This article is written by Ashika Dutta, Bharati Vidyapeeth (Deemed to be University), New Law College, Pune, B.B.A. LL.B., Third Year, during her internship at LeDroit India.
Scope of Article
- Meaning and principal forms of negative covenants in employment contracts
- Statutory framework under Section 27 of the Indian Contract Act, 1872 and the Specific Relief Act, 1963
- Detailed analysis of Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. Ltd.
- Distinction between restrictions during employment and restraints after termination
- Landmark and recent judicial developments, including lock-in clauses and employment bonds
- Protection of confidential information, trade secrets and employee mobility
- Critical assessment of the balance between legitimate business protection and freedom of occupation
Abstract
Negative covenants are widely used in an employment contract to secure exclusive service, protect trade secrets and prevent conflicts of interest. Their enforceability, however, must be reconciled with Section 27 of the Indian Contract Act, 1872, which invalidates agreements restraining a lawful profession, trade or business. This article examines the distinction between a restriction operating during employment and a post-employment non-compete clause through the Supreme Court’s decision in Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. Ltd.
It analyses the Court’s justification for enforcing a limited covenant designed to protect specialised training and confidential technical information. The article then traces the rule through later decisions concerning restraint of trade, minimum-service obligations and confidentiality. It argues that in-term exclusivity may legitimately protect an employer, but broad restraints on future employment should not be enforced merely by labelling ordinary knowledge as confidential information.
Keywords: negative covenant; restraint of trade; employment contract; Section 27; non-compete clause; trade secrets
1. Introduction
Employment relationships depend upon an exchange of labour, confidence and information. An employer may invest in recruitment, specialised training and access to commercial methods so that an employee can perform a particular role. The employee, in turn, acquires experience and professional capacity that may improve future career opportunities. This creates a recurring legal tension. Employers seek contractual protection against divided loyalty or misuse of confidential information, while employees must remain free to change jobs and pursue a lawful occupation.
Negative covenants are the principal contractual mechanism used to address this tension. They may require an employee to serve exclusively during an agreed term, refrain from working simultaneously for a competitor, preserve secrecy, avoid soliciting clients or remain in service for a minimum period. Some covenants operate only while the employment relationship continues; others attempt to control conduct after resignation or termination. Treating these provisions as a single category obscures the decisive question under Indian law: whether the promise supports performance of a subsisting contract or restrains future trade and employment.
The starting point is Section 27 of the Indian Contract Act, 1872, which renders an agreement restraining a lawful profession, trade or business void to the extent of the restraint. The Supreme Court’s judgment in Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. Ltd. remains the foundational authority distinguishing valid exclusivity during employment from an impermissible post-employment restraint. This article explains that distinction, examines its later development and evaluates whether the rule continues to achieve a fair balance in contemporary employment relationships.
2. Nature and Forms of Negative Covenants
A covenant is described as negative when it requires a contracting party to refrain from a specified act. In employment law, the expression is broader than a conventional non-compete clause. A promise to devote the whole of one’s working time to an employer, not to accept parallel work, not to disclose a manufacturing process and not to solicit identified customers may all be negative promises, even though they protect different interests and have different legal consequences.
An exclusivity clause ordinarily operates during employment and prevents divided service or conflicts of interest. A non-compete clause may operate during the contract or after it ends; the timing is usually decisive under Section 27. A confidentiality clause protects information possessing the necessary quality of secrecy, such as a formula, technical process, source code, pricing strategy or proprietary database. A non-solicitation clause seeks to prevent diversion of employees or customers. Finally, a lock-in clause or employment bond requires service for a minimum term or payment of an agreed amount upon premature departure.
The mere presence of the word “reasonable” does not determine validity. A court must identify the covenant’s substance, duration and practical effect. A clause may be framed as confidentiality yet function as a complete bar on joining a competitor; conversely, a minimum-service obligation may regulate performance of the existing employment rather than restrict the employee’s occupation after departure. The legal analysis therefore begins with classification and then considers the interest said to require protection.
3. Statutory Framework
3.1 Section 27 of the Indian Contract Act, 1872
Section 27 adopts a comparatively strict rule. Every agreement by which a person is restrained from exercising a lawful profession, trade or business is void to that extent. The text expressly preserves a limited exception where the goodwill of a business is sold and the seller accepts a reasonable local restraint. Unlike the English common-law approach, Indian law does not contain a general statutory exception saving every restraint that a court considers reasonable.
