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

Nisha, a tailor in Jaipur, sells her tailoring business and goodwill to Ravi in Jaipur. She agrees not to carry on a similar business within Jaipur city for 3 years, which is a reasonable limit. Later she opens a new tailoring shop in Jaipur. What is the legal position of this restraint?

The restraint is valid. Although agreements in restraint of trade are generally void, the Act makes an exception for a seller of goodwill who agrees not to carry on a similar business within reasonable local limits, and Nisha's restraint fits that exception.

  1. AVoid, because every agreement in restraint of trade is void
  2. BValid, because a reasonable restraint by a seller of goodwill is an exception to the general ruleCorrect
  3. CVoid, because the period of 3 years is too long under the Act
  4. DVoidable at Nisha's option as she was the seller

Explanation

Section 27 declares agreements in restraint of trade void, but it saves an agreement by which a seller of goodwill promises not to carry on a similar business within specified local limits, provided the limits are reasonable. Here the city and 3-year limits are stated to be reasonable, so Ravi can enforce it. The claim that all restraints are void ignores this exception.

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