within specified local limits. The section is the text readers look to first when they see a non-compete clause.
"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: 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 there, provided the limits appear to the Court reasonable, regard being had to the nature of the business. The text has no illustrations.
The general rule
The section reads: "Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void."
| Part | Text |
|---|---|
| Subject | "Every agreement" |
| Restraint | "by which any one is restrained from exercising" |
| What is restrained | "a lawful profession, trade or business of any kind" |
| Effect | "is to that extent void" |
Three points follow from the words.
- "Of any kind". The section is not limited to particular trades or professions.
- "Lawful". It protects the exercise of a lawful profession, trade or business.
- "To that extent void". The agreement is void only to the extent of the restraint. This differs from section 24, which says the agreement is void; see our article on section 24.
If you are drafting non-compete or confidentiality terms for employees, partners, vendors or buyers, our NDA and non-disclosure agreement service can help you build protection around what the Act allows.
What the text does not say
Section 27 does not mention employment, partnership or franchise agreements, or restraints that apply only during a contract, or only for a limited time. It does not say whether a restraint is void if it is partial. Those points have been worked out in case law, which is outside this article. We read only the words: a restraint from exercising a lawful profession, trade or business is void to that extent.
Exception 1: sale of goodwill
The text of the exception, in parts:
"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."
| Element | What the text requires |
|---|---|
| Who | One who sells the good-will of a business |
| With whom | The buyer |
| What he may agree | To refrain from carrying on a similar business |
| Where | Within specified local limits |
| For how long | So long as the buyer, or any person deriving title to the good-will from him, carries on a like business therein |
| Test of limits | The limits must appear to the Court reasonable, regard being had to the nature of the business |
So the exception has four built-in controls: it applies only on a sale of goodwill, the limits must be local and specified, the restraint lasts only while the buyer (or his successor in title) carries on a like business there, and the Court must regard the limits as reasonable.
The footnote
After Exception 1 the source prints asterisks with a footnote: "Exceptions 2 and 3 rep. by Act 9 of 1932, s. 73 and the Second Schedule." So those two exceptions no longer form part of the text. The footnote does not say more, and we do not describe what the repealed exceptions contained.
Where non-compete clauses sit
Many contracts contain non-compete clauses: in employment, in service agreements, in a sale of a business and between co-founders. On the words of section 27, such a clause is an agreement by which a person is restrained from exercising a lawful profession, trade or business, and is void to that extent, unless the sale-of-goodwill exception applies. The section does not itself sort out which kinds of non-compete clause fall within the section, and this article does not claim to. What you can do is read your clause against the text and take advice.
Section 27 compared with its neighbours
Sections 26 and 28 follow the same pattern of declaring a kind of agreement void; see section 26 and section 28.
| Section | Subject | Extent |
|---|---|---|
| 26 | Restraint of marriage | "is void" |
| 27 | Restraint of trade | "to that extent void" |
| 28 | Restraint of legal proceedings | "void to the extent" |
A modern example (ours, not the Act's)
Bhaskar sells his small catering business, including its name and customer list (the goodwill), to Chitra for an agreed price. In the sale agreement, Bhaskar promises not to open another catering business within the two municipal wards where the business operates, so long as Chitra or her successor carries on a catering business there. That fits Exception 1: a seller of goodwill, agreeing with the buyer, to refrain from a similar business, within specified local limits, for as long as the buyer carries on a like business, and the limits must appear reasonable to the Court, regard being had to the nature of the business.
Now change the facts. Chitra also requires Bhaskar to promise that he will not work in any food-related business anywhere in India for his lifetime. That goes beyond a similar business within specified local limits. Read with the general rule, an agreement restraining him from exercising a lawful business is void to that extent, subject to whether it falls within the exception.
What can the parties change?
The parties cannot agree around the general rule: a restraint is void to that extent, whatever the contract says. The only room the Act gives is Exception 1, and it sets its own limits on what can be agreed. Within that, the parties choose the local limits and the business covered; the Court must regard the limits as reasonable. Confidentiality and non-disclosure terms restrain the use of information rather than the exercise of a trade; whether a particular clause is a restraint of trade is a question of drafting and law beyond the text of section 27.
Practical points
- Do not copy a standard non-compete. Read it against section 27.
- In a business sale, tie the restraint to the goodwill. State the local limits and the business, and keep them reasonable.
- Separate confidentiality from non-competition. Clauses protecting confidential information are different from clauses stopping someone from carrying on a business.
- Take advice on the wording. The extent to which a clause survives is for the Court.
Need help with non-compete and confidentiality terms?
If you want to protect your business information, customers or goodwill without writing a restraint that the Act treats as void, our NDA and non-disclosure agreement team can help you draft terms that are targeted and clear.
Key takeaways
- Every agreement restraining anyone from a lawful profession, trade or business of any kind is void to that extent (s.27).
- The one exception in the text is for a seller of goodwill, who may agree to refrain from a similar business within specified local limits.
- The limits must appear reasonable to the Court, regard being had to the nature of the business.
- Exceptions 2 and 3 were repealed by Act 9 of 1932, as the footnote says.
Read next
- Section 26: agreement in restraint of marriage
- Section 28: restraint of legal proceedings and arbitration saving
- Void and voidable contracts: sections 24 to 30
Disclaimer: Based on the text of the Indian Contract Act, 1872 as consulted on 1 October 2026. Many questions under this Act turn on case law and on the wording of the particular contract, which this article does not cover. It is general information, not legal advice; check the official text and take advice before acting.