A non-compete clause or non-competition agreement is a legal provision often
included in various contracts and business agreements. It restricts the party to
engage in a competition with any other party's nosiness interests after
employment. It also prohibits an individual or entity from revealing information
or secrets to any party of competing interest during or after the employment.
In India, the enforceability of non-compete clause is governed by Section 27 of
Indian Contract Act 1872 and their compatibility with Article 19(g) of the
Constitution of India, which guarantees the right to practise any profession,
trade, or business. This article aims to explore the legal framework surrounding
non-compete clauses in India, the factors affecting the enforceability, and
balancing between reasonable restrictions imposed and safeguarding individual
Section 27 of the Indian Contract Act 1872, construe that any agreement which
restricts a person from exercising a lawful profession, trade, or business is
void to that extent. It also enumerates two exceptions to this rule: agreements
made in connection with the sale of goodwill and agreements that contains
reasonable restriction to protect the proprietary interest.
Article 19(g) of the Constitution of India guarantees the fundamental right to
practice any profession, trade or business. It recognises the importance of
individual freedom and the right to earn livelihood. Like other rights, this
right is also not absolute and is subject to reasonable restrictions imposed in
the interest of general public or for protection of other's rights.
The compatibility between non-compete clauses and Article 19(g) has been a
subject of debate. Courts in India have acknowledged that while non-compete
clauses restrict an individual's freedom to engage in a similar business or
profession, they are permissible if they fulfil the test of reasonableness. The
objective is to strike a balance between the employer's legitimate interests and
the employee's right to pursue their chosen profession or trade.
To understand the enforceability of non-compete clause it is crucial to
interpret the term "reasonable restriction" in its completeness. The specific
terms and scope of a non-compete clause can vary depending on the jurisdiction
and technicalities of a particular agreement. Various case laws which debate
about the validity of non-compete clause are discussed in this article below-
In the case Mitchell v. Reynolds
1, English Courts held that any restraint in
trade shall be based of reasonability of the terms of covenant. Courts in India
have acknowledged that while non-compete clauses restrict an individual's
freedom to engage in similar business or profession, they are permissible if
they fulfil the test of reasonableness. The objective should always be to strike
a balance between the employer's legitimate interest and employee's right to
pursue their chosen profession and trade.
In the case of Niranjan Shankar Golikari v. Century Spinning Mills
2, it was
established that a negative covenant can only be enforced if it is reasonable
and fair, the Apex Court on India validated the inclusion of non-compete clause
in an employment contract, which upheld the provision preventing the employee
holding position of shift supervisor, from joining entity with competing
interest for the duration of employment.
In the year 2006, in the case of Percept D'Mark (India) Pvt Ltd vs. Zaheer Khan
3, the Supreme Court of India, declined to enforce a non-compete clause
imposed by a media management company, prohibiting a renowned Indian cricketer Zaheer khan, from joining competing entities for a specific duration after
termination of the agreement. Further in the same year, The Delhi High Court in
Mr. Diljeet Titus, Advocate v. Mr. Alfred A Adebare and Ors4 granted injunction
against his former partners from using the confidential data even during
It was in the year 2013, when Madras High Court in the case of FL Smidth Pvt.
Ltd. v. Secan Invescast (India) Pvt. Ltd
.5, explicitly observed in its paragraph
21 that reasonable restrictions can be placed by distance, time-limit, trade
secrets, and goodwill. In the judgment, the Court categorically observed that an
employer can place suitable restrictions on the employee to not operate or practise the profession within the limits of the parent company.
However, in Pranshu Mishra Vs. Guru Gowri Krupa Technologies Private Ltd
was laid that in agreements, non-compete clauses can be divided into two
categories: contract term and post-term covenants and crucial distinction lies
between restrictions that apply during the contract's existence and those that
operate after its termination.
The Hon'ble Supreme Court and the High Court
consistently hold that negative covenants in effect during the contract term are
not affected by Section 27 of the Contract Act. This is because they are
intended to fulfil the contract rather than restrict it. Conversely, restraints
that operate after the contract's termination are no longer within the
contract's purview and are thus subject to Section 27 of the Contract Act.
Similarly, in the case of Tapas Kanti Mandal v. Cosmos Films Ltd.
7, Bombay High
Court held that negative restrictive covenant after employment period is not
enforceable. The defendant took employment in an MNCs where he entered into a
secrecy agreement which provided for a non-compete clause for a period of 3
When the defendant abruptly resigned after serving for long years, the
plaintiff submitted to the court that he has acquired in-dept knowledge of
products and confidential information of the company and defendant taking
employment will be against the non-compete clause. However, the Court did not
consider the argument plaintiff submitted and held that any clause restraining
the right to profession of an employee is non-enforceable.
Considering all the above-mentioned cases, we can conclude that the provision of
non-compete clause is the restrictive clause and enforceable pre-termination,
that is a negative covenant during the contract period are not considered
restraints of trade and therefore not attracted by Section 27 of the Contract
Restraints of trade encompass a broad range of agreements, including
master-servant agreements, covenants for the protection of goodwill, exclusive
dealing contracts, and agreements that fix prices. But, the concept of
prohibiting employees from engaging in a business or enforcing non-compete
clauses beyond the contract's terms that is post termination is deemed invalid.
The same principle applies to non-compete agreements between companies. Applying
the reasoning of various decision and established legal principles, it is
correctly determined that the negative covenants in the agreement can only be
enforced during the contract period and cannot extend beyond it.
Non-compete clauses in India, governed by Section 27 of the Indian Contract Act,
1872, and Article 19(g) of the Constitution of India, are subject to the test of
reasonableness. While they allow businesses to protect their legitimate
interests, including trade secrets and customer relationships, they must not
unduly curtail an individual's freedom to practice their chosen profession or
The courts play a crucial role in ensuring a delicate balance between
these competing interests, evaluating the duration, geographical scope, and
nature of the restriction. By upholding reasonable non-compete clauses, the
Indian legal framework seeks to foster a fair and competitive business
environment while respecting individual freedom.
- 24 Eng. Rep. 347 (1711)
- (2006) 4 SCC 227
- 2013 SCC OnLine Mad 389