Why the Seller's Non-Compete Clause in Your LOI Might Not Actually Hold Up in Court

Quick answer: Section 27 of the Indian Contract Act voids any agreement restraining a lawful trade or profession — there's no general reasonableness test the way there is in American or English law. A seller non-compete only survives inside one narrow carve-out, Exception 1, which requires the restraint to be tied to the goodwill sold, with local limits a court finds reasonable for that specific business. Employee non-competes that apply after termination don't get this exception and are almost never enforceable, no matter how they're worded.

Most buyers paste a non-compete clause into their LOI from a template, restrain the seller from competing for three to five years across a broad territory, and move on. The clause is built on an assumption American and English law both share, that a "reasonable" restraint on trade is enforceable. Indian law doesn't share that assumption, and a clause drafted as if it did can turn out to be void the moment anyone actually tests it.

The Rule Is Stricter Than You Think

Section 27 of the Indian Contract Act, 1872 states plainly: every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind is, to that extent, void. There's no built-in reasonableness test in the section itself, and Indian courts have read it that way from the start. In Madhub Chander v. Rajcoomar Doss, decided by the Privy Council in 1874, the court held that Section 27 draws no distinction between reasonable and unreasonable restraints — an agreement restraining trade is invalidated outright unless it fits one of the law's specific, narrow exceptions.

This is genuinely different from the English and American approach, where courts since Nordenfelt v. Maxim Nordenfelt in 1894 have generally upheld restraints that are reasonable in scope, geography, and time. A non-compete drafted by a lawyer trained on that framework, or copied from a template built for one, can look perfectly sensible and still fail entirely in an Indian court, because "reasonable" is not the test India actually applies.

The One Exception That Makes Any of This Work

There is exactly one surviving statutory exception relevant to a business sale, and everything about drafting an enforceable seller non-compete in India comes back to it. Exception 1 to Section 27 permits one who sells the goodwill of a business to agree with the buyer not to carry on a similar business within specified local limits, for as long as the buyer, or anyone who takes title to that goodwill from him, carries on a like business there — provided those limits appear reasonable to the court, having regard to the nature of the business.

Read that carefully, because two conditions are doing all the work. The restraint has to be tied to the sale of goodwill specifically, not to a general desire to keep a former owner out of the market, and it has to specify local limits that a court finds reasonable given what the business actually does. The Supreme Court confirmed in Gujarat Bottling Co. v. Coca Cola Co. that neither a general reasonableness test nor the idea that a partial restraint is automatically acceptable applies to a Section 27 case at all, unless the restraint falls within a recognised exception. Outside the exception, reasonableness is irrelevant. Inside it, reasonableness is the entire test.

What Actually Gets a Seller Non-Compete Struck Down

Two mistakes account for most of the clauses that fail.

Geographic overreach relative to the actual business. A non-compete tied to the sale of a regional manufacturing business that purports to restrain the seller anywhere in India, rather than in the specific markets that business actually operated in, is exactly the kind of clause courts have voided as excessive. The local limits have to track the real footprint of the business whose goodwill was sold, not the buyer's ambitions for it.

A restriction detached from what was actually paid for. The exception exists to protect the value of goodwill the buyer paid for. A non-compete that isn't clearly tied to real consideration for that goodwill, or that tries to restrain conduct well beyond the specific business sold, drifts outside what Exception 1 was built to protect, and starts looking like the kind of general restraint on trade Section 27 voids by default.

The Precedent That Actually Worked

It's worth knowing what a properly drafted version looks like in practice, not just what fails. In one Delhi High Court decision assessing a non-compete inside a share purchase agreement directly, the court held that a 36-month restriction on the outgoing promoter, preventing him from engaging in a competing business, fell squarely within Exception 1 and was not void — specifically because substantial consideration had been paid to the promoter under the agreement for exactly that restraint. The clause worked because it was clearly anchored to the goodwill being purchased and to real consideration paid for it, not because three years happened to sound like a standard number.

