In today's fast-moving digital economy, retaining top talent and safeguarding proprietary value is both a strategic priority and a legal balancing act. Businesses are constantly navigating the fine line between protecting proprietary information and empowering workforce mobility. A recent decision by the Delhi High Court in Varun Tyagi v. Daffodil Software Pvt Ltd, 2025 SCC OnLine Del 4589, reaffirmed that post-employment restrains, whether partial or complete, are unenforceable, unless they fall under the sole exception concerning the sale of goodwill.
A non-compete clause, is a negative covenant in a contract, imposed on the employee, pursuant which the employee is restricted from engaging in any competing business or being employed by a competitor.
This landmark case offers not just legal insight, but a strategic cue for forward-thinking leadership to reimagine contracts, compliance, and culture in the age of knowledge work.
Background: The Non-Compete Dilemma
In this case, Varun Tyagi ("appellant"), was employed by the company Daffodil Software Pvt. Ltd. ("respondent") as a Full Stack Developer under a contract dated 14 October 2021. Daffodil had deployed him to work on-site with Digital India Corporation ("DIC"), a government organisation, for the POSHAN Tracker Project- an initiative of the Ministry of Women and Child Development. Tyagi resigned from Daffodil in May 2023 and served a notice period of 60 days, as required. After his resignation, he directly joined DIC as a Senior Software Developer to continue working on the same POSHAN Tracker Project.
Daffodil claimed that Tyagi had breached a non-compete clause in his employment agreement. The clause prohibited him, for three years post-employment, from working with any "business associate" of Daffodil. Daffodil asserted that DIC was such an associate and that his new employment violated this restriction. Based on this claim, Daffodil obtained an ex parte ad interim injunction from the Saket District Court, restraining Tyagi from continuing in his new role at DIC.
Tyagi challenged the injunction before the Delhi High Court, arguing that:
- The non-compete clause was void and unenforceable under Section 27 of the Indian Contract Act, 1872 ("ICA").
- The project and its intellectual property were owned by DIC, not Daffodil.
- There was no risk of misuse of confidential information.
- His new role with DIC was independent of any agreement with Daffodil.
Legal Issue: The Clause in Conflict
Whether the non-compete and non-solicitation clause in the Employment Agreement was enforceable on post-termination under Section 27 of the Indian Contract Act, 1872.
High Court's Ruling: Employment Clauses v. Employee Rights
The Court conclusively held that it is a settled position of law that any restriction on an employee's right, post-termination of employment, is void, unless it is to safeguard confidential and proprietary information. According to the Court's reasoning, there was no real risk of disclosure as all the intellectual and confidential information belonged to DIC, under the Contract between the respondent and DIC.
According to the non-compete clause, the appellant was restricted from 'undertaking employment or otherwise deal with any Business Associate where the appellant first contracted or was contracted by or introduced to the Business Associate in any manner in connection with any business/professional assignment of the Respondent and/or its Affiliate.' The court was of the view that the clause had constituted a blanket ban on the appellant's capacity to work and was clearly a restraint of trade.
The court further upheld that determining whether the restraint is reasonable, or is partial or complete, is not required to be considered at all when an issue arises as to whether a particular term of a contract is or is not in restraint of trade, business, or profession. The High Court adopted an employee-centric and liberal interpretation, holding that any terms of the employment contract that impose a restriction on the right of an 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.
Judicial Approach Taken by Various High Courts
The High Courts across India have adopted nuanced and case-specific positions when determining the validity of negative covenants, based on the criteria of reasonableness. Although the invalidity of the negative covenant post termination remains a trite legal position. However, a non-compete clause in a commercial contract, which aims at restricting a party from competing with the business of the other, is viewed by the court more liberally.
The Madras High Court in FL Smidth Pvt. Ltd. v. M/s. Secan Invescast (India) Pvt. Ltd. (2013) 1 CTC 886, clarified that reasonable restrictions in the form of a non-compete clause are valid and do not render the clause void. This reasonable restriction could come under various forms:
- Sale of Goodwill: Section 27 of the ICA provides sale of Goodwill as an exception. By virtue of this, the buyer of the Business's goodwill can restrict the seller from engaging in a similar business within a specified local limit.
- Trade Secret: Proprietary information, such as trade secrets, is widely protected by the Court.
- Time limits: The validity of Non-Compete Clauses is also tested based on the reasonableness of their time limit.
- Distance: Reasonable restrictions on employees to carry on any competing business within a stipulated distance are enforceable.
