Authored By: Chaithanya N
Ramaiah Institute of Legal Studies
Abstract
Non-compete covenants are commercially significant in mergers and acquisitions because a purchaser may acquire not only shares or physical assets, but also goodwill, customer connections, reputation, know-how and market position. Yet section 27 of the Indian Contract Act 1872 adopts an unusually strict rule: agreements restraining a person from exercising a lawful profession, trade or business are void to the extent of the restraint, subject to the statutory exception for the sale of goodwill. This article examines whether that framework provides sufficient predictability for M&A transactions. It analyses the Supreme Court’s treatment of negative covenants in Niranjan Shankar Golikari v Century Spinning, Gujarat Bottling Co Ltd v Coca-Cola Co, Percept D’Mark (India) Pvt Ltd v Zaheer Khan and Superintendence Company of India (P) Ltd v Krishan Murgai, alongside the Delhi High Court’s more directly M&A-oriented reasoning in Affle Holdings Pte Ltd v Saurabh Singh. It also considers the Competition Commission of India’s treatment of non-competes as potential ancillary restraints in combinations. The article argues that Indian law contains a meaningful distinction between restraints that protect a transaction and restraints that merely suppress competition, but the absence of a clearly articulated M&A specific test leaves parties uncertain about duration, territory, business scope and transaction structure. Comparative approaches demonstrate that greater predictability can be achieved through structured legitimate-interest and proportionality analysis while preserving competition policy.
Introduction
India’s M&A market has become an important part of the country’s commercial landscape. EY reported total Indian M&A deal value of approximately US$123.8 billion in 2025, an 18 per cent increase over 2024, while Grant Thornton reported 963 M&A transactions worth US$60.2 billion in the same year. [1]
When a company is acquired, the transaction does not merely transfer tangible assets. Depending on the structure of the deal, the buyer may acquire goodwill, trade connections, customer relationships, reputation, know-how and a market position built over many years. A seller who immediately re-enters the same market may therefore compete using relationships and knowledge that formed part of the commercial value for which the buyer paid. For this reason, acquisition agreements commonly contain non-compete covenants restricting the seller from carrying on a competing business for a defined period and within a defined scope.
Indian law, however, begins from a stringent position. Section 27 of the Indian Contract Act 1872 provides that every agreement restraining a person from exercising a lawful profession, trade or business is void to the extent of the restraint. The principal statutory exception permits the seller of goodwill to agree not to carry on a similar business within specified local limits for so long as the buyer continues the like business, provided the limits appear reasonable to the court.[2]The provision therefore contains no general reasonableness exception comparable to the traditional common law approach.
Gujarat Bottling, Percept D’Mark, Superintendence Company and Affle Holdings do not produce a single, easily applied test for M&A non-competes. At the regulatory level, the Competition Commission of India has separately developed an ancillary-restraint analysis under the combination regime and examines the scope, duration, justification and proportionality of non-compete obligations.[3]
This article proceeds in six parts. Section II examines the statutory framework under Section 27, including the goodwill exception and its interaction with related legislation. Section III analyses the leading judicial decisions, while Section IV evaluates the uncertainty surrounding transaction structure, goodwill, duration and scope. Section V considers comparative approaches, and Section VI proposes a structured M&A-specific framework based on legitimate commercial interests and proportionality. The article concludes that legislative clarification is necessary to make enforcement more predictable while preserving the policy against restraints of trade.
Statutory Framework under Section 27
Section 27 is unusually categorical. It provides: ‘Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.’ The provision does not, in its general rule, ask whether the restraint is reasonable. Its structure is therefore materially different from the traditional English doctrine, under which a restraint may be upheld if justified by a legitimate interest and reasonable between the parties and in the public interest.[4]
The exception is narrow but commercially important. 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 while the buyer or a successor continues the like business, if those limits appear reasonable having regard to the nature of the business.[5] The statutory language is significant for M&A because it expressly recognises that the seller of a business may legitimately be restricted so that the purchaser can enjoy the goodwill it has bought.
