No Forced Loyalty: Delhi HC Rules Against Restrictive Job Clauses After Resignation

The verdict, delivered on 25 June by Justice Tejas Karia, relies on Section 27 of the Indian Contract Act, which invalidates agreements that restrain lawful professional activity.

The Court held that any employment clause that imposes a restriction on an employee’s right to seek a job after termination stands in contradiction to this section and is therefore unenforceable.

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The Delhi High Court ruled that clauses in employment contracts restricting an individual’s right to seek new employment after resignation are void under Indian law.

The verdict, delivered on 25 June by Justice Tejas Karia, relies on Section 27 of the Indian Contract Act, which invalidates agreements that restrain lawful professional activity, reported CNBC TV18.

What Is Section 27 Of Indian Contract Act?

The judgement is grounded in Section 27 of the Indian Contract Act, which states:
“Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.”

The Court held that any employment clause that imposes a restriction on an employee’s right to seek a job after termination stands in contradiction to this section and is therefore unenforceable.

The case pertains to Varun Tyagi, a software developer who resigned from Daffodil Software Private Limited after working on a project for Digital India Corporation (DIC). Upon leaving the company, Tyagi accepted a job offer from DIC. Daffodil Software invoked a non-compete clause in his employment contract, seeking to prevent him from joining the client organisation for a period of three years post-resignation.

The company argued that the clause was reasonable, limited only to DIC, and did not restrict Tyagi from working elsewhere. It also cited the possession of proprietary knowledge developed during his tenure as justification for enforcing the restriction.

Court Says Such Clauses Place Undue Burden On Employees

Rejecting the company’s claims, the Court stated that such restrictive clauses place an undue burden on the employee. “An employee cannot be confronted with the situation where he has to either work for the previous employer or remain idle,” the Court noted. It further observed that in employer-employee contracts, restrictive or negative covenants must be scrutinised strictly, especially as employees often have no choice but to accept standard-form agreements.

Confidentiality Cannot Justify Forced Employment

Addressing the employer's claim about protecting confidential data, the Court ruled that confidentiality cannot be used to compel continued employment or restrict future job opportunities.

Citing the 2006 case American Express Bank Ltd v. Ms Priya Malik, the Court reiterated that the freedom to change employment for improving service conditions is an essential right that cannot be curtailed based on alleged confidentiality concerns.

“In the garb of confidentiality, the employer cannot be allowed to perpetuate forced employment,” the bench stated.