A Non-Compete Hidden in an NDA Is Still a Non-Compete

Where do non-competes hide in an NDA?

Restraints inside NDAs are rarely headed 'non-compete'. They appear as an undertaking not to engage in any business competing with the disclosing party for a period after disclosure, or as an acknowledgement that you will not use the information to compete, drafted broadly enough that any competing activity is caught.

A second common form appears in NDAs signed before an investment or acquisition discussion, restricting the recipient from pursuing similar opportunities or dealing with the target's customers. A third is the 'non-circumvention' clause in introductions and brokered deals, which bars you from dealing directly with contacts you were introduced to. Each reaches considerably further than protecting information.

Look also at the definitions section. A restraint is sometimes created indirectly, for example by defining 'Purpose' so widely that any work in the same field counts as use of the confidential information.

Does Section 27 apply if the restraint is inside an NDA?

Yes. Section 27 of the Indian Contract Act, 1872 provides that every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind is to that extent void. The only exception in the section itself covers a seller of goodwill who agrees not to carry on a similar business within specified local limits, so long as the limits are reasonable. The provision addresses the substance of the restraint, not the title of the document it sits in.

So a post-engagement restraint inside a confidentiality agreement raises the same question it would raise inside an employment contract. That is worth knowing, because a counterparty presenting a document as 'just an NDA' is describing the wrapper rather than the contents.

Note also the words 'to that extent'. Section 27 does not make the whole NDA void. It strikes down the restraint, and the rest of the agreement, including the confidentiality obligations, generally continues to bind you. That is why ignoring the entire document because one clause is unenforceable is a mistake.

What have Indian courts said?

In Niranjan Shankar Golikari v Century Spinning and Manufacturing Co. (1967), the Supreme Court upheld a restraint that operated during the term of employment, distinguishing it from restraints after the relationship ends. In Percept D'Mark (India) Pvt Ltd v Zaheer Khan (2006), the Supreme Court held that a restraint operating after the contract has ended is void under Section 27, and confirmed that the principle is not confined to employment contracts.

The resulting position is that restraints during an engagement are generally enforceable if reasonable, while restraints after it ends are generally not, outside the statutory exceptions. Partnership is one such area: the Indian Partnership Act, 1932 permits certain reasonable restraints on partners, including an outgoing partner under Section 36(2).

Courts look at substance. A clause that is really about protecting identified confidential information may survive where a bare bar on competition would not.

None of this means a court will always side with the person restrained. Each case turns on its wording and facts, and litigation is slow and expensive whichever way it ends. The practical lesson is to deal with the clause at the drafting stage, where it costs nothing to fix.

Restrictive clauses compared

What is genuinely different about confidentiality and non-solicitation?

It would be wrong to conclude that everything restrictive in an NDA falls away. Confidentiality obligations are not restraints of trade; they restrict use and disclosure of information rather than the exercise of a profession. They stand on their own footing, and courts enforce them.

Non-solicitation sits between the two. An undertaking not to approach specific named clients or employees for a defined period is a narrower restriction than a bar on competing. Indian courts have been more receptive to narrow non-solicits, particularly where tied to confidential client information, but outcomes vary and some decisions have treated client non-solicits as restraints of trade. Where a counterparty has a genuine concern, offering a targeted non-solicit in place of a broad non-compete is often the deal that gets done.

How to handle it before you sign

Sample replacement wording: 'Nothing in this Agreement restricts either party from carrying on any business or engaging in any employment, provided it does not use or disclose the other party's Confidential Information in breach of this Agreement.' That sentence keeps the confidentiality protection intact and removes the restraint.

• Read the whole document, not just the clauses with 'confidentiality' in the heading.
• Separate what restricts information from what restricts activity.
• Ask for any restraint on future work or business to be removed, on the basis that the agreement is about information.
• Where the counterparty has a real concern, offer a defined non-solicit instead, limited to named clients or staff you deal with, for six to twelve months.
• Check the definitions: a 'competing business' defined as anything the discloser 'may undertake in future' is a red flag.
• Where the restraint matters commercially and the counterparty will not move, take advice before signing rather than after.

What can the disclosing party legitimately protect?

A business sharing information before a deal has real interests: its trade secrets, its client list, its pricing and its people. Indian law protects those interests mainly through confidentiality. A clause preventing you from using or disclosing the confidential information, and requiring return or destruction of materials at the end, addresses the actual risk without restraining your trade.

If the discloser fears that you will take its clients, a narrow non-solicit limited to clients you were introduced to under the NDA, for a short period, is a proportionate answer. If it fears you will build a competing product using its information, the confidentiality clause already covers that use. Pointing this out often resolves the issue: the discloser keeps everything the law will actually give it.

Does the same rule apply to employees?

Yes. Employees are often asked to sign an NDA or 'confidentiality and non-compete undertaking' alongside the offer letter. The same Section 27 analysis applies: a restraint during employment, such as a bar on working for a competitor while still employed, is generally enforceable if reasonable, while a bar on joining a competitor after leaving generally is not.

Employers in India therefore tend to rely on other tools after exit: confidentiality, non-solicitation of clients and staff, notice periods, and garden leave during the notice period, when the employee is still employed and paid. If an employment NDA contains a post-exit non-compete, the advice is the same as for a commercial NDA: ask for it to be removed or narrowed before signing, and keep strictly to the confidentiality obligations after you leave.

Why raising it works

The person sending you an NDA usually wants the conversation that follows it, and the restraint clause is often in the template rather than chosen for this deal. Asking for it to come out is often a two-minute exchange rather than a negotiation.

Consider a freelance product designer asked to sign an NDA before pitching to a fintech start-up, with a clause barring her from working for 'any fintech company' for two years. If she signs, she may later have to argue Section 27 against a well-funded client while losing work in the meantime. If she asks for the clause to be replaced with the sentence above, the start-up loses nothing it is entitled to.

Once signed, the position is harder. Not because the analysis changes, but because you are then arguing about a document you accepted, with the counterparty invested in it, at a point when the relationship may already have deteriorated.

What should you do if you have already signed one?

• Do not panic and do not ignore it. Read the clause carefully and note exactly what it restricts and for how long.
• Keep scrupulously to the confidentiality obligations, which are likely to be enforceable whatever happens to the restraint.
• Avoid taking documents, client lists or code from the discloser, which would turn a weak restraint claim into a strong confidentiality claim.
• If you receive a legal notice, respond through an advocate rather than directly.
• Where a new opportunity depends on the answer, take advice on the clause before accepting, so you know the realistic risk.