The difficulty is that modern acquisitions do not always fit neatly within a nineteenth-century sale-of-goodwill model. A share purchase may transfer control of a company whose goodwill remains legally vested in the corporate entity. A technology acquisition may derive value from software, data, intellectual property, network effects and human relationships. A merger may combine businesses without a conventional seller transferring goodwill to a buyer. Section 27 does not expressly distinguish these structures.
Nor does the Contract Act provide detailed guidance on duration, territorial scope or the activities that may be restricted. The comparison with section 54 of the Indian Partnership Act 1932 is instructive: Parliament expressly provided there that a reasonable restraint following dissolution of a firm can be valid notwithstanding section 27. This demonstrates that where the legislature intends a reasonableness standard to operate notwithstanding section 27, it can say so.[6]
The Competition Act 2002 adds another layer. Section 3 addresses agreements that cause or are likely to cause an appreciable adverse effect on competition, while the combination regime requires the Commission to consider restraints associated with mergers and acquisitions. The CCI has explained that restraints may be unrelated, merely facilitating, or directly related and necessary to a combination. The latter are treated as ancillary restraints, and non-competes are examined for whether they are reasonable, balanced and proportionate.[7] This competition-law analysis should not be confused with a direct amendment to section 27, but it demonstrates that Indian regulation already possesses a more structured methodology for evaluating transaction related restraints.
III. Judicial Treatment of Non-Compete Covenants
Niranjan Shankar Golikari v Century Spinning and Manufacturing Co Ltd: The Supreme Court considered a five-year employment arrangement containing a negative covenant restricting the employee from working for another concern during the contractual period. The Court upheld the restraint, emphasising that a negative covenant operating during employment, where the employee was bound to serve the employer exclusively, was not ordinarily a restraint of trade within section 27. The Court nevertheless considered whether the covenant was unconscionable, excessively harsh, unreasonable or one-sided.[8] The decision is important because it shows that timing and context matter. It does not, however, establish a general post-sale reasonableness test for M&A covenants.
Gujarat Bottling Co Ltd v Coca-Cola Co: The case concerned a bottling arrangement under which the franchisee agreed not to manufacture, sell or deal in competing beverages during the subsistence of the agreement. The Supreme Court upheld the interim injunction and treated the negative covenant as part of the commercial arrangement rather than a restraint of trade operating after the contract had ended.[9] The case is particularly important for the distinction between restraints during the life of a commercial relationship and restraints that survive termination. It should not be read as blanket approval of post-contractual non-competes.
Percept D’Mark (India) Pvt Ltd v Zaheer Khan: The Supreme Court considered a post-contractual restriction in a celebrity-management agreement. It reaffirmed the established Indian position that a post-contractual restraint is generally hit by section 27, even where the parties characterise the restriction as commercially reasonable. The Court stressed the settled interpretation of section 27 and declined to treat the restriction as enforceable merely because the commercial relationship was sophisticated.[10] For M&A practice, the case warns against assuming that commercial sophistication or negotiated consideration alone converts a post-contractual restraint into an enforceable covenant.
Superintendence Company of India (P) Ltd v Krishan Murgai: The Supreme Court provided a clear statement of the strict post-employment rule. A covenant restraining an employee after termination of service fell within section 27 and could not be saved merely by arguing that it was reasonable.[11] The decision therefore distinguishes the contractual period, where exclusive service obligations may be valid, from the period after employment has ended. For M&A purposes, this strengthens the policy distinction between protecting purchased goodwill and restricting an individual’s future employment.
Affle Holdings Pte Ltd v Saurabh Singh: This Delhi High Court decision is particularly significant because it involved an acquisition of the controlling interest in a company and a covenant restricting competition. The Court considered that the purchaser had acquired the business and goodwill and that substantial consideration had been paid. At the interim stage, it concluded that the covenant could fall within the goodwill exception and that the prohibition was reasonable in time and space.[12] The decision demonstrates that an acquisition-related covenant can receive different treatment from an employment non-compete. At the same time, it exposes the predictability problem: the judgment recognises reasonableness in time and space without articulating a comprehensive M&A test applicable across different transaction structures.
