Negative Covenants and Injunctions in Indian Contract Law: An Integrated Analysis

Negative Covenants and Injunctions in Indian Contract Law: An Integrated Analysis

Introduction

Negative covenants—contractual stipulations restraining a party from undertaking specific acts—occupy a contested yet indispensable space in Indian private law. Their enforcement frequently pivots on equitable remedies such as injunctions. The present article undertakes a critical examination of (i) the substantive validity of negative covenants under Section 27 of the Indian Contract Act, 1872 (“ICA”), and (ii) the remedial architecture governing their enforcement through injunctions under the Specific Relief Act, 1963 (“SRA”). Drawing extensively from seminal authorities, including Niranjan Shankar Golikari, Gujarat Bottling, Wipro v. Beckman Coulter, and Percept D’Mark v. Zaheer Khan, the analysis interrogates the doctrinal fault lines that mark the interface between contractual autonomy and public policy in India.

Statutory Framework

Section 27, Indian Contract Act, 1872

Section 27 renders void “every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind”, subject only to the narrowly cast exception pertaining to the sale of goodwill. Unlike English common law, the Indian provision eschews a reasonableness test; restraints—partial or total—are void unless statutorily excepted.[1]

Specific Relief Act, 1963

  • Section 41(e): Injunctions cannot be granted to prevent breach of a contract that is not specifically enforceable.
  • Section 42 (formerly §57 of the 1877 Act): Creates an exception where a contract contains an affirmative promise coupled with a negative covenant; even if specific performance of the affirmative promise is unavailable, the negative stipulation may be enforced by injunction, provided the plaintiff is not in default.[2]

Jurisprudential Evolution

Negative Covenants During v. Post-Contractual Period

The foundational distinction articulated by the Supreme Court in Niranjan Shankar Golikari v. Century Spinning is that restraints operative during the subsistence of a contract of employment or agency may be upheld if they protect legitimate interests and are reasonable in scope, whereas post-termination restraints attract the full rigour of Section 27.[3] The Court declined to import a common-law reasonableness test for post-service restraints in Superintendence Company v. Krishan Murgai, reiterating that Section 27 is exhaustive.[4]

Commercial versus Employment Contexts

Although Section 27 applies indiscriminately, courts have demonstrated greater latitude in sustaining negative covenants in commercial agreements. In Gujarat Bottling Co. Ltd. v. Coca-Cola Co. the Supreme Court upheld a non-compete clause confined to the tenure of a franchise, finding that it was “designed to promote trade” rather than restrain it.[5] Conversely, in Percept D’Mark v. Zaheer Khan a right-of-first-refusal clause surviving the contract term was struck down as an unlawful restraint.[6]

Non-Solicitation Clauses

The Delhi High Court’s decision in Wipro Ltd. v. Beckman Coulter International S.A. clarifies that a covenant merely preventing the solicitation of employees—without fettering the employees’ own mobility—does not necessarily infringe Section 27.[7] The Court balanced contractual freedom with public policy by restraining future solicitation but refusing to impede employees already disengaged.

Public Policy and Fundamental Rights

Article 19(1)(g) of the Constitution guarantees the right to practise any profession or trade. Although the provision operates primarily horizontally against the state, judicial reluctance to enforce covenants that indirectly coerce idleness or compel specific performance of personal service underscores a constitutional undercurrent.[8]

Criteria for Granting Injunctions

Tripartite Test

Courts routinely apply a tripartite test—prima facie case, balance of convenience, and irreparable injury—to determine interlocutory relief.[9] However, even where these factors converge, an injunction to enforce a negative covenant remains discretionary, particularly if enforcement would result in undue hardship or contravene public policy.[10]

Section 42 SRA: Mandatory Conditions

  • The contract must be valid and subsisting (Crompton Greaves v. Hyundai).[11]
  • The plaintiff must not be in breach (Interlink Services v. Bangera).[12]
  • The covenant should not indirectly compel specific performance of personal service, a proscription reaffirmed in employment matters (VFS Global v. Suprit Roy).[13]

Analytical Synthesis of Leading Cases

Niranjan Shankar Golikari (1967)

The Court upheld a clause restraining an employee from working for competitors during the contractual period, emphasising the employer’s legitimate interest in maintaining trade secrets and the reasonableness of temporal and geographic limits. Crucially, the restraint terminated with the contract, thereby circumventing Section 27’s bar.[3]

