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CA Foundation · Business Laws · The Indian Contract Act, 1872

Anil sells his bakery in Indore to Bhavesh and agrees not to carry on a similar bakery business within Indore for three years. The restriction is reasonable and the goodwill was sold along with the bakery. Bhavesh sues Anil when Anil opens a new bakery in Indore after one year. What is the position?

The agreement is valid. A seller of goodwill may agree not to carry on a similar business within specified local limits, if the limits are reasonable. This is a statutory exception to the rule that restraint of trade is void, so Bhavesh can enforce it.

  1. AThe agreement is void because it restrains trade
  2. BThe agreement is valid, because a reasonable restraint on the seller of goodwill is an exception to the rule against restraint of tradeCorrect
  3. CThe agreement is voidable at Anil's option
  4. DThe agreement is valid only if the restraint is for an unlimited period

Explanation

Restraint of trade is generally void, but the exception allows a seller of goodwill to agree to refrain from a similar business within specified local limits, provided the limits are reasonable. Here the area is Indore and the period is three years, so it is enforceable and Bhavesh can seek an injunction. Treating it as void ignores the goodwill exception.

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