Delhi High Court Strikes Down Post-Employment Non-Compete Clause, Backs Employee Mobility

The main issue in this appeal was the validity of the non-solicitation and non-compete clause in the Employment Agreement under Section 27 of the Indian Contract Act (ICA). The court held that any terms of the employment contract that impose a restriction on the right of the employee to seek employment post-termination are void under Section 27 of the ICA.

Background

1. Varun Tyagi (the Appellant), an IT engineer, was employed by Daffodil Software Private Limited (Daffodil) and assigned to work on the POSHAN Tracker Project for DIC, a government initiative.
2. The Appellant resigned and accepted employment with DIC immediately after serving his notice period with Daffodil.
3. Daffodil alleged breach of the Employment Agreement's non-solicitation and non-compete clauses, which prohibited the Appellant from working with business associates like DIC for three years post-employment.
4. The Trial court initially granted an ex parte injunction restraining the appellant from working with the Daffodil's clients, which was later modified to specifically restrain the Appellant from working with DIC and NeGD pending suit resolution.
5. The Trial Court held that there was a prima facie case in favour of Daffodil, the balance of convenience also lies in their favour and if the Appellant was to share any proprietary information, intellectual property, insider knowledge, source code, as the case maybe, the Respondent and its employees would suffer irreparable harm.

Employment Agreement and Disputed clauses

The Employment Agreement signed by the Appellant included a 'Non-Solicitation' and 'Non-Compete Clause' (Clause 2.16) that barred the Appellant from soliciting or working with any business associate or employee of the respondent during employment and for three years after cessation. Daffodil argued the clause was necessary to protect confidential information, intellectual property, insider knowledge, and source code related to the project

Arguments Presented by the Respondent/Daffodil

1. Specialized Knowledge and Technical Skills: Daffodil Software argued that the Appellant acquired specialized knowledge and technical skills during his employment, which were crucial to the POSHAN Tracker Project. This included backend and frontend development, API integration, and data management. They contended that his subsequent role at DIC relied on confidential information, proprietary techniques, and internal know-how gained during his tenure at Daffodil Software.
2. Confidentiality and Non-Disclosure Clauses: Daffodil Software emphasized that the Appellant actions amounted to a direct violation of the confidentiality and non-disclosure clauses in his employment agreement. These clauses prohibited him from sharing, copying, transmitting, publishing, or disclosing any confidential information of the company during and after his employment. They argued that the non-compete and confidentiality clauses were reasonable and necessary to protect their business interests.
3. Breach of Trust: Daffodil Software maintained that the Appellant's employment with DIC constituted a breach of trust. They argued that his employment with DIC, a business associate of Daffodil Software, was in direct violation of the non-compete clause in his employment agreement. They contended that this breach caused irreparable harm to their business interests, including loss of reputation, project delays, and damage to client relationships.
4. Legal Precedents: Daffodil Software relied on various legal precedents to support their arguments. They cited a) Leeds Rugby Ltd v Harris & Anor [2005] EWHC 1591 (QB), to submit that post-employment restraints in employment agreements are enforceable if they are reasonable and meant to protect the employer's business interests b) Stenhouse Australia Ltd. v. Marshall William Davidson Phillips 1974 A.C. 391, to submit that whether a particular contractual provision operates in restraint of trade is to be determined not by the form the stipulation wears, but by its effect in practice.
   Based on the above Daffodil argued that the non-compete clause in the Appellant's employment agreement was reasonable and necessary to protect their proprietary interests.
5. Limited Restriction: Daffodil Software argued that the restriction imposed on Varun Tyagi was limited to preventing him from working with DIC and NeGD for three years post-termination. They contended that this restriction was reasonable and did not constitute a blanket ban on his employment opportunities. They emphasized that the injunction was necessary to prevent irreparable harm to their business interests

Appellants Arguments

1. Interpretation of Section 27 of the Indian Contract Act (ICA): The Appellant argued that the Trial Court erroneously interpreted the provisions of Section 27 of the ICA by applying the principle of reasonableness and permitting partial restraint, even though the Employment Agreement stood terminated. The Appellant contended that Section 27 of the ICA does not recognize the distinction between partial and absolute restraint. Any agreement that falls within the scope of Section 27 is rendered void unless it is saved by Exception 1 to Section 27 of the ICA which did not apply in this case.
2. Non-Compete Clause: The Appellant submitted that Clause 2.16 of the Employment Agreement that covers Non-Solicitation and Non-Compete obligations., when read along with the definition of 'Business Associate,' is worded as a blanket prohibition on the Appellant from working with existing or potential customers. However, such a restriction cannot be sustained or confined even to a single customer, client, vendor, or affiliate of the Respondent, since any form of restraint, whether partial or absolute, becomes legally inapplicable once the Appellant was relieved from service upon completion of the stipulated ninety-day notice period.
3. Legal Precedents: The Appellant relied on several legal precedents to support his arguments:
   1. Superintendence Co. of India v. Krishan Murgai: The Appellant argued that Section 27 of the ICA does not draw a distinction between partial and complete restraint, and any agreement with the object of restraining trade is void unless it falls within Exception 1 to Section 27 of the ICA.
   2. Madhup Chunder v. Rajcoomar Doss: The Appellant submitted that Section 27 of the ICA deliberately omits the use of the word 'absolutely,' reflecting the specific legislative intent to prohibit not only absolute restraints but also any form of partial restraint on trade or profession.
   3. Niranjan Shankar Golikari v. Century Spg. and Mfg. Co. Ltd.: The Appellant argued that Section 27 of the ICA restrains a service covenant to be extended beyond the termination of service and a clause intended to restrain trade is void.
   4. Interlink Services (P) Ltd. v. S.P. Bangera, Ambiance India (P) Ltd. v. Naveen Jain, Wipro Ltd. v. Beckman Coulter International: The Appellant submitted that once the agreement between the parties ends, any restriction placed on a person's ability to work or carry on their profession after that point is not enforceable under Section 27 of the ICA.
   5. R. Babu v. TTK LIG Ltd.: The Appellant argued that no injunction can be granted against an employee after the termination of his employment, restraining him from carrying on a competitive trade.
4. Intellectual Property Rights: The Appellant submitted that no confidential information, trade secret, or proprietary right was created during the course of his employment with Daffodil. The Appellant argued that the intellectual property rights to the software and related documentation belonged to DIC, not the Respondent, as per the Letters of Intent. The court concluded that the apprehension of the Respondent regarding the sharing of confidential information with DIC was misconceived since the intellectual property already belonged to DIC.

Court Ruling

The court held that any terms of the employment contract that impose a restriction on the right of the employee to seek employment post-termination are void under Section 27 of the ICA. The Court allowed the appeal, and the order restraining the appellant from working with DIC and NeGD was set aside.

Our Comments

By setting aside the Trial court's injunction, the Delhi High Court reinforced a crucial precept of Indian employment law: non-compete clauses are not enforceable after employment ends. The ruling affirms that unless an employer can establish breach of confidentiality or misuse of proprietary information, it cannot restrict an employee's right to join a competitor or client post-employment. The decision balances the employer interests with employees' fundamental right to pursue lawful employment after contract termination.

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