Non-Compete Clause Vs Section 27 Contract- Analysis

Author – By CHITWANDEEP KAUR and Tanmay Sharma (Intern)

 

INTRODUCTION

During this boom of globalization a large amount of success of any business majorly relies on trade secret

 

Meaning of Non-Compete Clause

In a legally enforceable contract known as a Non-Compete clause or Non-Compete Agreement (NCA), the employee promises not to work for a competitor’s firm or launch a related business or profession for a fixed timeframe after quitting his present job. Employers can protect sensitive data (company secrets, client databases, business strategies, etc.) and prohibit former employees from using it in the event that they intend to work for the opposition or launch a comparable business by establishing such a contract.

How to create a Non-compete clause (NCC)

 

The following information is necessary in order to create a Non-compete clause:

  • The name and addresses of the parties involved (both the protected party, or the party requesting the agreement and the non-competing party, or the party who is being prohibited from working for a competitor)
  • The effective date and the duration of the agreement
  • The reason for the agreement
  • The geographic area covered by the agreement
  • The compensation or “consideration” for signing the agreement
  • The names of the individuals who will sign the agreement

 

Section 27

Agreement in restraint of trade, void.—Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. —Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.

 

Meaning of section 27

The court declares void any agreement that prohibits two or more people from operating in a legal trade or profession. The court determines that limiting one or more individual’s ability to engage in a particular legitimate business is unjust and infringes on their fundamental freedom to choose the line of work they wish to engage in. As it restricts one’s freedom to pursue a business interest, the court ruled that the restriction of trade agreement is irrational and unlawful.

 

Scope of section 27

The Section provides a very strict standard that nullifies restraints—general and partial—and forbids the exception of particular local restrictions. In a broad sense, contracts in restraint of commerce are those in which one or the other parties impose limits on their ability to labor, practice their profession, or run their business. Such agreements are usually criticized because they go against the interest of the public and are unfair since they excessively restrict human freedom. Every commitment made in connection with business activity acts, in certain ways, as a trade restriction since it restricts the promisor’s potential future liability.

 

Analysis of section 27 and Non-compete clause

If we look at the point of view of Indian law, the non-compete clause is considered unlawful under section 27 of the law of contracts. In multiple cases Indian courts have also consistently denied enforcement of post-termination non-compete clauses in contracts of employment as restraint of trade is not allowed under section 27 of the Indian Contract act-1872. Deeming them to be void and against public policy as they have the power to deprive a person of his/her fundamental right to earn a living.

 

For any restrictive agreement to come under section 27 of the contract act, the agreement has to be in restraint of trade.  Section 27 does not give an idea as to what kind of restraints are not void. Article 19(g) of the constitution of India provides every citizen with the right to practice any profession, trade or business. This is not considered as an absolute right which means that some restriction can be placed on this right in the context of public interest. The courts have always kept the interpretations of such provisions flexible in order to make sure that the principles of morality, fairness and justice are upheld. After considering the required confidentiality and the integrity of the employment, the courts have inclined their view towards giving some regard to the non-compete clause.

 

Case Laws

In the case of Niranjan Shankar Golikari Vs the Century Spinning and Manufacturing Company Ltd. (1967 AIR 1098 1967 SCR (2) 378), the Hon’ble Supreme Court observed that-restraints or negative covenants in the appointment or contracts may be valid if they are reasonable.

 

In the case of V.F.S. global services Pvt. Ltd Vs Mr. Suprit Roy (2008(2) Bom CR 446) the Bombay High court established the principle that a restraint on the use of trade secrets during or after the cessation of employment does not tantamount to a restraint on trade under section 27 of the Act and therefore can be enforceable under certain circumstances.

 

Similar to these, a number of other High court rulings have developed standards or rules to assess the legitimacy and acceptability of placing constraints on such non-competing agreements. It demonstrates that Indian courts may, under certain conditions, impose confidentiality agreements meant to safeguard an employer’s intellectual property rights.

 

The Supreme Court of India, while dealing with such a contractual issue in Superintendence Company of India (P) Ltd. v. Sh. Krishan Murgai (1980 AIR 1717, 1980 SCR (3)1278) raised the question whether a post-service restrictive covenant would fall within the mischief of section 27 of the Contract Act. The court held that a contract, which had for its object a restraint of trade, was prima facie void.

