The idea that an employee cannot join a competitor or start a competing business after leaving their job is not new. Employers across industries insert non-compete clauses in appointment letters or have employees sign non-compete undertakings during employment, often without much negotiation. These clauses, though common, carry serious enforceability issues under Indian law — particularly when they attempt to restrict employees after their resignation or termination.
Under Section 27 of the Indian Contract Act, 1872, any agreement that restrains a person from carrying on a lawful profession, trade or business is void, unless it fits within a narrow exception. This legal position is not just theoretical — it has been consistently upheld by Indian courts over the decades.
The distinction is clear: a restriction during employment may be enforceable, but once the employee exits the organisation, a non-compete clause usually becomes legally irrelevant. The Supreme Court, in Niranjan Shankar Golikari v. Century Spinning & Mfg. Co. Ltd., allowed a non-compete clause to operate during the term of service on the grounds that it protected the employer’s confidential information and proprietary interests. However, in Superintendence Co. of India v. Krishan Murgai, the Court took a different view of post-employment restraints and ruled them void for being in conflict with Section 27.
Even if a post-employment non-compete clause is formally agreed upon — whether embedded in the offer letter or signed later during employment — it does not automatically pass the test of enforceability. Indian courts examine such clauses with a clear lens: does the clause amount to a restriction on trade? Does it unjustifiably interfere with the employee’s right to livelihood? Was it agreed upon under unequal bargaining power?
Most post-employment non-compete clauses fail these tests. The situation is especially problematic where the employer uses pressure tactics — for instance, asking an employee mid-way through their tenure to sign a fresh undertaking stating they won’t join any competitor for one or two years after leaving. Indian courts have time and again invalidated such arrangements as being contrary to public policy and inconsistent with constitutional rights under Article 19(1)(g) of the Constitution.
This doesn’t mean all forms of post-employment restraint are void. There are limited exceptions. The sale of goodwill, for example, is a recognised exception under Section 27. If someone sells a business and agrees not to start a competing enterprise for a limited time in the same area, such a clause may be upheld. Similarly, employers can and should safeguard their sensitive business information by incorporating confidentiality and non-solicitation clauses, which are far more likely to be enforced by courts.
What is not advisable is the imposition of sweeping non-compete clauses that aim to restrict all future professional activity within an entire industry or geography. Such clauses are often overbroad, lack consideration, and are rarely proportional to the interest sought to be protected. In Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan, the Supreme Court reiterated that post-contractual restrictions violate the freedom to pursue a lawful profession and must be struck down.
From a practical standpoint, employers seeking to protect proprietary interests must focus on narrow tailoring — define what constitutes confidential information, restrict usage or disclosure of such information even after exit, and impose reasonable non-solicitation obligations (e.g., not poaching clients or colleagues for a fixed duration). Courts are far more sympathetic to such clauses, especially when drafted clearly and applied fairly.
On the other side, employees should be conscious that not every clause in a contract is legally valid just because it was signed. If a clause restrains trade, limits post-employment freedom without justification, or was signed under pressure, there’s a strong chance it won’t stand in court.
In conclusion, while employers are understandably concerned about protecting business interests, they must balance this concern against the legal and constitutional rights of individuals. Indian law is clear — the right to earn a livelihood cannot be contractually given up, especially not under conditions that mirror coercion or disproportionate restraint. A well-drafted confidentiality clause or narrowly tailored restraint may still serve the employer’s purpose without violating the employee’s rights. But overreaching non-compete clauses, even if embedded in the appointment letter or extracted during employment, will almost always fall foul of Section 27.