Delhi High Court Reaffirms Limits of Post-Employment Non-Compete Clauses (India)

Background

Varun Tyagi (the “Employee”), an IT engineer, being initially employed with an associate company of Daffodil Software Private Limited (“DSPL”), was transferred to DSPL. Among other restrictions, the Employee’s agreement with DSPL included a non-compete clause preventing him, during the period of his employment and for three years thereafter, from working with or soliciting any business associate he was introduced to through DSPL’s business activities—whether directly or indirectly, or in any capacity.

DSPL assigned the Employee to work closely with Digital India Corporation (“DIC”), a business associate of DSPL. Subsequently, the Employee resigned from DSPL and joined DIC. DSPL sought to prevent the Employee from joining DIC for three years post-employment in accordance with the employment agreement, claiming risk to proprietary information and business interests.

Legal Issue in Focus

The fundamental question was whether a post-employment non-compete clause, which prohibited the Employee from engaging with DSPL’s business associate (i.e., DIC), was valid under Section 27 of the Indian Contract Act, 1872 (“ICA”). This section provides that all agreements in restraint of trade are void, except in the limited case involving the sale of goodwill.

Court’s Analysis and Decision

The Delhi High Court analyzed the non-compete clause in the Employee’s agreement with DSPL considering Section 27 of the ICA and concluded that the clause constituted a restraint of trade. The High Court set aside the interim injunction passed by the lower court in favor of DSPL, thereby allowing the Employee to join DIC.

In rendering its judgment, the Court, among other things, reiterated the legal position on post-employment restraints and held the following※1:

• It is clear that any term of the employment contract that imposes a restriction on the right of the employee to get employed post-termination of the contract of employment shall be void being contrary to Section 27 of the ICA.
• The reasonableness and whether the restraint is partial or complete is not required to be considered when an issue arises as to whether a particular term of contract is or is not in restraint of trade, business or profession.
• A post-employment restrictive covenant is enforceable only to protect an employer’s confidential or proprietary information, or to prevent the employee from soliciting the employer’s clients. In this case, the business between DIC and DPSL was based on a contract and such contract stated that all intellectual property and related documentation arising from the assignment would belong to DIC. Therefore, DSPL’s concern that the employee might share confidential information or intellectual property with DIC was unfounded, as those rights already vested in DIC. There was no question of any improper disclosure of confidential information or intellectual property to DIC.
• An employee cannot be confronted with the situation where he has to either work for the previous employer or remain idle.
• The balance of convenience is in favour of the Employee as the Employee has already joined DIC and if the Employee is restrained from working with DIC during the pendency of the judgement, it would cause irreparable loss to the Employee. In case DSPL is able to prove breach of the employment agreement, it can be compensated by way of damages.

Conclusion

The Delhi High Court’s decision upholds India’s stringent restrictions on post-employment non-compete covenants. While employers may impose reasonable limits during the employment of an employee, post-employment non-compete clauses are typically unenforceable regardless of their extent or duration, unless they fall under one of the few legal exceptions.