The authorities reveal a coherent core principle but an incomplete M&A framework. Covenants operating during an existing commercial or employment relationship may be treated differently from restraints beginning after termination. A restraint genuinely connected with the sale of goodwill has stronger statutory footing. Yet the cases do not establish a uniform formula for deciding whether a share sale amounts to a sale of goodwill, how long a seller may be restricted, how broad the prohibited activity may be, or whether the same approach should apply to an asset sale, share sale and merger. A 2024 Delhi High Court judgment, while reaffirming the strict rule against post-contractual employment restraints, continued to distinguish restraints operating during the contractual relationship.[13]
Critical Evaluation: The Predictability Problem
Ancillary protection versus independent restraint: The most important unresolved question is whether the covenant is genuinely ancillary to the transfer of a business or whether the acquisition is being used as a vehicle for imposing an independent restraint. A buyer who pays for goodwill has a legitimate concern that the seller should not immediately recreate the business that has just been sold. The difficulty is that section 27 does not state the factors by which a court should determine whether the covenant is sufficiently connected to the transaction. A structured inquiry should ask what was acquired, what interest the covenant protects, and whether the restraint goes no further than necessary to preserve that interest.
Transaction structure: Predictability is affected by the form of the transaction. In an asset purchase, the relationship between the buyer’s payment and the acquired business or goodwill may be relatively direct. In a share purchase, the target company continues to own its goodwill while the buyer acquires shares and control. The seller’s personal ability to compete may nevertheless undermine the economic value of the acquisition. A merger presents a different problem again. Section 27 does not expressly differentiate among these structures, even though their commercial rationales are not identical.
Duration, territory and business scope: Market practice often uses multi-year restraints, but the legal question is not whether a particular period is common. It is whether the restriction is justified by the business interest acquired and proportionate to that interest. Earlier CCI materials indicated that a restraint of up to three years might ordinarily be justified where goodwill and know-how were transferred, and up to two years where only goodwill was transferred. These observations are not statutory safe harbours and should not be treated as binding rules under Section 27. [14] Their value is methodological; they demonstrate how predictability can be improved by linking duration and scope to identifiable transaction interests.
Goodwill in modern M&A: Goodwill is no longer confined to the reputation associated with a physical shop or local customer base. Modern transactions may derive value from brand recognition, recurring customer relationships, proprietary processes, technology-enabled networks and other intangible advantages. The statutory language does not define goodwill for this purpose. Courts can interpret it in light of commercial reality, but parties still lack clear guidance on what evidence will establish that a non-compete protects purchased goodwill rather than suppressing future competition.
Consideration and bargaining position: The fact that a seller receives consideration for a transaction should matter to the commercial context, but consideration alone cannot make a restraint enforceable if section 27 renders it void. Likewise, sophisticated parties are not exempt from statutory limitations merely because they negotiated at arm’s length. Consideration is better treated as one factual indicator of the covenant’s connection with the transaction, rather than as a substitute for statutory validity.
Competition policy: A strict rule has legitimate advantages. It protects freedom of trade, prevents powerful buyers from suppressing competition and avoids lengthy judicial inquiries into reasonableness. Yet an equally rigid approach can undermine the value of goodwill that the law itself recognises as capable of being sold with a reasonable restraint. The answer need not be an unrestricted reasonableness doctrine. A narrower M&A test could require a demonstrable transaction interest, close connection with the acquired business, proportionality in duration and scope, and a prohibition on restrictions unrelated to the transaction.