This does not mean that every contractual limitation connected with work is void. Courts first ask whether the promise is truly a restraint of trade. A covenant securing exclusive performance while a contract remains operative may be regarded as furthering, rather than restraining, trade. Once a provision is properly characterised as a post-contractual restraint on future employment, however, describing it as partial or commercially convenient will not ordinarily remove it from Section 27.
3.2 Injunctions and the Specific Relief Act, 1963
Employment contracts raise a remedial difficulty because courts ordinarily decline to compel the specific performance of personal service. Compelling an unwilling employee to continue working would conflict with personal liberty and be impractical to supervise. Sections 41 and 42 of the Specific Relief Act, 1963 nevertheless permit a distinction between enforcing a positive promise to work and restraining breach of an independent negative promise. Where the employer has performed its corresponding obligations and the covenant is otherwise lawful, a court may issue a limited injunction. The remedy remains equitable and discretionary: its scope must not indirectly force the employee into idleness or recreate compulsory service.
4. The Golikari Decision: Facts, Issues and Ratio
4.1 Factual Background
Century Spinning and Manufacturing Company operated a tyre-cord yarn plant at Kalyan. It had obtained specialised technical know-how from foreign collaborators on terms requiring the company to preserve the secrecy of the processes and obtain corresponding undertakings from employees. Niranjan Shankar Golikari was appointed as a shift supervisor in the tyre-cord division under a contract dated 16 March 1963 for a fixed term of five years. He received approximately nine months of training and became acquainted with the machinery, continuous-spinning technique and technical information supplied by the collaborators.
The agreement contained both positive and negative obligations. Golikari was required to devote his time and energy exclusively to the company. He also undertook to preserve confidential information. Clause 17 addressed premature departure: if he left, abandoned or resigned from service in breach of the agreement before the end of five years, he would not engage in the same business or serve a person carrying on that business for the remainder of the agreed term. The clause also contemplated liquidated damages and reimbursement of training expenditure.
In 1964, before the term expired, Golikari left Century Spinning and accepted employment with Rajasthan Rayon, another manufacturer of tyre-cord yarn, at higher remuneration. The employer sought an injunction restraining him from working in a substantially similar capacity for a competing concern until 15 March 1968 and from divulging technical secrets acquired during his training and service. The trial court granted a tailored injunction, and the Bombay High Court affirmed it.
4.2 Issues and Contentions
The principal question before the Supreme Court was whether Clause 17 was an agreement in restraint of trade prohibited by Section 27. Golikari argued that the clause was oppressive, wider than necessary and capable of forcing him either to remain idle or return to Century Spinning. He also questioned whether the company required such a broad restriction to protect its legitimate interests. Century Spinning responded that the covenant was confined to the unexpired contractual period, similar employment and a field in which confidential know-how had been entrusted to him.
4.3 Decision and Reasoning
The Supreme Court dismissed the appeal. It drew a clear distinction between restrictions operating during the term of an employment contract and restraints intended to operate after the relationship has legally ended. A promise to serve an employer exclusively during a definite period is normally integral to the performance of the contract. Accordingly, a covenant preventing substantially similar service for another employer during that period is generally outside Section 27, unless the agreement is unconscionable, excessively harsh, unreasonable or one-sided.
The Court did not enforce Clause 17 at its widest verbal extent. It approved the limited form of injunction fashioned by the courts below. The restraint was confined by time to the remainder of the five-year term, by subject matter to work as a shift supervisor or substantially similar duties in continuous-spinning tyre-cord production, and by area to competing concerns in India. Century Spinning had paid for specialised know-how, trained Golikari and faced a real risk that the information would benefit a direct competitor. These facts supplied a legitimate interest beyond a desire to suppress ordinary competition.
Equally important, the injunction did not order Golikari to return to Century Spinning and did not prohibit all employment. He could pursue work that did not involve the restricted specialised duties. The Court also upheld protection against disclosure of genuine processes and technical information. Its ratio can therefore be stated narrowly: a proportionate negative covenant securing exclusive service during the subsistence of a fixed employment term may be enforced when it protects a legitimate interest and does not operate as disguised specific performance.