 

Even the Delhi High Court in Pepsi Foods Ltd. and Others v. Bharat Coca-cola Holdings Pvt. Ltd. & others (1999 VAD Delhi 93, 81 (1999) DLT 122, 1999 (50) DRJ 656, ILR 1999 Delhi 193, (1999) IILLJ 1140 Del) observed,

“It is well settled that such post-termination restraint, under Indian Law, violates Section 27 of the Contract Act. Such contracts are unenforceable, void, and against public policy. What is prohibited by law cannot be permitted by Court’s injunction.”

The judgment of the Supreme Court in Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan and Anr. sheds some light on the legality of such clauses. The Apex Court observed,

“Under Section 27 of the Contract Act:

  • A restrictive covenant extending beyond the term of the contract is void and not enforceable.

 

  • The doctrine of restraint of trade does not apply during the continuance of the employment contract and is applied only when the contract comes to an end.

 

  • As held by this Court in Gujarat Bottling v. Coca Cola (supra), this doctrine is not confined only to contracts of employment, but is also applicable to all other contracts.

 

Given the aforementioned findings, it can be concluded that the Indian courts have taken into account the pre-termination time frame of the employment separately from the post-termination time frame of the employment when handling disagreements referring to such non-compete clauses under a contract of employment. Although the courts have been understanding regarding the applicability of the non-compete clause, they have gone over and beyond to make sure that it has no bearing after the termination of employment and have determined that such a condition would be in violation of section 27 of the Contract Act.

However, the Supreme Court in Niranjan Shankar Golikari v. The Century Spinning and Mfg. Co. Ltd., thereby giving a liberal interpretation to section 27 of the Contract Act further clarified that not all non-compete clauses effective after the termination of the employment agreement are prima facie prohibited and held:

“a negative covenant that the employee would not engage himself in a trade or business or would not get himself employed by any other master for whom he would perform similar or substantially similar duties is not, therefore, a restraint of trade unless the contract as aforesaid is unconscionable or excessively harsh or unreasonable or one-sided”.

In the case of Brahmaputra Tea Co., Ltd. v. Scarth  it was held that ‘An agreement to serve a person exclusively for a definite term is a lawful agreement, and it is difficult to see how that can be unlawful which is essential to its fulfillment, and to the due protection of the interests of the employer, while the agreement is in force.

The Delhi High Court in Wipro Limited v. Beckman Coulter International S.A. held that the bar under Section 27 of the Act will not be attracted in cases where non-solicitation clauses operate between business partner and distributor contracts or similar partnership contracts between two independent entities as opposed to that between an employer and an employee.

Bombay High Court in the case of Tapas Kanti Mandal v. Cosmos Films Ltd, held that negative restrictive covenant post-employment period is not enforceable. In this case, the defendant took employment as a manager in the Research and Development department in a multinational company supplier of BOPP, before the employment the defendant entered into a service contract, bond and secrecy agreement. The secrecy agreement provided for a non-compete clause for a period of 3 years. However, the defendant after long years of service abruptly resigned and was to take employment against the non-compete clause. The plaintiff submitted that the defendant, by virtue of his employment, had acquired in-depth knowledge of the products of the company and had also come in possession of confidential processes and knowledge of manufacture of its product. He had also been knowledgeable of various projects of the company, formulae, patterns, complexion, programmes, devices, methods, techniques and processes of the plaintiff company. Future plans of the plaintiff company have been known to him and he has also been aware of unique ideas, discoveries and inventions of the plaintiff company. Such knowledge as well as trade secrets, unique ideas, discoveries, inventions, processes, projects are intellectual property of the plaintiff and by virtue of his position in employment, the defendant had come across the same and had been in possession of the same and he is under obligation not to divulge the same to any other person, partnership, company, corporation as per the contractual obligations incurred by him. However, the Court did not consider the argument and held that any clause restraining the right of profession of an employee is non-enforceable.

In light of this, it can be said that the Court did not apply reasonableness as an exception and took a strict approach with regard to enforceability of non-compete clauses.

Therefore, non-solicitation clauses have more sanctity when part of agreements such as those of partnership where there is a strong implicit presumption that each party had an equal opportunity at the negotiation table and there was an absence of dominance of will of one party over another. This however would be dependent on the facts of each case and the language of each contract. Similarly, in Mr. Diljeet Titus, Advocate v. Mr. Alfred A. Adebare and Ors., the Delhi High Court clarified that confidential information of the employer can be protected even in the post-employment period.

