Restrictive Covenants in Employment Contracts in India: Non-Compete, Non-Solicit and Garden Leave

Introduction

Non-compete, non-solicitation, confidentiality and garden leave provisions are commonly incorporated into employment agreements to protect an employer’s business interests when an employee leaves the organisation. However, the enforceability of such restrictive cove

nants in India is governed by a statutory framework that differs significantly from the position under English common law.

Section 27 of the Indian Contract Act, 1872 provides that every agreement by which a person is restrained from exercising a lawful profession, trade or business is void to the extent of the restraint, subject to the statutory exception relating to the sale of goodwill. Unlike the English doctrine of restraint of trade, Indian law does not generally permit a court to uphold a post-employment restraint merely because it is reasonable in terms of duration, geographical scope or protection of a legitimate business interest.

The distinction that emerges from the jurisprudence is therefore not simply whether a non-compete clause is reasonable, but whether the restraint operates during the subsistence of employment or after termination of employment. This distinction has been recognised by the Supreme Court for decades and was reaffirmed by the Delhi High Court in Varun Tyagi v. Daffodil Software Private Limited in 2025.

This article examines the enforceability of non-compete agreements, non-solicitation clauses, confidentiality obligations and garden leave provisions in India, and the practical implications for employers and employees when drafting or enforcing employment contracts.

Section 27 of the Indian Contract Act: The Starting Point

Section 27 of the Indian Contract Act, 1872 states:

“Every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, is to that extent void.”

The provision contains an exception for an agreement relating to the sale of goodwill, subject to the statutory conditions prescribed therein. The Indian position is materially different from the traditional English approach. Under English law, a restrictive covenant may, subject to applicable principles, be upheld where it is reasonable between the parties and does not go beyond what is necessary to protect a legitimate business interest. In India, however, the Supreme Court has repeatedly emphasised that the validity of a restraint falling within Section 27 must be determined by the language and statutory scheme of Section 27 itself.

In Superintendence Company of India (P) Ltd. v. Krishan Murgai, the Supreme Court held that a post-employment negative covenant restricting an employee from taking up similar employment was void and unenforceable under Section 27. The Court also distinguished restrictions operating during the employment relationship from restrictions that continue after its termination.

Restrictions During Employment: Generally Enforceable

The leading authority on this distinction is Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. Ltd., where the Supreme Court considered a negative covenant requiring an employee to serve the employer exclusively during the contractual period.

The Court recognised that a restriction operating during the subsistence of an employment contract is generally not regarded as a restraint of trade under Section 27. Such a covenant regulates the employee’s obligations while the employment relationship continues rather than preventing the employee from pursuing a profession indefinitely after the contract has ended.

This principle was subsequently considered in Superintendence Company of India v. Krishan Murgai, where the Supreme Court reiterated that negative covenants operating during the period of employment are generally outside the prohibition contained in Section 27, whereas a covenant seeking to restrict an employee after termination may amount to a restraint of trade.

Accordingly, employment exclusivity clauses, subject to their contractual terms and circumstances, may be enforceable during employment. An employer may therefore be able to restrain an employee from simultaneously working for a competitor or undertaking competing work while the employment contract remains in force.

However, this does not mean that every restriction imposed during employment will automatically be upheld. Courts may examine the nature and circumstances of the contractual restriction, particularly where a clause is unconscionable, excessively harsh, unreasonable or one-sided.

Post-Employment Non-Compete Clauses: Generally Unenforceable

The position changes materially once the employment relationship ends. In Superintendence Company of India v. Krishan Murgai, the Supreme Court held that a negative covenant extending beyond the period of employment and restricting an employee from taking up similar employment amounted to a restraint of trade and was unenforceable under Section 27.

The Supreme Court subsequently reaffirmed the principle in Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan. The Court held that a restrictive covenant extending beyond the contractual term and restricting an individual’s freedom to enter into future professional relationships could constitute a restraint of trade under Section 27. It further emphasised that the test of reasonableness or partial restraint does not ordinarily save a covenant that falls within the statutory prohibition, unless it falls within the applicable statutory exception.

This has important consequences for employers drafting post-employment non-compete agreements in India. A clause stating that an employee cannot work for a competitor, operate a competing business or work in the same industry for a specified period after resignation may remain unenforceable even where the restriction is limited to a particular period, territory or category of competitor.

