Delhi High Court Reaffirms Invalidity of Post-Employment Non-Compete Clauses

In Varun Tyagi v. Daffodil Software Private Limited (CM APPL. No. 36613 of 2025), the Delhi High Court once again examined the enforceability of restrictive covenants in employment contracts. The Court reaffirmed that non-compete clauses that operate after termination of employment are void under Section 27 of the Indian Contract Act, 1872.

Background

In the case under discussion, a software professional who had earlier worked on a government technology project resigned and later joined the same project directly under a new employer. His former employer alleged breach of a non-compete clause that prohibited him from joining any business associate or client for three years after leaving the organization. The employer approached the trial court and obtained an interim injunction restraining the employee from continuing his new role. The employee challenged this order before the Delhi High Court, arguing that the restriction amounted to an unlawful restraint of trade under Section 27 of the Indian Contract Act, 1872.

Court’s Observations

The Delhi High Court set aside the trial court’s order and allowed the employee to continue his work. It held that the non-compete clause, which operated beyond the period of employment, was void under Section 27 of the Indian Contract Act. While analysing the issue, the Court referred to key Supreme Court rulings such as Niranjan Shankar Golikari v. The Century Spinning & Manufacturing Co. Ltd. (AIR 1967 SC 1098), Superintendence Company of India (P) Ltd. v. Krishan Murgai ((1981) 2 SCC 246), and Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan ((2006) 4 SCC 227). These judgments draw a clear line between restrictions valid during employment and those extending beyond it. The Court noted that while employers may impose reasonable conditions to protect confidential information and trade secrets during the course of employment, such protection cannot extend into the post-employment period unless it directly relates to safeguarding proprietary rights. In this case, since the intellectual property and project data were owned by the client and not by the employer, there was no legitimate basis to restrain the employee from joining the new organization.

Judgment and Rationale

The High Court emphasized that the extent or duration of a restraint, whether partial or total, is not relevant in deciding its validity under Section 27. Even a limited prohibition after employment ends is considered void unless it falls within narrow exceptions such as the sale of goodwill. The Court further observed that denying employment to a professional would cause undue hardship and financial loss, whereas the employer's alleged loss could be compensated through damages if any misuse of confidential information were proven. The balance of convenience, therefore, lay in favor of the employee. The Court further clarified that employers may, however, protect confidential business information and client data through narrowly drafted confidentiality or non-solicitation clauses, provided these do not operate as indirect restraints on future employment.

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion, advice or recommendation.