 

Conclusion

Restrictions must be reasonable in the parties’ best interests in order to provide the covenantee with sufficient safeguards. Restrictions to prevent the disclosure of trade secrets or commercial contacts must be reasonable. An agreement in restraint of commerce must be reasonable between both the parties and consistent with the public interest in order to be legitimate.

Under the given conditions, whatever a rational person would do in the same situation using common sense and understanding will be considered reasonable. Therefore, each case’s facts and circumstances will determine how to apply the rationality test.

One comment

  • Abhiraj

    May 11, 2024 at 11:19 am

    I would never suggest anyone to work for an organization where such clause is imposed. I was employeed for an organization but after seeing the non compete agreement, I have declined signing and acknowledging the same due to which it would not be enforced on me and now I independently run my own YouTube channel on Automobiles.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

Need Legal Guidance?

Schedule a Consultation

UPSCALE LEGALAbout
Upscale Legal is a multi-service law firm catering to the needs and interests of various Corporate houses, Financial institutions, Government agencies & departments, along with assisting in supplementary business & legal issues of our individual clients.
AWARDSOur Presence
https://upscalelegal.com/wp-content/uploads/2022/09/iblj.jpg
The 10 Highly Recommend
Untitled design (1)
Legal era
Insight
image 6
image 5
Untitled design (2)
Legal Era awards
certificate-of-Indian-business-law-journal-new
GET IN TOUCHUpscale Social links
UPSCALE LEGALHeadquarters
Upscale Legal is a multi-service law firm catering to the needs and interests of various Corporate houses, Financial institutions, Government agencies & departments, along with assisting in supplementary business & legal issues of our individual clients.
OUR LOCATIONSWhere to find us
https://upscalelegal.com/wp-content/uploads/2019/04/img-footer-map.png
AWARDSOur Presence
https://upscalelegal.com/wp-content/uploads/2022/08/Awards.png
GET IN TOUCHSocial links

Copyright by Upscale Legal. All rights reserved.

Copyright by Upscale Legal. All rights reserved.

Kshitij Suri

Kshitij Suri is a practicing advocate, having completed his B.A.LLB from the University School of Law and Legal Studies, with focused experience in civil and criminal litigation. He has trained and practiced in a rigorous chamber environment prior to joining the Firm, where his work was primarily rooted in trial-level advocacy across a range of forums.

His practice includes handling civil disputes, consumer litigation, and select criminal matters, with substantial involvement in drafting pleadings, applications, written arguments and legal notices.

He is also adept in conducting in-depth and exhaustive legal research, providing comprehensive legal answers.

Aditya Chopra

Aditya is a professionally qualified Advocate with over 8 years of post-qualification experience, specializing in diverse domains including Commercial Law, Dispute Resolution, Contract Management, Corporate Advisory, Tender Management, Labor & Employment, Intellectual Property Rights, Document Processing, Business Set-up & Management Services, and Start-Up Advisory.

His expertise lies in contract management, due diligence, corporate advisory, and litigation, where he has successfully drafted, negotiated, and reviewed complex agreements, conducted risk assessments, ensured regulatory compliance, and represented clients before various judicial and quasi-judicial forums. Aditya has actively handled high-stakes disputes and achieved tangible results through negotiations, settlements, and arbitration.

With a strong foundation in legal drafting and research, Aditya is adept at providing strategic solutions to clients across industries. I take pride in building and maintaining trusted professional relationships with clients, colleagues, and law enforcement authorities, thereby ensuring effective outcomes and long-term success.

Vagisha Gupta

Vagisha is a highly skilled legal professional with extensive experience as an advocate, legal advisor, and consultant, specializing in litigation, arbitration, and corporate advisory. I have successfully represented clients before labour courts, sessions courts, trial courts, and the High Court of Delhi, handling diverse legal disputes with strategic precision and professionalism. Her expertise spans drafting and reviewing a wide range of legal documents, including commercial suits etc.

