Making Non-Compete Agreements Work in India: A Guide for Employers (2025 Update)

Non-compete clauses are a fundamental tool for employers seeking to safeguard trade secrets, preserve customer relationships, and protect significant investments in talent. However, in India, their enforceability is not straightforward, primarily due to the stringent provisions of Section 27 of the Indian Contract Act, 1872. This section declares that "Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void".

This guide provides an updated overview for employers on the legal distinctions concerning employee restraint, both during and after the period of employment, drawing on key judicial pronouncements up to 2025.

The Legal Framework: Section 27 of the Indian Contract Act

Indian law stands distinct from jurisdictions such as the UK or US in its approach to restraints of trade. A crucial difference is that Section 27 of the Indian Contract Act, 1872 does not differentiate between partial and total restraints; any agreement falling within its scope is considered void. Furthermore, the test of reasonableness, which is common in other jurisdictions, does not apply to post-termination employment contracts in India, unless the restraint is tied to the sale of goodwill, which is the sole exception explicitly provided in Section 27. This legislative intent is reinforced by the fact that despite recommendations from the Law Commission, no additional exceptions have been incorporated. The overarching principle upheld by Indian courts is the employee's constitutionally protected right to pursue a livelihood.

Non-Compete During Employment: Permissible and Enforceable

Employers possess a legal entitlement to restrict employees from undertaking competing roles during the course of their active employment. This type of restraint is considered permissible as it ensures exclusivity and loyalty to the employer. Indian courts have consistently upheld such limited restraints, recognising the employer's need to protect their legitimate business interests while the employment relationship subsists.

Landmark Case: The Supreme Court's decision in Niranjan Shankar Golikari v. Century Spinning & Mfg. Co. Ltd. (1967) affirmed that negative covenants operating during the period of employment are generally not regarded as a restraint of trade under Section 27 of the Indian Contract Act, 1872. Such clauses are upheld provided they are:

• Reasonable in nature

• Not one-sided or harsh

• Not forcing the employee into idleness

  
  

The Niranjan Shankar Golikari judgment clarified that an injunction can be granted to protect employer interests where the negative stipulation is not void, especially if it is restricted as to time, nature of employment, and area, and does not compel the employee to idleness or return to the previous employer.

Key Takeaway: Employers can confidently include non-compete clauses that apply during the employment period, provided they are clearly defined, time-bound, and do not impose disproportionate burdens or abuse the imbalance of bargaining power between the employer and employee.

Post-Employment Non-Compete: Largely Unenforceable

The landscape significantly shifts after the employment relationship concludes. Indian courts have consistently struck down clauses that attempt to bar former employees from joining competitors or starting their own businesses, even if the restrictions appear to be limited in scope. The Supreme Court has unequivocally drawn a line, emphasising that commercial contracts cannot override an employee's fundamental right to earn a livelihood.

Key Cases:

• Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan & Anr. (2006) reaffirmed this stance, holding that any restraint after termination—no matter how minor—would fall foul of Section 27 of the Indian Contract Act. This means that once the employment ends, the employee is generally free to work where and how they choose, and non-compete clauses extending beyond employment are typically void.

  
  

• The recent Varun Tyagi v. Daffodil Software Private Limited (2025) case further reinforced this principle. The Delhi High Court quashed an interim injunction that had restrained an employee from working with a former client post-termination. The court explicitly stated 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 Indian Contract Act".

  
  

  The specific non-compete clause in the employment agreement, which restricted the employee from dealing with any "Business Associate" for three years post-cessation, was deemed a blanket prohibition and therefore void, even when limited to specific clients. The court reiterated that the freedom of changing employment for improving service conditions is a vital right that cannot be curtailed on the grounds of confidential data. Furthermore, the court in Varun Tyagi highlighted that an employer cannot compel an employee to remain idle or to return to the previous employer.

  
  

Key Takeaway: Blanket post-employment bans on joining a competitor, geographical or industry-wide employment restrictions, or terms that appear to punish career progression are unlikely to be upheld in India. The reasoning for this is that Indian law does not distinguish between partial and complete restraints in post-termination contexts, and the test of reasonableness is generally not applied.

Exceptions and Legally Viable Protections (Post-Employment)

While broad non-compete clauses are largely unenforceable post-employment, narrow and targeted protections are still legally viable. Indian courts have shown a willingness to uphold clauses that aim to protect genuine proprietary interests, such as confidentiality and client relationships, provided they do not unduly restrict an individual's right to employment.

Case with Practical Insight: The Supreme Court in Gujarat Bottling Co. Ltd. v. Coca Cola Co. (1995), while not a pure employment case, clarified that not all restraints are void; only those that are unreasonable and not in the nature of a business necessity. The Court distinguished between clauses that seek to prevent competition and those that seek to protect a legitimate proprietary interest, such as confidential data or trade secrets. This judgment is often cited in employment disputes to support narrow, purpose-driven restrictions that protect what the employee knows, rather than where they work.

Such legally enforceable post-employment protections include:

• Non-solicitation clauses for clients, employees, and vendors.

• Confidentiality obligations.

• Intellectual Property (IP) protection and assignment clauses.

• Robust Non-Disclosure Agreements (NDAs) with survival clauses post-termination.

  
  

The Varun Tyagi judgment affirmed that negative covenants post-termination can be granted to protect the confidential and proprietary information of the employer or to restrain the employee from soliciting the clients of the employer. However, in Varun Tyagi, the court found the employer's apprehension regarding the disclosure of intellectual property to be "misconceived" because the IP in question belonged to the client (Digital India Corporation), not the employer (Daffodil Software Private Limited). This highlights the importance of clearly establishing the ownership of confidential information or IP for such clauses to be enforceable. Courts have also held that an employer cannot use the garb of confidentiality to perpetuate forced employment.

Key Takeaway: Employers can enforce narrow restraints that protect legitimate business interests, provided these do not act as a de facto non-compete clause by broadly restricting future employment opportunities.

Given the clear judicial stance, employers in India must rethink their employment contract templates and shift their focus from attempting to enforce broad non-compete clauses to adopting legally sustainable alternatives.

What Works (Legally Sustainable Alternatives):

• During-employment non-compete clauses: These are generally enforceable if clearly defined and time-bound.

• Non-solicitation clauses: These are crucial for protecting client, employee, and vendor relationships without directly restricting future employment.

• Confidentiality and IP assignment clauses: These ensure that proprietary knowledge and intellectual property developed during employment remain with the company.

• Robust NDAs with survival clauses: These should clearly define confidential information and ensure the obligation of non-disclosure survives the termination of employment.

What Fails (Legally Problematic Clauses):

• Blanket post-employment bans on joining a competitor.

• Geographical or industry-wide restrictions on future employment.

• Terms that appear to punish career progression or coerce loyalty by restricting an employee's ability to seek better opportunities.

  
  

Conclusion: Protect Interests, Not at the Cost of Freedom

While non-compete clauses that operate during active employment remain enforceable under Indian law, post-employment restraints are typically invalid, unless they are meticulously structured to protect legitimate, narrowly defined business interests such as confidential information, trade secrets, or client relationships.

For employers in India, the prudent approach is to move away from outdated blanket restrictions and instead focus on safeguarding proprietary knowledge, preserving client trust, and designing fair, legally defensible employment contracts. This strategic shift ensures compliance with Indian law while still allowing businesses to protect what truly matters to their continued success.