The question of how negative covenants in employment contracts are to be treated under Indian law has long plagued both litigating and transaction lawyers alike. The legal uncertainty surrounding post-employment restraints, particularly non-compete clauses, is primarily owing to the absolute language of Section 27 of the Indian Contract Act, 1872, coupled with the reluctance of the courts to confront this doctrinal rigidity.
The recent decision of the Delhi High Court in Varun Tyagi v. Daffodil Software Pvt. Ltd., delivered on 25 June 2025, provided an opportune moment for the judiciary to recalibrate the legal understanding of such covenants in the context of modern commercial and employment realities.
Although it is true that the Hon'ble Court whilst sitting in appellate jurisdiction under Section 104 of the Code of Civil Procedure, 1908, was constrained in terms of the scope of enquiry, given the wider recognition of the inadequacies in the current legal framework, and the specific and recurring nature of such disputes, especially in sensitive and rapidly evolving sectors like information technology, the Hon'ble Court, in our respectful view, could have considered referring the matter to a larger bench. This was, arguably, an opportunity to initiate a judicial conversation around modernising the approach to post-employment restraints.
The facts in brief are that the appellant had been employed at Daffodil Software, a technology company engaged in the development of software products for clients, including the Digital India Corporation (DIC). During the course of his employment, the appellant was deputed to a project that Daffodil was executing for the DIC. Within a month after his resignation in April 2025, the appellant joined DIC directly, continuing work on the same project. The employer objected to this move, invoking Clause 2.16(b) of the employment agreement, which restrained the employee, for a period of three years post-employment, from engaging – directly or indirectly – with any business associate, such as DIC and NEGC, with whom he had interacted during his employment. Alleging breach, the employer sought a quia timet injunction to restrain the employee from continuing with DIC. The lower court ruled in favour of the employer, recognising the reasonableness of the restraint, the narrow scope of the negative covenant which the employer sought to enforce, and given the sensitive nature of the information involved. However, the same was overturned on appeal by the Hon'ble High Court which held that the covenant violated Section 27 and was therefore void and unenforceable.
Section 27, in its plain text, renders void any agreement that restrains a person from exercising a lawful profession, trade, or business. Unlike English law, Indian jurisprudence does not distinguish between reasonable partial restraints and unreasonable total restraints, with the sole statutory exception being contracts involving the sale of goodwill. This has led to a rigid legal framework in which non-compete clauses are routinely invalidated, irrespective of context or proportionality. Most respectfully, the authors believe that while adhering to this strict textual approach, the Hon'ble High Court may have lost an opportunity to assess whether the covenant in question was a proportionate and legitimate means of protecting business interests, rather than an undue restraint on trade.
Needless to state, in a highly competitive and information-sensitive industry like software development, the mobility of employees often brings with it the potential misuse of proprietary knowledge. When an employee transitions from working on a project for a client under one employer to working directly for that client on the same project, the risk of confidential information being exploited – intentionally or inadvertently – is not merely hypothetical.
In such a context, courts are increasingly confronted with the need to evaluate the reasonableness of restrictive covenants – scrutinising factors such as the duration of the restriction, the nature of the information involved, and the specificity of the restraint. As mentioned hereinabove, while an appellate court may not be empowered to reframe settled doctrine, cases like Daffodil present occasions where a reference to a larger bench could be considered appropriate. Not doing so, appears to be owing to the wider doctrinal malaise surrounding Section 27. Save referring to the established line of precedents, Courts have consistently avoided any inquiry into the legitimacy or proportionality of non-compete clauses and treated the provision as an absolute embargo.
The decision to make a reference would have also aligned with broader reformist thinking, such as that found in the Thirteenth Law Commission Report, which had long recognised the datedness of Section 27 in the context of modern employment dynamics. The Commission acknowledged that in modern employment relationships, especially in specialised sectors, some measure of post-employment restriction may be, not only valid, but essential to preserve business confidence. However, these recommendations have languished without legislative follow-up, thereby placing a heavier burden on the judiciary to interpret the law in ways that reflect current economic realities. Initiating a judicial dialogue would therefore, not only acknowledge these modern realities but also contribute meaningfully to shaping a jurisprudence that resonates with today's economic environment.
It is in this context that the Hon'ble High Court's reluctance to scrutinise the reasonableness of the clause becomes especially problematic. Given the increasing mobility of technical professionals, and the sensitive nature of roles, employers invest substantial resources in training, onboarding, and exposing employees to high-value client relationships. These investments are placed at risk when employees are allowed to freely move to competitors or clients and replicate or exploit the knowledge gained. While the law must certainly protect an individual's right to pursue gainful employment, this right cannot be so absolute as to negate the employer's legitimate business interests.
A careful weighing of competing interests is necessary. In this regard, and most respectfully, it would be apposite for the courts to apply a reasonableness standard that examines the duration, geographic scope, the nature of the business, the employee's role and seniority, and the confidentiality at stake while dealing with non-compete clause.
More broadly, it would be in the interest of all stakeholders if courts begin to appreciate that not all negative covenants are designed to drive former employees to professional idleness. In many cases, such clauses are inserted to protect interests that are both commercially and ethically sound, confidentiality, client trust, competitive neutrality, and long-term strategic planning, to name a few. To dismiss such restraints outright is to encourage a business environment where ethical boundaries are blurred and contractual expectations, rendered meaningless. Judicial refusal to recognise this dimension fuels uncertainty in contract enforcement and undermines the faith of commercial actors in the legal system's ability to uphold carefully negotiated bargains.
Therefore, the authors believe that the time has come for Indian courts to bring about a shift in the jurisprudence surrounding negative covenants.
First, the courts may begin by abandoning the binary approach that renders all restraints void under Section 27, except in cases involving the sale of goodwill.
Second, judicially crafted guidelines may be developed to assess the enforceability of negative covenants – focusing on industry-type, reasonableness, duration, scope, and proportionality.
Third, when faced with a dispute, courts must engage in a thorough analysis of facts to ensure that legitimate employer interests are not sacrificed and adhere to the judicial guidelines as envisaged above.
Such an approach would not only align the law with the needs of a modern, knowledge-driven economy but also strike a fair balance between labour mobility and business security and strengthen trust in contractual relationships.
Further, said approach would also equip both transaction and litigating lawyers with much-needed guidance to navigate employment contracts and to assist the courts in resolving disputes in a manner that brings about certainty, and is both commercially and jurisprudentially sound.
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