In the corporate sphere, Vagisha has conducted comprehensive due diligence in transactions, evaluated risks, and ensured adherence to regulatory frameworks across HR policies and governance structures. Ms. Gupta has advised clients extensively on employment agreements, labour law compliance, and POSH policies, contributing to legally sound and ethically compliant workplaces. Vagisha’s work reflects a blend of technical legal expertise and practical business insight, ensuring effective solutions for complex challenges.

With strong analytical, drafting, and negotiation skills, she remains committed to safeguarding client interests, upholding the highest standards of ethics and confidentiality, and fostering enduring professional relationships.

Shreya Shrivastav

Shreya Shrivastav is a strategic outreach and coordination professional with over three years of cross-functional experience spanning HR operations, stakeholder management, and growth-oriented communication. At Upscale Legal, she operates at the intersection of leadership coordination and external engagement, working closely with founders, HR heads, and institutional partners.

Her expertise lies in people management, structured planning, negotiation, and disciplined execution. She plays a key role in managing professional relationships, coordinating internal teams, and ensuring seamless communication across operational and growth initiatives. Her ability to balance strategy with execution allows her to contribute meaningfully to both organizational development and market positioning.

Shreya brings a strong foundation in digital marketing and operational structuring, enabling her to align outreach efforts with long-term business objectives. She is known for her clarity in communication, composure in professional interactions, and ability to build trust-driven relationships.

Her approach is deliberate and growth-focused — combining strategic thinking with reliable execution.

Saurabh Dikshit

Saurabh is a corporate law professional holding a B.A., LL.B. (H) (Batch 2016–2021) and a Master’s degree in Corporate Law from Amity University (Batch 2023–24), with over two years of focused experience in corporate advisory and real estate transactions. He currently serves as a Legal Associate at Upscale Legal, advising clients on a wide spectrum of commercial, transactional, and regulatory matters.

His core expertise lies in transaction structuring, drafting, and documentation, including Lease Deeds, Sale Deeds, MOUs, MSAs, Trust Deeds, Undertakings, NDAs, Settlement Deeds, and Statutory Legal Notices, including Notices under Section 138 of the Negotiable Instruments Act, 1881. He has substantial experience in conducting legal Due Diligence, Share Transfer Transactions, Labour Law Advisory, Licensing and Regulatory Registrations, and Comprehensive Document Vetting across complex commercial arrangements.

He has actively handled corporate leasing transactions and conducted extensive real estate and corporate due diligence for a leading edutech enterprise undertaking pan-India expansion, supporting multi-city commercial leasing, title verification, regulatory compliance, and transaction risk assessment across jurisdictions.

His practice reflects strong proficiency in contract management, risk assessment, corporate governance advisory, and dispute pre-litigation strategy. He brings a commercially driven approach to legal structuring, ensuring enforceability, compliance, and long-term risk mitigation for his clients.

Samriddhi Goswami

Samriddhi Goswami is a law graduate from the Faculty of Law, University of Delhi (Batch 2021–2024). Her professional journey has provided her with substantial exposure to both Corporate Advisory and Litigation, enabling her to address legal issues from preventive as well as remedial perspectives.

With approximately one year of post-qualification experience in Corporate Advisory, she has developed proficiency in drafting and reviewing a wide range of complex agreements, including Service Agreements, Memorandum of Understanding (MoUs), Lease Deeds, and Non-Disclosure Agreements (NDAs). Her practice further extends to Intellectual Property advisory, Labour and Employment law matters, Real Estate transactions, Tender management, Due Diligence, Mergers and Acquisitions (M&A) support, RERA compliance, and regulatory registrations, including TRAI compliance and Start-up advisory.

On the litigation front, she has represented clients before various judicial forums, including District Courts, the High Court of Delhi, and several Tribunals. Her litigation experience encompasses civil disputes, criminal matters, labour and employment disputes, and proceedings under Section 138 of the Negotiable Instruments Act.

Anushrut Rajawat

A versatile legal professional with a strong foundation in both corporate law and litigation. Anushrut holds a B.A.LL. B from the School of Law, University of Petroleum and Energy Studies, Dehradun. His journey in the legal field began early, as he gained invaluable experience as a legal advisor during my 5th year of law school.

With over one year of post-qualification experience at Upscale Legal, He has developed a robust skill set. Anushrut’s corporate experience includes drafting and reviewing a wide range of agreements (including SHA’s, NDAs, and Service Agreements), conducting due diligence for real estate and company acquisitions, and managing regulatory tasks such as GST registrations. He has also gained unique insight into corporate legal departments through a client secondment.