The Bigger Mistake: Trying to Bind Key Employees the Same Way

This is the part most buyers get wrong in a completely different, and arguably more costly, way. A buyer who wants to lock in a plant manager or a senior salesperson often assumes the same non-compete logic that protects a seller's goodwill can protect the buyer's grip on key staff. It generally can't.

The Supreme Court in Niranjan Shankar Golikari v. Century Spinning & Manufacturing Co. Ltd. held that a negative covenant in an employment contract is valid only for the period during which the employee remains employed. In Superintendence Company of India v. Krishan Murgai, the court put the underlying principle plainly: the doctrine of restraint of trade never applies during the continuance of an employment contract, it applies only once that contract ends. A non-compete that binds an employee while they work for you is generally fine. The same clause trying to bind them after they leave is exactly the kind of restraint Section 27 voids, because it deprives someone of their ability to earn a living, and Indian courts have consistently refused to enforce it regardless of how it's worded. The Supreme Court reinforced the same underlying logic in Percept D'Mark India v. Zaheer Khan, holding that a negative covenant enforced beyond its actual contractual term runs into the same problem.

Practically, this means the employee retention tool that actually works looks nothing like the seller's non-compete. During-employment restrictions, confidentiality obligations, non-disclosure of trade secrets, and genuine loyalty clauses are enforceable. A promise that a key employee won't join a competitor two years after leaving almost certainly isn't, no matter how it's drafted.

What to Actually Draft Instead

Tie the seller's non-compete explicitly to the goodwill being purchased and to identifiable consideration paid for it in the agreement itself, not to a generic clause pulled from a template. Specify local limits that match the real geographic footprint of the business sold — resist the instinct to restrain the seller pan-India when the business itself never operated pan-India. Keep the duration tied to something defensible, commonly the length of the agreed transition period plus a reasonable buffer, rather than an arbitrary five-year figure because that's what looked standard elsewhere. For key employees you actually want to retain, build your protection around during-employment restrictions, confidentiality, and trade secret obligations, not a post-termination non-compete that Indian courts have shown little appetite to enforce. This is the same drafting discipline worth applying to the rest of your letter of intent — get the clause specific to the actual deal, not copied from a template built for a different legal system.

Frequently Asked Questions

Is a non-compete clause on the seller in an Indian business acquisition enforceable at all?

Yes, provided it fits Exception 1 to Section 27 of the Indian Contract Act, tied to the sale of goodwill, with specified local limits a court would find reasonable given the nature of the business. Outside that exception, restraints on trade are void regardless of how reasonable they otherwise seem.

Why is Indian law stricter on this than American or English law?

English and American courts generally apply a reasonableness test to restraints of trade. Indian courts, following Madhub Chander v. Rajcoomar Doss and reaffirmed in Gujarat Bottling Co. v. Coca Cola Co., have held that Section 27 makes no such general allowance — a restraint is void unless it fits a specific statutory exception, and reasonableness only matters once you're inside that exception.

Can I restrain the seller from competing anywhere in India after I buy their business?

Only if a court would consider that geographic scope reasonable given the actual nature and footprint of the business sold. A restriction far broader than where the business actually operated is a common reason these clauses get struck down.

Can I bind a key employee, like a plant manager, with a non-compete after they leave?

Almost certainly not. Indian courts have consistently held post-termination employee non-competes void under Section 27, since they restrain a person's ability to earn a living. Restrictions that apply only during employment, and confidentiality or trade-secret obligations, are the enforceable alternative.

Does paying the seller more money make a broader non-compete more enforceable?

Consideration matters — a Delhi High Court decision upheld a 36-month promoter non-compete specifically because substantial consideration had been paid for it under the share purchase agreement. But consideration alone doesn't fix a clause with unreasonable geographic scope; both the payment and the local limits need to hold up together.

What should I actually put in my LOI instead of a generic non-compete clause?

Tie the restriction explicitly to the goodwill being sold and the consideration paid for it, specify geographic limits that match the business's real operating footprint, and set the duration by reference to something defensible like the transition period, rather than copying a standard multi-year term from an unrelated template.