In our experience, these clauses are sought to be kept by the employer in an employment contract with an employee and also in commercial agreements e.g. in a Services Contract, in a Share Purchase Agreement, in an agreement for taking over of a business, etc. The question however is whether these clauses are enforceable and sufficient to achieve the purpose.

Employment Contracts

In India, such a clause is governed by the provisions of section 27 of the Indian Contract Act, 1872 (“ICA”), which provides that every agreement by which anyone is restrained from exercising lawful profession or trade or business of any kind, is to that extent void. There is an exception carved out in the case of the Sale of goodwill of a business.

Observations of the Hon’ble Supreme Court of India in the case of Niranjan Shankar Golikari v. The Century Spinning & Mfg. Co. Ltd. liberally interpreting s.27 of ICA holding that:-

“a negative covenant that the employee would not engage himself in a trade or business or would not get himself employed by any other master for whom he would perform similar or substantially similar duties is not, therefore, a restraint of trade unless the contract as aforesaid is unconscionable or excessively harsh or unreasonable or one-sided“; 

could form the basis for an argument that all non-compete clauses in an employment contract must be tested for unconscionability or excessive harshness before striking them down as being hit by s.27 of ICA.

However, it is a broadly accepted position that in so far as a restrictive covenant/ non-compete clause in an employment contract is concerned that such a clause is valid during the subsistence of an employment contract but is not enforceable to the extent it prescribes any post-termination or post-expiry restraints.

Amongst many, relevant decisions in that regard include decisions in the cases of D’ Markr(India) Pvt. Ltd. v Zaheer Khan and Anr. Of Supreme Court of India and Gujarat Bottling v. Coca Cola.

Other Commercial Contracts 

s.27 does not expressly permit such restrictive covenants even in commercial contracts.

In Gujarat Bottling v. Coca Cola, the Supreme Court of India has specifically held that doctrine is not confined only to contracts of employment, but is also applicable to all other contracts.

Considering the position, generally, all non-competitive agreements will run contrary to s.27 of ICA. However, courts have taken a much stricter view as regards restrictive covenants in an employment contract to apply after completion of the service period as against such covenants in other contracts.  Courts have recognised that a clause in an employment contract might be hit by s.27 of ICA but a similar restrictive covenant in other commercial contracts may not be hit by s.27 of ICA; the validity of non-solicitation clause providing for non-solicitation clause between Principal and distributor was upheld by Delhi High Court in the case of Wipro Ltd. v. Beckman Coulter International S.A.  

The author believes that the backdrop of a commercial deal/ contract and proper narration of said backdrop will be relevant parameters that will be looked into by the court of law while determining whether a restrictive covenant in a commercial contract is enforceable.


As written above, one of the ways could be a proper narration of the backdrop of a commercial contract.  However, even with a proper narration, there is no absolute certainty about the enforceability of such provision under ICA as ICA does not expressly permit such contracts.

Internationally, however, non-compete clauses are ubiquitous and recognized as enforceable under Contract Law of various jurisdictions if parties to a commercial transaction are found to be having equal bargaining power.  One of the ways therefore could be to choose the foreign governing law of contract in place of ICA.  We intend to separately write about when and in what circumstances foreign governing Law of Contract could be chosen in a Contract.

# Contract Law # Restrictive Covenants # Employment Contracts # Non-compete clause

R & D Law Chambers is a full-service firm providing Commercial, Legal and International, and Domestic Tax Advisory services with operations in India and UK/EU. To know more visit 


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