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 goodwill is sold.—One who sells the goodwill 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 goodwill 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.
Legal Commentary & Landmark Judgments: Section 27
Section 27 of the Indian Contract Act, 1872 invalidates all agreements in restraint of trade, profession, or business, establishing a strict prohibition against post-employment non-compete covenants.
The sole statutory exception allows the seller of the goodwill of a business to agree with the buyer to refrain from carrying on a similar business within specified local limits, provided the court regards such limits as reasonable.
Employment contracts in India frequently contain non-compete clauses restraining employees from working for competitors for 1 to 2 years after leaving. Under Section 27 and settled Supreme Court jurisprudence, all post-termination non-compete clauses are completely void and unenforceable. Employers can lawfully protect only trade secrets, proprietary intellectual property, and prevent active customer solicitation.