Any business lawyer will vouch for the popularity of non-compete and non-solicit agreements as a way, inter alia, to try to limit employees and former employees from working for a competitor or from divulging trade secrets or other proprietary data. In several jurisdictions such as England and Wales, the law has evolved to uphold such agreements, subject mainly to the reasonableness of the limitations imposed by them.

In India, such agreements are governed by the codified provisions of section 27 of the Indian Contract Act, 1872, whereby every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. The section also contains an exception, applicable to cases where one sells the goodwill of a business. In such cases, the seller of the goodwill of the business may agree with the buyer to refrain from carrying on a similar business, within specified local limits so long as the buyer or any person deriving title to the goodwill from him carries on like business therein. However, such limits must appear reasonable to the court, regard being had to the nature of the business. Where the goodwill of a business is sold without an express agreement as to the vendor refraining from competing with the vendee, the vendor may set up a rival business, but he is not entitled to canvass the customers of the old firm. The grounds for this may be either that a man may not derogate from his own grant, or that the vendor had impliedly contracted not to solicit his former customers, or that it would be fraudulent to do so.

The Honourable Supreme Court's 2006 decision in Percept D'Mark v Zaheer Khan clarifies the law in this area as follows:

- a restrictive covenant extending beyond the term of the contract is void and not enforceable;

- the doctrine of restraint of trade does not apply during the continuance of the contract for employment and it applies only when the contract comes to an end; and

- this doctrine is not confined only to contracts of employment, but is also applicable to all other contracts.

Based on the decision in the above case, the provisions of section 27 may be divided to deal with two phases; the period during which a contract is in force and the period after its currency.

When the contract is in force, judicial precedents have settled the fact that restraints, both general and partial, may be good and permissible, unless falling foul of public policy.

So, for example, during the period of employment, the employer has the exclusive right to the services of the employee. A negative covenant, that the employee may not engage himself in a trade or business or will not take up employment under any other master for whom he would perform similar or substantially similar duties, is therefore not restraint of trade.

The Honourable Supreme Court's decision in the above case also clarifies that all covenants existing beyond the currency of the contract are void. However, an exception to this rule is cases where a covenant exists for 'non-solicitation'. It has been held both by the Supreme Court (Superintendence Co of India v Krishan Murgai [1981]) as well as the Delhi High Court (Wipro v Beckman Coulter International) that non-solicit covenants are covenants that essentially prohibit either party from enticing and/or alluring each other's employees away from their respective employments. It is a restriction cast upon the contracting parties and not on the employees. The bar or restriction is on inducements offered to the other's employees to give up employment and join them instead. Therefore, the clause by itself does not put any restriction on the employees and is viewed more liberally than a similar restriction in an employer-employee contract. Therefore, a non-solicitation clause does not amount to a restraint of trade, business or profession and will not be hit by the provisions of section 27 of the Indian Contract Act, 1872 as being void.

To summarise, where a contract imposes non-compete covenants during the currency of the contract, the covenants will be enforced unless viewed as opposing public policy by a court of law. On the other hand, where a contract imposes non-compete covenants to extend beyond the currency of the contract, the covenant will not be enforceable unless it is for non-solicitation.

The tussle between liberty of individual action and the right of freedom to contract must now be revisited in light of the rapid development towards a free market economy in India. In this regard, cue may be taken from the developments in England and Wales, where parties are free to agree not to compete following the pendency of the relevant contract, so long as the limitations imposed by them are reasonable. The Indian courts have touched upon this issue time and again and have highlighted their inability to act as reformers in this regard because there exist explicit legislative provisions, leaving little room for judicial activism. The Indian legislature is therefore the appropriate body to deal with this issue by amending the Indian Contract Act, 1872, allowing for the recognition that employers have a legitimate interest in protecting the time, investment, and other resources they have invested in employees. The protection of reasonable business interests of an employer without unduly limiting an employee's other work opportunities must be reflected in the law for an effective free enterprise system.