Almost every employment letter today has a clause saying that, after leaving, the employee will not join a competitor, will not work for the company's clients, or will not start a similar business for one, two or three years. Employees sign it without a second thought, and many later turn down good offers because they believe the clause binds them. Under Indian law, in most cases, it does not.
This article explains why a non-compete clause generally cannot stop a person from taking up employment after being relieved, what an employer can still protect, and how the courts have drawn the line, including two important decisions from 2025.
The law: Section 27 of the Indian Contract Act
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 of any kind is, to that extent, void. There is only one exception in the section itself: a person who sells the goodwill of a business may agree with the buyer not to carry on a similar business within specified local limits, if the court finds those limits reasonable.
An employment contract is not a sale of goodwill, so that exception does not help an employer. The question in employment cases is therefore simple: does the clause restrain the employee from exercising a lawful profession or trade? If it does, it is void to that extent.
Why the "reasonableness" argument does not work in India
Employers often argue that their clause is reasonable because it is limited in time (say, two years), in area (one city) or in scope (only certain clients). Under English common law, a reasonable restraint can be upheld. Indian law is different.
In Superintendence Company of India (P) Ltd. v. Krishan Murgai, (1981) 2 SCC 246, Justice A.P. Sen explained that Section 27 does not distinguish between partial and total restraints. Unless the case falls within the goodwill exception, a restraint is void even if it is partial, and English decisions on reasonableness cannot be imported to dilute the section. In Percept D'Mark (India) (P) Ltd. v. Zaheer Khan, (2006) 4 SCC 227, the Supreme Court described this position as consistent and settled: when construing Section 27, neither the test of reasonableness nor the fact that the restraint is only partial applies, unless the case falls within the statutory exception.
During employment versus after employment
The courts draw a clear line between restrictions that operate while the contract is running and those that operate after it ends.
While the employee is still employed
A clause requiring the employee to serve the employer exclusively during the term of employment is generally valid. In Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. Ltd., AIR 1967 SC 1098, the employee had agreed to work only for the company for a fixed term and then left mid-way to join a rival. The Supreme Court upheld an injunction, holding that a negative covenant operating during the period of employment is not ordinarily a restraint of trade, unless it is unconscionable, excessively harsh or one-sided. The logic is that such a clause furthers the employment contract rather than restraining trade.
The same principle covers the notice period, since the employee is still in service until relieved.
After the employee is relieved
Once the employment ends, the position reverses. In Percept D'Mark, the Supreme Court summarised the law in three propositions: a restrictive covenant extending beyond the term of the contract is void and unenforceable; the doctrine of restraint of trade does not apply while the contract continues, only after it ends; and this applies to all contracts, not just employment contracts. The Court refused to stop the cricketer Zaheer Khan from signing with another agency after his three-year contract with Percept had expired, even though the old contract contained a right-of-first-refusal clause meant to survive its expiry.
The core rule: a clause that stops a former employee from taking up a job, joining a competitor or starting a similar business after being relieved is void under Section 27. It does not matter that the employee signed it, that it is limited to a period or a place, or that the employer calls it reasonable.
Even a narrow non-compete fails: Varun Tyagi v. Daffodil Software (2025)
The Delhi High Court applied these principles to a typical modern situation in Varun Tyagi v. Daffodil Software Pvt. Ltd., FAO 167/2025, decided on 25 June 2025 (2025:DHC:5015).
A software engineer had been deployed by his employer on a Government project run by Digital India Corporation (DIC), the employer's client. His contract barred him, for three years after leaving, from working with any "business associate" he had dealt with during employment. He resigned, served his full notice period, and joined DIC directly the next day. The trial court restrained him from working with DIC and NeGD until the suit was decided, reasoning that this was a limited restraint confined to two entities and not a blanket ban.
The High Court set that order aside. It held that any term of an employment contract restricting the employee's right to get employed after termination is void under Section 27, and that this was so even though the employer had confined its request to just two organisations. The Court also noted that an employee cannot be put in the position of either working for the old employer or remaining idle, and that such clauses are read strictly because they are usually part of standard-form contracts the employee has little power to negotiate.
The Court added a practical point: the employer's fear that confidential material would reach DIC made little sense, because under the employer's own contract with DIC, the intellectual property in the software belonged to DIC anyway. If the employer could prove an actual breach, its remedy was damages, not an injunction keeping the employee out of work.
The decision was given at the interim stage, but it applies settled Supreme Court law and is a clear illustration of how courts view these clauses.
What an employer can still protect
Section 27 frees the employee to work. It does not free the employee to take the employer's property with him. Two kinds of obligations generally survive the end of employment:
- Confidentiality and trade secrets. A former employee can be restrained from disclosing or using the employer's genuinely confidential information, such as client data, pricing, source code the employer owns, or special processes. Courts distinguish this from the general skill and experience an employee builds up, which belongs to the employee and can be used anywhere.
