Can Confidentiality Clauses Become Non-Compete? Examining the Limits of Post-Employment Restraints in India
Summary: The article examines whether confidentiality clauses in employment contracts can operate as disguised post-employment non-compete restrictions under Section 27 of the Indian Contract Act, 1872. It distinguishes legitimate protection of confidential information and trade secrets from restraints that effectively prevent an employee from pursuing future employment. Indian jurisprudence draws an important distinction between restrictions operating during employment and those imposed after termination. Decisions including Niranjan Shankar Golikari, Vijaya Bank, American Express Bank, Varun Tyagi and Parraj Automobiles illustrate the continuing importance of examining the substantive effect of restrictive covenants. A confidentiality obligation may protect genuinely secret information, but an employee’s professional skill, experience, knowledge and commercial judgment cannot automatically become the proprietary interest of the former employer. The article highlights the danger of treating the mere possibility of disclosure as equivalent to actual misuse of confidential information. It argues that courts should focus on whether the relief sought genuinely protects identifiable confidential information or instead prevents competitive employment. The distinction between misappropriation and competition is therefore central: joining a competitor ordinarily concerns employee mobility, whereas taking or disclosing proprietary information may constitute a distinct legal wrong. The article concludes that employers should be permitted to protect genuine trade secrets and confidential information, while confidentiality provisions should not be transformed into mechanisms controlling an employee’s future profession or labour.
Brief
This article is concerned with the use of Non-Compete clause as tool to prohibit employees from choosing their means of employment in the name of confidentiality. It presents tension between an employer’s right to protect confidential information and an employee’s right to pursue future employment. While Section 27 of the Indian Contract Act generally prohibits restraints on trade. Whereas employers increasingly rely on confidentiality and non-solicitation clauses to protect their business interests. The article examines when such protections remain legitimate and when they effectively operate as disguised non-competes. It analyses Indian judicial developments to distinguish genuine protection of trade secrets and confidential information. The article presents that courts should assess the substantive effect of restrictive covenants rather than their contractual labels. Protecting confidential information without treating an employee’s skills, experience and knowledge as the employer’s proprietary interests could be violative of the purpose of Section 27.
Introduction
Employment contracts increasingly employ a layered architecture of restrictive covenants. In the manner of non-compete clauses, non-solicitation obligations and confidentiality undertakings. Although these restraints are conceptually distinct, their practical boundaries are becoming increasingly difficult to maintain. The emerging question is not whether an employer may protect its confidential information or trade secrets. It’s rather whether confidentiality can be drafted or enforced so broadly that it becomes a substitute for the post-employment restraint. That too being prohibited by Section 27 of the Indian Contract Act.
Section 27 provides that an agreement restraining a person from exercising a lawful profession, trade or business is void to that extent.[1] Subject to the statutory exception concerning the sale of goodwill. The provision is notably stricter than the common-law approach to reasonable restraints. Indian law does not ordinarily validate a restraint merely because it is limited in duration, geography or scope.[2]
What the Indian Jurisprudence Says
The jurisprudence nevertheless draws a critical distinction between restrictions operating during employment and those post termination. In Niranjan Shankar Golikari v. Century Spinning & Manufacturing Co., it was recognised that a negative covenant requiring an employee to serve the employer exclusively during the employment contract ordinarily does not amount to a restraint of trade within Section 27.[3] The distinction is not merely temporal. Instead, covenant during employment regulates an existing contractual relationship. The same after termination, becomes restriction potentially controlling the employee’s future livelihood.
The Supreme Court’s decision in Vijaya Bank v. Prashant B. Narnaware reinforces this distinction. The Court upheld a minimum-service obligation accompanied by a financial consequence for premature resignation.[4] In view that the covenant operated within the subsisting employment relationship and did not prevent the employee from pursuing employment after termination. However, Vijaya Bank should not be read as diluting the prohibition against post-employment non-competes. The Calcutta High Court subsequently made a precise distinction in Parraj Automobiles Pvt. Ltd. v. Samiran Sinha.[5] Observing that Vijaya Bank concerned a premature-resignation consequence and is not applicable where the same prevents future competitive employment as outside Section 27.
With the above distinctions an interesting question arises. Which is about what if an employer avoids an express prohibition on competitive employment and instead relies upon an expansive confidentiality covenant. Consider a clause preventing an employee from joining a competitor where such employment “may reasonably result” in the use, disclosure or exploitation of confidential information. On its face, the covenant protects information but in operation, restricts competitive employment impossible.
