Non-Compete Clauses in

Employment Contracts under Indian

Law
What are non-compete clauses? Simply put, a non-compete clause is a legal agreement or a clause
in a contract between an employer and an employee which states that the employee must not enter
into a competition with the employer after the employment period is over. These agreement include
prohibiting the employee from revealing proprietary information or secretes to any other parties
during or after employment. Many contract often specify a certain length of time when the
employee is barred from working for a competitor after they end employment. Employers may
often require employees to sign such non-compete agreements to keep their place in the market.

Legal Framework of Non-Compete Clauses in India

In India, non-compete clauses are generally considered void and unenforceable under Section 27 of
the Indian Contract Act, 1872. Section 271 states “Every agreement by which any one is restrained
from exercising a lawful profession, trade or business of any kind, is to that extent void.”
So we can establish that, the general rule put forth by Section 27 is that any agreement that restrains
a person from carrying out a lawful profession, trade, or business is void to the extent of such
restraint. This rule is absolute and does not consider whether the restraint is reasonable or not. The
main purpose is to prevent any contractual term that could limit an individual’s right to engage in
economic activities which would be a violation of their fundamental right to freedom of profession
under Article 19 of the Indian constitution.
Although Section 27 is quite straightforward and rigours in its invalidation of restraint agreements,
there are certain statuary exceptions where restrains may be permissible:
—> Sale of Goodwill: Section 27 of the Act also lays down an exception which states that “Saving
of agreement not to carry on business of which good-will is sold.One who sells the good-will of a
business may agree with the buyer to refrain from carrying on a similar business, within specified
local limits, so long as the buyer, or any person deriving title to the good-will from him, carries on a
like business therein, provided that such limits appear to the Court reasonable, regard being had to
the nature of the business.” —This section permits the seller of a business’s goodwill2 to agree with
the buyer not to carry on a similar business within specified local limits, provided these limits are
reasonable and necessary for protecting the buyer’s interests.
The rationale behind this exception was that the buyer of the goodwill should be able to enjoy the
benefits without undue competition from the seller.
—> The Indian Partnership Act, 1932, outlines specific situations where restraints on trade may be
considered valid and enforceable:
1. Section 113: This section addresses the determination of partners' rights and duties through

1 The Indian Contract Act, 1872. Government of India, sec. 27, https://legislative.gov.in.
2 Goodwill is the portion of the purchase price of a company that's higher than the net fair value of its assets and
liabilities. It's an intangible asset, meaning it has no physical form but still provides long-term value
3 The Indian Partnership Act, 1932. Government of India, sec. 11, https://legislative.gov.in.
mutual agreement. It allows partners to include non-compete clauses in their contracts during the
partnership. It explicitly permits agreements where partners agree not to engage in any business
other than that of the partnership while it exists, making such trade restraints valid in this context.
2. Section 364: This provision allows reasonable restrictions on a partner after leaving the firm. It
enables partners to agree that, after ceasing to be a partner, they will refrain from conducting a
business similar to the firm’s operations within specific geographical boundaries or for a defined
period. Such agreements are valid if the restrictions are reasonable in scope and duration.
3. Section 545: This section validates agreements that impose reasonable limitations on partners
upon dissolution or retirement from the firm. Partners may agree not to engage in a business similar
to the firm’s within defined time or geographical limits after the firm dissolves. Such restrictions are
considered lawful as long as they are reasonable.
—> Service contracts: In the context of employer-employee relationships, service agreements that
place reasonable restrictions on employees to protect the employer’s trade interests are not rendered
void under Section 27 of the Indian Contract Act, 1872. Such restrictions are valid only during the
period of employment and cease to apply once the employment relationship ends.

Some Key Judgements related to Non-Compete Agreements

- Niranjan Shankar Golikari v. Century Spinning6
The landmark judgment in Niranjan Shankar Golikari v. Century Spinning and Manufacturing
Co. Ltd. has played a pivotal role in shaping the interpretation and enforceability of non-compete
clauses in employment contracts in India. This case established a clear precedent for balancing
the competing interests of employers and employees when assessing the validity of restrictive
covenants. The Supreme Court’s meticulous examination of the restrictive clauses in the
employment contract provided a framework for determining their reasonableness and necessity.
By focusing on factors such as the scope, duration, and geographical applicability of the
restrictions, the Court set out the conditions under which non-compete clauses could be upheld
during the term of employment.
In its ruling, the Court emphasized that restraints during the term of employment, such as
requiring exclusivity and confidentiality, are enforceable provided they are reasonable and protect
legitimate business interests. The judgment underscored the importance of safeguarding an
employer’s proprietary information, trade secrets, and investment in employee training, while
ensuring that such restrictions do not unreasonably hinder the employee's right to earn a
livelihood or conflict with public policy. The Court’s reasoning balanced the employer's right to
protect its business interests against the employee's freedom to seek alternative opportunities,
setting an important distinction between restrictions during and after employment.
The judgment clarified that non-compete and confidentiality clauses during employment are valid
if they are limited in scope and aligned with the employer’s legitimate business needs. For
instance, in this case, the injunction against Mr. Golikari was confined to a specific time frame
(until March 15, 1968), related only to his role as a Shift Supervisor in tyre cord yarn
manufacturing, and applied geographically within India. These limitations highlighted the
necessity of reasonableness when imposing restraints. Furthermore, the Court affirmed that such
restrictive covenants were not against public policy, as they neither imposed oppressive

