Is seller of goodwill restrained to do business even after buyer stops business?

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This topic contains 1 reply, has 2 voices, and was last updated by Dr. Ashok Dhamija Dr. Ashok Dhamija 7 months, 1 week ago.

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  • #4199

    Anonymous
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    In a case, a person sold his business along with the goodwill (it was book publishing business) to a company. One clause was a restraint on the seller to not to do the same type of business (i.e., book publishing, marketing, etc.) for 10 years. However, the company was not able to run the business purchased by it, along with goodwill, and after about 3-4 years, it ran into huge losses and stopped doing book publishing business. Now, my question is whether the seller of goodwill is still restrained to enter into a new business of book publishing (though not in the same name) even though the buyer of goodwill is no more in that business?

  • #4200

    While I’ll not comment on the facts of your case, I’ll cover the legal issue involved in my answer.

    Section 27 of the Contract Act lays down that: “Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.”

    Therefore, a contract or agreement in restraint of trade is void and is not valid under law.

    However, there is one exception to this rule, provided under Section 27 itself. This exception is as under:

    Exception 1.—Saving of agreement not to carry on business of which goodwill is sold

    Exception 1.—Saving of agreement not to carry on business of which goodwill is sold.—One who sells the good-will 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 any person deriving title to the goodwill from him, carries on a like business therein:

    Provided that such limits appear to the Court reasonable, regard being had to the nature of the business.”

    Thus, subject to the conditions mentioned in the above Exception, there can be a restraint on the seller of a goodwill from carrying on a similar business. This is obviously with a view to protect the interests of the buyer of the goodwill. However, as you would have noticed, there are some conditions on this restraint also.

    One of the important conditions or limitations on such restraint on the seller of goodwill is that such restraint of not carrying similar business is applicable to him only “so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein”.

    Thus, if the buyer of goodwill (or any person deriving from his rights to the said goodwill) stops doing the business (or the like business; in your case, the business of book publication or book marketing), then there is no restraint on the seller of goodwill. This means that in such a situation, the seller of goodwill would be freed from the restraint of not carrying similar business.

    This is the general legal position applicable in India. Now, it is for you to decide whether it fits into your facts, i.e., whether the buyer of your goodwill has actually stopped doing the said business, etc., as it is not possible for me to comment accurately on the detailed facts, without having studied the detailed facts of the case.

         


    Dr. Ashok Dhamija is a New Delhi based Supreme Court Advocate and author of law books. Read more about him by clicking here. List of his Forum Replies. List of his other articles. List of his Quora Answers.

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