Superintendence Company (1980)

A two-year post-service non-compete was invalidated. The Court refused to dilute Section 27 through common-law doctrines of partial restraint, underscoring the statute’s absolutist language.[4]

Gujarat Bottling (1995)

By characterising the franchise’s exclusivity clause as an instrument to advance trade during the agreement term, the Supreme Court reconciled negative covenants with Section 27, provided the restraint is co-terminous with the contract.[5]

Percept D’Mark (2006)

The right-of-first-refusal clause was void because it extended beyond the contractual duration, thereby impermissibly fettering the sportsperson’s economic liberty.[6]

Wipro v. Beckman Coulter (2006)

A nuanced approach distinguished employee mobility from inter-party solicitation. The Delhi High Court granted a limited injunction restraining future solicitation but eschewed any fetter on employees’ choices.[7]

Recent Trends Post-2018 SRA Amendment

The 2018 amendment positions specific performance as the default remedy (Section 10), potentially recalibrating the discretionary landscape of injunctions. Yet, as reiterated in Global Music Junction v. Shatrughan Kumar, equity remains central; courts may still favour damages over coercive relief where mutual trust has eroded.[14]

Critical Observations

  1. Formalism v. Contextualism: Indian courts oscillate between a literal interpretation of Section 27 and a more contextual, purpose-driven inquiry into the nature of the restraint. The latter stance, evident in Gujarat Bottling and Wipro, aligns contractual enforcement with commercial realities without subverting statutory text.
  2. Discretionary Equilibrium: Even where a covenant survives Section 27 scrutiny, injunctive relief is not automatic. Equity demands an assessment of hardship, public interest, and availability of monetary damages, as exemplified in Polaris Software v. Suren Khiwadkar and Farinni v. Dream Food Products.[15]
  3. Constitutional Shadow: Though Section 27 predates the Constitution, constitutional values—particularly freedom of occupation—inform judicial discretion, steering courts away from outcomes that would coerce idleness or economic servitude.

Conclusion

The enforceability of negative covenants in India is mediated by a dual inquiry: (i) substantive validity under Section 27 ICA, and (ii) equitable enforceability through injunctions under the SRA. Courts have delineated a defensible path that upholds covenants ancillary to legitimate commercial interests during the contractual term while striking down post-term restraints that fetter trade. Injunctive relief, even when statutorily permissible, remains a matter of judicial discretion sensitive to public policy, proportionality, and constitutional values. Practitioners drafting negative covenants must therefore calibrate temporal scope, geographic reach, and legitimate interest with meticulous precision, anticipating both statutory scrutiny and equitable balancing.

Footnotes

  1. See Madhub Chunder v. Raj Coomar Doss, 14 BLR 76 (1874) (Cal.).
  2. Specific Relief Act, 1963, s. 42 (formerly s. 57, 1877 Act).
  3. Niranjan Shankar Golikari v. Century Spinning & Mfg. Co., (1967) 2 SCR 378.
  4. Superintendence Company of India (P) Ltd. v. Krishan Murgai, (1981) 2 SCC 246.
  5. Gujarat Bottling Co. Ltd. v. Coca-Cola Co., (1995) 5 SCC 545.
  6. Percept D’Mark (India) (P) Ltd. v. Zaheer Khan, (2006) 4 SCC 227.
  7. Wipro Ltd. v. Beckman Coulter International S.A., 2006 SCC OnLine Del 743.
  8. Sunilchand C. Mazumdar v. Aryodaya Spg.& Wvg. Mills, 1962 SCC OnLine Guj 3.
  9. Polaris Software Laboratory Ltd. v. Suren Khiwadkar, 2003 SCC OnLine Mad 59.
  10. Farinni v. Dream Food Products, 2008 SCC OnLine Cal 116.
  11. Crompton Greaves Ltd. v. Hyundai Electronics Industries, 1998 SCC OnLine Del 805.
  12. Interlink Services (P) Ltd. v. S.P. Bangera, 1997 SCC OnLine Del 558.
  13. VFS Global Services Pvt. Ltd. v. Suprit Roy, 2007 SCC OnLine Bom 117.
  14. Global Music Junction Pvt. Ltd. v. Shatrughan Kumar, 2023 SCC OnLine Del 3382.
  15. See also Rajasthan Breweries Ltd. v. Stroh Brewery Co., AIR 2000 Del 450 (re iterating discretionary nature of injunctions).