This article is written by Ms Saniya Arfa, Amity University Kolkata, B.A.LL.B, 3rd year, during her internship at LeDroit India.
SCOPE OF THE ARTICLE
- Introduction: Concept of restrictive covenants and non-compete clauses
- Statutory framework: Section 27 of the Indian Contract Act, 1872
- Types of restrictive covenants in employment and commercial contracts
- Judicial evolution: Landmark Supreme Court and High Court decisions
- Post-employment non-compete clauses and constitutional dimensions
- Distinction between employment and sale-of-business covenants
- Treatment of confidentiality, non-solicitation, and garden leave clauses
- Drafting considerations and enforceability tests in India
- Impact of recent jurisprudence and trends in 2023–2025
- Comparative and policy perspectives on restraints of trade
- Practical guidance for employers and employees in India
- Conclusion
KEYWORDS
Restrictive covenants; Non-compete clauses; Section 27 Indian Contract Act; Post-employment restraint; Sale of goodwill; Employment contracts.
ABSTRACT
Restrictive covenants and non-compete clauses have become a standard feature of modern employment contracts, technology arrangements, and business acquisitions in India. Yet, India’s statutory regime, especially Section 27 of the Indian Contract Act, 1872, treats agreements in restraint of trade as void, creating a sharp tension between contractual freedom and the constitutional right to livelihood. Indian courts have consistently held that post-employment non-compete clauses are generally unenforceable, while allowing certain negative covenants during the subsistence of employment and in narrowly tailored sale-of-business situations where goodwill is transferred.
This article examines the statutory basis, major case law—from Niranjan Shankar Golikari to Percept D’Mark and recent Delhi High Court and Supreme Court decisions—and practical drafting trends that determine when a restrictive covenant survives judicial scrutiny in India. It also discusses how confidentiality and non-solicitation clauses can protect legitimate interests without infringing Section 27, and offers structured guidance for employers and employees negotiating such covenants in an evolving legal landscape.
INTRODUCTION
Restrictive covenants and non-compete clauses have become increasingly significant in modern commercial and employment relationships, especially as businesses seek to safeguard sensitive information, customer networks, trade secrets, and competitive advantages. These contractual tools aim to regulate the conduct of employees, business partners, franchisees, and sellers of businesses to prevent unfair competition and misuse of proprietary knowledge. In India, however, the enforceability of restrictive covenants—particularly post-employment non-compete clauses—remains a contentious issue due to the strict statutory prohibition under Section 27 of the Indian Contract Act, 1872, which declares agreements in restraint of trade void. This creates a complex legal landscape where employers attempt to protect legitimate business interests while employees retain the fundamental right to livelihood and occupational freedom.
The debate becomes even more nuanced when distinguishing between restraints within employment contracts and those arising during commercial transactions, such as the sale of goodwill. Indian courts have developed sophisticated principles to differentiate valid protective covenants from impermissible restraints on trade. Consequently, understanding the scope, purpose, and enforceability of restrictive covenants and non-compete clauses is crucial for employers, employees, and legal professionals navigating contractual relations in India’s rapidly evolving economic environment.
STATUTORY FRAMEWORK: SECTION 27 OF THE INDIAN CONTRACT ACT, 1872
Section 27 of the Indian Contract Act, 1872 declares void any agreement that restrains a person from exercising a lawful profession, trade, or business of any kind, subject only to a narrow statutory exception relating to the sale of goodwill. Unlike some common law jurisdictions, the Indian statute does not expressly differentiate between partial and total restraints, leading courts to treat even limited post-termination non-compete covenants with suspicion.
The statutory exception allows a seller of goodwill to agree with the buyer to refrain from carrying on a similar business within reasonable local limits, so long as the restraint appears to the court to be reasonable. Outside this context, courts have repeatedly held that the tests of reasonableness and partial restraint do not salvage post-employment non-compete clauses from the prohibition under Section 27.
TYPES OF RESTRICTIVE COVENANTS IN EMPLOYMENT AND COMMERCIAL CONTRACTS
Restrictive covenants are contractual mechanisms used to regulate the conduct of employees, business sellers, partners, and commercial entities to protect legitimate business interests. In India, these covenants commonly appear in employment agreements, franchise arrangements, joint ventures, distribution contracts, and sale-of-business transactions. Although their enforceability varies depending on context and purpose, the nature of the restriction largely determines whether it aligns with Indian public policy and Section 27 of the Indian Contract Act, 1872.