5. The Central Distinction: During Employment and After Termination
The phrase “during employment” requires care. In Golikari, the employee had physically left the workplace, but the agreed five-year term had not expired and his departure itself was in breach. The restraint therefore corresponded to the balance of the subsisting contractual period. By contrast, where an employment relationship has lawfully ended or the agreed term has expired, a covenant preventing the employee from joining a competitor ordinarily restrains future employment and falls within Section 27.
This distinction prevents two opposite errors. The first is assuming that resignation automatically transforms every restriction into a post-employment covenant, even when the employee had undertaken to serve for a definite unexpired term. The second is using Golikari to justify a general ban after termination. The judgment does not create a broad reasonableness exception for post-employment non-compete agreements. It validates a limited obligation connected with performance of an existing contract.
6. Judicial Development After Golikari
6.1 Superintendence Company of India v. Krishan Murgai
In Superintendence Company of India (P) Ltd. v. Krishan Murgai, (1981) 2 SCC 246, the employer sought to apply a restrictive covenant after the employment had ended. The Supreme Court distinguished Golikari because the later case did not concern exclusive service during an unexpired contractual term. The decision reinforces the proposition that an employer has no legitimate interest in preventing competition merely because it comes from a former employee. A post-service restraint on carrying on a similar business was therefore unenforceable under Section 27.
6.2 Gujarat Bottling Co. Ltd. v. Coca-Cola Co.
Although it did not arise from an employment relationship, Gujarat Bottling Co. Ltd. v. Coca-Cola Co., (1995) 5 SCC 545, is important because the Supreme Court reaffirmed that a negative stipulation operating during the subsistence of a commercial agreement is not necessarily a restraint of trade. The Court also emphasised that an injunction is not automatic. The claimant must satisfy equitable considerations, including a prima facie case, balance of convenience and the justice of enforcing the promise in the circumstances.
6.3 Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan
In Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan, (2006) 4 SCC 227, a right-of-first-refusal arrangement was intended to affect endorsement opportunities after the management contract had expired. The Supreme Court treated the post-contractual restriction as void. The judgment stated the modern distinction succinctly: the doctrine of restraint does not ordinarily apply during the continuance of the contract, whereas a restrictive covenant extending beyond the contractual term is caught by Section 27. Percept therefore prevents Golikari from being converted into a general approval of non-compete clauses.
6.4 Confidentiality Decisions
Two Delhi High Court decisions illustrate the boundary between property and mobility. In Diljeet Titus, Advocate v. Alfred A. Adebare, 2006 SCC OnLine Del 551, the Court protected copied documents, client-related material and work products in which the former firm asserted proprietary rights. The defendants remained free to practise their profession and use skills retained in memory. Conversely, American Express Bank Ltd. v. Priya Puri, 2006 SCC OnLine Del 638, rejected an attempt to treat readily ascertainable customer information as a basis for restricting future employment. Confidentiality cannot become a substitute for an otherwise void non-compete agreement.
7. Recent Developments: Lock-in Clauses and Service Bonds
7.1 Lily Packers Pvt. Ltd. v. Vaishnavi Vijay Umak
The Delhi High Court revisited in-term employment obligations in Lily Packers Pvt. Ltd. v. Vaishnavi Vijay Umak and connected matters, 2024 SCC OnLine Del 4725. The employment agreements contained a three-year lock-in period, and the employees left before completing it. The Court held that a reasonable covenant operating during the employment term was not inherently unlawful and that disputes concerning breach and damages were capable of arbitration. Because the proceedings arose under Section 11 of the Arbitration and Conciliation Act, the judgment should not be read as a final determination of every monetary claim. Its importance lies in confirming that a lock-in clause is not automatically void merely because it limits premature departure.
7.2 Vijaya Bank v. Prashant B. Narnaware
The Supreme Court provided a significant contemporary restatement in Vijaya Bank v. Prashant B. Narnaware, 2025 INSC 691. A bank appointment required the selected officer to serve for three years or pay Rs. 2 lakh upon earlier resignation. The employee resigned to join another bank and challenged the condition under Sections 23 and 27 of the Contract Act and Articles 14 and 19(1)(g) of the Constitution.
The Court upheld the clause. It reasoned that the condition regulated the minimum tenure of the appointment and imposed no prohibition on employment after resignation. It also recognised the bank’s institutional interest in controlling attrition and avoiding repeated recruitment exercises for senior posts. The stipulated amount was not shown to be so excessive as to be punitive or unconscionable. The judgment expressly relied on Golikari and confirmed that a covenant supporting performance during the subsistence of employment must be distinguished from one obstructing future employment.
