Introduction
Employment contracts form the backbone of modern employer–employee relationships. With increasing competition and mobility in the labour market, employers often include restrictive clauses in employment agreements to protect their business interests. One such clause is the negative covenant, which restricts an employee from engaging in certain activities either during the period of employment or after its termination.
While employers justify negative covenants as necessary to safeguard trade secrets, confidential information, and goodwill, such clauses frequently come into conflict with the employee’s right to livelihood and freedom of profession. In India, the legality of negative covenants is primarily governed by Section 27 of the Indian Contract Act, 1872, which renders agreements in restraint of trade void.
This article examines the concept of negative covenants in employment contracts, the judicial approach adopted by Indian courts, constitutional implications, and the need for reform in light of evolving commercial realities.
Understanding Negative Covenants in Employment Contracts
A negative covenant is a contractual promise by which a party agrees not to do a particular act. In employment contracts, such covenants commonly restrict employees from:
• Joining competing businesses
• Starting similar ventures
• Soliciting clients or employees
• Disclosing confidential or proprietary information
These covenants may operate during employment or after termination of employment. The legal validity of such clauses largely depends on their timing, purpose, and scope.
Statutory Framework: Section 27 of the Indian Contract Act, 1872
Section 27 of the Indian Contract Act states:
“Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.”¹
Indian law adopts a strict interpretation of restraint of trade, unlike English law which permits reasonable restraints. The only statutory exception recognised under Indian law relates to agreements involving the sale of goodwill.
The objective behind Section 27 is to protect economic freedom and prevent contractual restrictions that may deprive individuals of their livelihood. This provision plays a decisive role in determining the enforceability of negative covenants in employment contracts.
Validity of Negative Covenants During Employment
Indian courts have consistently upheld negative covenants that operate during the subsistence of employment. The rationale is that an employee owes a duty of loyalty and good faith to the employer while receiving remuneration.
In Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. Ltd.,² the Supreme Court upheld a clause restraining the employee from working elsewhere during the period of employment. The Court held that such a restriction does not amount to restraint of trade under Section 27, as it is limited to the duration of the contract.
This judgment established that negative covenants during employment are legally enforceable, provided they are reasonable and necessary for protecting employer interests.
Post-Employment Negative Covenants and Judicial View
Post-employment negative covenants are treated far more strictly by Indian courts. Clauses that restrict an employee’s professional activities after termination are generally held to be void.
In Superintendence Company of India (P) Ltd. v. Krishan Murgai,³ the Supreme Court invalidated a post-employment restraint that prevented the employee from engaging in similar work. The Court categorically rejected the doctrine of “reasonable restraint” and affirmed that Indian law does not permit such post-termination restrictions.
This decision reinforced the principle that an individual cannot be prevented from earning a livelihood after leaving employment.
Non-Compete Clauses in Employment Agreements
Non-compete clauses are a common form of post-employment negative covenants. Indian courts have repeatedly refused to enforce such clauses once the employment relationship ends.
In Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan,⁴ the Supreme Court struck down a non-compete clause that restricted professional freedom after termination of contract. The Court held that such restraints are contrary to public policy and violate Section 27 of the Contract Act.
This judgment highlights the judiciary’s strong inclination towards protecting employee mobility and economic freedom.
Protection of Confidential Information and Trade Secrets
Despite the general invalidity of post-employment restraints, Indian courts recognise an important exception for confidential information and trade secrets. Employers are permitted to restrain former employees from misusing sensitive information even after termination.
In Gujarat Bottling Co. Ltd. v. Coca Cola Co.,⁵ the Supreme Court observed that negative covenants intended to protect business interests and confidentiality may be valid if they are reasonable and necessary.
Such restrictions do not restrain trade but prevent unfair competition, thereby striking a balance between employer protection and employee freedom.
Constitutional Perspective
Negative covenants directly affect the right to practice any profession under Article 19(1)(g) and the right to livelihood under Article 21 of the Constitution of India. Although reasonable restrictions may be imposed under Article 19(6), private contractual restraints must not be arbitrary or excessive.
Indian courts have interpreted Section 27 in harmony with constitutional values, ensuring that contractual arrangements do not indirectly violate fundamental rights.
Comparative Perspective
In jurisdictions such as the United Kingdom and the United States, post-employment restraints are enforceable if they are reasonable in duration, scope, and geographical extent. Indian law, however, adopts a more employee-centric approach by rendering most post-employment restraints void.
While this approach protects workers in a developing economy, it has been criticised for being outdated in industries driven by innovation, technology, and intellectual capital.
Need for Legal Reform
The rise of startups, technology companies, and the gig economy has increased the relevance of negative covenants. Employers seek to protect investments and trade secrets, while employees seek flexibility and career growth.
There is a growing need to reconsider Section 27 to allow limited and reasonable post-employment restraints, particularly in cases involving senior employees or highly confidential information. Clear legislative guidance would reduce uncertainty and excessive litigation.
Conclusion
Negative covenants in employment contracts represent a delicate balance between protecting corporate interests and safeguarding individual freedom. Indian courts have consistently upheld restrictions during employment while striking down post-employment restraints as void under Section 27 of the Indian Contract Act.
While this approach strongly supports constitutional values and employee rights, it may not fully address the demands of a modern, competitive economy. A balanced legal framework allowing limited protection to employers without compromising the right to livelihood would better serve India’s evolving employment landscape.
Footnotes (OSCOLA)
1. Indian Contract Act 1872, s 27.
2. Niranjan Shankar Golikari v Century Spinning and Manufacturing Co Ltd AIR 1967 SC 1098.
3. Superintendence Company of India (P) Ltd v Krishan Murgai (1981) 2 SCC 246.
4. Percept D’Mark (India) Pvt Ltd v Zaheer Khan (2006) 4 SCC 227.
5. Gujarat Bottling Co Ltd v Coca Cola Co (1995) 5 SCC 545.