Post-employment non-compete clauses are void in India. Section 27 of the Indian Contract Act, 1872 provides that every agreement by which anyone is restrained from exercising a lawful profession, trade or business is void to that extent. Indian courts have applied this consistently for over a century, and unlike England or the United States, Indian law offers no reasonableness test that can save an otherwise void restraint. Restrictions operating during employment are enforceable. Restrictions operating after it ends are not, unless they fall within the narrow statutory exceptions for the sale of goodwill or for partners under the Indian Partnership Act, 1932.
The practical consequence is that most Indian employment contracts contain a clause the employer cannot enforce and the employee is frightened of unnecessarily. Both sides would be better served by drafting the things that do work.
Why Section 27 Voids Non-Compete Clauses
The provision is short and its effect is broad.
Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind is, to that extent, void.
Three features of the Indian position follow, and each differs from what most drafters assume.
There is no reasonableness test
This is the most important and most commonly misunderstood point. English law asks whether a restraint is reasonable in the interests of the parties and of the public, and enforces it if it is. Indian law asks no such question. A restraint either falls within a recognised exception or it is void.
A twelve month restriction limited to one city is void for the same reason a five year nationwide restriction is void. Narrowing the clause does not rescue it. Employers who copy drafting from American or English precedents routinely miss this, and the clause they carefully limited is no more enforceable than the one they started with.
Partial restraints are void, not just total ones
The point was settled early. In Madhub Chander v Raj Coomar (1874), the Calcutta High Court held that a restraint confined to a single locality was still void, reasoning that Section 27 contains no word equivalent to “absolutely” and therefore catches partial restraints as well as complete ones. That reading has been followed since.
The exceptions are statutory, not judicial
Indian courts have not developed a general power to enforce reasonable restraints. The exceptions come from the statute book:
- Exception 1 to Section 27, permitting a person who sells the goodwill of a business to agree not to carry on a similar business within specified local limits, so long as the limits are reasonable having regard to the nature of the business.
- Sections 11(2), 36(2), 54 and 55(3) of the Indian Partnership Act, 1932, permitting restraints between partners during the partnership, on an outgoing partner, on dissolution, and on the sale of goodwill of the firm. These sit alongside the wider rights and duties of partners and are the reason a partnership deed can restrict competition where an employment contract cannot.
Anything outside those categories is caught. The general treatment of void agreements in contract law places restraint of trade alongside restraint of marriage and restraint of legal proceedings as categories the legislature chose to prohibit outright.
During Employment vs After Employment: The Line That Decides Enforceability
The distinction the courts draw is temporal, not one of degree.
| Basis | During employment | After employment ends |
|---|---|---|
| Enforceable | Generally yes | Generally no |
| Legal basis | Duty of fidelity and exclusive service | Section 27 renders it void |
| Leading authority | Niranjan Shankar Golikari (1967) | Superintendence Company (1980), Varun Tyagi (2025) |
| Typical clause | Exclusive service, no moonlighting | Twelve to thirty six month restraint on joining competitors |
| Remedy available | Injunction | None on the non-compete itself |
| Reasonableness relevant | Yes, to the scope of the in-term restraint | No, the clause is void regardless |
In Niranjan Shankar Golikari v The Century Spinning and Manufacturing Co Ltd, AIR 1967 SC 1098, the Supreme Court upheld an injunction restraining an employee from working for a competitor during the currency of his contract. The reasoning is narrow and often overstated: a restriction operating while the employee is bound to serve the employer exclusively is not a restraint of trade within Section 27, because the employee is not being prevented from earning a living, only from serving two masters at once.
That reasoning does not survive the end of the employment. In Superintendence Company of India v Krishan Murgai (1980), the Supreme Court declined to enforce a post-service restriction, and the position has been reaffirmed repeatedly since, including in Percept D’Mark (India) Pvt Ltd v Zaheer Khan (2006).
What the Varun Tyagi Judgment Decided in 2025
The most recent significant authority is Varun Tyagi v Daffodil Software Private Limited, FAO 167/2025, decided by the Delhi High Court on 25 June 2025.
The facts
Tyagi, an IT engineer, was employed by Daffodil Software and assigned to the POSHAN Tracker project, a government initiative commissioned by the Digital India Corporation. His employment agreement contained a clause restraining him for three years after leaving from engaging with any “business associate” of the company, a definition that captured the Digital India Corporation itself. He resigned in January 2025, served three months’ notice, left on 7 April 2025, and joined the Digital India Corporation the following day.
The trial court granted an ex parte interim injunction restraining him from working there.
What the High Court held
The Delhi High Court set the injunction aside. The reasoning matters more than the outcome:
- Post-termination restraints on employment that do not fall within the narrow exception to Section 27 are void and unenforceable, however they are labelled.
