Restraint, Rights and Remedy: Restrictive and IP Covenants in Service Contracts at the Crossroads of the Contract Act, the Competition Act and the Specific Relief Act

Indian Courts distinguish sharply between a covenant that restrains the employee’s trade in general — void — and one that protects the employer’s proprietary interest in confidential information, trade secrets and intellectual property — enforceable, even after the employment has ended.

The covenant as a fault line

Every service contract of any sophistication carries a cluster of negative promises. The employee agrees not to join a competitor for some period after leaving, not to poach colleagues or clients, and not to carry away the confidential information and intellectual property built up on the employer’s time. Employers treat these clauses as ordinary risk management. Indian law treats them with suspicion, because each of them asks a departing individual to give up something the legal system holds dear — the freedom to earn a living.

That tension is the fault line this article traces. A restrictive covenant is not simply valid or invalid; it can meet three distinct fates. It may be void from the outset as a restraint of trade. It may be valid between the parties yet exposed as an agreement that harms competition in the wider market. Or it may be perfectly lawful yet practically unenforceable, because the remedy the employer wants — an injunction — is one the court is forbidden to grant. Understanding which fate a given clause meets, and why, requires reading the Contract Act, 1872, the Competition Act, 2002, and the Specific Relief Act, 1963 together rather than in isolation. Intellectual property is what ties the three readings into one story.

Validity: The filter of Sections 23 and 27

The starting point is Section 27, Contract Act, and it is unusually blunt. Every agreement by which anyone is restrained from exercising a lawful profession, trade or business is, to that extent, void. The section admits a single statutory exception, for the seller of goodwill who agrees not to carry on a similar business within reasonable local limits. India made a deliberate choice here. English common law tests a restraint for reasonableness and upholds it if it protects a legitimate interest no more than necessary; the Indian legislature declined to import that graduated approach and laid down a rule of near-automatic invalidity. A covenant that restrains trade is void whether or not it is reasonable, save in the narrow goodwill situation.

The consequence that matters most in practice is the treatment of time. Indian Courts have drawn a firm line between restraints that operate during the subsistence of the contract and those that bite after it ends. A negative covenant confining the employee’s energies to his employer while the employment lasts is not treated as a restraint of trade at all, because it enforces the bargain rather than sterilising the person. That was the holding in Niranjan Shankar Golikari v. Century Spg. and Mfg. Co. Ltd.¹, where the Supreme Court upheld a negative covenant operating through the term of service. The same logic runs through Gujarat Bottling Co. Ltd. v. Coca Cola Co.², which confirmed that a negative stipulation binding a party during the term of the agreement does not offend Section 27.

Once the relationship ends, the picture inverts. A covenant that forbids the former employee from competing, or from working in his field, for a stretch of time after departure is a restraint on the exercise of a lawful profession, and Section 27 strikes it down. The Supreme Court in Superintendence Co. of India (P) Ltd. v. Krishan Murgai³ declined to enforce a post-service restriction, and in Percept D’Mark (India) (P) Ltd. v. Zaheer Khan⁴ it held a post-term restrictive arrangement — there, a right of first refusal that fettered future dealings — to be hit by Section 27 and void. Reasonableness of duration or geography does not rescue such a clause; the vice is the post-employment restraint itself.

Section 23 supplies a parallel and sometimes overlooked route to the same destination. An agreement is void if its object or consideration is unlawful — because it is forbidden by law, defeats the provisions of any law, or is opposed to public policy. A covenant that would, for instance, frustrate a statutory scheme or offend a public-policy interest can fall under Section 23 independently of Section 27. This matters for the argument that follows, because it is through Section 23’s public-policy gateway that the concerns of competition law re-enter the private contract: an agreement whose object is to defeat the policy of the Competition Act is not merely exposed to regulatory action but is itself vulnerable as unlawful.

The intellectual-property correlation: Legitimate interest against naked restraint

If Section 27 were the whole story, employers would have no way at all to protect what they legitimately own. They do, and the key that unlocks the door is intellectual property. Indian Courts distinguish sharply between a covenant that restrains the employee’s trade in general — void — and one that protects the employer’s proprietary interest in confidential information, trade secrets and intellectual property — enforceable, even after the employment has ended. The distinction is not a loophole in Section 27; it reflects that protecting property is different in kind from sterilising a person’s livelihood.

The proprietary interests that qualify are concrete. Trade secrets and genuinely confidential business information can be protected. So can intellectual property that vests in the employer by operation of law or assignment — copyright in works made in the course of employment, which under Section 17(c), Copyright Act, 1957 belongs to the employer in the absence of agreement to the contrary; patents and designs assigned under the contract; and databases and compilations in which the employer holds rights. A covenant tethered to these interests is doing something Section 27 does not forbid.

