Question 1 OR (b)
Sale of a business's goodwill with a covenant not to compete
6 marks
- Time to write
- About 12 minutes
- Notes
- Crux notes
Question
Question 1 OR (b) · 6 marksA sold B his artificial Jewellery business in Mumbai. A promised that for two years he would not do any business relating to real or artificial jewellery anywhere in Mumbai. But a month later he started a jewellery business in Mumbai. Can B stop him from doing this?
Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- Can B stop…?A case problem: state the rule and its section, apply it to these facts, then answer in one line (yes or no, and why).
Write it in this order
- Read the facts; underline who did what, and the exact question 1 min
- 1 Section 27 and the sale-of-goodwill exception 3 marks 5 min
- 2 Application and conclusion 3 marks 5 min
- Check: section named, answer stated in one line 1 min
Short on time? Trim steps 1 and 2 evenly rather than skip one: each is capped at its own marks.
Try it first. About 12 minutes for 6 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
Provision. Section 27 of the Indian Contract Act, 1872 makes every agreement by which anyone “is restrained from exercising a lawful profession, trade or business of any kind” void to that extent. Exception 1: a person 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 his successor” carries on a like business there, provided the limits are reasonable. The restraint is valid only as far as it falls within the exception; beyond that it is void.
1Gopal offers Ravi a pouch of money never to sell sweets again—Ravi waves it away; that paper is already waste.
Section 27Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind is, to that extent, void.
2Selling the shop and its goodwill is different: with the keys, a no-competition promise can stand.
Sale of goodwillMay agree with the buyer to refrain from carrying on a similar business within specified local limits.
3The promise stops at the dotted line—past those limits, Ravi sets up his stall freely.
Local limitsThe local limits must be reasonable.
Application. A sold B the goodwill of his artificial jewellery business in Mumbai and promised not to deal in real or artificial jewellery anywhere in Mumbai for two years. The restraint is limited to the city where the goodwill was sold and to two years, which are reasonable local and time limits for protecting the goodwill B bought.
- As to artificial jewellery, the business A sold, the restraint is a similar business within reasonable limits: it is valid, and B can obtain an injunction stopping A from carrying on such a business in Mumbai for the two years.
- As to real jewellery, the restraint goes beyond the business sold, so it is not a similar business within the exception and is void to that extent.
Conclusion. The question says only that A started "a jewellery business". If it deals in artificial jewellery, B can prevent him; if it deals only in real jewellery, B cannot, since that part of the restraint is void under section 27.
Where the 6 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Section 27 and the sale-of-goodwill exception | 3 |
| 2 | Application and conclusion | 3 |
| Total | 6 |
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