In the recent case of Varun Tyagi v Daffodil Software Private Limited, Delhi High Court upheld the enforceability of negative covenants in employment contracts only to the extent of protecting the employer’s confidential and proprietary information and restraining the soliciting of clients. The court overruled the order of the trial court preventing Tyagi from taking up employment with Digital India Corporation (DIC) after his employment ceased at Daffodil Software Private Limited.
Tyagi was a software engineer employed by Daffodil. Their employment contract imposed three-year non-solicitation and non-compete clauses to take effect after termination. The contract also stipulated confidentiality and non-disclosure, restraining the employee from sharing and disclosing confidential information after employment.
Tyagi resigned from Daffodil. While serving the three-month notice period set out in his employment contract, he learned of the opportunity at DIC. Daffodil had business dealings with DIC, both as a client and as a business associate. DIC had engaged Daffodil to provide specialised software professionals for a high-priority government project and Tyagi had worked on it.
Daffodil sought to enforce the non-compete provisions, arguing that Tyagi had acquired specialised knowledge and skills related to the project. It further alleged that Tyagi’s engagement with DIC was based on confidential information and proprietary techniques obtained while at Daffodil, thereby violating his confidentiality obligations.
The trial court granted an interim injunction, restraining Tyagi from working with DIC and another entity, on whose projects Tyagi had worked while at Daffodil. That court based its order on holding the prohibitions in the contract to be only a limited restraint of trade. They applied solely to Daffodil’s existing clients. Without the injunction, Tyagi’s disclosure of confidential information would cause irreparable harm to Daffodil.
On appeal, Tyagi argued that section 27 of the Indian Contract Act, 1872 (act), made void any restraint of trade, not falling within the exception to the section. Daffodil contended that reasonable restrictions on trade were permissible. The court, relying on its decision in American Express Bank Limited v Priya Malik, held that access to confidential data, by itself, cannot fetter an employee’s prospects of employment elsewhere. The court analysed the contract between DIC and Tyagi. It ruled that Daffodil’s fear of disclosure of proprietary information was moot because it already belonged to DIC as Daffodil’s business associate. The court held that it was not required to decide whether the restraint was partial or complete because section 27 prohibits any restraint of trade.
The court correctly applied the longstanding position in Indian law, which holds that non-compete stipulations, even if limited in duration and scope, are unenforceable, other than in a sale of goodwill. This contrasts with the modern approach adopted in jurisdictions such as the United Kingdom. There, reasonable restraints are enforceable, provided they protect legitimate business interests and do not unduly restrict employees’ rights to livelihood.
Employers in India increasingly place key employees on “gardening leave”. Here, employees do no work and have no access to employers’ premises, data and clients. They continue to receive remuneration and remain on company rolls until such leave expires. Courts view gardening leave as a safeguard to prevent disclosure of proprietary information and trade secrets. However, it is enforceable only if its terms are reasonable, employees continue to receive monetary compensation and employees remain on company rolls until it ends.
The legislature could adopt a more purposive and commercial approach to employment freedom. This may include formal recognition of gardening leave. Intellectual property, confidential information and technical know-how drive competitive advantage. Breaches are usually irreversible. Leaks of confidential information harm not only reputations but also businesses’ foundations. The Law Commission of India, as long ago as 1958, recommended that partial restraint be permitted.
This judgment emphasises the urgent need for a more modern approach to restraint of trade, suitable for India’s future-facing economy.
Bharucha & Partners – Sneha Jaisingh and Manan Parekh