Apart from this, the Indian Partnership Act, 1932, imposes restrictions on Partners to the Agreement from carrying on a competing business after leaving the firm, or after the dissolution of the partnership. These clauses are valid, as long as the restriction is reasonable in terms of duration and geographical limits.
In Wipro Ltd. v. Beckman Coulter International SA,1 the Delhi High Court upheld the validity of a non-solicitation clause in a commercial agreement. It clarified that such a clause does not amount to a restriction on trade, profession, or business. Instead, it simply prevents the contracting parties from encouraging or hiring each other's employees. Importantly, it does not stop employees themselves from leaving and joining the other party on their own.
The Courts have also been conscious of the importance of protecting Intellectual property from wrongful exploitation by ex-employees. The Madras High Court in M/s Lifecell International Private Limited v. Vinay,2 the court supported a non-compete clause in a franchise deal that stopped the former franchisee from starting a competing business for two years after the agreement ended. The court agreed this was fair because the person had access to important confidential information—like trade secrets—while running the franchise and using that knowledge after leaving would harm the original business.
In the same vein, the Kolkata High Court, in the case ofEmbee Software Pvt. Ltd v. Samir Kumar Shaw & Ors,3 the court supported a restriction placed on a former employee, stopping him from reaching out to the company's customers after leaving the job. This was because the employee had used the company's source code confidential and proprietary information, and had access to it while working there, in an unfair way.
The Delhi High Court in the case of Desiccant Rotors International Pvt. v. Bappaditya Sarkar & Anr,4 the court agreed with the trial court decision that stopped a former employee from trying to influence or take away the company's clients, customers, suppliers, or team members for two years after leaving the job. The logic behind the ruling was that the restriction in the agreement was narrowly focused, restricting the employee from inducing the employer's clients, suppliers, or staff to breach their contracts. This was held to be valid because it did not restrict the employee from seeking gainful employment in any competitive business and thus did not clash with his right to livelihood.
Practical Insights: Drafting Valid and Enforceable Non-Compete Contracts
Although the Indian courts have taken a consistent view on the prohibition of restriction, post-employment, employers are not left completely without recourse. Instead of relying on broad non-compete clauses, employers can adopt enforceable practical alternatives to protect the business interest:
- Non-solicitation clauses: Unlike a non-compete clause, non-solicitation clauses are viewed more liberally. The key distinction is that non-solicitation clauses narrowly focus on restricting the former employees from actively inducing the employer's clients to break their business with the Employer and take their business somewhere else. A non-solicitation clause does not bar the right of the former employee from pursuing gainful employment with a competitor. Employers can use narrowly defined non-compete clauses outlining the prohibited conduct to effectively protect business interests.
- Protection of Intellectual Property: Restrictive covenants, safeguarding proprietary interests, are enforceable in India, even after cessation of employment. Specific clauses elaborating the obligations of both parties, the determination of proprietary information, and the extent of restriction must be specified in the Employment Agreement.
- Confidentiality and Non-Disclosure Agreements (NDAs): Restrictive clauses: Incorporation of a narrowly tailored, well-drafted non-disclosure agreement is indispensable in the present legal scenario. The validity of NDA's stands as one of the most effective tools for safeguarding the proprietary information and deterring the misuse by former employees even after their employment.
- Garden Leave Clauses: These clauses in a contract restrict the employee from engaging with any other employer or competitor, after the employee tenders his/her resignation and till the actual termination. These restrictions can be validly imposed on the employees so long as they are still on the Company's Payroll. These clauses prevent the outgoing employees from being employed by the rival organisation during the notice period and the consequential divulgence of confidential information.
Key Takeaway: Building Legally Sound Employment Contracts
The Varun Tyagi v. Daffodil Software ruling reinforces a critical operational reality: while protecting business interests is important, post-employment restrictions must be precisely framed and legally enforceable. Indian courts continue to uphold the principle that an employee's right to livelihood cannot be curtailed by overly broad or indefinite non-compete clauses. For employers, the takeaway is clear contracts must evolve to reflect enforceable, purpose-driven protections such as confidentiality, non-solicitation, and clear IP ownership, rather than blanket restrictions.
Footnotes
1 Wipro Ltd. v. Beckman Coulter International SA2006 (131) DLT 681
2 M/s Lifecell International Private Limited v. Vinay Katrela O.A. Nos. 599 and 600 of 2018
3 Embee Software Pvt. Ltd v. Samir Kumar Shaw & Ors on August 19 2014, CS No.77 of 2012
4 Desiccant Rotors International Pvt. v. Bappaditya Sarkar & Anr, July 14 2009, CS(OS) No.337/2008
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