Legal Guide

Everything about Section 27 of the Indian Contract Act

by ezyLegal Editor · 1 min read

section 27 of indian contract act

Section 27 of the Indian Contract Act declares invalid any m that prohibits two or more parties from operating in a legal trade or commercial profession. 

The court determines that prohibiting one or more individuals from working in certain authorized businesses is unjust and violates an individual’s basic right and freedom to choose the sort of career he desires to pursue. The court ruled that the restriction of trade in a master service agreement is irrational and unenforceable since it restricts one’s commercial interests.

For instance, assume “Rounak” operates a legal company in the heart of a city. Rounak was the first person in his neighborhood to establish a Chinese restaurant. Directly across the street from Rounak’s, ‘Rohit’ established a second Chinese restaurant. 

If Rounak prevents Rohit from running his restaurant because Rounak opened his restaurant earlier, this is known as a restriction of trade, which the court deems unconstitutional since it is arbitrary and unjust to the other company. Section 27 of the Indian Contract Act addresses this trading restriction.

Context of Section 27 of the Indian Contract Act

  • In interpreting Section 27, the Indian High Courts determined that the ‘reasonable’ criterion and the ‘principle of constraint’ do not apply to cases covered by Section 27 of the Indian Contract Act, unless they fall within certain exceptions. 
  • The first draft of the law commission did not contain any trade restrictions.
  • However, only Section 27 of the Indian Contract Act of 1872 was added throughout the enactments. This section’s major objective is to preserve Indian trade. 
  • After analyzing the difficulties between market freedom and contract freedom, the Law Commission has added Section 27 to the Indian Contract Act to address the issue of trade restriction, although it was absent from the initial draft.
  • The purpose of legally dissolving these trade restrictions in master service agreements is to increase market competition since the supremacy of contract freedom discourages competitive agreements that prevent competitors from using innovative deals within the contract’s constraints. 
  • In its thirteenth report, the law commission recommended adding Section 27 of the Indian Contract Act so that the laws are revised to permit restrictions and therefore any contracts in restraint of commerce, whether broad or partial, that were in the best interests of the parties and the public. 

What is Section 27 of the Indian Contract Act of 1872 for?

  • The intent of Section 27 of the Indian Contract Act of 1872 is to make any contract illegal that inhibits trade or business. 
  • According to Section 27 of the Indian Contract Act, any service contract that prohibits or limits an individual from acting in any form of trade, company, or legal profession is invalid. Consequently, a void service contract is one in which a party refrains from participating in a commercial activity that is detrimental to the other parties. 
  • Section 27 of the Indian Contract Act of 1872 recognizes some exclusions as genuine contracts. Act 9 of 1932, however, repeals exceptions 2 and 3, although exception 1 is considered a genuine contract, as follows:
  1. Exception 1 to Section 27 of the Indian Contract Act

The exception to Section 27 of the Indian Contract Act states the agreement not to operate with the firm whose goodwill is being sold.

When one party (seller) sells the goodwill of a business to another party (buyer), the buyer agrees not to conduct the same business within specified local limits as long as the buyer purchases the title of goodwill from the seller, who offers not to conduct a similar business within specified limits. Due to the company’s nature, this criterion makes the court look reasonable.

The underlying public policy of Section 27 of the Indian Contract Act of 1872

  • According to public policy, every individual should be free to participate in his or her vocation, i.e., occupation, business (i.e., buying and selling goods and services), and trade in any defined field of activity. 
  • This freedom is essential for the economic growth of society. It promotes both industry and competition. Contrary to public policy, agreements that limit this freedom are thus invalid. 
  • In this situation, this is also an exception to the rule. If ‘A’ sells his business to ‘B’ for instance, ‘B’ may inform ‘A’ that he will not operate the same business in the same town. Fairly, this contract restricts his business freedom. 
  • Section 27 of the Indian Contract Act implements public policy and gives effect to the exception.

Application of Section 27 of the 1872 Indian Contract Act

  • Unless an exemption is satisfied, the section declares all contracts in restriction of commerce invalid, pro tanto (to that amount or for so much). 
  • Section 27 of the Indian Contract Act provides a very stringent regulation that disproves broad and partial constraints and prohibits the exemption of particular local boundaries. 
  • In general terms, Section 27 of the Indian Contract Act provides that agreements in restriction of commerce are those in which one or both parties limit their capacity to work or conduct their profession or business. 
  • Such agreements are commonly criticized because they are contrary to the public interest and unfair since they unjustly restrict human freedom. 
  • In a sense, every commercial commitment works as a trading constraint since it restricts the future obligation of the promisor. 

Conclusion

Thus, Section 27 of the Indian Contract Act states that a contract restricting trade or business-related subjects is often invalid. If a trade restriction exists, the court will declare the agreement null and invalid. 

According to the court, the contract is illogical, unjust, and infringes on the individual’s freedom to select any profession, trade, or company. This trade restriction is intended to encourage healthy competition between people. 

Section 27 of the Indian Contract Act states that a contract restricting trade or business-related subjects is often invalid. It is wise to consult an attorney to get the service agreement drafted as he is an expert.

ezyLegal Editor

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