This is where the distinction between confidential information and employee knowledge becomes critical. An employer’s legitimate proprietary interests cannot automatically encompass everything an employee learns, develops or remembers during employment. Professional skill, experience, knowledge and commercial judgment acquired through employment ordinarily form part of the employee’s capacity to work. Treating these attributes as proprietary merely because they were developed in the course of employment risks converting an employer’s informational interest into control over the employee’s future profession.[6]
The Delhi High Court’s decision in American Express Bank Ltd. v. Priya Puri remains instructive. The Court distinguished genuine confidential information from information that did not possess the necessary character of secrecy. [7]It was refused to use confidentiality as a means of effectively compelling continued employment. The significance lies its underlying recognition that protection of information and protection from competition are legally different interests.
The same distinction has acquired renewed significance in Varun Tyagi v. Daffodil Software Pvt. Ltd. [8] Wherein the Delhi High Court declared a post-employment clause restrictive, where the employee was prohibited from working with the employer’s business associates. The trial court had previously restrained the employee from joining on the apprehension that proprietary information, source code and insider knowledge could be disclosed. The High Court’s analysis, however was centred on whether the post-employment restraint itself violated Section 27.
The decision is particularly valuable because it exposes the danger of treating the possibility of disclosure as equivalent to disclosure itself. A former employee may possess confidential information; that fact does not necessarily establish that joining a competitor constitutes misuse of it. The appropriate remedy is therefore not automatically to prohibit the new employment, but to restrain the disclosure or use of information that is genuinely confidential.
The Calcutta High Court’s 2026 decision in Parraj Automobile provides perhaps the clearest recent illustration of this calibrated approach.[9] It permitted protection against solicitation of employees and disclosure or use of confidential information and trade secrets. Crucially, the Court rejected the proposition that joining a competitor, by itself, establishes disclosure of trade secrets.[10] It observed that an employee with specialised experience will naturally seek similar employment elsewhere. While treating such employment as automatic disclosure would place the employer’s claim “on too high a pedestal.”
This suggests a more principled distinction. Suggesting towards clarification for what precisely is the information claimed to be confidential. Next could be around what distinguishes that information from the employee’s general skill, experience and professional knowledge. Finally, does the relief sought protect the information, or does it effectively prevent the employee from obtaining competing employment.
The last question is particularly important. A confidentiality covenant may be formally valid while the injunction sought under it is functionally equivalent to a non-compete. The court should therefore examine not merely the contractual label but the substantive operation of the restraint. If an employer can identify a specific trade secret and establish a credible risk of misuse, protection should be available. However, if the employer’s claim rests principally on the proposition that the employee cannot work for a competitor without any basis, the restraint risks crossing the boundary drawn by Section 27.
This approach does not diminish the legitimate interests of employers. On the contrary, it encourages greater protection to both the employee and the employer. A genuine trade secret or a genuinely secret commercial strategy can warrant protection because its economic value may depend upon secrecy. But an employer should not acquire a proprietary interest in an employee’s accumulated professional competence merely by restricting from any employment opportunities.
The reality should be….
Today a boundary, therefore, should be drawn between misappropriation and competition. Joining a competitor is ordinarily an exercise of employee mobility, whereas taking or disclosing proprietary information is a different legal wrong. Conflating the two allows confidentiality to become a disguised non-compete.
The future of restrictive-covenant jurisprudence in India should accordingly move beyond contractual nomenclature and towards substantive scrutiny. Employee mobility should equally not become a licence to appropriate genuine trade secrets. The principled position lies between these extremes. Which is the position that the employer may protect what is genuinely confidential, but cannot convert confidentiality into ownership of the employee’s future labour.
References
[1] Indian Contract Act, 1872, § 27.
[2] Superintendence Co. of India (P) Ltd. v. Krishan Murgai, (1981) 2 S.C.C. 246, 257–58.
[3] Niranjan Shankar Golikari v. Century Spinning & Manufacturing Co., (1967) 2 S.C.R. 378, 388–89.
[4] Vijaya Bank v. Prashant B. Narnaware, 2025 INSC 691.
[5] Parraj Automobiles Pvt. Ltd. v. Samiran Sinha, 2026 (Cal. H.C. Feb. 10, 2026).
[6] Percept D’Mark (India) (P) Ltd. v. Zaheer Khan, (2006) 4 S.C.C. 227, 239–40.
[7] American Express Bank Ltd. v. Priya Puri, 2006 SCC OnLine Del 638.
[8] Varun Tyagi v. Daffodil Software Pvt. Ltd., FAO 167/2025, order dated June 25, 2025 (Delhi H.C.).
[9] Specific Relief Act, 1963, § 42. Parraj Automobiles also expressly considered the availability of injunctive relief for enforceable negative covenants concerning confidentiality and non-solicitation.
[10] Gujarat Bottling Co. Ltd. v. Coca Cola Co., (1995) 5 S.C.C. 545, 564–65.
