- An agreement by which anyone is restrained from exercising a lawful profession, trade or business is void to that extent (section 27), subject to a narrow exception for the sale of goodwill.
- Restraints during the term of employment or of a contract are enforceable; restraints operating after termination generally are not.
- Confidentiality obligations are enforceable in contract and in equity, if the information is in fact confidential and identified.
- Non-solicitation of customers and employees post-termination has been treated more strictly than confidentiality, and outcomes depend on wording and facts.
Section 27: the rule and its exception
Section 27 of the Indian Contract Act 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. The only statutory exception is for a seller of the goodwill of a business who agrees with the buyer to refrain from carrying on a similar business within specified local limits, so long as the buyer carries on a like business and the limits are reasonable. India has not adopted the English “reasonableness” test for restraints generally: the Supreme Court has held that a post-employment restraint is void even if reasonable, and treated the doctrine as a matter of public policy and of the right to livelihood.
| Restraint | During the term | After termination |
|---|---|---|
| Non-compete — employee | Enforceable: exclusivity during employment is a lawful term | Generally void under section 27 |
| Non-compete — sale of business goodwill | N/A | Enforceable if within the section 27 exception and reasonable in area and time |
| Non-compete — commercial exclusivity between businesses | Enforceable as a term of the contract | Generally void if it extends beyond the contract term |
| Non-solicit — employees | Enforceable | Mixed: depends on wording and whether it restrains livelihood |
| Non-solicit — customers | Enforceable | Mixed: depends on facts; more likely enforced if tied to confidential customer data |
| Confidentiality | Enforceable | Enforceable if the information is genuinely confidential |
Confidentiality — what makes it enforceable
- The information is identified. A clause that protects “all information” is weaker than one that lists categories — source code, pricing models, supplier terms, customer data.
- The information is actually confidential. Information in the public domain or general skill and knowledge is not protected.
- The recipient is bound. Contract, and in equity the duty of confidence that arises from the circumstances in which information is shared.
- Reasonable steps are taken. Access controls, marking and exit procedures show that the information was treated as secret.
Clauses that tend to hold
- Exclusivity during employment or the term of the contract
- Confidentiality that survives termination, for defined categories of information
- Assignment of IP created in the course of the work
- Notice periods and garden-leave arrangements paid during the notice
Clauses that tend to fail
- Post-employment bar on working for any competitor for a fixed period
- Liquidated damages for joining a competitor as a penalty
- Perpetual, unbounded restrictions with no defined information
- Restraints that effectively stop a person from earning a living in their field
Remedies
Where a clause is valid, the remedies are an injunction — interim under Order XXXIX of the Code of Civil Procedure and permanent under the Specific Relief Act, 1963 — and damages under section 73 of the Contract Act. Liquidated damages are limited to reasonable compensation not exceeding the amount named (section 74), so a clause that fixes a large amount as the price of leaving may be reduced. Courts do not grant specific performance of personal contracts of service, so a company cannot normally compel a former employee to return, only restrain breaches that are enforceable.
Drafting checklist
- Replace post-termination non-competes with notice periods, garden leave and exclusivity during the term
- List categories of confidential information and carve out public domain and general skill
- State that confidentiality survives for a defined term or for as long as the information remains confidential
- Include assignment of IP created in the course of the engagement
- Add return-and-delete obligations on exit, and an exit certificate
- Name the governing law and dispute resolution — see the drafting note
See contract drafting clauses and which IP right protects what.
Frequently asked
Can a non-compete be valid for six months only?
Indian courts have not accepted a time-limited exception for post-employment non-competes; the restraint is void as to the post-termination period regardless of duration, other than in the sale-of-goodwill setting.
Do non-competes work between companies?
During the contract, yes — as exclusivity. After the contract ends, a restraint that prevents either party from trading is void under section 27, subject to the goodwill exception.
Can a company stop a departing employee from using what they learned?
It can stop use of genuinely confidential information, and trade secrets, but not the employee’s general skill, knowledge and experience.
What about a clause requiring a bond or repayment on early exit?
Reasonable repayment of training costs actually incurred has been upheld in some cases; a penal amount unrelated to loss is vulnerable under section 74. The clause should be tied to documented cost.
Case law on section 27 and on post-employment covenants continues to develop in the High Courts and the Supreme Court. Confirm current authority for the clause in question. Not a substitute for advice from an advocate or chartered accountant on your facts.