Keywords: Non-compete clause in India, validity of non-compete clause, Indian Contract Act Section 27, post-employment restrictions, enforceability of non-compete agreements
Introduction: What is a Non-Compete Clause?
A non-compete clause is a contractual provision that restricts a person from engaging in similar trade, business, or profession that competes with another party, usually the employer or business purchaser. It is commonly used in employment agreements, founders’ contracts, franchise deals, and business sale transactions to protect confidential information, client relationships, and proprietary know-how.
Is a Non-Compete Clause Enforceable in India?
According to Section 27 of the Indian Contract Act, 1872, any agreement that restrains a person from exercising a lawful profession, trade, or business is void. As a general rule, non-compete clauses that operate after the termination of employment are considered unenforceable in India.
However, certain limited exceptions and contexts allow for enforceability if the clause is reasonable and aimed at protecting legitimate business interests.
When is a Non-Compete Clause Valid in India?
A non-compete clause may be considered legally valid and enforceable under the following circumstances:
- It is operative during the course of employment.
- It is part of a business sale agreement, where the seller agrees not to start a similar business for a limited time.
- It seeks to protect trade secrets, confidential information, or client relationships.
- It is reasonable in scope, duration, and geographical area.
- It is agreed upon between two commercial entities, rather than in an employer-employee context.
When is a Non-Compete Clause Void?
Indian courts have repeatedly held that non-compete clauses are void in the following situations:
- If they apply after employment ends and seek to restrict a person’s right to work.
- If the restriction is too broad or indefinite in terms of time or geography.
- If it lacks a genuine need to protect proprietary business interests.
- If it violates the fundamental right to livelihood under Article 19(1)(g) of the Constitution.
Landmark Judgments on Non-Compete Clauses in India
1. Niranjan Shankar Golikari v. Century Spinning & Manufacturing Co. Ltd. (1967)
Citation: AIR 1967 SC 1098
Held: The Supreme Court upheld a non-compete clause operative during employment as valid and enforceable. Restrictions imposed during employment are not hit by Section 27 if reasonable.
2. Superintendence Co. of India v. Krishan Murgai (1980)
Citation: (1980) 3 SCC 189
Held: The Supreme Court declared post-employment non-compete clauses void, as they amount to a restraint of trade.
3. Tapas Kanti Mandal v. Cosmos Films Ltd. (2016)
Citation: Bombay High Court
Held: The court ruled that post-employment restrictions on joining a competitor were unenforceable and in violation of Section 27.
4. Diljeet Titus v. Alfred A. Adebare & Others (2006)
Citation: 130 (2006) DLT 330
Held: The Delhi High Court held that while non-compete clauses may not be enforceable post-employment, confidentiality and non-disclosure obligations can still be enforced to protect proprietary information.
Common Use Cases for Non-Compete Clauses
- Employment agreements, particularly with senior executives or employees handling sensitive data
- Partnership dissolution agreements
- Shareholder or founders’ agreements
- Distribution or franchise contracts
- Business transfer or sale agreements
Tips for Drafting Enforceable Clauses
- Clearly define what constitutes “confidential information” or “competitive activity”
- Limit the clause to the duration of employment or a reasonable time frame post-employment
- Ensure the clause is specific in terms of industry and geography
- Use non-solicitation and confidentiality clauses as alternatives to outright non-compete terms
- Avoid blanket restrictions on future employment
Conclusion
In India, non-compete clauses face significant legal limitations due to the restrictions imposed by Section 27 of the Indian Contract Act and the constitutional right to work. While such clauses may be valid during employment or in the context of business sales, blanket post-employment restrictions are generally unenforceable. Employers and legal professionals should focus on drafting reasonable, specific, and narrowly tailored clauses that serve legitimate business needs without infringing on employee rights.
Sample Agreement of Non-Compete & Non-Solicitation Agreement