- Non-Compete Clauses
A non-compete clause restricts an individual or entity from engaging in activities that directly compete with the employer or buyer. In employment contracts, non-compete obligations are enforceable only during the period of employment, while post-employment restrictions are generally void. Conversely, in commercial contracts—especially sale-of-business agreements—reasonable non-compete covenants may be upheld to protect transferred goodwill.
- Non-Solicitation Clauses
These clauses prohibit soliciting clients, customers, suppliers, or employees of the organisation. Unlike non-compete clauses, non-solicitation obligations may be enforceable even after employment ends, provided they aim to prevent unfair competition rather than restrain the right to trade.
- Confidentiality or Non-Disclosure Clauses
Confidentiality provisions protect trade secrets, proprietary information, business strategies, pricing structures, and sensitive data. Such clauses are widely enforceable both during and after employment, as they do not restrain trade but safeguard legitimate business interests.
- Garden Leave Clause
Garden leave clauses require employees to refrain from attending work during their notice period while being paid. Courts often uphold these clauses when the duration is reasonable and compensation is provided, as they maintain the employment relationship while limiting competitive harm.
- Non-Poaching or No-Hire Agreements
Typically arising in B2B or franchise arrangements, these clauses prevent organisations from hiring each other’s employees. Their enforceability depends on whether they amount to anti-competitive practices or simply regulate contractual conduct.
Together, these restrictive covenants shape how contractual parties balance business protection with freedom of trade in India.
JUDICIAL EVOLUTION: LANDMARK SUPREME COURT AND HIGH COURT DECISIONS
- Niranjan Shankar Golikari v. The Century Spinning & Mfg. Co. Ltd.
In Niranjan Shankar Golikari v. The Century Spinning and Mfg. Co. Ltd., the Supreme Court upheld a negative covenant restricting an employee from working for competitors during the fixed term of his employment. The Court distinguished between restraints operative during employment, which can be valid, and those extending beyond termination, which are generally void under Section 27.
This decision remains the foundational authority for the proposition that reasonable non-compete obligations during the currency of employment, particularly for skilled or confidential roles, may be enforced through injunctions. However, the judgment did not endorse post-employment restraints and has been carefully read in light of later decisions that emphasize strict limits on such covenants.
- Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan
In Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan, the Supreme Court held that any restraint that operates after the termination of a contract, even if limited in duration or scope, falls foul of Section 27 unless it fits the statutory exception. The Court made clear that Indian law does not accept post-contractual restraints merely on the ground that they are reasonable or partial.
This case reinforced the principle that, once a contract ends, parties are generally free to engage in any lawful trade or profession, and contractual terms cannot curtail that freedom except where the statute expressly allows. As a result, drafting strategies that attempt to justify post-employment non-competes on reasonableness alone face a high risk of invalidation.
- High Court jurisprudence on employment non-compete
Indian High Courts have widely followed the Supreme Court’s approach, treating post-employment non-compete clauses as void and refusing to grant injunctions that would prevent former employees from joining competitors. Decisions from the Delhi High Court, Bombay High Court, and other forums have consistently stressed that an employee’s right to livelihood and mobility overrides an employer’s desire to restrict competition through post-termination restraints.
Recent Delhi High Court cases, such as those discussed in 2024–2025 commentary and in Varun Tyagi v. Daffodil Software Private Limited (FAO 167/2025), reaffirm that post-termination non-compete clauses in employment contracts are void under Section 27 and cannot be enforced even if the restriction is limited in time or territory. Courts instead suggest that employers rely on claims for damages, protection of confidential information, or specific statutory remedies rather than seeking to prevent employees from taking up new roles.
POST-EMPLOYMENT NON-COMPETE CLAUSES AND CONSTITUTIONAL DIMENSIONS
Post-employment non-compete clauses are among the most debated restrictive covenants in India because they directly impact an individual’s right to livelihood. These clauses typically restrain an employee, after leaving an organisation, from joining a competing company, starting a similar business, or engaging in activities that may harm the former employer’s commercial interests. While such restraints are common in global employment practices, Indian law treats them with strong suspicion due to the absolute bar under Section 27 of the Indian Contract Act, 1872, which declares any agreement restraining trade as void.
The constitutional dimension intensifies this scrutiny. Article 19(1)(g) of the Constitution guarantees every citizen the fundamental right to practise any profession or carry on any trade or occupation. Post-employment non-compete clauses, by restricting a person’s ability to work, are considered contrary to this constitutional guarantee. Indian courts have consistently held that once the employment relationship ends, the employee must be free to use their skills, knowledge, and experience. Landmark decisions such as Superintendence Co. of India v. Krishan Murgai and Percept D’Mark v. Zaheer Khan reaffirm that post-termination restraints amount to an unlawful restriction on trade.
