Non-Solicitation Agreements under Indian Law: Enforceability, Scope and Drafting Considerations

Non-Solicitation Agreements under Indian Law: Enforceability, Scope and Drafting Considerations

1. Introduction

Non-solicitation covenants—contractual promises not to entice employees, customers, or suppliers of another—have become ubiquitous in modern Indian commerce. Their legitimacy, however, is frequently questioned because Section 27 of the Indian Contract Act, 1872 (“ICA”) declares void every agreement “by which anyone is restrained from exercising a lawful profession, trade or business of any kind.”[1] Indian courts have therefore been called upon to strike a delicate balance between freedom of trade, protection of legitimate business interests, and the public policy favouring employee mobility. This article critically analyses the Indian jurisprudence on non-solicitation agreements, synthesising principles from leading decisions, notably Wipro Ltd. v. Beckman Coulter International S.A.[2], Superintendence Company of India v. Krishan Murgai[3], and Gujarat Bottling Co. Ltd. v. Coca-Cola Co.[7], and offers drafting guidance for practitioners.

2. Conceptual Framework

2.1 Defining Non-Solicitation

A non-solicitation clause restrains a contracting party from actively inducing (a) employees to leave another party, or (b) clients, suppliers or other counterparties to shift business. Unlike non-compete clauses, the restriction targets conduct (the act of solicitation) rather than status (engaging in a competing business). Properly drafted, such clauses do not prevent the employee or customer from acting of their own volition; they merely proscribe active enticement.

2.2 Distinction from Related Covenants

  • Non-compete: restrains engagement in competing business; highly susceptible to invalidity post-termination.
  • Confidentiality: protects trade secrets; generally enforceable as it does not restrain trade but safeguards proprietary information.
  • Garden-leave: keeps employee on payroll while preventing active work; analysed as an intra-employment restraint.

3. Statutory Matrix

Section 27 ICA embodies a statutory prohibition, not a mere common-law presumption of invalidity. The sole statutory exception pertains to sale of goodwill. Consequently, Indian courts cannot apply an unconstrained “reasonableness” test but must examine whether the covenant (i) operates during or after subsistence of the underlying relationship, and (ii) amounts to restraint of trade on the promisor, not on third parties.[3]

4. Judicial Treatment

4.1 Employer–Employee Relationships

Post-employment restraints are scrutinised stringently. The Supreme Court in Superintendence held a two-year post-service non-compete void, underscoring that Section 27 leaves little room for “partial” restraint analysis.[3] In American Express Bank v. Priya Puri, the Delhi High Court refused injunctive relief against an ex-banker, reiterating that post-employment restrictions aiming to restrain trade are void unless they fall under specific statutory exceptions.[5]

Yet courts enforce in-term restraints or those necessary to protect confidential information. Niranjan Shankar Golikari v. Century Spinning upheld an exclusivity covenant operative during employment, drawing a fundamental distinction between “during” and “after” covenants.[4]

The Delhi High Court in Desiccant Rotors International v. Bappaditya Sarkar granted relief where an ex-employee misused confidential information to solicit customers, treating the conduct as an independent tort and enforcing confidentiality obligations notwithstanding Section 27.[6]

4.2 Commercial, Distribution and Franchise Relationships

The analytical posture shifts where the covenant exists between two businesses rather than in an employment contract. In Wipro v. Beckman Coulter, a distributor–principal agreement prevented each party from soliciting the other’s employees for two years post-termination. Justice Badar Durrez Ahmed held that the clause (i) targeted the parties—not the employees—and (ii) did not impede any person’s right to trade; hence it was not hit by Section 27.[2] The court emphasised that general advertising and unsolicited approaches were outside the covenant’s scope, illustrating how careful drafting can immunise the clause from invalidity.

Similarly, Gujarat Bottling upheld a negative covenant in a franchise arrangement, reasoning that restraints co-terminous with the agreement are facilitative, not prohibitory, of trade.[7] Though the case involved product exclusivity, the ratio is instructive: a temporary, contract-term restraint aimed at protecting goodwill may survive Section 27 scrutiny.

4.3 Non-Solicitation as Tortious Interference

Recent High Court dicta—e.g., M/s. Nian Media Pvt. Ltd. v. R. Prabakar—describe solicitation that induces customers to break contractual relations as a tort independent of contract.[10] Where a covenant mirrors the tortious duty, courts may grant injunctions even absent an express contractual stipulation, provided misappropriation of confidential information or deliberate interference is shown.

