Non-Compete Clauses in India: What Section 27 of the Contract Act Still Permits

Employment agreements in India frequently contain clauses that would be routine in other jurisdictions: a twelve-month bar on joining a competitor, a prohibition on working for clients, and a ban on soliciting colleagues. Many of those clauses are unenforceable in India once employment ends. The reason lies in a single sentence of a statute enacted in 1872.

This paper explains the law under Section 27 of the Indian Contract Act, 1872, the Delhi High Court's 2025 decision in Varun Tyagi v Daffodil Software Pvt Ltd, and the tools that remain available to employers seeking legitimate protection.

The statutory rule

Section 27 provides that every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind is to that extent void. The only statutory exception concerns the sale of goodwill, where the seller may agree not to carry on a similar business within specified local limits, provided the restraint is reasonable.

Unlike English common law, Section 27 does not distinguish between partial and total restraints, nor does it save restraints merely because they are reasonable in time and area. This distinction is fundamental and is often missed in agreements drafted on international templates.

The Supreme Court's framework

Three Supreme Court decisions form the backbone of the law.

• Niranjan Shankar Golikari v Century Spinning (1967) held that a negative covenant operating during the term of employment, requiring the employee not to work elsewhere while employed, is not a restraint of trade under Section 27. It merely ensures performance of the contract.

• Superintendence Company of India v Krishan Murgai (1980) held that a restraint operating after termination of employment is void under Section 27, and that the doctrine of restraint of trade applies once the contract has ended.

• Percept D'Mark v Zaheer Khan (2006) confirmed that post-contract restraints, including a right of first refusal that effectively restrained the player after the contract term, were void.

Varun Tyagi v Daffodil Software (2025)

In June 2025, the Delhi High Court, in an appeal against an interim injunction, considered a clause that prevented a former employee from joining the employer's clients or business associates for three years after leaving. The trial court had restrained the employee from working with a government-linked client. The High Court set aside the injunction.

The Court held that terms in an employment contract restricting an employee's right to be employed after termination are void under Section 27. It observed that an employee cannot be forced to choose between idleness and working for the former employer, and that the right to livelihood cannot be curtailed by contract once employment ends. The employer's remedy, if any, lay in proving misuse of confidential information or proprietary material, not in preventing the employee from working.

What remains enforceable

Section 27 is strict, but it does not leave employers defenceless. The following protections are generally recognised.

1. Restraints during employment. An employee may be prohibited from working for a competitor, or from undertaking any other engagement, while the employment subsists, including during the notice period.

2. Garden leave. Employers may place a departing employee on paid leave during the notice period, keeping them away from clients and confidential information while the contract continues. Because the employment is still in force, this is not a post-termination restraint.

3. Confidentiality obligations. Covenants protecting trade secrets, client data, pricing, source code and other confidential information survive termination and are enforceable. Courts will injunct actual or threatened misuse.

4. Non-solicitation, with care. Courts have taken differing views on clauses preventing former employees from soliciting clients or employees. A clause that prevents active solicitation using confidential information is more likely to be upheld than one that bars any dealing with former clients, which may be treated as a disguised non-compete.

5. Intellectual property assignment. Clear assignment of work product created during employment protects the employer's rights irrespective of where the employee goes next.

Common drafting mistakes

• Copying a post-termination non-compete from a foreign template and assuming reasonableness will save it in India.

• Relying on liquidated damages for breach of a void restraint. If the restraint is void, a damages clause attached to it does not make it enforceable.

• Combining confidentiality and non-compete in one sentence, so that a court striking down the restraint may treat the entire clause with suspicion.

• Failing to identify what is genuinely confidential, which makes it difficult to show misuse when an employee joins a competitor.

Practical recommendations

Employers that want meaningful protection should shift attention from restraining movement to protecting information. That means mapping confidential information, limiting access on a need-to-know basis, using garden leave for sensitive roles, conducting structured exit processes with return-of-property confirmations, and acting quickly with evidence where misuse is suspected. For founders and senior management selling a business, the sale-of-goodwill exception remains available and should be documented separately in the share purchase or business transfer agreement.

Conclusion

India's position on post-employment restraints is clear and unusually protective of employees. Varun Tyagi reaffirms that position in modern terms, linking Section 27 to the right to livelihood. For employers, the sensible response is not to draft more aggressive restraints, but to build enforceable protection around confidentiality, intellectual property and the notice period.