However, courts differentiate such clauses from protections that safeguard legitimate business interests, such as confidentiality and non-solicitation obligations, which may be enforceable even after employment. The constitutional emphasis on protecting the right to livelihood ensures that post-employment non-compete agreements remain largely unenforceable in India, unless they fall within narrow exceptions such as the sale of goodwill or commercial transactions between parties with equal bargaining power.
DISTINCTION BETWEEN EMPLOYMENT AND SALE-OF-BUSINESS COVENANTS
Indian jurisprudence draws a clear distinction between restrictive covenants in employment contracts and those arising from the sale of a business. In employment agreements, courts recognise the inherent unequal bargaining power between employer and employee. Since an employee’s right to livelihood is constitutionally protected under Article 19(1)(g), any post-employment restraint—particularly non-compete clauses—is treated as void under Section 27 of the Indian Contract Act. Once employment ends, the individual must remain free to work, compete, and utilise acquired skills.
In contrast, sale-of-business covenants operate in a commercial setting where both parties negotiate on an equal footing. When a buyer pays for the goodwill of a business, the law allows reasonable restraints to protect the value of that goodwill. The proviso to Section 27 specifically validates such agreements, enabling courts to uphold non-compete obligations if they are proportionate in duration, geography, and scope.
This distinction remains foundational to determining enforceability in India.
TREATMENT OF CONFIDENTIALITY, NON-SOLICITATION, AND GARDEN LEAVE CLAUSES
Indian courts have consistently differentiated between invalid post-employment non-compete clauses and other protective covenants that do not restrain trade. Among these, confidentiality, non-solicitation, and garden leave clauses occupy a comparatively safer legal position, as they are designed to safeguard legitimate business interests rather than restrict an individual’s right to livelihood.
- Confidentiality Clauses
Confidentiality or non-disclosure clauses prohibit employees and commercial partners from revealing trade secrets, proprietary data, client lists, formulas, strategies, and other sensitive information. Courts uphold these obligations even after the termination of employment, recognising that the preservation of confidential information does not amount to a restraint on trade. Protection of trade secrets is treated as a legitimate business interest, and breach may invite injunctions or damages.
- Non-Solicitation Clauses
Non-solicitation provisions restrict an employee or former employee from approaching the employer’s clients, customers, or staff. Since these clauses do not prevent a person from working elsewhere but only from unfairly diverting business, courts often consider them enforceable if they are reasonable and focused on preventing competitive abuse. Indian courts have upheld such clauses when they aim to maintain commercial integrity rather than inhibit professional mobility.
- Garden Leave Clauses
Garden leave clauses require employees to stay away from work during the notice period while continuing to receive full salary and benefits. These clauses are generally enforceable because the employment contract technically remains in force, and the employee is compensated during the restricted period. Courts emphasise that garden leave must be reasonable in duration and not oppressive, ensuring it does not become an indirect non-compete.
Collectively, these clauses are treated more favourably as they balance business protection with employee rights.
DRAFTING CONSIDERATIONS AND ENFORCEABILITY TESTS IN INDIA
Drafting restrictive covenants in India requires careful alignment with Section 27 of the Indian Contract Act, 1872 and the judicial standards developed over decades. Since Indian courts disfavor restraints on trade—particularly post-employment non-compete clauses—contracts must focus on protecting legitimate business interests rather than imposing broad prohibitions. Employers must ensure that covenants are precise, reasonable, and proportionate to withstand judicial scrutiny.
From a drafting perspective, clauses should clearly define “confidential information”, specify client groups covered under non-solicitation, detail the scope of restricted activities, and avoid vague or overly broad language. Geographic and temporal limits must be justified with business realities. Courts also expect clauses to reflect equal bargaining power, especially in commercial agreements such as franchise, distribution, and sale-of-business contracts.
Indian courts apply various enforceability tests, including the reasonableness test, which examines whether the restriction is narrowly tailored; the legitimate interest test, assessing if the employer seeks to protect trade secrets, client relationships, or goodwill; and the public policy test, ensuring the covenant does not infringe on an individual’s fundamental right to livelihood under Article 19(1)(g).
For employment contracts, restrictions during the tenure of employment are enforceable, but post-employment non-compete clauses are almost always void. However, courts uphold confidentiality, non-solicitation, and garden leave clauses when they are objectively reasonable. In commercial transactions, the proviso to Section 27 allows courts to validate restraints attached to the sale of goodwill, provided they are proportionate in duration and territorial scope.
Ultimately, enforceability depends not merely on what the clause intends to restrict, but how precisely and reasonably it is drafted.
