Enforcement of post-termination restrictive covenants in employment contracts

18 October 2023 4 min read

By Emily Gallagher

At a glance

Indian courts have generally upheld the validity of non-compete, non-solicit and confidentiality obligations operational during an employment term, unless unconscionable, excessively harsh, unreasonable or one-sided.
Considerations adopted by Indian courts on key post-termination restrictive covenants include; non-compete obligations, confidentiality and, non-solicit obligations.
Enforcing post-termination obligations in India can be challenging, primarily due to the tendency of Indian courts to protect an individual's right to pursue their livelihood.

Reproduced with the permission of the authors Gerald Manoharan, Sonakshi Das and Sandhya Swaminathan at JSA advocates and solicitors.

In the interest of protecting and maintaining market advantage, client relationships, trade secrets and other sensitive data, it is common for employers in India to have employees sign employment contracts which include several post-termination restrictive covenants, particularly relating to non-compete, non-solicit and confidentiality. These restrictions typically extend to specific durations, and in some instances, also have territorial limitations.

Enforceability of restrictive covenants, operative both during and after the employment term, has often been challenged from time to time as being a restraint on an individual’s right to exercise lawful profession, trade or business of any kind, and to that extent, void, as discussed under Section 27 of the Indian Contract Act, 1872. Indian courts have generally upheld the validity of non-compete, non-solicit and confidentiality obligations operational during an employment term, unless unconscionable, excessively harsh, unreasonable or one-sided. However, validity of these restrictions in a post-termination context has been examined on a case-to-case basis, factoring several considerations such as protection of proprietary information, reasonability of restrictions imposed and the balance of convenience between contracting parties.

Discussed below are some considerations adopted by Indian courts on key post-termination restrictive covenants.

Non-compete obligations

Post-termination non-compete clauses have generally not been held to be enforceable in India based on the rationale that the right to livelihood of an employee must prevail over interests of an employer. For instance, the Bombay High Court in VFS Global Services private Limited v. Mr. Suprit Roy laid down that “to obstruct an employee who has left service from obtaining gainful employment elsewhere is not fair or proper.” Reasonableness of such a clause is generally not relevant and could be unenforceable even if restricted by factors such as geography, duration, etc. Further, the Delhi High Court in Wipro Limited v. Beckman Coulter International held that:

Negative covenants between employer and employee contracts pertaining to the period post termination and restricting an employee's right to seek employment and / or to do business in the same field as the employer would be in restraint of trade and, therefore, a stipulation to this effect in the contract would be void. In other words, no employee can be confronted with the situation where he has to either work for the present employer or be forced to idleness.

In the same vein, the Delhi High Court in Affle holdings Pte Limited v. Saurabh Singh held that a negative covenant in the employment contract, prohibiting carrying on a competing business beyond the tenure of the contract, is void and unenforceable.

Non-solicit obligations

Unlike non-compete clauses, post-termination employee non-solicit clauses have not been expressly held to be unenforceable under Indian law. Notably, in E-merge Tech Global Services Private Limited v. M. R. Vindhyasgar and Ors, the Madras High Court upheld the validity of a non-solicitation clause operational for a period of three years post termination taking into consideration losses suffered by the employer on account of an employee’s breach of non-solicit obligation. Having said that, asserting a non-solicit right often proves demanding as it could be challenging to demonstrate through evidence that an employee was solicited away, as opposed to having them moved away from their own free will.

Confidentiality

In a landmark case, Zee Telefilms Limited v. Sundial Communications Private Limited, the Bombay High Court recognised that maintenance of confidence is in public interest. The court noted that no one should be allowed to profit from the wrongful use of information received in confidence. As such, post-employment confidentiality obligations have generally been held to be enforceable. Even where confidentiality obligations are not specifically spelt out in the terms of employment, employees have an implied duty to protect confidential information even post-employment. Courts have upheld this position in numerous cases. For instance, in the case of Mr. Diljeet Titus, Advocate v. Mr. Alfred A. Adebare & Ors, the Delhi High Court restrained ex-employees of a law-firm from using the confidential information post their employment. The court observed that:

The defendants are free to carry on their profession, utilise the skills and information they have mentally retained and they are being restrained only from using the copied material of the plaintiff in which the plaintiff alone has a right.

Similarly, the Calcutta High Court in the case of Hi-Tech Systems & Services Ltd. v. Suprabhat Ray ad Ors, prevented ex-employees from utilising the database and trade secrets of their former employer after employment cessation.

Enforcing post-termination obligations in India can be challenging, primarily due to the tendency of Indian courts to protect an individual's right to pursue their livelihood. To increase chances of enforcement, employers may ensure that such obligations, if incorporated into an employment contract, are drafted in a manner that takes into consideration contextual reasonability, designed to protect the legitimate business interests of the employer, and strikes the right balance between protecting the employer's interests and respecting the employee's rights.