This is one of the clearest differences between Indian law and the law most template contracts are copied from.
The provision
Section 27 of the Indian Contract Act, 1872: every agreement by which any person is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. The only statutory exception is the sale of goodwill of a business, within reasonable local limits.
Unlike English law, India does not save a restraint merely because it is reasonable. In Superintendence Company of India v. Krishan Murgai and the line of cases following it, courts have consistently struck down post-termination non-competes.
The distinction that decides these cases
- During employment: a clause preventing you from working for a competitor while still employed is enforceable. It is a term of service, not a restraint of trade. Exclusivity clauses and garden leave fall here.
- After employment ends: a clause preventing you from joining a competitor, or setting up on your own, is void under Section 27, however short the period or narrow the geography.
Three things survive: confidentiality, because protecting trade secrets and proprietary information is not a restraint on trade; non-solicitation of clients and employees, which courts have enforced where narrowly drawn, though the position is not uniform; and IP assignment, which is enforced routinely. A well-advised employer relies on these, not on a non-compete.
If you have signed one
Do not assume it binds you, and equally do not assume you can ignore the rest of the contract. What follows you after you leave is the duty of confidence and, often, a non-solicitation obligation. Taking client lists, source code, pricing data or databases is a genuine exposure, and can attract liability under the Information Technology Act, 2000 as well as in contract.
Why the during-employment clause is enforceable, in statutory terms
The distinction is not judicial invention. Section 42 of the Specific Relief Act, 1963 provides that where a contract contains an affirmative agreement to do a certain act coupled with a negative agreement not to do a certain act, the fact that the court cannot compel specific performance of the affirmative part does not prevent it from granting an injunction to enforce the negative part, provided the plaintiff has not himself failed to perform. That is the machinery behind an exclusivity or garden leave injunction: no court will order you to keep working for your employer, but it can restrain you from working for a competitor while the contract subsists. The limit is in Section 41(e), which bars an injunction to prevent the breach of a contract that would not itself be specifically enforced, and that is the provision an employee relies on once the employment has ended.
Moonlighting and dual employment
The same distinction answers the moonlighting question. While the employment subsists, an exclusivity clause is a term of service and is enforceable, so a second job taken in breach of it is a contractual and disciplinary matter, not a restraint of trade. Several employment statutes also restrict dual employment in their own terms. What the employer cannot do is convert that into a right to stop you working for anyone after you leave. Our note on moonlighting and dual employment in India sets out where the line falls and what a disciplinary process has to look like.
What to put in the contract instead
If you are the employer, the drafting follows from the law. Put the exclusivity obligation squarely in the term of employment. Define confidential information specifically rather than generically. Take a written assignment of intellectual property that satisfies the formalities. Draw non-solicitation narrowly, limited to clients the employee actually dealt with and to a short period, because a narrowly drawn clause has a real chance and a sweeping one invites the argument that it is a non-compete in disguise. Consider notice and garden leave, which are paid and therefore far easier to defend than an unpaid restraint. Our note on the employment agreement in India works through those clauses, and where the relationship is with a consultant or a vendor rather than an employee, the confidentiality obligations belong in a properly drafted non-disclosure agreement instead.
Two related instruments are often confused with a non-compete and are governed differently. An employment bond, requiring repayment where the employee leaves before a minimum period, is not a restraint of trade at all; it is tested as a stipulation for damages, and the employer must show genuine expenditure, typically on training, and an amount that is a reasonable pre-estimate rather than a penalty. Courts reduce inflated bond amounts routinely. Garden leave, by contrast, keeps the employee on the payroll and out of the market during the notice period, and stands on the firm ground described above.
Sale of a business is different
Where you sell your business and its goodwill, a non-compete against you is valid within reasonable limits, because the buyer is paying for the goodwill. That exception is expressly in Section 27 and it is routinely enforced.
There is a parallel and less well known set of exceptions for partners. The Indian Partnership Act, 1932 expressly validates certain restraints between partners notwithstanding Section 27, including an agreement by a partner selling the goodwill of the firm not to carry on a similar business within specified limits, provided the restrictions are reasonable. So the same clause that is void in an employment contract can be perfectly good in a partnership retirement deed or a business sale agreement. The question is always which relationship the clause sits in.