The case law maps the boundary with some precision. In Diljeet Titus v. Alfred A. Adebare⁵, the Delhi High Court restrained departing lawyers from using confidential client data and material in which the firm held copyright, holding that protecting such proprietary information is not a restraint of trade. By contrast, in American Express Bank Ltd. v. Priya Puri⁶, the same court refused to treat an employer’s customer information as a protectable trade secret and declined to restrain the former employee, emphasising her right to livelihood; the employer’s asserted interest did not rise to genuine confidential property. Wipro Ltd. v. Beckman Coulter International S.A.⁷ worked through the reasonableness of negative covenants and the line between protecting confidentiality and imposing an impermissible embargo on employment. The lesson for the draftsman is exact: a restrictive covenant is defensible only so far as it is genuinely anchored to an identifiable intellectual property (IP) or confidentiality interest. Stretched beyond that anchor, it stops being IP protection and becomes the naked restraint that Section 27 exists to defeat.

This is why the well-drawn modern clause protects the asset rather than the person: it enjoins the use or disclosure of specified confidential information and the exploitation of the employer’s intellectual property, rather than forbidding the employee from working. The former survives; the latter does not.

The competition overlay: Section 3 and the limits of the IPR carve-out

A covenant may be entirely valid between the two contracting parties and still be objectionable for a reason that has nothing to do with either of them — its effect on the market. This is the domain of Section 3, Competition Act, 2002, which prohibits agreements that cause or are likely to cause an appreciable adverse effect on competition in India. Vertical arrangements of the kind embedded in distribution, licensing and franchise contracts are tested under Section 3(4) on the rule of reason, weighing their pro-competitive justifications against their foreclosing effects by reference to the factors in Section 19(3). A restrictive or exclusivity covenant that is unremarkable as a matter of contract can, at sufficient scale or market power, become an agreement that the Commission may strike down.

Intellectual property does not place such covenants beyond the reach of competition law. Section 3(5) carves out an exception, but a carefully limited one: it protects the right of a proprietor to impose reasonable conditions as may be necessary for protecting the intellectual property rights conferred under the specified statutes. The words carry weight. The shield extends only to conditions that are both reasonable and necessary to protect the IP; it is not a blanket immunity for anything an IP owner cares to insert into a licence or a service agreement. An unreasonable or excessive IP-linked restriction falls outside the carve-out and stands exposed to Section 3 like any other agreement. The carve-out, in other words, rewards the same discipline that Section 27 does — a condition tightly fitted to a genuine proprietary interest — and withdraws its protection from overreach.

Where the exercise of IP shades into an abuse of market power, the jurisdictional relationship between the IP statutes and the Competition Act becomes contested, and the current Indian position is unsettled at the highest level. In Ericsson AB v. CCI⁸, a Division Bench of the Delhi High Court in July 2023 reversed the earlier Single Judge view and held that, in matters concerning the exercise of patent rights, the Patents Act, 1970 operates as a special and complete Code that prevails over the Competition Act, ousting the Commission’s jurisdiction over such patent-licensing disputes. The reasoning is patent-specific and has been criticised, and the Competition Commission’s challenge is pending before the Supreme Court on special leave, so the last word has not been written. For present purposes the significance is narrower and safe to state: the mere presence of an intellectual-property right neither automatically invites competition scrutiny nor automatically excludes it, and a covenant that has survived the private-law filters of Sections 23 and 27 may still have to answer, in the appropriate forum, for its effect on the market.

The remedial filter: Why valid covenants still fail under the Specific Relief Act

Suppose a covenant clears both earlier filters — it is validly confined to the term of employment or tethered to a genuine proprietary interest, and it raises no serious competition concern. The employer still faces a third obstacle, and it is the one most often underestimated: the court may simply lack the power to give the remedy sought. The Specific Relief Act, 1963, as recast by the 2018 Amendment, governs here.

Section 14⁹ lists the contracts that cannot be specifically enforced, and two of its clauses are fatal to service contracts. A contract that is so dependent on the personal qualifications of the parties that the court cannot enforce specific performance of its material terms falls under clause (c); a contract whose performance involves a continuous duty that the court cannot supervise falls under clause (b). A contract of personal service answers both descriptions. The courts have said so for generations — a master will not be compelled to keep a servant, nor a servant to serve a master — and the principle survived the 2018 Amendment intact. The result is that no court will decree the affirmative performance of an employment contract.