Comparative Perspectives
United Kingdom: English law treats restraints of trade through a reasonableness framework rather than a statutory rule equivalent to section 27. Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co established the classic approach: a restraint may be valid where it is reasonable between the parties and consistent with the public interest.[15] The sale-of-business context is treated more favourably because the purchaser has a legitimate interest in protecting the goodwill for which it has paid. The modern English approach does not create a universal numerical safe harbour; instead, the restraint is connected to the legitimate interest it protects. Cavendish Square Holding BV v Makdessi, although principally concerned with penalties, also illustrates the Supreme Court’s willingness to examine substantial commercial interests in sophisticated transactions.[16]
United States: The United States has no single national non-compete rule. State law varies considerably, and employment restraints have become increasingly restricted in several jurisdictions. Business-sale restraints, however, have traditionally received more favourable treatment because the purchaser’s interest in preserving goodwill is directly connected to the consideration paid. The Restatement (Second) of Contracts section 188 frames restraint-of-trade analysis around reasonableness and legitimate interests. The comparative lesson for India is not to copy the American position wholesale, but to recognise the importance of distinguishing acquisition restraints from employment restraints.
Singapore: Singapore’s common-law approach provides a useful comparison because it operates in a commercially sophisticated Asian jurisdiction. The restraint-of-trade doctrine generally asks whether the restraint protects a legitimate interest and is reasonable between the parties and in the public interest. Commercial transactions can therefore be assessed with attention to the business interest being protected. This demonstrates how a common-law system can accommodate commercial restraints without treating every non-compete as automatically enforceable.
Towards a Predictable Indian Framework
India’s M&A market would benefit from structured legislative clarification rather than an unrestricted judicial reasonableness test. The purpose should be to distinguish restraints protecting a purchased business from restraints whose principal effect is to prevent a person from participating in lawful trade.
First, the covenant should have a direct connection with a genuine acquisition, sale or transfer of a business or goodwill. A clause should not receive M&A treatment merely because it appears in a share purchase agreement. Secondly, the buyer should identify the legitimate commercial interest being protected, such as goodwill, customer connections, know-how or a defined business line acquired through the transaction. Thirdly, restricted activities should correspond to the business actually acquired rather than an entire industry in which the seller might compete only indirectly.
Fourthly, duration and territorial scope should be assessed against the life and geographical footprint of the acquired business. The CCI’s approach provides a useful benchmark for transaction planning, but it should not become an automatic statutory period. Fifthly, the court should consider the structure of the transaction and the economic relationship between the covenant and the consideration paid. Sixthly, restraints directed at employees should remain subject to the distinct and stricter principles applicable to post-employment restraints.
Seventhly, the Competition Act should remain an independent safeguard. A covenant may be valid as a matter of contract and still raise competition concerns if it contributes to an appreciable adverse effect on competition. Conversely, a finding that a restraint is ancillary for combination purposes should not be treated as conclusive proof of contractual validity under section 27.
Finally, parties should draft with precision. The covenant should define the restricted business, territory, duration and relevant persons; identify the goodwill or business interest being protected; and separate acquisition-related restrictions from employment obligations. Drafting cannot cure statutory invalidity, but close alignment between the covenant and the transaction’s legitimate commercial purpose can reduce litigation risk and improve the parties’ ability to assess enforceability.
VII. Conclusion
Section 27 remains one of the strictest statutory provisions governing restraint of trade in Indian contract law. Its policy of protecting freedom of trade is legitimate, but the commercial context in which the provision operates has changed substantially since 1872. M&A transactions now routinely involve intangible value, complex corporate structures and cross-border operations. Buyers may pay significant consideration for goodwill, customer relationships, know-how and market position, making some form of post-closing seller protection commercially important.
The case law provides important building blocks but not a sufficiently predictable M&A-specific test. Golikari and Gujarat Bottling distinguish restraints operating during contractual relationships from post-contractual restraints. Percept D’Mark and Superintendence Company reaffirm the strict treatment of post-contractual restraints. Affle Holdings demonstrates that an acquisition-related covenant can receive different treatment where the purchaser has acquired the business and goodwill. Yet the authorities do not clearly establish how duration, territory, transaction structure, consideration and the scope of acquired goodwill should interact.