4 The Indian Partnership Act, 1932. Government of India, sec. 36, https://legislative.gov.in.
5 The Indian Partnership Act, 1932. Government of India, sec. 54, https://legislative.gov.in.
6 Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. Ltd., AIR 1967 SC 1098.
 restrictions on the employee nor unduly interfered with his right to work.
In conclusion, this judgement has become a cornerstone in Indian employment law, guiding
courts in determining the enforceability of non-compete clauses. By affirming that reasonable
restrictions during employment are valid and necessary to protect proprietary information and
investments, the judgment has set a balanced precedent, ensuring that employers can safeguard
their interests without infringing upon the rights of employees. This case has not only clarified
the legal boundaries of restrictive covenants but has also influenced the evolving jurisprudence
surrounding non-compete clauses in India.
- Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan7
The case of Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan has played a significant role in
shaping the interpretation and application of non-compete clauses and restrictive covenants in
India, particularly in the context of post-contractual agreements. This case marked a departure
from the traditional employer-employee paradigm, focusing instead on agency relationships
where mutual trust and confidence are essential. The Supreme Court’s judgment emphasized the
importance of balancing the freedom of trade and the autonomy of contracting parties,
particularly in agreements involving unequal bargaining power. The Court struck down the Right
of First Refusal (ROFR) clause in the agreement between Percept and Zaheer Khan, declaring it
void under Section 27 of the Indian Contract Act, 1872, which prohibits agreements in restraint
of trade.
The Supreme Court's analysis revolved around two key issues: the validity of the ROFR clause
and whether Percept could compel Zaheer Khan to extend the agreement. It concluded that the
ROFR clause amounted to a restraint of trade as it imposed limitations on Zaheer’s ability to
freely negotiate and contract with third parties post-termination. This was particularly significant
as the clause compelled Zaheer to remain tied to Percept even after the lawful termination of their
agreement. The Court underscored that such post-contractual restrictions, which force a party to
act against their will, violate the principles of contract law and individual autonomy. The
judgment highlighted that relationships like the one between Percept and Zaheer require mutual
trust, and forcing an unwilling party to extend such a relationship would be contrary to the spirit
of freedom of contract.
In interpreting the enforceability of non-compete clauses, the Court reiterated the rigidity of
Section 27, which does not allow for the imposition of restraints, even if they appear reasonable.
While some earlier judgments, such as Niranjan Shankar Golikari v. Century Spinning, permitted
limited restraints during employment to protect legitimate business interests, the Court in this
case took a stricter stance against post-contractual restrictions. It highlighted that any such
restraint must be carefully scrutinised to ensure it does not unfairly prejudice the aggrieved party,
especially in cases where the bargaining power is unequal, as it was between Zaheer and Percept.
This judgment has had a lasting impact on the interpretation of restrictive covenants in India by
reinforcing the principle that post-contractual restraints are void under Section 27 unless they are
incidental to protecting legitimate business interests. It also provided clarity on the boundaries
within which restrictive covenants in agency agreements, distinct from employment agreements,
can operate. By affirming Zaheer Khan’s freedom to negotiate with third parties post-termination,
the Court recognized the evolving nature of contractual relationships and the need to protect
individual autonomy. The case stands as a critical precedent in Indian contract law, shaping the
judicial approach to balancing the enforcement of restrictive covenants with the protection of
trade and professional freedom.

