Non-Compete Clauses in India and Section 27 of the Contract Act

Is a non-compete clause valid in India?

Only in limited situations. Section 27 reads: 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 exception written into the section is for a person who sells the goodwill of a business, who may agree with the buyer not to carry on a similar business within specified local limits, so long as the buyer carries on a like business there and the limits are reasonable.

This makes Indian law stricter than English law. English courts enforce restraints that are reasonable in time, area and scope. Indian courts, from the Calcutta High Court's decision in Madhub Chunder v Rajcoomar Doss in 1874 onwards, have read section 27 as voiding partial restraints too. A two-year, Delhi-only restriction is still a restraint, and a court will not save it by calling it reasonable.

The words to that extent void matter. Section 27 does not make the whole contract void, only the restraining part. An employment agreement with a void non-compete still binds both sides on salary, notice, confidentiality and intellectual property. Courts sever the restraint and enforce the rest, which is why careful drafting keeps each obligation in its own clause.

Why does a reasonable non-compete still fail after employment ends?

Because the Supreme Court has said so, clearly and more than once. In Superintendence Company of India v Krishan Murgai (1980), the Court refused to enforce a clause that stopped a former branch manager from working in the same line of business in the same area for two years after leaving. It held that a restraint operating after the termination of employment is void under section 27, and that reasonableness is not the test in India for such restraints.

In Percept D'Mark (India) v Zaheer Khan (2006), the Supreme Court applied the same logic outside employment. A clause giving a sports management company a right of first refusal after the contract had ended, which effectively stopped the cricketer from freely contracting with others, was held to be a restraint of trade and void. The question the Court asked was simple: does the restraint operate during the contract, or after it?

That distinction runs through all the case law. During a contract, a promise to work exclusively for one party is part of the bargain, and courts enforce it. After the contract, the person must be free to earn a living. An employee should not be put to the choice of working for the old employer or sitting idle.

Can an employer stop an employee from working for others during employment?

Yes. In Niranjan Shankar Golikari v Century Spinning and Manufacturing Co (1967), the Supreme Court upheld a covenant by which an employee agreed to serve only the company for a fixed term, and enforced it by injunction when he tried to join a competitor during that term. The Court said a negative covenant that operates during the period of employment is not a restraint of trade under section 27, unless it is unconscionable or excessively harsh.

So exclusivity, no-moonlighting and conflict of interest clauses are enforceable while the employment continues. An employer can also enforce the notice period: if the contract requires three months' notice, the employee cannot simply walk out and start with a rival the next day. Courts will not order an unwilling employee to work, because a contract of personal service is not specifically enforced, but they can restrain him from working for someone else during the notice period under section 42 of the Specific Relief Act.

Garden leave sits on this side of the line. If the employer keeps paying full salary and benefits during the notice period, while asking the employee to stay home and not work for anyone else, the employment continues and the restraint operates during it. Garden leave clauses work best when the notice period is reasonable and the pay continues in full. A garden leave period stretched to a year, to achieve indirectly what a non-compete cannot, invites scrutiny.

Which restrictive clauses are enforceable in India?

This table sets out the usual position. Outcomes still depend on the exact wording and the facts proved.

What did the Delhi High Court decide in Varun Tyagi v Daffodil Software (2025)?

It confirmed, in a typical modern fact pattern, that a post-employment non-compete cannot be used to block a new job. A software developer had worked on a project for his employer's business associate. His contract barred him from joining that associate for three years after leaving. After serving his notice period he joined the associate, and the trial court granted the employer an interim injunction restraining him.

In June 2025 the Delhi High Court allowed his appeal and set aside the injunction. Justice Tejas Karia held that terms restricting post-termination employment are void under section 27. After termination, the court said, a covenant can be invoked only to protect confidential and proprietary information or to prevent solicitation of the employer's clients, and even then it cannot bar the employee from taking up employment altogether. On the facts, the court found no real risk of confidential information passing, because the intellectual property in the work belonged to the associate anyway.

The case is useful because the clause looked narrow: one named company, not the whole industry. That did not save it. Employers who think a targeted restriction will survive because it leaves the employee free to work elsewhere should read this judgment carefully.

Are non-solicitation clauses enforceable after an employee leaves?

They can be, if they are narrow and genuinely protect something other than the employer's wish to avoid competition. A clause that stops a former employee from using the employer's confidential client information to approach the clients he handled, for a limited period, is often treated as protecting confidential information and trade connections rather than restraining trade. Courts have granted injunctions in such cases, especially where there is evidence that client lists or pricing were taken.

A clause that stops the former employee from dealing with any customer of the employer, even customers who approach him on their own, looks much more like a non-compete. Courts are reluctant to stop clients from choosing whom to deal with, and they are reluctant to prevent a person from accepting business offered to him. The distinction between soliciting and merely dealing matters in drafting.