From that flows the decisive provision. Section 41(e) forbids the grant of an injunction to prevent the breach of a contract the performance of which would not be specifically enforced. Because a contract of personal service cannot be specifically enforced, an injunction to restrain its breach is, as a general rule, unavailable. This is the remedial mirror of Section 14: what cannot be positively decreed cannot be negatively enjoined either.

The escape valve — and it is a narrow one — is the proviso structure of Section 42. Where a contract contains an affirmative agreement to do an act coupled with a negative agreement, express or implied, not to do some other act, the court’s inability to compel the affirmative part does not, by force of Section 42, preclude it from granting an injunction to enforce the negative part. The negative covenant thus becomes enforceable by injunction notwithstanding Section 41(e) — but the section attaches an express condition in its proviso: the plaintiff must not himself have failed to perform the contract so far as it is binding on him. An employer who is in breach of his own obligations cannot invoke the negative covenant against the employee.

Two limits keep this remedy in its place. First, Section 42 rescues only the negative stipulation, not the affirmative service obligation; a court will restrain the employee from doing the forbidden thing, not order him to keep working. Second, and crucially, the negative covenant it enforces is the one operating during the subsistence of the contract — the very covenant that Section 27 also permits. This is where the three statutes lock together. A negative covenant that bites during employment is valid under Section 27 and enforceable by injunction under Section 42; the same covenant projected beyond the term collapses twice over — void as a restraint under Section 27, and unenforceable as an injunction under Sections 14 and 41(e). The remedial half of this bar rests on a long and consistent line — the Supreme Court in Pearlite Liners (P) Ltd. v. Manorama Sirsi¹⁰, and earlier in Executive Committee of Vaish Degree College v. Lakshmi Narain¹¹ and Nandganj Sihori Sugar Co. Ltd. v. Badri Nath Dixit¹², holding that a contract of personal service can be enforced neither by a decree of specific performance nor by an injunction restraining its breach, so that the aggrieved party’s remedy lies in damages. Section 27 supplies the other half. It explains, better than any single provision could, why the Indian post-employment non-compete so rarely holds: the employer runs into the Contract Act at the front door and the Specific Relief Act at the back.

Bringing the filters together: A practical synthesis

Read as a sequence, the three statutes yield a working method for anyone who drafts, reviews or litigates these covenants.

The first question is validity. Does the clause restrain the exercise of a lawful profession after the relationship ends? If it does, Section 27 is likely to void it, and no amount of reasonableness will save it outside the goodwill exception. A covenant confined to the term of the engagement, or one that protects a defined proprietary interest rather than the person’s general liberty to work, stands on far firmer ground.

The second question is legitimacy of interest, which is where intellectual property earns its central place. The clause should be anchored to something the employer genuinely owns — identified confidential information, trade secrets, copyright vesting under Section 17(c), assigned patents or designs — and should protect that asset specifically. The closer the covenant sits to a real proprietary interest, the more likely it is both to escape Section 27 and to satisfy the “reasonable and necessary” standard of the Section 3(5) carve-out. A confidentiality-and-IP covenant is worth ten general non-competes.

The third question is market effect. In commercial licensing, distribution and franchise settings especially, the draftsman must ask whether the restriction, aggregated across the market, could cause an appreciable adverse effect on competition under Section 3(4), and whether it stays within the reasonable-and-necessary limits of Section 3(5). The presence of an IP right frames this inquiry; it does not end it.

The fourth question is remedy. Even a valid, legitimate, competition-compliant covenant is only as good as the relief available to enforce it. Because personal-service contracts cannot be specifically enforced, the employer’s realistic remedy is an injunction on the negative covenant during the term under the proviso to Section 42 — available only if the employer has kept his own side of the bargain — supplemented by damages and by confidentiality and IP relief that rests on proprietary rights rather than on restraint of trade. Post-termination, the employer’s protection lies in the law of confidence and intellectual property, not in a non-compete.

Conclusion

The restrictive covenant in an Indian service contract lives at the meeting point of three statutes that were written for different purposes and are usually read in isolation. The Contract Act asks whether the promise is valid; the Contract Act asks whether it harms the market; the Specific Relief Act asks whether a court can do anything about its breach. An employer who thinks only of the first, or drafts as though reasonableness alone will carry the clause, is repeatedly surprised in litigation — because a covenant can be struck down as a restraint, exposed as anti-competitive, or left unenforceable for want of an available remedy, and a post-employment non-compete manages to fail on two of these grounds at once. What survives the passage through all three filters is a narrower and more honest instrument: a covenant that protects the employer’s intellectual property and confidential information, that is confined in time to what the law will countenance, and that seeks relief the court is actually empowered to grant. Restraint, rights and remedy are not three separate conversations. They are one, and intellectual property is the language that connects them.