7 Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan, (2006) 4 SCC 227.
Jurisdictional Variation in Judicial Interpretation
The interpretation and enforceability of non-compete clauses in India vary significantly across
jurisdictions due to differences in judicial reasoning and the specific circumstances of each case.
The primary legal basis for such clauses is Section 27 of the Indian Contract Act, 1872, which
declares agreements in restraint of trade to be void. However, courts across India have interpreted
this provision differently, often influenced by the context of the restraint, such as employment
contracts, business sales, or agency agreements. These jurisdictional variations reflect the
complexities of balancing individual rights with commercial interests.
1. Supreme Court's Approach: The Supreme Court of India has provided key rulings that serve as
guiding principles for lower courts. In Niranjan Shankar Golikari v. Century Spinning (1967),
the Court upheld a restrictive covenant during the employment period, ruling it as reasonable
and necessary to protect the employer's legitimate business interests. However, in
Superintendence Co. of India Pvt. Ltd. v. Krishan Murgai (1980), the Court took a stricter stance
on post-employment restraints, holding that Section 27’s language does not allow for any
reasonable restriction post-termination.
In Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan (2006), the Supreme Court struck down a
"Right of First Refusal" clause, emphasizing that post-contractual restraints must be void unless
they are reasonable and protect legitimate business interests. These rulings illustrate that while
non-compete clauses during employment may be enforceable if reasonable, post-employment
restrictions are generally viewed as void.
2. High Courts' Interpretation: Indian High Courts, however, show some variations in their
approach based on case-specific facts and local commercial practices:
—> Delhi High Court: The Delhi High Court has shown a nuanced approach toward restrictive
covenants. In Desiccant Rotors International Pvt. Ltd. v. Bappaditya Sarkar (2009), the court
refused to enforce a non-compete clause post-employment, holding that such clauses violate
Section 27. However, the court has occasionally enforced confidentiality agreements and non-
solicitation clauses, distinguishing them from broad non-compete restrictions.
—> Bombay High Court: The Bombay High Court has historically favoured a more pragmatic
approach, often focusing on the reasonableness of the restraint. In Taprogge Gesellschaft MBH
v. IAEC India Ltd. (1988), the court upheld a non-compete clause in a commercial contract,
reasoning that it protected the legitimate interests of the contracting party. The court has also
upheld non-solicitation clauses in employment contracts when they were found to be reasonable
and not overly broad.
—> Madras High Court: The Madras High Court has taken a strict interpretation of Section 27.
In Gemini Equipment and Rentals Pvt. Ltd. v. Cinedreams (2016), the court struck down a non-
compete clause in a business agreement, stating that even reasonable restraints are void under
Section 27 unless they fall within a recognized exception, such as the sale of goodwill.
—> Karnataka High Court: The Karnataka High Court has upheld non-solicitation agreements
under certain circumstances. In Mphasis Ltd. v. Mr. Nitin Ramesh (2013), the court held that an
agreement preventing an ex-employee from soliciting the company’s clients was enforceable as
it did not amount to a restraint of trade under Section 27. However, the court clarified that broad
non-compete clauses that unreasonably restrict an employee's right to earn a livelihood would
not be enforceable.
3. Employment Contracts vs. Commercial Agreements
—> Employment Contracts: Courts across jurisdictions generally adopt a stricter interpretation
of non-compete clauses in employment contracts, especially post-employment. Such clauses are
often deemed to violate an employee's fundamental right to livelihood under Article 21 of the
 Indian Constitution. However, restrictions during the term of employment, such as those
involving exclusivity and confidentiality, are typically upheld if they are reasonable and protect
the employer's legitimate interests.
—> Commercial Agreements: Non-compete clauses in commercial agreements, such as the sale
of a business or franchise agreements, are more likely to be upheld by courts. This is because
these agreements often fall within the exception to Section 27, particularly when they are
incidental to the transfer of goodwill.
The interpretation of non-compete clauses in India varies across jurisdictions, reflecting a blend of
statutory rigidity under Section 27 and judicial discretion based on context. While the Supreme
Court has set broad principles, High Courts often tailor their rulings to specific facts, leading to
nuanced differences. Generally, courts are more likely to uphold non-compete clauses in
commercial agreements than in employment contracts, particularly post-termination.

Practical Implications for Senior Executives versus Junior Employee

The nature of employment contracts and the obligations imposed on employees vary significantly
based on their seniority and role within a company. These differences, while rooted in legal
principles, have important practical implications for both employers and employees. Restrictive
Covenants: Balancing Protection and Reasonableness
Restrictive covenants, such as non-compete, non-solicitation, and non-disclosure clauses, are
common in senior executives’ contracts but are less frequently applied to junior employees. The
enforceability of these clauses hinges on their reasonableness, which courts assess by considering
factors like the employee's position and the business's need for protection.
—> Senior Executives: These employees often have direct relationships with clients, access to trade
secrets, and insights into the company’s strategies. As a result, restrictive covenants in their
contracts are both necessary and easier to enforce. For instance, a non-compete clause preventing a
senior executive from joining a competitor for a limited time and within a specific geographic scope
can be upheld as reasonable if it protects the company’s legitimate business interests.
—> Junior Employees: Restrictive covenants are less common in junior employees’ contracts due to
their limited exposure to sensitive information. However, when junior employees frequently interact
with clients, tailored non-solicitation or confidentiality clauses may be included. Courts are less
likely to enforce broad restrictive covenants for junior employees, as these may be deemed
excessive or unnecessary.
The level of risk posed by a former employee largely depends on their seniority and access to
sensitive information or client relationships.
—> Senior Executives: The risk of a senior executive exploiting confidential information or client
relationships post-termination is high. Restrictive covenants and confidentiality clauses must be
designed to mitigate these risks, ensuring that the company’s competitive interests are protected.
—> Junior Employees: While the risk is generally lower for junior employees, tailored provisions
may still be necessary for roles involving frequent client interaction or access to sensitive
information.
Analysis with other Jurisdiction
1. English law: In contrast to Section 27, English law, under the common law doctrine, allows for
reasonable restraints. Such restraints must protect legitimate business interests, and their
reasonableness is judged in terms of duration, geographical area, and scope.
2. American law: In the United States, the approach is somewhat similar to English law. The
enforceability of non-compete clauses depends on their reasonableness concerning the interests of
the employer, the employee, and the public.
3. Australian law: Australian courts also uphold reasonable restraints, provided they are designed to
protect legitimate business interests without being overly restrictive.
The strict stance of Section 27 differentiates Indian law significantly, aligning more with a policy of
economic liberalism and individual freedom.