No-poach clauses, which stop a former employee from inducing his old colleagues to leave, are more often upheld, because they do not prevent the former employee himself from working. But the employees he approaches are free to resign, and an employer cannot use the clause to trap its own staff. The honest position is that non-solicit clauses are enforceable sometimes, on good evidence, for a limited time, and that no clause guarantees an injunction.

Is a non-compete valid when you sell a business?

Yes, within limits. Exception 1 to section 27 allows the seller of the goodwill of a business to agree with the buyer to refrain from carrying on a similar business within specified local limits, so long as the buyer, or anyone deriving title to the goodwill from him, carries on a like business there. The limits must be reasonable, having regard to the nature of the business.

The logic is commercial. A buyer who pays for goodwill is paying for the customers' habit of coming back. If the seller could open next door the following week, the goodwill would be worthless. So the law lets the buyer protect what it paid for, but no more: the restraint should match the business sold, the territory where it actually operates and a period that is reasonable for the goodwill to settle with the buyer.

Share purchase deals raise a harder question, because the promoter sells shares rather than the business itself. The case law here is thinner, but a promoter's non-compete in a genuine sale of a controlling stake has a fair argument for falling within the spirit of the exception, particularly where the promoter received a substantial price that reflects the goodwill. A non-compete given by a minority founder who stays on as an employee is closer to an employment restraint. Large transactions may also be reviewed by the Competition Commission of India, which looks at whether non-compete obligations go beyond what the deal needs.

The legal provisions on restraint of trade

Non-competes for partners, co-founders and directors

Partners stand on a different footing because the Partnership Act expressly allows restraints that section 27 would otherwise forbid. During the partnership, partners can agree not to carry on any competing business. An outgoing partner can agree not to compete for a reasonable period within reasonable limits. These clauses belong in the partnership deed and the retirement deed; our post on partnership firm disputes and dissolution covers what happens when partners fall out.

Co-founders of a company are usually shareholders, directors and often employees, all at once. A non-compete in a shareholders' agreement that applies while the founder holds shares is closer to a restraint during the contract, and courts are more willing to enforce it. One that continues for years after the founder has sold out and left can fall foul of section 27 unless it is genuinely tied to a sale of goodwill. Vesting, good leaver and bad leaver provisions often protect the company better than a post-exit non-compete; see our posts on co-founder disputes, exits and vesting and shareholders' agreement clauses that prevent disputes.

Directors owe statutory duties under section 166 of the Companies Act while in office, including avoiding conflicts of interest. A director who sets up a competing venture while still on the board, or diverts a company opportunity to himself, can be restrained on that basis without relying on any non-compete. Once he resigns and the resignation takes effect, those duties largely end, though the duty not to misuse confidential information continues.

Franchise, distribution and vendor agreements

The same line between during and after the contract applies in commercial agreements. In Gujarat Bottling Co v Coca Cola Co (1995), the Supreme Court upheld a clause that stopped a bottler from dealing in competing beverages during the term of the franchise agreement, holding that a negative stipulation operating during the term is not a restraint of trade. Exclusive distribution, exclusive supply and exclusive service arrangements are therefore generally enforceable while the agreement runs.

Post-term restraints are another matter. A clause stopping a former franchisee from running any restaurant, salon or coaching centre in the city for three years after the franchise ends is open to challenge under section 27. What the franchisor can do is protect its trademark, trade dress, recipes, manuals and customer data, and require de-branding on exit. Our post on franchise agreement disputes: terms, exit and remedies deals with this in detail.

With vendors and consultants, avoid clauses that bar them from working for any of your competitors after the engagement. Instead, restrict use of your information, assign the intellectual property in the work product to you, and if needed agree a short exclusivity during the engagement in a specific product line.

What can an employer realistically do when a senior employee joins a competitor?

Focus on what the employee took, not where he went. If there is evidence that he downloaded client data, copied source code or carried away pricing sheets, the employer can seek an injunction restraining use of that information and, in a suitable case, solicitation of the clients concerned. The court will look at forensic evidence, the confidentiality clause and how quickly the employer acted.

If he left without serving notice, the employer can claim salary in lieu of notice as the contract provides, and if he is still within the notice period, seek to restrain him from working for the rival until it ends. If there is a valid bond for genuine training costs, the employer may recover a reasonable amount. What the employer should not do is threaten the new employer with a non-compete that will not stand, or withhold earned salary or gratuity because the employee joined a competitor. Those steps create claims against the employer.

When Advocate B.K. Singh advises a company on a departing executive, the first question he asks is whether the company can point to a specific document, list or file that is now at risk. If it can, there is usually a case for a narrow order. If the worry is only that the person knows the business well, the honest advice is that the law protects his right to use that knowledge, and the company should compete on the merits.

