Post-employment restraints must be reasonable, narrowly tailored and justified by a legitimate business interest to withstand judicial scrutiny.
In a significant ruling, the Delhi High Court has reaffirmed that unreasonable non-compete clauses imposed on employees or business partners post-separation are unenforceable and that contractual restraints on professional freedom must be reasonable and legally sound (Cigma Events Pvt. Ltd. vs. Deepak Gupta & Ors., C.S. (OS) 1011/2024).
Background
Deepak Gupta was employed by Cigma Events Pvt. Ltd. as a senior executive. As part of his employment contract, Gupta agreed to a non-compete clause that barred him from working in a similar industry or interacting with the company's clients and vendors for two years following his departure. Regardless, after resigning, Gupta launched a competing venture. Cigma Events responded by filing a lawsuit seeking an injunction to restrain him from engaging in similar business activities, alleging a breach of the non-compete agreement.
Key issues before the court
- Whether a non-compete clause is enforceable after employment ends;
- Whether post-separation restrictions can be justified to protect business interests;
- Whether the clause violated Section 27 of the Indian Contract Act, 1872, which prohibits agreements that restrain trade.
The court's ruling
The court reiterated that any agreement restraining a person from carrying out their trade or profession after leaving employment is void under Section 27 of the Indian Contract Act. While employers are entitled to safeguard trade secrets, confidential information, and goodwill, they cannot impose broad restrictions on an individual's right to work. Although Cigma Events argued that Gupta had access to sensitive client data and strategic information, the court held that these concerns could be more appropriately addressed through well-drafted confidentiality clauses—not through a blanket restriction on future employment. It reaffirmed that Indian law does not recognise post-employment non-compete agreements, except in limited circumstances where the protection of proprietary information is justified.
The importance of reasonableness was emphasised in the context of enforceability of contractual restraints. A two-year ban on an employee working in the same field was deemed excessive and unfair - safeguarding an employer's interests could not come at the cost of restricting an individual's livelihood. The court refused to grant an injunction, stating that enforcing the clause would infringe Gupta's fundamental right to carry on a profession, as protected under Article 19(1)(g) of the Indian Constitution.
Broader implications
This ruling reaffirms long-standing legal principles and warns employers against drafting overly broad non-compete clauses that seek to curtail an individual's professional freedom. Post-employment restraints must be narrowly tailored and justified by a legitimate business interest. While companies retain the right to safeguard trade secrets and enforce non-solicitation or confidentiality agreements, general non-compete clauses are unlikely to withstand judicial scrutiny.
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