IMPACT OF RECENT JURISPRUDENCE AND TRENDS IN 2023–2025
Between 2023 and 2025, Indian jurisprudence has continued to reinforce the traditional position that post-employment non-compete clauses remain unenforceable, while simultaneously strengthening protections for confidentiality, trade secrets, and non-solicitation obligations. High Courts have emphasised that the right to livelihood under Article 19(1)(g) cannot be curtailed by contractual restraints once employment ends, reaffirming the principles laid down in Percept D’Mark and Krishan Murgai.
A major trend emerging in recent years is the increased judicial willingness to enforce narrowly drafted non-solicitation and confidentiality clauses, especially in industries such as technology, pharmaceuticals, fintech, and consulting, where misuse of proprietary data poses substantial business risks. Courts have also granted injunctions to prevent employees from taking sensitive client information, signalling a stronger recognition of trade-secret protection even without a specific statute.
Another notable jurisprudential development is the growing acceptance of garden leave clauses, with courts holding that paid notice-period restrictions do not violate Section 27, provided they are reasonable and not disguised non-compete obligations.
On the commercial side, courts from 2023–2025 have upheld commercial non-compete clauses linked to the sale of goodwill or franchise rights, applying stricter tests of reasonableness and proportionality. The overall trend suggests a shift toward balancing economic freedom with legitimate business protection, without diluting the long-standing prohibition on post-employment restraints.
COMPARATIVE AND POLICY PERSPECTIVES ON RESTRAINTS OF TRADE
Restraints of trade refer to any agreement, clause, or practice that restricts a person’s freedom to carry on a lawful profession, business, or trade. Different countries approach these restraints differently based on their legal principles, economic priorities, and public policies. A comparative and policy-based study helps us understand how various legal systems balance individual freedom with business needs
In India, restraints of trade are primarily governed by Section 27 of the Indian Contract Act, 1872, which declares all agreements in restraint of trade void, except in limited situations such as the sale of goodwill or reasonable employee restrictions. Indian law strongly favors individual freedom and is cautious about enforcing broad or unfair restraints. Courts often strike down non-compete clauses, especially after employment, to protect a person’s right to livelihood under Article 19(1)(g) of the Constitution.
In contrast, England and other common-law countries take a more flexible approach. Restraints are allowed if they are “reasonable” in terms of time, area, and nature of restriction. English courts accept non-compete and confidentiality agreements if they protect legitimate business interests such as trade secrets, client connections, or investments in training.
The United States follows an even more economic and policy-driven model. Restraints are valid if they do not harm competition. American antitrust laws focus on whether the restraint promotes or suppresses market competition. Reasonable non-competes, exclusive dealing contracts, and certain trade practices are enforceable if they benefit the market and consumers.
From a policy perspective, the challenge is to balance individual freedom with fair business protection. While strict restrictions safeguard workers and economic mobility, flexible or economic-based models help businesses grow, innovate, and protect confidential information. Therefore, different jurisdictions adopt policies that best suit their economic realities, social values, and labor markets.
PRACTICAL GUIDANCE FOR EMPLOYERS AND EMPLOYEES IN INDIA
For employers, the key is to design protection mechanisms that align with Indian public policy: focus on information security, customer relationships, and reasonable notice or garden leave, rather than on blanket bans on future employment. Investment in robust confidentiality frameworks, access controls, and tailored training repayment clauses is more likely to withstand judicial review than broad non-compete language.
For employees, awareness of Section 27 and leading case law is essential when negotiating contracts, especially in high-skill or knowledge-intensive roles. Employees should scrutinize non-compete and non-solicitation clauses, negotiate narrower wording where possible, and understand that, while many post-employment non-competes may not be enforceable, confidentiality obligations and fiduciary duties can still attract serious legal consequences.
CONCLUSION
In India, restrictive covenants and non-compete clauses must be understood through the lens of Section 27 of the Indian Contract Act, 1872 and the constitutional guarantee of occupational freedom, which together render most post-employment non-compete restraints void. While non-compete clauses can be enforceable during the subsistence of employment or in connection with the sale of goodwill, courts demand that such restrictive covenants be narrowly drafted, necessary to protect legitimate interests, and not greater than required for that purpose.
Non-compete clauses, when used as broad post-employment restraints, are thus largely ineffective tools for employers in India and sit uneasily with the policy against restraints of trade. Restrictive covenants aimed at confidentiality, non-solicitation, and reasonable protection of goodwill remain the more viable instruments, and careful drafting is essential to ensure that restrictive covenants and non-compete clauses withstand scrutiny in Indian courts.