Received a legal notice over a non-compete? Steps for employees

Employees often panic on receiving a notice from a former employer. Most such notices are sent to discourage the new employer, not because a court action is planned. Handle it carefully all the same.

1. Read the whole agreement, not just the clause quoted

   Check the confidentiality, notice period, non-solicit, intellectual property and return-of-property clauses. Note what the agreement says about governing law, courts and arbitration.

2. Work out whether your notice period was properly served

   If you left before the notice period ended or without the employer accepting a shorter period, that is the weak point, not the non-compete. Settling the notice period dues often ends the matter.

3. Return company property and data

   Return laptops, documents and access cards, and do not keep copies of client lists, code or internal files on personal devices or email. Do not delete anything in a way that looks like destruction of evidence; get advice on how to hand back and certify.

4. Do not solicit former clients using the employer's information

   Even where you are free to work for a competitor, using the old employer's client data or pricing to approach its customers is the act most likely to attract an injunction.

5. Reply in measured terms through an advocate

   A short reply stating that the post-employment restraint is void under section 27, that you will honour confidentiality, and that you hold no company property is usually enough. Avoid admissions and avoid making allegations you cannot prove.

6. Inform your new employer

   Most employers have seen such notices before. Share the reply and confirm you are not bringing confidential material. If you are served with a suit, the time to respond is short, so get the papers to an advocate the same day.

How to draft restrictive covenants that will survive

Start from what you actually need to protect. For most businesses that is confidential information, client relationships built with that information, the team, and intellectual property. Each has a clause that courts enforce: confidentiality with a clear definition, a time-limited non-solicit of named or identifiable clients the employee dealt with, a no-poach clause, and an assignment of intellectual property created during employment.

Use the time during employment fully. An adequate notice period for senior roles, with a garden leave option on full pay, gives the business time to move clients and change access. An exclusivity clause stops moonlighting while the person is on the payroll. These operate during the contract and sit comfortably with section 27.

Keep each restraint in its own clause, with a severability clause, so that a court that strikes down one does not taint the rest. Avoid foreign templates that assume a reasonableness test. And for sale-of-business transactions, tie the seller's non-compete to the goodwill transferred, the territory where the business really operates and a period that matches the price paid. Our page on commercial contracts and agreements explains how we draft these as part of a full set of documents.

Checklist: before you sign or rely on a non-compete

• Does the restraint operate during the contract, or after it ends?
• If after, is it a sale of goodwill or a partnership restraint that the law allows?
• Is there a separate confidentiality clause with a usable definition?
• Is any non-solicit limited to clients the person dealt with, for a short period, and to solicitation rather than all dealing?
• Is the notice period clear, and is there a garden leave option on full pay?
• Is intellectual property created during the engagement assigned in writing?
• Is there a return-of-property and certification clause for exit?
• Are the clauses severable, and is Indian law chosen?
• For employers: do you have evidence of what the person took, not just where he went?
• For employees: have you returned all company property and kept no copies?

Common mistakes on both sides

Employers most often rely on a broad non-compete and neglect the clauses that work. They send threatening notices to new employers, which can expose them to claims for interference or defamation if the allegations are unfounded. Some withhold full and final settlement, relieving letters or gratuity to pressure the employee. Earned wages and gratuity are statutory entitlements and cannot be held back for this reason; our post on salary not paid: legal notice, labour claim or civil suit explains the employee's remedies.

Employees most often make the opposite mistake: assuming that because non-competes are void, anything goes. Taking client data, forwarding files to personal email in the last weeks, or approaching the old employer's clients with its own price list are the facts that win injunctions against employees. Leaving before the notice period ends, without the employer's agreement, is the other common error.

Both sides also forget the forum clause. If the contract has an arbitration clause, the employer may have to seek interim relief through a section 9 petition, and the employee should check whether a suit filed in court is maintainable. Employment disputes for workmen may also involve the labour machinery under the Industrial Relations Code 2020; see our labour and industrial laws practice page.

What to do this week

If you are an employer drafting or revising contracts, replace post-exit non-competes with confidentiality, narrow non-solicit, garden leave and intellectual property clauses, and build an exit routine for senior staff. If someone has just left and you suspect misuse, secure the evidence first and take advice before writing to anyone.

If you are an employee with a notice in hand, do not ignore it and do not reply angrily. Return what belongs to the employer and get the reply drafted carefully. If you want an advocate to read the agreement and the notice, the team of Advocate B.K. Singh at B.K. Singh & Associates can look at the papers and tell you where you stand. Write to us through the online legal enquiry page, or read more about our corporate law practice.