Contracts
Section 27 renders post‑employment non‑compete clauses void, meaning any such restraint is unenforceable and brings no legal protection, while the rest of the contract may still stand, costing businesses the illusion of enforceability and potentially wasting drafting resources.
Check your DPDP readiness — free More on the blogSection 27 of the Indian Contract Act 1872 deals with restraints on trade. It declares any agreement that stops a person from practising a lawful profession, trade or business to be void, except for a narrow goodwill sale exception. This means that clauses trying to stop a former employee from working in the same field after leaving are generally unenforceable. The provision aims to keep the market open and protect individual freedom to earn a livelihood.
The wording is simple: an agreement restraining anyone from exercising a lawful profession, trade or business is void to that extent. The courts have applied this literally, refusing to save any post‑employment non‑compete on the basis of reasonableness. The clause disappears, but any other part of the contract that does not impose a restraint can continue to operate.
A single carve‑out exists for the sale of goodwill. When a business is sold, the seller may agree not to carry on a similar business within a defined local area, provided the limits are reasonable given the nature of the business. This exception is limited to transactions involving goodwill, not to ordinary employment relationships.
Many Indian companies copy non‑compete clauses from US or UK templates, assuming a reasonableness test will save them. Others conflate long notice periods or garden‑leave provisions with post‑employment restraints, even though those operate while the employee is still employed. Relying on the goodwill exception in an employment contract is another frequent error, as it does not apply outside a business sale.
A void non‑compete does not automatically invalidate confidentiality or non‑solicitation clauses. Those obligations protect information or client relationships and are assessed on their own merits. A well‑drafted confidentiality clause can survive even if the accompanying non‑compete is struck down, provided it does not itself restrain trade. In practice, the cost of relying on a void non‑compete is the loss of any legal leverage to stop a former employee from joining a competitor. Companies may spend time and money drafting, negotiating and enforcing such clauses, only to find courts dismiss them entirely. Understanding Section 27 helps avoid that wasted effort and directs resources to enforceable protections.
No. Section 27 makes any agreement that restrains a person from practising a lawful profession, trade or business void after employment ends. Indian courts have consistently applied this rule, so post‑employment non‑compete clauses are generally unenforceable.
The only statutory exception is the sale of goodwill. A seller may agree not to carry on a similar business within reasonable local limits, but this applies only to transactions involving the goodwill of a business, not to ordinary employment contracts.
No. Confidentiality obligations are evaluated separately. They protect proprietary information rather than restricting a person’s right to work, so a properly drafted confidentiality clause can remain enforceable even if a non‑compete in the same agreement is void.
Often they copy templates from jurisdictions where a reasonableness test can save a non‑compete. Without adapting to Section 27, those clauses provide an illusion of protection but are likely to be struck down, leading to wasted drafting effort and false security.
Founder & CEO at VidhiSar. I have watched four companies pay for the same mistake, and it was never the mistake anyone expected. VidhiSar is software, not a law firm: every answer names the section it relies on so you can check it, and anything turning on your specific facts is worth putting to a professional. More about who builds this