In other words, simply making a non-compete clause reasonable in duration or geographical scope does not necessarily make it enforceable under Indian law.

The 2025 Delhi High Court Decision in Varun Tyagi v. Daffodil Software

The Delhi High Court’s decision in Varun Tyagi v. Daffodil Software Private Limited, decided on 25 June 2025, provides a recent application of these principles in the employment context.

The appellant, Varun Tyagi, was employed as an IT professional by Daffodil Software. His employment agreement contained non-compete and non-solicitation provisions. After completing his notice period and leaving the company, he accepted employment with Digital India Corporation and the National e-Governance Division.

The Trial Court had granted an interim injunction restraining him from working with the entities concerned. The Delhi High Court set aside that order, holding that the post-termination restrictions relied upon by the employer could not be enforced in a manner that restrained the appellant from pursuing subsequent employment.

The judgment is significant because it reinforces the established principle that an employer cannot ordinarily use a contractual non-compete or restrictive covenant to prevent a former employee from pursuing lawful employment after the employment relationship has ended.

The employer’s reliance on principles developed under English law, including the protection of legitimate business interests through reasonable restrictive covenants, could not overcome the statutory framework of Section 27. The Indian courts must apply the statutory language of Section 27 rather than import a general reasonableness test from English restraint-of-trade jurisprudence.

Non-Solicitation Clauses: A More Nuanced Position

The position concerning employee non-solicitation and client non-solicitation clauses in India requires greater care than simply treating them as equivalent to non-compete clauses.

A narrowly drafted non-solicitation provision may seek to prevent a former employee from actively soliciting or inducing the employer’s identified clients, customers or employees to terminate or alter their relationship with the employer. Such a clause is conceptually different from a clause that prohibits the employee from working for a competitor altogether.

However, the label attached to a clause is not determinative. Courts may examine the substance and practical effect of the restriction. If a purported non-solicitation clause effectively prevents the employee from working in the same industry, serving a broad category of customers or accepting employment with a competitor, it may be viewed as an indirect or disguised restraint on the employee’s profession.

The Delhi High Court’s decision in Wipro Limited v. Beckman Coulter International S.A. is instructive in this context. The Court considered a post-contractual non-solicitation provision and explained the distinction between restrictions imposed in commercial relationships and restrictions affecting an individual’s freedom to seek employment. The Court also observed that an employee cannot effectively be prevented from taking up employment merely by imposing an indirect restraint on the prospective employer.

Accordingly, non-solicitation agreements in India should be drafted narrowly and carefully, particularly where they concern existing clients, customers, employees or business relationships. Employers should avoid drafting a non-solicitation clause so broadly that it effectively becomes a prohibition on competing employment.

Confidentiality, Trade Secrets and Proprietary Information

The unenforceability of a post-employment non-compete clause does not mean that an employer loses all protection against misuse of its confidential or proprietary information.

Confidentiality obligations, trade secret protections and non-disclosure provisions serve a different purpose. Rather than preventing a former employee from pursuing a lawful profession, they seek to prevent the misuse or disclosure of information that the employee obtained through the employment relationship.

This distinction is particularly important for businesses dealing with proprietary technology, source code, customer information, pricing strategies, business plans, technical know-how, product information and other commercially sensitive material.

The Supreme Court’s jurisprudence recognises that contractual obligations concerning confidentiality and protection of proprietary information can have continuing relevance even after employment ends. In Niranjan Shankar Golikari, for instance, the contractual arrangement involved obligations concerning confidential technical information and know-how.

For employers, this makes a carefully drafted confidentiality and non-disclosure agreement (NDA) an important component of employment documentation. Rather than attempting to prevent a former employee from working in a particular industry, employers should clearly identify the categories of information that are confidential and regulate their unauthorised use or disclosure.

Garden Leave in India: An Important Distinction

Garden leave requires separate consideration because its enforceability depends substantially on when and how the restriction operates. Garden leave generally refers to a contractual arrangement under which an employee who has resigned or is serving a notice period is directed not t o perform active duties, while continuing to remain employed and receive contractual remuneration for the applicable period. During this period, the employee may be restricted from joining a competitor or undertaking competing activities.