4.4 Fiscal Treatment of Non-Solicitation Consideration

Non-solicitation covenants often involve consideration. In Atlas Copco (India) Ltd. the Income-tax Appellate Tribunal addressed taxability of amounts received for non-solicitation and non-compete covenants, classifying them as capital receipts taxable as capital gains rather than revenue income.[15] The failure of the payer to honour the covenant led to arbitration and eventual settlement—demonstrating that careful tax structuring and future business strategy must be aligned.

5. Comparative Synthesis: Key Principles Emanating from the Case-Law

  1. During-term v. Post-term: Covenants effective during subsistence of the contract (employment or commercial) are generally valid; post-termination covenants face Section 27 hurdles unless falling within the goodwill exception or targeted at proprietary information.
  2. Object of Restraint: Where the clause restrains only the parties from active solicitation, and not the third parties’ freedom, courts are more inclined to uphold it (Wipro).
  3. Reasonableness & Territory: Although Indian courts reject the English “reasonableness” test as a standalone standard, territorial and temporal reasonableness remain persuasive factors in assessing whether the covenant in substance restrains trade.
  4. Confidential Information Interface: Protection of bona fide confidential information is a legitimate interest; covenants narrowly tailored to this end have higher enforceability (Desiccant Rotors).
  5. Drafting Clarity: Ambiguity is fatal. The covenant voided in Superintendence turned on the equivocal word “leave”. Precision in scope, duration, and definitions is essential.
  6. Alternative Remedies: Where an injunction would operate as indirect specific performance of personal service, damages may be preferred (Priya Puri).

6. Drafting and Enforcement Strategies

  • Delineate Conduct: Use verbs—“solicit”, “induce”, “entice”—and provide non-exhaustive definitions. Exclude passive receipt of applications and general advertising.
  • Restrict Parties, Not Persons: Frame the restraint as a mutual undertaking between businesses; affirm the freedom of employees/customers to act independently.
  • Temporal Limits: Two years is the outer edge generally tolerated; shorter periods are safer.
  • Geographical Neutrality: For employee solicitation, geography may be unnecessary; for customer solicitation, specify markets to avoid over-breadth.
  • Severability & Tiered Drafting: Incorporate severability clauses and cascade provisions (e.g., 24/18/12-month alternatives) to permit partial enforcement.
  • Consideration & Tax: Where standalone consideration is paid, align documentation with tax positions to avert re-characterisation (cf. Atlas Copco).
  • Choice of Remedies: Couple the covenant with arbitration clauses and liquidated damages to provide practical enforcement avenues.

7. Conclusion

Indian jurisprudence has evolved from rigid hostility toward post-contract restraints to a more nuanced acceptance of non-solicitation clauses that are carefully crafted and limited in scope. The decisive factors are (i) whether the covenant targets the conduct of the contracting parties, (ii) whether it is co-extensive with legitimate interests such as protection of goodwill or confidential information, and (iii) whether it avoids fettering the autonomous choices of third parties. Practitioners must therefore draft with surgical precision, cognisant of Section 27’s statutory mandate and the judicial guidance distilled above.

Footnotes

  1. Indian Contract Act, 1872, s. 27.
  2. Wipro Ltd. v. Beckman Coulter International S.A., 2006 SCC OnLine Del 743 (Del HC).
  3. Superintendence Company of India (P) Ltd. v. Krishan Murgai, (1981) 2 SCC 246.
  4. Niranjan Shankar Golikari v. Century Spinning & Mfg. Co. Ltd., AIR 1967 SC 1098.
  5. American Express Bank Ltd. v. Priya Puri, 2006 SCC OnLine Del 638.
  6. Desiccant Rotors International Pvt. Ltd. v. Bappaditya Sarkar, 2009 SCC OnLine Del 1913.
  7. Gujarat Bottling Co. Ltd. v. Coca-Cola Co., (1995) 5 SCC 545.
  8. FL Smidth Pvt. Ltd. v. Secan Invescast (India) Pvt. Ltd., 2013 SCC OnLine Mad 1650.
  9. Eli Research India Pvt. Ltd. v. Deepak Gupta, 2017 SCC OnLine Del 8403.
  10. M/s. Nian Media Pvt. Ltd. v. R. Prabakar, 2024 SCC OnLine Mad —.
  11. Deputy CIT v. Atlas Copco (India) Ltd., 2018 SCC OnLine ITAT 3140 (ITAT Pune).