Court’s Decision
The Delhi High Court allowed the appeal filed by the former employee and set aside the Trial Court’s interim order which had restrained him from joining Digital India Corporation (DIC) and National E-Governance Division (NeGD). The Court held that post-termination negative covenants which restrain employment are unenforceable under Section 27 of the Indian Contract Act, 1872, and observed:
“Any term of the employment contract that imposes a restriction on the right of the employee to get employed post-termination shall be void being contrary to Section 27 of the Indian Contract Act.”
Facts
The appellant was initially hired by an affiliate of the respondent company in July 2021 and subsequently transferred to the respondent’s rolls in January 2022 under a formal Employment Agreement. The agreement contained non-solicitation and non-compete clauses restricting the employee from working with any of the respondent’s business associates for three years post-employment.
The respondent was engaged by DIC for a high-priority government project titled “POSHAN Tracker.” The appellant, being a full-stack developer, was assigned to this project. After resigning from the respondent company and completing his notice period on 7 April 2025, the appellant joined DIC as Deputy General Manager on 8 April 2025.
Aggrieved, the respondent filed a civil suit and secured an ex parte injunction from the Trial Court restraining the appellant from working with DIC and NeGD. This was later confirmed by the Trial Court’s impugned order. The appellant appealed against this order before the High Court.
Issues
- Whether the Trial Court was justified in granting an interim injunction against the appellant from joining DIC and NeGD.
- Whether the non-solicitation and non-compete clauses in the employment agreement are valid and enforceable post-termination under Section 27 of the Indian Contract Act, 1872.
Petitioner’s Arguments
The appellant argued that the non-compete clause in the Employment Agreement was invalid under Section 27 of the Indian Contract Act, which prohibits all agreements in restraint of trade. Key submissions included:
- The Employment Agreement ceased on 7 April 2025, and the appellant was legally free to join any organisation thereafter.
- The non-compete clause constituted a blanket ban and did not fall under the exception carved out in Section 27.
- The work done during employment involved no proprietary development; all intellectual property belonged to DIC, not the respondent.
- Enforcing the clause would deprive the appellant of his livelihood and damage his career.
- Precedents such as Superintendence Co. v. Krishan Murgai, Wipro Ltd. v. Beckman Coulter, and Manipal Business Solutions were relied upon to argue that post-termination restraints are void in India.
Respondent’s Arguments
The respondent contended that:
- The appellant was trained extensively and entrusted with critical project responsibilities.
- Clause 2.16 of the Employment Agreement validly prohibited him from associating with DIC post-employment to protect the respondent’s proprietary interests.
- The restriction was narrow and targeted, applying only to DIC and NeGD.
- The appellant’s role at DIC involved use of confidential know-how acquired during his tenure with the respondent.
- The bar under Section 27 of the Contract Act was not absolute and did not apply when reasonable protection of trade secrets or confidential data was intended.
- English precedents like Leeds Rugby Ltd. v. Harris, Stenhouse v. Phillips, and Indian judgments like Desiccant Rotors v. Bappaditya Sarkar and Embee Software v. Samir Kumar Shaw were cited to argue in favour of reasonableness of the clause.
Analysis of the Law
The Court examined Section 27 of the Indian Contract Act, which voids all agreements restraining lawful profession, trade, or business, except in case of sale of goodwill. The Court reaffirmed that under Indian law, unlike English law, no distinction exists between partial and absolute restraints, and reasonableness is not a defence.
The Court emphasized that:
- The clause under scrutiny attempted to restrain employment post-termination and hence was squarely hit by Section 27.
- Even limited restraints, such as not joining DIC or NeGD, are impermissible unless covered under the narrow exceptions allowed by law.
- The Trial Court’s concern that the appellant might misuse confidential information was unfounded since all intellectual property in the project was expressly vested with DIC.
Precedent Analysis
- Superintendence Co. of India v. Krishan Murgai (1981) 2 SCC 246
Held that agreements restraining trade post-employment are void unless falling under statutory exception. - Niranjan Shankar Golikari v. Century Spinning (1967 SCC OnLine SC 72)
Distinguished between in-term and post-term restraints, holding that negative covenants valid during service may not be enforceable post-employment unless they protect legitimate interests. - Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan (2006) 4 SCC 227
Reinforced that restrictive covenants post-termination are unenforceable in India. - American Express Bank Ltd. v. Priya Malik (2006)
Recognised employee’s right to seek employment despite holding confidential information.
Court’s Reasoning
The Court found that:
- The restriction on joining DIC was not a protection of trade secrets but a restraint on lawful employment.
- The Respondent was engaged only in supplying manpower; the source code and related intellectual property were owned by DIC.
- The Respondent’s apprehensions were unfounded since no confidential or proprietary interest of the Respondent was being jeopardized.
- The clause, though limited to DIC and NeGD, still constituted an invalid restraint under Indian law.
Conclusion
The Delhi High Court quashed the Trial Court’s injunction order dated 3 June 2025. It held that the non-compete clause in the Employment Agreement was void under Section 27 of the Indian Contract Act, 1872. The Court found that:
“There is no question of any sharing of the confidential information, source code or intellectual property with DIC, as the same already belongs to DIC.”
Hence, the injunction was contrary to law, and the appeal was allowed.
Implications
- Reinforces that post-employment restrictive covenants are void in India unless covered under statutory exceptions.
- Clarifies that intellectual property ownership plays a key role in deciding the legitimacy of confidentiality concerns.
- Upholds employees’ right to seek better employment post termination, even with clients or business associates of former employers.
FAQs
1. Can an employer in India legally stop an employee from joining a client after leaving the company?
No. As per Section 27 of the Indian Contract Act, any clause that restrains an employee from joining a client post-employment is void unless it protects trade secrets or is during the term of employment.
2. What is the difference between in-term and post-term employment covenants?
In-term covenants (during employment) can validly restrict dual employment or solicitation. Post-term covenants, unless protecting confidential information, are generally unenforceable under Indian law.
3. What happens if the employer fears misuse of confidential data after the employee leaves?
The employer can protect itself during the course of employment. However, post-termination, the law does not permit broad restraints merely based on speculative fears unless actual misuse or theft of trade secrets can be proven.
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