The continuing limit is visible in Arun Rambhai Desai v. Deepak Nitrite Ltd. (Gujarat High Court, 10 June 2025). The Court reiterated that a post-termination non-compete restriction is unenforceable under Section 27, while a specifically framed obligation protecting genuine confidential information stands on a different footing. Read together, the recent authorities do not weaken the traditional distinction; they apply it to modern lock-in, damages and confidentiality disputes.
8. Illustrative Applications
Simultaneous competing employment: An engineer employed full-time by a technology company secretly begins working for a direct competitor during the same contractual term. A clause requiring exclusive service would ordinarily support the existing employment and may be enforceable.
General post-employment prohibition: A salesperson resigns lawfully and is prohibited from working for any business in the same industry anywhere in India for two years. The restraint affects future employment after the relationship has ended and would ordinarily be void under Section 27.
Genuine trade secret: A technical employee copies an unpublished chemical formula and supplies it to a new employer. An injunction may protect the formula even after employment because the relief targets misuse of proprietary information rather than ordinary competition.
General skill and public information: An employee changes jobs and relies on professional experience, communication skills and customer details available through public sources. Labelling these matters confidential should not justify an order preventing the employee from pursuing the new role.
9. Critical Analysis
The Golikari framework has a defensible core. An employer that commits resources to specialised training and shares secret processes should not be required to accept simultaneous disloyal service or deliberate transfer of confidential know-how during an agreed term. Freedom of contract would become hollow if an employee could accept the benefits of a fixed engagement and immediately redirect those benefits to a competitor without any consequence. Limited exclusivity, reimbursement of demonstrable costs and protection of genuine secrets may therefore be legitimate.
At the same time, employment contracts are not always negotiated between parties of equal strength. Standard-form clauses may combine a long lock-in period, disproportionate damages, an expansive definition of confidential information and a nationwide post-employment ban. A formal signature should not prevent scrutiny of substance. The Court’s warnings against covenants that are unconscionable, excessively harsh, unreasonable or one-sided remain crucial, particularly where enforcement would leave an employee without realistic work.
Three safeguards should guide application of the doctrine. First, courts should require the employer to identify a concrete interest: exclusive service during the term, specific training expenditure or information that is genuinely secret. Fear of ordinary competition is insufficient. Second, the remedy should be proportionate. An injunction must be limited by time and function and should not compel return to service indirectly. Damages should correspond to proved loss or a defensible pre-estimate rather than operate as a penalty. Third, confidentiality must be separated from skill. Knowledge of public facts, personal relationships and general professional ability travels with the employee; copied formulas, private databases and proprietary documents do not.
A further conceptual difficulty is the use of “reasonableness”. Under Indian law, reasonableness does not generally rescue a clause already falling within Section 27, except within the statutory goodwill exception. The inquiry is more accurately directed to classification: does the covenant further performance of a subsisting contract, or does it restrain a lawful occupation after that contract has ended? Reasonableness remains relevant to unconscionability and equitable relief, but it should not obscure the statutory prohibition.
On balance, Golikari continues to offer a workable structure when read narrowly and alongside later cases. Its legitimacy comes from the limited injunction and the proven technical interest, not from an unrestricted power of employers to control future careers. Recent decisions on lock-in periods and service bonds demonstrate that courts are willing to enforce genuine in-term commitments, while decisions on post-employment non-compete clauses preserve employee mobility. That combination reflects both contractual responsibility and economic freedom.
10. Conclusion
Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. Ltd. established that a negative covenant securing exclusive service during the subsistence of an employment contract is generally not a restraint of trade under Section 27. The ruling was fact-sensitive: the term was definite, the duties were specialised, confidential technical information required protection and the injunction was narrower than the contractual language. It neither compelled personal service nor imposed a general prohibition after expiry of the agreement.
Subsequent decisions have preserved this boundary. Post-employment non-compete restrictions ordinarily remain void, while genuine confidentiality obligations and proportionate minimum-service conditions may be enforced in appropriate circumstances. The correct inquiry is therefore not whether every negative covenant is valid or invalid, but what interest it protects, when it operates and what practical restraint it creates. A principled application of these questions can protect legitimate business investments without converting employment contracts into instruments for controlling an employee’s future livelihood.
