Validity of Non-Solicitation and Non-Compete Clauses in Employment Agreements

Introduction

Non-compete and non-solicitation clauses are contractual provisions commonly incorporated into employment agreements to protect an employer's legitimate business interests. However, their enforceability under Indian law presents a complex legal landscape, shaped primarily by Section 27 of the Indian Contract Act, 1872 ("ICA"), and refined through decades of judicial interpretation. The recent judgment of the Delhi High Court in Varun Tyagi v. Daffodil Software (P) Ltd., [2025 SCC Del 4589], has reinforced the strict limitations on post-employment restraints, holding that "any terms of the employment contract that imposes a restriction on right of the employee to get employed post-termination of the contract of employment shall be void being contrary to Section 27 of the ICA."

Legal Framework

Section 27 of the ICA forms the cornerstone of the legal analysis governing restraints of trade in India. It stipulates that every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind is, to that extent, void. The sole statutory exception pertains to agreements concerning the sale of goodwill, wherein the seller may be reasonably restrained from carrying on a similar business within specified local limits.

Indian law adopts a distinctly more rigid approach than jurisdictions such as the United Kingdom or the United States. As established by the Supreme Court in Superintendence Co. of India (P) Ltd. v. Krishan Murgai, [(1981) 2 SCC 246], Section 27 is general in its terms and does not distinguish between partial and absolute restraints. Any agreement falling within its scope is rendered void, irrespective of how reasonable it may appear. The Supreme Court affirmed in Percept D'Mark (India) (P) Ltd. v. Zaheer Khan, [(2006) 4 SCC 227], that "neither the test of reasonableness nor the principle of restraint being partial is applicable, unless it falls within the express exception engrafted in Section 27."

The Critical Distinction: During vs. Post-Employment Restraints

Non-Compete Clauses During Employment

The Supreme Court, in Niranjan Shankar Golikari v. Century Spg. and Mfg. Co. Ltd., [1967 SCC OnLine SC 72], established a critical distinction between restrictive covenants operating during employment and those extending beyond its termination. The Court held that "negative covenants operative during the period of the contract of employment when the employee is bound to serve his employer exclusively are generally not regarded as restraint of trade and therefore do not fall under Section 27 of the Contract Act." This principle was reaffirmed in Superintendence Co. of India v. Krishan Murgai, where the Supreme Court observed that the doctrine of restraint of trade applies only when the contract comes to an end, not during its continuance.

More recently, the Supreme Court in Vijaya Bank & Anr. v. Prashant B Narnaware, [2025 INSC 691], upheld a three-year minimum service tenure clause coupled with liquidated damages. The Court emphasized that such restrictive covenants, operating during the subsistence of an employment contract, do not place a clog on the freedom of a contracting party to trade or seek employment and are therefore not violative of Section 27.

Post-Employment Restraints: Void and Unenforceable

The legal landscape shifts dramatically once employment terminates. A service covenant extending beyond the term of service is void under Section 27. The Supreme Court in Percept D'Mark (India) (P) Ltd. v. Zaheer Khan, [(2006) 4 SCC 227] held that "a restrictive covenant extending beyond the term of the contract is void and not enforceable." Similarly, in Varun Tyagi v. Daffodil Software (P) Ltd., [2025 SCC Del 4589], the Delhi High Court quashed an interim injunction that sought to restrain an employee from working with a competitor for three years post-termination, reinforcing that such clauses are contrary to law.

Non-Solicitation Clauses and Protection of Confidential Information

Non-solicitation clauses present a more nuanced legal position than outright non-compete restrictions. It is settled law that negative covenants post-termination may be enforced, but only for the limited purpose of protecting the employer's confidential and proprietary information or to restrain the employee from soliciting the employer's clients. However, no judicial precedent supports restraining an employee from undertaking any employment merely to enforce a negative covenant.

The Delhi High Court in American Express Bank Ltd. v. Ms. Priya Malik, (2006) IIILLJ 540 DEL, held that an employee's right to seek better employment cannot be curbed on the ground that the employee possesses confidential data. The Court observed, "In the garb of confidentiality the plaintiff cannot be allowed to perpetuate forced employment... Such a restriction will be hit by Section 27 of the Contract Act."

Conclusion

The enforceability of non-compete and non-solicitation clauses in employment agreements under Indian law follows a clear demarcation. While restrictive covenants operating during the subsistence of employment are generally valid and enforceable, post-employment restraints face stringent scrutiny under Section 27 of the ICA and are typically rendered void. The only exceptions are narrowly tailored covenants designed to protect an employer's trade secrets, confidential information, and client connections, without imposing an undue or blanket restriction on an individual's right to pursue their profession.