- A clause preventing a former employee from joining a client or business associate is a restraint on employment, not merely a protection of business interests.
- Any breach of the employment agreement can be compensated in damages, which removes the case for an injunction.
- Negative covenants remain enforceable to the extent they protect genuinely confidential and proprietary information, rather than restraining employment as such.
Why it matters
The judgment establishes no new principle, and that is precisely its significance. Employers had argued that a narrowly drawn restriction protecting legitimate business interests should survive, and the court declined to import that reasoning. The burden sits on the employer to bring the clause within a statutory exception, and reasonableness is not a route in.
A Bombay High Court decision in January 2026 reaffirmed the same position. Where High Courts have addressed the question, they have moved in one direction, so the doctrine of stare decisis offers an employer little to work with here.
What Employers Can Actually Enforce
This is the part worth reading if you draft employment contracts. Four mechanisms survive Section 27, and together they achieve most of what a non-compete is meant to achieve.
- Confidentiality obligations. A promise not to use or disclose confidential information is not a restraint on trade, because it does not prevent the employee working anywhere. It prevents a specific misuse. This is the strongest protection available and it survives termination indefinitely if drafted to. The principles are the same as those governing a standalone non-disclosure agreement, and the drafting discipline is set out in best practices for drafting NDAs in India.
- Non-solicitation of clients and employees. More likely to be enforced than a non-compete, though not certain. Varun Tyagi accepted that covenants protecting against client solicitation can stand where they are genuinely directed at that and not at employment generally. Draft it as a restriction on approaching named or defined clients, not as a bar on working in the sector.
- Garden leave. During the notice period the employee remains employed and continues to be paid, so the restriction operates during employment rather than after it. This is the cleanest way to keep someone out of a competitor’s office for a defined period, and its enforceability rests on the Golikari reasoning.
- Intellectual property assignment. A clause vesting work product in the employer prevents the departing employee taking the asset itself, which is often the real concern.
To these, add a properly drafted notice period. A three month notice requirement achieves in practice much of what a three month non-compete would, and it is enforceable because the employment subsists throughout. The interaction with termination clauses in Indian contracts matters here, since a notice provision that does not say what happens on payment in lieu is easily circumvented.
Non-Compete vs Non-Solicitation vs Confidentiality
These three are drafted together and confused constantly.
| Basis | Non-compete | Non-solicitation | Confidentiality |
|---|---|---|---|
| What it restricts | Working for a competitor at all | Approaching specified clients or employees | Using or disclosing defined information |
| Restrains trade | Yes, directly | Arguably, in part | No |
| Post-employment enforceability | Void under Section 27 | Contested, sometimes upheld | Generally enforceable |
| Duration that works | None | Modest and defined | May be indefinite for genuine secrets |
| Remedy | Damages at best | Injunction possible | Injunction and damages |
| Drafting priority | Lowest | Medium | Highest |
If time is limited, spend it on the confidentiality clause. It is the provision that will actually be enforced, and it is usually the one copied from an old precedent without thought, alongside the other boilerplate clauses that decide outcomes nobody negotiated.
Non-Compete Clauses in Commercial Contracts
The employment position does not carry across to commercial transactions, and this is where the exception has real work to do.
Sale of business and goodwill
Exception 1 to Section 27 permits a seller of goodwill to agree not to compete within reasonable local limits. Where a founder sells a business and the buyer is paying for customer relationships and reputation, a restraint of two to five years is commonly accepted, provided the goodwill genuinely transferred and the limits are proportionate to what was sold.
The exception has been read strictly. A restraint attached to a business the seller never actually carried on, or extending worldwide, has been struck down as falling outside it.
Shareholder and joint venture agreements
Courts approach restraints between commercial parties differently, on the footing that the bargaining power is more equal and the restraint protects an investment rather than confining a person’s livelihood. Non-compete covenants in shareholder agreements, share purchase agreements and joint venture agreements are therefore more likely to be upheld, particularly where they are tied to a genuine transfer of goodwill.
The safest structure is to link the restraint expressly to the goodwill acquired, define the restricted business narrowly, and keep the duration and territory proportionate.
Franchise and distribution
A restriction preventing a franchisee from dealing in competing goods during the term of the franchise is generally treated as facilitating distribution rather than restraining trade, because it operates only during the currency of the agreement. Extending it beyond expiry raises the same problem as a post-employment non-compete, which is among the recognised pitfalls in drafting franchise and licensing agreements.
How to Draft the Clause Properly
Assume the non-compete will not be enforced and build the protection elsewhere.
- Separate the covenants. Confidentiality, non-solicitation, non-compete and IP assignment should be distinct clauses, not one paragraph. If they are bundled and the non-compete falls, a court severing the offending part has a cleaner job when the drafting is separated.
