Module 4 of 7 — Indian Employment Law (Non-Lawyer)

Restrictive Covenants and Section 27

Reading module · approx 14 min

Section 27 of the Indian Contract Act, 1872 voids agreements in restraint of trade. This 19th-century section governs the enforceability of every non-compete clause, non-solicit clause, and post-employment restriction in every Indian employment contract.

The rule in Section 27

Section 27 states: "Every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, is to that extent void." The section has one statutory exception — sale of goodwill — and courts have carved out limited additional exceptions through case law.

What survives Section 27 and what does not

Restrictions during employment are generally enforceable. An employee can be prohibited from working for a competitor, moonlighting, or engaging in competing business during the term of employment. This is not a restraint of trade because the employee is being paid to work exclusively for the employer.

Post-employment non-compete clauses are generally unenforceable. The Supreme Court and High Courts have consistently held that post-employment restraints preventing an ex-employee from working in a particular industry, geography, or type of role are void under Section 27, regardless of duration.

Post-employment confidentiality obligations are enforceable. An ex-employee can be prohibited from using or disclosing the employer's trade secrets and confidential information. The distinction from non-compete: confidentiality restrains disclosure of specific information, not general professional activity.

Non-solicitation of customers and employees is in a grey zone. Courts have been more willing to enforce reasonable non-solicit clauses limited in duration (typically 12 to 24 months) and scope (limited to customers or employees actually known to the departing employee through the course of employment). Broad non-solicit clauses covering all customers or all employees may be struck down.

Garden leave Garden leave is a period during which the employee remains formally employed (and continues to receive salary and benefits) but is not required to attend work. During garden leave, the employee is still bound by the exclusivity obligation of employment and cannot begin work for a new employer. This is generally enforceable because it operates during, rather than after, employment. Garden leave is used strategically to keep departing senior employees away from competitors without the enforceability problems of a post-employment non-compete.

Drafting restrictive covenants that will survive scrutiny

The principles that maximise enforceability under Indian law:

Structure the clause as confidentiality or trade secret protection rather than naked non-compete
Limit the duration to what is reasonable (12 to 24 months for non-solicit; anything longer is high-risk)
Limit the geographic scope to areas where the employee actually operated or where confidential information could cause harm
Limit the substantive scope to the specific customers, information, or activities the employer legitimately needs to protect
Consider using garden leave and pre-termination notice periods rather than post-employment restrictions where possible

Module 5 covers statutory protections that apply to Indian employees regardless of contract terms — the "floor" of employment law that cannot be reduced.