Employment LawENFORCEABILITY OF THE EMPLOYMENT BONDS CANNOT BE RESTRICTED BY THE EMPLOYER

The Hon’ble Supreme Court, in the case of Vijaya Bank vs. Prashant B Narnaware, Civil Appeal Numbers 11708 of 2016, decided on 14.05.2025, held and overruled the decision of the High Court of Karnataka, saying that employment bonds cannot be restricted.

FACTS

Vijaya Bank (hereinafter referred to as “the Appellant”) is one of the very well-known public sector banks that was questioned by one of its employees, Prashant B Narnaware (hereinafter referred to as “the Respondent”), and the issue was later taken to the Supreme Court. The Respondent was recruited by the Appellant in the year 1999 as a Probationary Assistant Manager.

The Respondent was promoted to Middle Management Scale-II after the confirmation in 2001. This is because the Appellant posted 349 Officer jobs, and in the recruitment notification, it added Clause 9(w). According to this clause, the candidates selected were obligated to sign an indemnity bond in the amount of 2 lakhs, and this will be paid in case the employee quits the service prematurely, before serving three years.

As the Respondent was aware of this provision, he had applied and been chosen to the post of Senior Manager-Cost Accountant (Middle Management Grade-III) at a basic pay of Rupees 18,240. He was later given a letter of appointment on 7 August 2007 with an accompanying Clause 11(k) making him serve the Appellant at least 3 years and to sign the above mentioned indemnity bond.

The Respondent voluntarily resigned from his previous position and joined as Senior Manager on 28 September 2007, executing the bond accordingly. However, before the completion of three years, on 17 July 2009, he tendered his resignation to join IDBI Bank. His resignation was accepted, and under protest, he paid the ₹2 lakh as required by the indemnity bond.

To this, the Respondent filed a writ petition before the Hon’ble High Court of Karnataka saying that there is a violation of Articles 14 and 19(1)(g) of the Constitution of India.

The High Court allowed the writ petition, saying that the clause, being part of a standard form contract, was imposed through an unequal bargaining process, which often compels the employee to accept the terms for career advancement. Being aggrieved by the decision of the High Court, the Appellant filed an appeal before the Hon’ble Supreme Court.

ISSUES BEFORE THE SUPREME COURT

1. Whether Clause 11(k) of the appointment letter constituted a restraint of trade under Section 27 of the Indian Contract Act, 1872?
2. Whether this clause opposed to public policy under Section 23 of the ICA 1872?

CONTENTIONS OF THE PARTIES

The Appellant submitted that the High Court misused Section 27 of the Indian Contract Act, 1872, which was also seen in the case of Superinterpendence Co. of India v. Krishan Murgai (1980) SCR 3.

In the backdrop of the foregoing, the Appellant also stated that the clause proved to be not a restraint of trade under the Section 27 of the Indian Contract Act as it did not prevent the employee to obtain his or her employment anywhere but made the employee at least serve a specific amount of time in the service or pay pre-agreed liquidated damages after quitting his or her job prematurely.

The Appellant further contented that their clause based on public policy was since retention of the trained staff is important in the efficient running of the bank. The clause had been alleged to be a pure business practice, not being unconscionable, or anti unfair.

The Appellant has cited the fact that in recruitment and training, it is a long process that is also expensive to the public sector banks. Early resignations have actual losses in terms of financial and operation aspect, hence a guard must be put in place both in terms of efficiency and fiscal responsibility. The indemnity bond was not designed to harass or discriminate against the employees, but was introduced to weed out candidates who would not be serious and keen enough to take up responsible positions, or to assure such costs, in the event of early resignation, during recruitment and training.

On the contrary, the Respondent argued that these clauses were arbitrary and unreasonable and therefore infringed his rights to equality (Article 14) and his freedom to practice any profession or occupation of his choice (Article 19(1)(g)). Subjecting him to a financial liability due to his resignation forced him to pursue a more idealistic career, where all unconstitutional obstruction cast over his ability to resign in search of better career opportunities.

The Respondent also contended that the liquidated damages of 2 lakh Rs were an unfair pre-estimate of the loss suffered by the bank. That amount was contended to be exorbitant and in the form of a penalty, as opposed to actual damage in the event of a loss.

The reliance of the Respondent on the verdict in K.Y. Venkatesh Kumar v. BEML Ltd, Writ Appeal No. 2736 of 2009,where a like covenant had also been quashed by the Karnataka High Court. He said that the current case was on all fours as well, since the case was a similar case where a mandatory minimum service period was accompanied by a liquidated damage provision in a run-of-the-mill contract.

DECISION AND FINDINGS

The Hon’ble Supreme Court surveyed Section 27 of the Indian Contract Act of 1872, which declared convention restricting lawful propensity or profession as not effective. The Court repeated the difference between restraints in force during the continuance of employment and those in force after cessation. It had the view that covenants which obliged an employee to serve a certain term or pay damages in the event the employee left before the defined term expires without preventing employment in the future were not a restraint of trade under Section 27. Because Clause 11 (k) contained no limits to future employment, then it was not void on the ground of restraint of trade.

The Supreme Court resorted to Section 23 of the Contract Act by taking into account the aspect of public policy. It emphasized that the concept of public policy is dynamic and elastic, which has to be viewed alongside social and economic realities. The Court was fully aware that companies in the public sector like the Appellant, incur huge expenditure and administrative work in the recruitment and training of management personnel. The liquidated damages clause and the minimum term were held to have been a reasonable business device with an aim of mitigating constant turnover, protecting the efficiency of institutions, and providing continuity of management. In light of this, the clause was neither unconscionable nor unfair so it was not contrary to the public policy.

As a result, the Hon’ble Supreme Court set aside the High Court order upholding which had quashed Clause 11(k). It upheld the validity and enforceability of the clause, affirming that it did not constitute a restraint of trade nor violate public policy or constitutional guarantees. The Supreme Court thereby allowed appellant’s appeal and restored the bank’s right to enforce the minimum service period and corresponding liquidated damages.

AMLEGALS REMARKS

The ruling of the Supreme Court in this case does so in a reasonably balanced manner, keeping in view the legitimate interest of employers and workers in a current environment which requires the effort in such a manner. Maintaining the reasonability of a feasible minimum of service term and consequent liquidated damages, this decision acknowledges the impact of operation and financial constraints on the retention of talented human resources in the world of banking (public sector). Simultaneously, it is cautious enough to make sure that such provisions should not limit the fundamental right of a person to find a job or exercise a profession unreasonably. Such subtle policy will push employers to produce fair and transparent contracts and make employees free to choose the most suitable variant of their career at the rational level.

This case sets a positive precedent, emphasizing that employment covenants must be fair, proportionate, and reflective of current social and economic realities. It underscores the importance of good faith and clarity in employment agreements, fostering trust and stability in employer-employee relationships.

–Team AMLEGALS assisted by Mr. Jeet Soni (intern)

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