- Solicitation of clients. In Varun Tyagi, the Delhi High Court described it as settled that a post-termination covenant can be enforced only to protect confidential and proprietary information or to restrain the employee from soliciting the employer's clients. The distinction is between actively poaching the employer's clients, which may be restrained, and simply accepting a job, which may not.
What an employer cannot do is use confidentiality as a back door to a non-compete. The Delhi High Court has held, in a line of cases followed in Varun Tyagi, that an employee's freedom to change jobs for better conditions cannot be curtailed merely because the employee had access to confidential data. The remedy for misuse of information is an order against the misuse, not an order against the employment.
Minimum service bonds are different: Vijaya Bank v. Prashant B. Narnaware (2025)
A clause that requires an employee to serve for a minimum period, or pay a fixed sum if he leaves early, is not the same as a post-employment non-compete. In Vijaya Bank v. Prashant B. Narnaware, Civil Appeal No. 11708 of 2016, decided on 14 May 2025, the bank required newly appointed officers to serve at least three years or pay ₹2 lakh. An officer left early for another bank, paid under protest, and challenged the clause.
The Supreme Court upheld the clause. It held that the restriction operated during the employment, was meant to further the employment contract rather than restrain future employment, and so was not hit by Section 27. On public policy, it found the amount was not so high as to make resignation illusory for a senior officer, and that the bank, as a public sector employer bound by an open recruitment process, had a genuine interest in reducing attrition.
Two parts of the judgment help employees too. The Court recognised that standard-form employment contracts are prima facie evidence of unequal bargaining power, and that the burden of showing a restrictive covenant is not a restraint of lawful employment or contrary to public policy lies on the employer, not the employee. A bond that is disproportionate to the salary or the employer's actual training and recruitment costs can still be challenged.
"After you leave": how the clause is worded matters
In Krishan Murgai, the clause applied "after you leave the company". The employee had not resigned; he was terminated. The majority of the Supreme Court held that "leave" ordinarily means leaving voluntarily, so the clause did not apply to a person who was dismissed. Restrictive clauses are read narrowly and against the employer who drafted them.
The position at a glance
| Clause | During employment and notice period | After being relieved |
|---|---|---|
| Not to work for anyone else | Generally valid (Golikari) | Void (Percept D'Mark, Varun Tyagi) |
| Not to join a competitor or a client | Generally valid | Void, even if limited to named entities (Varun Tyagi) |
| Not to start a similar business | Generally valid | Void (Krishan Murgai, per A.P. Sen J.) |
| Not to disclose confidential information | Valid | Valid and enforceable |
| Not to solicit the employer's clients | Valid | May be enforced, as recognised in Varun Tyagi |
| Minimum service period or pay a fixed sum | Valid if not unconscionable (Vijaya Bank) | Not applicable |
What this means in practice
For employees
- Serve the notice period as the contract requires, and get a relieving letter. Your freedom is strongest once you have been formally relieved.
- After that, a non-compete clause does not legally stop you from joining a competitor or a client of your former employer.
- Do not take documents, client lists, code or data with you, and do not use the old employer's confidential information in the new job. This is where genuine liability lies.
- Avoid actively approaching your former employer's clients to divert their business, as courts may restrain solicitation.
- If you receive a legal notice or a suit is filed, respond promptly. Interim injunctions are sometimes granted at the first hearing and have to be challenged.
For employers
- Rely on well-drafted confidentiality, intellectual property assignment and non-solicitation clauses rather than a blanket non-compete.
- Use the notice period, and exclusivity during employment, to manage transitions.
- Where you invest in training or recruitment, a minimum service clause with a proportionate amount is more likely to be upheld than a post-employment restraint.
Conclusion
Section 27 has been read the same way for over 150 years. A promise not to work, compete or do business after the employment ends is void, however reasonable it looks on paper. Once an employee has been relieved, the former employer cannot dictate where he works next. What survives is the duty not to misuse the employer's confidential information and, in appropriate cases, not to solicit its clients. Employers who want protection should frame their contracts around those interests, not around keeping a former employee out of work.
Cases referred to
- Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. Ltd., AIR 1967 SC 1098
- Superintendence Company of India (P) Ltd. v. Krishan Murgai, (1981) 2 SCC 246
- Percept D'Mark (India) (P) Ltd. v. Zaheer Khan, (2006) 4 SCC 227
- Vijaya Bank v. Prashant B. Narnaware, Civil Appeal No. 11708 of 2016, Supreme Court, decided 14 May 2025
- Varun Tyagi v. Daffodil Software Pvt. Ltd., FAO 167/2025, Delhi High Court, decided 25 June 2025, 2025:DHC:5015
This article is for general legal awareness and reflects the law as on the date of publication. It is not legal advice. Please refer to the current bare Act and consult an advocate on the facts of your own matter.