Legal

NDA pitfalls in Indian employment contracts — what Section 27 actually blocks

LexVio Editorial20 February 20268 min read

Almost every Indian employment contract has an NDA, a non-compete, and a non-solicit clause. Most of them are either unenforceable or so narrowly enforceable that they don't do what HR thinks they do. The reason is one line in the Indian Contract Act, 1872.

Section 27, in plain English

Section 27 of the Indian Contract Act says: every agreement by which anyone is restrained from exercising a lawful profession, trade, or business is, to that extent, void.

There is exactly one exception in the Act itself — restraints around the sale of goodwill in a business sale. Everything else has been carved out by case law, and the Supreme Court has been consistently narrow.

The result: post-employment restraints in India work very differently from US or UK practice.

What is enforceable

During employment, restraints on working for competitors are enforceable. An employee owes a fiduciary duty during the term of employment; courts will enforce a contractual prohibition on moonlighting for a competitor or starting a competing business while still employed.

Confidentiality (the NDA part) is enforceable both during and after employment, provided the confidential information is genuinely confidential — i.e., not in the public domain, communicated under conditions of confidence, and the employee was aware of its confidential nature. Trade secrets, customer lists, proprietary algorithms, source code, financial projections — all enforceable post-employment.

Non-solicit of customers and employees is enforceable post-employment if narrowly drafted (time-limited, related to specific customers the employee actually dealt with). Courts have upheld 12-24 month non-solicit clauses; broader ones get read down.

Garden leave — paying the employee through their notice period while keeping them out of the office — is enforceable because it's not a post-employment restraint, it's still during employment.

What is NOT enforceable

Post-employment non-compete. A clause saying "the Employee shall not join a competitor for 2 years post-termination" is unenforceable in India, full stop. The Supreme Court in *Niranjan Shankar Golikari* and a long line of cases has held this is restraint of trade under Section 27.

This is the single most-misunderstood clause in Indian employment contracts. US firms operating in India routinely include 2-year non-competes; Indian courts ignore them.

Geographic restraints post-employment are similarly unenforceable. "Employee shall not work in Bengaluru for 1 year" — no.

Broad customer non-solicit — "shall not solicit any customer of the Company" — gets read down to customers the employee actually dealt with.

Liquidated damages for joining a competitor — courts treat this as a penalty for working, hence restraint of trade.

The IP twist

Many employment contracts try to use IP-assignment language to do the work of a non-compete. "All IP created during or after employment relating to the Company's business is assigned to the Company." Courts split this:

IP created during employment using company resources: enforceable assignment.
IP created after employment, even if related: not assignable. Section 27 again.

If you want post-employment IP rights (rare and usually unwise), they need a separate consultancy or buy-out arrangement, not bolted into the employment contract.

What about senior executives and founders?

The Supreme Court has been slightly more flexible for very senior employees (typically C-suite) with deep customer relationships and access to trade secrets. Even so, the courts will:

Limit duration (3-6 months typically, occasionally 12);
Limit scope to genuine competitors, not entire industries;
Require quantifiable harm, not speculative loss.

A 2-year, India-wide non-compete on a CTO will still get struck down. A 6-month restriction on joining one specifically-named competitor with a similar product line might survive.

What about shareholder agreements with founders?

Different beast. A founder's non-compete tied to their shareholder agreement, with consideration in the form of equity vesting, lock-in, and post-exit purchase, often survives because it is structured as restraint around the sale of goodwill (the Section 27 exception). Investor lawyers carefully document this distinction.

If you're a founder signing a shareholder agreement, read the non-compete clause carefully — it works very differently from an employment non-compete.

How to draft NDAs that actually protect you

1. Be specific about confidential information. List categories. Mark sensitive documents "Confidential." Vague definitions get struck down.

2. Time-bound the confidentiality. "Indefinite" sometimes gets read down to "reasonable period" — usually 3-5 years for commercial information. Pure trade secrets can be indefinite.

3. Carve out genuinely public information, prior knowledge, and information independently developed. Standard exceptions; their absence makes the NDA look overreaching.

4. Combine NDA with non-solicit, not non-compete. Non-solicit is enforceable. Non-compete is not. Don't waste contractual leverage on a clause that won't hold.

5. Pick the right forum. Commercial Court jurisdiction in Mumbai, Delhi, or Bengaluru tends to dispose of confidentiality applications faster than civil courts. Specify the forum in the contract.

6. Have a real evidence trail. Confidentiality enforcement is only as good as your ability to show what was confidential and that the employee took it. Build access logs, document classification, and exit-interview discipline.