Summary
In the case of Varun Tyagi v. Daffodil Software Pvt. Ltd., the Delhi High Court considered whether a former employee could be restricted from taking up employment with a client of his previous employer. Holding that the clause amounted to an unenforceable restraint under Section 27 of the Indian Contract Act, the Court lifted the injunction.
Employment and Non-Compete Clause
Varun Tyagi, a full-stack developer, was employed by Daffodil Software and deployed on the government’s POSHAN Tracker project through Digital India Corporation (DIC). After resigning and serving his notice period, Tyagi joined DIC in a senior capacity. Daffodil then sought to enforce a non-compete clause in the employment agreement, which barred employees from joining clients for three years after cessation of employment.
The Trial Court granted an interim injunction preventing Tyagi from working with DIC and NeGD. Tyagi appealed this order before the Delhi High Court.
Issues for the Court
Whether a post-employment restriction in a non-compete clause, which prevents a former employee from joining a client of the previous employer, is enforceable under Section 27 of the Indian Contract Act, 1872?
Arguments of Employee and Employer
Employee’s Arguments:
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- Post-employment restraints are void under Section 27, even if they appear reasonable or limited in scope.
- The employment agreement ended on 7 April 2025, and any restrictions thereafter are unenforceable.
- The non-compete clause constitutes a blanket prohibition on employment with existing or potential clients.
- No confidential or proprietary information of Daffodil was involved in the new role at DIC.
- The source code and project IP belong to DIC, not to Daffodil.
- Enforcement would violate his right to livelihood and damage future career prospects.
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Employer’s Arguments:
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- The restriction is narrow and applies only to DIC and NeGD, with whom Tyagi directly worked.
- The employee received specialised training and had access to confidential processes and internal know-how.
- Clauses protecting intellectual property and confidentiality continue post-employment.
- The limited restraint is aimed at protecting legitimate business interests and is not a blanket ban.
- The employment terms were clear and voluntarily accepted by Tyagi.
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Court’s Analysis
The Court began by emphasising that Section 27 of the Indian Contract Act renders void any agreement that restrains a person from exercising a lawful profession, trade, or business, unless the case falls under a recognised statutory exception. The employment agreement’s non-compete clause, although limited to certain business associates, remained a restraint post-termination. The Court found no basis for importing a reasonableness test into Section 27, reaffirming that even partial restraints are not enforceable unless protected under the sole statutory exception concerning sale of goodwill.
The Court examined whether the apprehension of misuse of confidential information justified the injunction. It found that the project data, source code, and intellectual property belonged to DIC, not to Daffodil. Since Daffodil had only supplied manpower to DIC and did not develop or own the proprietary materials, it could not claim trade secret protection over them.
The Court also addressed Daffodil’s argument that the clause was necessary to protect business interests. It held that the clause imposed a contractual prohibition after the cessation of employment and therefore fell squarely within the prohibition under Section 27.
While the Trial Court treated the restraint as limited and reasonable, the High Court found that approach inconsistent with settled law. It reiterated that restrictions extending beyond the term of employment, however minimal, are not enforceable under Indian contract law.
Findings & Order
The Court set aside the Trial Court’s order dated 3 June 2025. It held that the non-compete clause in the employment agreement was void under Section 27 of the Indian Contract Act, 1872, and could not be enforced against the appellant. The injunction preventing Varun Tyagi from working with DIC and NeGD was vacated.
Relevant Paragraphs
“Section 27 of the ICA does not draw distinction between partial and complete restraint, any agreement with the object of restraining trade is void…” — para 16 “Since the Employment Agreement… stood terminated on 07.04.2025… the Appellant is well within his legal rights to engage in any competitive trade.” — para 22 “…any clause intended to restrain trade is void unless it clearly falls within Exception 1 to Section 27.” — para 24 “The restraint sought by the Respondent… cannot be considered to be a ‘blanket ban’… still, it constitutes a restraint post-employment.” — para 48 Disclaimer This case note has been prepared based on the author’s understanding, views, and conclusions. Opinions of others may differ. A proprietary AI application was used to make the judgment accessible, and to extract certain relevant portions.
Citation: Varun Tyagi v. Daffodil Software Pvt. Ltd., FAO 167/2025, High Court of Delhi, decided on June 25, 2025, available at: https://indiankanoon.org/doc/187332526/ (last visited June 26, 2025).
