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Non-compete clause: An interpretation
In a landmark judgment delivered by the Hon’ble Delhi High Court on June 25, 2025, a fresh wave of discussion has emerged within legal and corporate circles surrounding the enforceability of non-compete clauses. The Hon’ble High Court, while reaffirming the principle of Section 27 of the Indian Contract Act, 1872, stated that it is clear that any terms of the employment contract that impose a restriction on the right of the employee to get employed post-termination of the contract of employment shall be void, being contrary to Section 27 of the Indian Contract Act, 1872. The Hon’ble High Court stated that the law is settled on this point that the negative covenant post-termination of the employment can be granted only to protect the confidential and proprietary information of the employer or to restrain the employee from soliciting the clients of the employer.
Varun Tyagi (Appellant) is an Information Technology Engineer and was employed as an Associate in the affiliate of Daffodil Software Private Limited (Respondent) on 29.07.2021 and was later transferred to Daffodil Software itself on 01.01.2022 under an Employment Agreement. The Employment Agreement contained a Non-Solicitation and Non-Compete Clause. The Clause stated that for three years from his resignation, he will be barred from soliciting or attempting to solicit any of the business associates, directly or indirectly advise or undertake employment with any business associate, and directly or indirectly solicit, associate, advise, or otherwise deal with any of the existing employees of the Company and its affiliates.
The Respondent Company, under a contract with DIC through Letters of Intent, was engaged to supply specialized software professionals, specifically full stack developers, in connection with a high-priority government initiative, POSHAN Tracker (“Project”). The Project aimed at enhancing nutritional outcomes for children across the country and holds significant public importance.
The Appellant, who was assigned work from January 2023 by the Respondent, underwent extensive specialized training, reflecting a considerable investment made by the Respondent. Due to his expertise, he was promoted to a leadership role. He was entrusted with oversight of key project modules and active engagement with stakeholders.
The Appellant resigned from the Respondent company on 06.01.2025, and thereafter, after serving a three-month notice period, he joined DIC as their General Manager on 08.04.2025. Aggrieved by the violation of its Non-Solicitation and Non-Compete Clause, Daffodil filed a suit for injunction. On 23.05.2025, the Ld. Trial Court (Saket) granted an ex parte ad interim injunction against the Appellant, restraining the Appellant from working with or for the clients and business affiliates of the Respondent company until further orders.
The Appellant challenged the order of the Ld. Trial Court. The Hon’ble High Court directed the Trial Court to dispose of the application of interim injunction within one week and stayed the order of interim injunction dated 23.05.2025, till the time the Ld. Trial Court disposes of the application of interim injunction in accordance with law.
On 03.06.2025, the Ld. Trial Court, in its impugned order, restrained the Appellant from working with DIC and NeGD. The Ld. Trial Court held that there was a prima facie case in favour of the Respondent, the balance of convenience also lies in favour of the Respondent, and if the Appellant were to share any proprietary information, intellectual property, insider knowledge, or source code, as the case may be, the Respondent and its employees would suffer irreparable harm. Therefore, the Appellant filed this present appeal.
The core legal issue in this case was: “Whether the Non-Solicitation and Non-Compete Clause would apply to an employee post his resignation/termination in lieu of Section 27 of the Indian Contract Act, 1872?”
The Hon’ble High Court, after reviewing the judgments quoted from the side of the Appellant and the Respondent and analyzing the jurisprudential essence of Section 27 of the Indian Contract Act, 1872, stated that an employee cannot be confronted with the situation where he has to either work for the previous employer or remain idle. In employer-employee contracts, the restrictive or negative covenants are viewed strictly, as the employer has an advantage over the employee, and it is quite often the case that the employee has to sign a standard form contract or not be employed at all.
Further, the reasonableness and whether the restraint is partial or complete is not required to be considered at all when an issue arises as to whether a particular term of contract is or is not in restraint of trade, business, or profession.
The Hon’ble High Court, while pronouncing its judgment, relied upon the case of American Express Bank Ltd. v. Ms. Priya Malik, MANU/DE/2106/2006: DEL, and held that the right of an employee to seek and search for better employment is not to be curbed by an injunction, even on the ground that the employee has confidential data. In the garb of confidentiality, the employer cannot be allowed to perpetuate forced employment. Freedom of changing employment for improving service conditions is a vital and important right of an employee, which cannot be restricted or curtailed on the ground that the employee has the employer’s data and confidential information. Such a restriction would be hit by Section 27 of the Indian Contract Act, 1872.
The Hon’ble High Court, while setting aside the impugned order, noted that Clause 2.16 of the Employment Agreement would be void on account of Section 27 of the Indian Contract Act, 1872. The apprehension of the Respondent that confidential information or intellectual property shall be shared with DIC is entirely misconceived, as the same already belongs to DIC. The allegation against the Appellant that he may disclose proprietary information, intellectual property, insider knowledge, or source code is not supported by any reasoned argument, as the scope of work between DIC and the Respondent was limited to providing the supply of manpower by the Respondent.
The judgment, in the light of constitutional principles, gave importance to the aspect of individual goals, ambitions, and freedom of choice. It highlighted the notion that employment contracts made by companies, who command greater power under the guise of Non-Solicitation and Non-Compete Clauses, cannot put excessive restrictions on the growth of their employees, and only reasonable restrictions are permitted, that too in accordance with law.
Ashish Shukla
{Varun Tyagi Vs. Daffodil Software Private Limited (MANU/DE/4616/2025)}