Where the employee continues to remain in an employment relationship and the garden leave operates during the contractual notice period, the restriction may fall within the category of restraints operating during employment, which courts have treated differently from post-employment restraints.

However, an employer should not assume that every garden leave clause is enforceable merely because it is described as “garden leave”. The Delhi High Court considered this issue in VFS Global Services Pvt. Ltd. v. Suprit Roy. In that case, the garden leave clause was structured to operate after the employee had ceased to remain on the company’s rolls. The Court held that the clause was prima facie a restraint of trade and attracted Section 27, notwithstanding the limited duration of the restriction and the payment of compensation.

The distinction is therefore critical:

• Garden leave during the subsistence of employment: may be enforceable depending on the contractual terms and circumstances.
• Garden leave commencing after termination of employment: may be treated as a post-employment restraint and therefore face serious enforceability concerns under Section 27.
• Payment of compensation alone: does not necessarily convert an otherwise post-employment restraint into a valid employment obligation.

Employers should therefore ensure that garden leave provisions are carefully aligned with the notice period and the continuing employment relationship, rather than relying on a clause that effectively imposes a non-compete period after termination.

What Should Employers Include in Indian Employment Agreements?

The legal position has important implications for the drafting of employment contracts and restrictive covenants in India. Employers seeking to protect legitimate business interests should consider the following:

1. Clearly drafted confidentiality obligations: Employment agreements should identify confidential information and proprietary information with sufficient precision and impose appropriate obligations concerning its use, disclosure, return and destruction.

2. Carefully framed non-solicitation provisions: Where commercially justified, a non-solicitation clause should focus on specific prohibited conduct, such as deliberate solicitation or inducement of identified clients, customers or employees, rather than imposing a blanket prohibition on working in a particular industry.

3. Avoid overbroad post-employment non-compete clauses: A clause preventing an employee from joining competitors or carrying on a competing business after termination is likely to face enforceability challenges under Section 27. Merely limiting the restriction to six months, one year or a particular geographical area does not, by itself, cure the statutory objection.

4. Carefully structure garden leave: Where garden leave is commercially necessary, the clause should clearly operate within the continuing employment and notice-period framework, with appropriate contractual remuneration and clearly defined obligations.

5. Protect trade secrets and intellectual property separately: Employers should distinguish between a restriction on competition and contractual protections concerning trade secrets, confidential information, intellectual property and proprietary business information. The latter can provide more meaningful protection without necessarily preventing an employee from pursuing future employment.

Key Takeaways for Employers and Employees

The Indian law on restraint of trade and employment restrictive covenants can broadly be summarised as follows:

The precise enforceability of any particular covenant will ultimately depend on the language of the employment agreement, the nature of the restriction, the timing of its operation and the factual circumstances of the employment relationship.

Conclusion

The enforceability of non-compete, non-solicitation and garden leave clauses in India is fundamentally shaped by Section 27 of the Indian Contract Act, 1872. Indian courts have consistently distinguished between restrictions operating during the employment relationship and those that continue after its termination.

While an employer may, subject to the circumstances, impose reasonable contractual obligations governing an employee’s conduct during employment, a post-employment covenant that prevents an individual from pursuing a lawful profession, trade or business will generally face the statutory prohibition contained in Section 27. The Supreme Court’s decisions in Niranjan Shankar Golikari, Superintendence Company of India and Percept D’Mark, together with the Delhi High Court’s 2025 decision in Varun Tyagi, reaffirm this position.

For Indian employers, the practical focus should therefore be on carefully drafted confidentiality obligations, protection of trade secrets and intellectual property, narrowly tailored non-solicitation provisions and appropriately structured garden leave arrangements, rather than relying on broad post-employment non-compete clauses.

For employees, the existence of a restrictive covenant in an employment agreement does not necessarily mean that the restriction is enforceable. The courts will examine the substance of the covenant and its operation against the statutory framework of Section 27.

The continuing challenge for employers is to protect legitimate business interests without impermissibly restricting an individual’s freedom to pursue future employment. In this area, precise employment contract drafting and fact-specific legal advice remain critical.

Last Updated on 8 October, 2026