The better approach is not to replace section 27 with an unrestricted reasonableness test. Legislative clarification should create a narrowly defined M&A exception, supported by judicial factors requiring a genuine transaction nexus, identifiable legitimate interest, and proportionality in time, geography and activity. The CCI’s ancillary-restraint practice provides a useful regulatory model for assessing transaction connection and proportionality, while comparative jurisdictions demonstrate the practical value of distinguishing business-sale restraints from employment restraints.
Predictability is essential to transaction certainty. Parties should be able to assess the enforceability of a negotiated covenant before signing a major acquisition agreement rather than discovering its limits only after litigation. A clearer framework would preserve section 27’s protection of economic freedom while recognising that protecting the value of a purchased business is not necessarily the same as suppressing competition.
Table of Cases
Affle Holdings Pte Ltd v Saurabh Singh, OMP 1257/2014 (Delhi HC, 22 January 2015)
Cavendish Square Holding BV v Makdessi [2015] UKSC 67
Delhi High Court, FAO (OS) (COMM) 7/2023 & connected matters, judgment dated 11 July 2024
Gujarat Bottling Co Ltd v Coca-Cola Co (1995) 5 SCC 545
Niranjan Shankar Golikari v Century Spinning and Manufacturing Co Ltd (1967) 2 SCR 378
Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co [1894] AC 535 (HL)
Percept D’Mark (India) Pvt Ltd v Zaheer Khan (2006) 4 SCC 227
Superintendence Company of India (P) Ltd v Krishan Murgai (1981) 2 SCC 246
Table of Legislation
Competition Act 2002
Competition Commission of India (Combinations) Regulations 2024
Indian Contract Act 1872
Indian Partnership Act 1932
Bibliography
Competition Commission of India, ‘Inviting public comments regarding examination of non-compete restrictions under regulation of combinations’ https://www.pib.gov.in/PressReleaseIframePage.aspx?PRID=1624196®=48&lang=2
Competition Commission of India, ‘Non-Compete Restrictions’ and related combination guidance on ancillary restraints, https://www.cci.gov.in/combination/legal-framwork/regulations/details/12/0
EY India, ‘How selective investing shaped India’s M&A deals in 2025’ (29 April 2026) https://www.ey.com/en_in/insights/mergers-acquisitions/how-selective-investing-shaped-india-s-m-a-deals-in-2025
Grant Thornton Bharat, ‘Annual Dealtracker 2025’ (2026) https://www.grantthornton.in/insights/thought-leadership/annual-dealtracker-20252/
[1] EY India, ‘How selective investing shaped India’s M&A deals in 2025’ (20 April 2026); Grant Thornton Bharat, ‘Annual Dealtracker 2025’ (2026).
[2] Indian Contract Act 1872, s 27
[3] Competition Commission of India, ‘Non-Compete Restrictions’ and related combination guidance; Competition Commission of India (Combinations) Regulations 2024.
[4] Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co [1894] AC 535 (HL).
[5] Indian Contract Act 1872, s 27, Exception 1.
[6] Indian Partnership Act 1932, s 54.
[7] Competition Act 2002, s 3; Competition Commission of India materials on ancillary restraints.
[8] Niranjan Shankar Golikari v Century Spinning and Manufacturing Co Ltd (1967) 2 SCR 378.
[9] Gujarat Bottling Co Ltd v Coca-Cola Co (1995) 5 SCC 545.
[10] Percept D’Mark (India) Pvt Ltd v Zaheer Khan (2006) 4 SCC 227.
[11] Superintendence Company of India (P) Ltd v Krishan Murgai (1981) 2 SCC 246.
[12] Affle Holdings Pte Ltd v Saurabh Singh, OMP 1257/2014 (Delhi HC, 22 January 2015).
[13] Delhi High Court, FAO (OS) (COMM) 7/2023 & connected matters, judgment dated 11 July 2024.
[14] Competition Commission of India, ‘Inviting public comments regarding examination of non-compete restrictions under regulation of combinations’ (public comments document), noting three years as usually justified for goodwill and know-how and two years for goodwill alone, with scope tied to the business and territory.
[15] Nordenfelt (n 4).
[16] Cavendish Square Holding BV v Makdessi [2015] UKSC 67.