- Include a severability provision. So that the void restraint does not take the enforceable covenants with it. This is one of the essential clauses every commercial contract must contain and it earns its place here.
- Define confidential information precisely. A definition covering everything covers nothing, because a court asked to injunct will want to know what specifically is at risk.
- Name the clients for non-solicitation, or define them by reference to those the employee actually dealt with in a stated period. A bar on approaching the entire market is a non-compete wearing a different label, which is exactly what Varun Tyagi refused to enforce.
- Use notice and garden leave rather than a post-termination restraint, since both operate during employment.
- Do not rely on a penalty. A liquidated damages figure attached to a void restraint does not make the restraint enforceable.
- Stamp the agreement properly. An employment agreement that is not duly stamped is inadmissible in evidence, and the general stamp duty position on agreements applies here under the framework of the Indian Stamp Act, 1899. Discovering this at the injunction hearing is the worst possible moment.
The broader discipline is the same one that runs through any employment agreement: draft for what a court will actually do, not for what you would like it to do.
What Employees Should Know
Three points, stated plainly, because the anxiety is usually disproportionate to the risk.
- A post-employment non-compete in your contract is very likely unenforceable. Signing it does not create an obligation the law will enforce against you.
- Confidentiality obligations are different and are real. Taking a client list, source code or a database to a new employer is a genuine legal exposure, separate from any non-compete, and it is the claim a former employer is most likely to succeed on.
- An injunction application still costs you time and money, even when you win. The fact that a clause is void does not stop it being litigated, as Varun Tyagi discovered before the appeal succeeded.
Learning to Draft Restrictive Covenants Properly
Non-compete drafting is a useful test of whether someone is drafting from precedent or from law. The clause is in almost every Indian employment contract, it has been unenforceable for the whole of that period, and it survives because each generation of drafters copies the last.
The skill is in knowing what to build instead, which requires understanding why the courts hold the line they do rather than merely that they hold it. That is where drafting shades into advice, and it is the gap between drafting and negotiating a contract: a client who is told the clause is void will ask what they should have instead, and the answer has to be ready. Reasoning of this kind is exactly what a legal memo is for, since the honest answer to “can we enforce this” is usually no, followed by a better question.
Getting there is a matter of the basic principles of legal drafting applied with some scepticism about inherited precedent, which is most of what improving drafting skills consists of once the basics are in place.
LawMento’s Practical Training in Drafting of Contracts covers employment agreements, restrictive covenants and confidentiality provisions across 30 or more contract types, 26 hours of instruction and 230 pages of reading material. It builds on the foundation in contract drafting as a discipline, where the recurring theme is that the clause everyone copies is the clause nobody has checked.
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FAQs
Are non-compete clauses legal in India?
They can lawfully be included in a contract, but a post-employment non-compete is void and unenforceable under Section 27 of the Indian Contract Act, 1872. Restrictions operating during employment are enforceable.
Can a company sue me for joining a competitor?
It can file a suit, but a claim founded solely on a post-employment non-compete is unlikely to succeed. A claim founded on misuse of confidential information or breach of a properly drafted non-solicitation covenant stands on stronger ground.
Is a non-compete valid if it is only for six months and one city?
No. Indian law applies no reasonableness test to post-employment restraints. Narrowing the duration or the territory does not save the clause, which is the principal difference from English and American law.
Is a non-solicitation clause enforceable in India?
More likely than a non-compete, though not guaranteed. A covenant genuinely restricted to approaching identified clients or employees may be upheld. One drafted so widely that it prevents working in the sector will be treated as a non-compete.
What is garden leave and is it enforceable?
Garden leave keeps an employee away from work during the notice period while they continue to be paid. Because the employment subsists, the restriction operates during employment rather than after it, and it is generally enforceable.
Can a non-compete be enforced when a business is sold?
Yes, within limits. Exception 1 to Section 27 permits a seller of goodwill to agree not to carry on a similar business within reasonable local limits. The goodwill must genuinely have been sold and the restriction must be proportionate.
What did the Varun Tyagi judgment change?
It changed no principle. The Delhi High Court set aside an injunction and reaffirmed that post-termination restraints falling outside the Section 27 exception are void, including clauses framed as restrictions on joining clients or business associates.
Can partners agree not to compete with the firm?
Yes. Sections 11(2), 36(2), 54 and 55(3) of the Indian Partnership Act, 1932 permit restraints between partners during the partnership, on an outgoing partner, on dissolution, and on the sale of the firm’s goodwill.
This guide explains the general position and is not legal advice on any specific contract or dispute. The enforceability of a restrictive covenant depends on its precise wording, the surrounding agreement and the facts. Take advice on your own position before signing, enforcing or resisting one.