On the litigation front also, he has a proven track record of representing clients in civil and criminal matters before the District Courts and High Court of Delhi. Anushrut has specific expertise in recovery and labour matters, providing effective legal counsel and representation in court. This dual expertise allows him to offer comprehensive legal solutions, blending proactive corporate advice with assertive dispute resolution.

Jasleen Kaur

Jasleen Kaur is an Advocate providing comprehensive legal solutions across a broad spectrum of practice areas. She has developed a dynamic and well-rounded practice that seamlessly combines effective courtroom advocacy with strategic legal advisory services for individuals, corporates, and institutions. She holds a Bachelor of Laws (LL.B.) degree and commenced her professional journey in 2017 through extensive internships and rigorous practical training. This early exposure afforded her substantial hands-on experience in both litigation and corporate law even prior to her formal enrolment as an Advocate, enabling her to cultivate a mature, practical, and in-depth understanding of the legal profession from an early stage.

Jasleen is recognised for her strong command over litigation and dispute resolution, having successfully represented clients before District Courts, High Courts, arbitral tribunals, and statutory forums. Her practice spans civil litigation, criminal defence, arbitration proceedings, labour and employment disputes, matrimonial and family law matters, consumer complaints, corporate and commercial disputes, and cases under Section 138 of the Negotiable Instruments Act (cheque dishonour matters). She has developed a particularly robust practice in criminal law, handling complex trials, sensitive matters, and bail applications with precision and diligence. She is also actively involved in critical stages of criminal proceedings, including police station proceedings, interactions with investigating officers, and safeguarding clients’ procedural and constitutional rights at every stage.

In the field of arbitration, Jasleen possesses a strong working knowledge of the Arbitration and Conciliation Act, 1996, and regularly appears in arbitral proceedings, including matters before institutional arbitration forums. She is experienced in drafting pleadings, applications, and written submissions, managing procedural aspects of arbitration, and advising clients on strategy and enforcement.

She also commands significant expertise in labour and employment laws, representing clients in disputes relating to illegal termination, non-payment of dues, disciplinary proceedings, industrial disputes, and service-related matters before Labour Courts, Industrial Tribunals, and other appropriate forums. Her approach in labour matters is both legally sound and commercially pragmatic, balancing employer compliance with employee rights.

In addition to domestic corporate advisory, Jasleen advises clients on international incorporation and cross-border business structuring, assisting startups and businesses with company incorporation in foreign jurisdictions, regulatory compliance, shareholder structuring, and coordination with overseas professionals, ensuring legally sound and commercially viable expansion beyond India.

Jasleen has actively participated in court-referred mediations, facilitating amicable and commercially viable settlements in civil and matrimonial disputes. She has further handled accident claims, sensitive criminal cases, and disputes arising out of altercations, equipping her with a comprehensive and practical understanding of civil, criminal, and quasi-criminal proceedings.

While litigation remains her core strength, she also efficiently manages complex corporate and commercial assignments, including drafting, vetting, and negotiating high-value contracts, agreements, and legal documentation. Her drafting and advocacy are marked by clarity, precision, and persuasive articulation, and she is particularly known for identifying weaknesses in the opposing party’s case and presenting focused, effective submissions before judicial and arbitral forums.

Disclaimer

Welcome to the website of Upscale Legal. As per the rules of the Bar Council of India, lawyers and law firms are not permitted to solicit work or advertise. By clicking on the “AGREE” button below, the website visitor agrees and acknowledges that:-

* There has been no advertisement, personal communication, solicitation, invitation or any other inducement of any sort whatsoever by or on behalf of Upscale Legal or any of its members to solicit any work through this website.
* The user wishes to gain more information about Upscale Legal for his/her/their own information and use.
* All information about Upscale Legal on this website is being provided to the user only on his/her/their specific request and any information obtained or materials downloaded from this website is completely at the user’s volition and any transmission, receipt or use of this site would not create any lawyer-client relationship.
* All material and information (except any statutory instruments or judicial precedents) on this website is the property of Upscale Legal, and no part thereof shall be used, with or without adaptation, without the express prior written consent of Upscale Legal