Introduction

In a landmark ruling titled Vijaya Bank & Anr. v. Prashant B Narnaware[1], the Hon’ble Supreme Court of India (“SC”), upheld the validity of an employment bond clause requiring a bank employee to serve a minimum of 3 years or pay ₹2 lakhs in liquidated damages upon premature resignation. This judgment carries significant implications for employers seeking to enforce minimum service obligations and outlines the circumstances under which employment bonds are considered lawful.

Brief Facts

The respondent (“Employee”) joined Vijaya Bank (“Bank”) as a Probationary Assistant Manager in 1999 and was later promoted. In 2007, he was appointed as a Senior Manager under a fresh recruitment drive. As per Clause 11(k) of his appointment letter, he was required to serve the bank for at least three years or pay INR 2 lakhs in case of early resignation. The Employee executed an indemnity bond accordingly. However, in 2009, he resigned before completing three years to join another bank and paid the amount of INR 2 lakhs as per the appointment letter. He subsequently challenged the clause before the High Court, alleging it was unconstitutional and void under Sections 23 and 27 of the Indian Contract Act, 1872 (“ICA”). The High Court ruled in his favour, but the Bank appealed to the Supreme Court.

Issues Raised

The core legal issues before the SC were:

  1. Whether Clause 11(k), which imposed a ₹2 lakh penalty for resigning before three years, was in restraint of trade under Section 27 of the ICA?
  2. Whether the clause was opposed to public policy under Section 23 of the ICA, especially given the unequal bargaining power between employer and employee?

Legal Analysis of the Hon’ble SC

The Supreme Court undertook a rigorous examination of Section 27 and Section 23 of the ICA, alongside relevant constitutional principles and established case law.

To address the first issue, the SC relied heavily on the precedent set in Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. Ltd.[2], where it was held that negative covenants operative during the term of employment do not amount to restraint of trade. The SC reaffirmed that such covenants are enforceable unless they are unconscionable or excessively harsh. This principle was further endorsed in Superintendence Company of India (P) Ltd. v. Krishan Murgai[3], which reaffirmed this view and stated that agreements preventing employees from working elsewhere during the employment term are enforceable, since they promote exclusivity of service and are not oppressive per se. Applying these precedents, the SC held that Clause 11(k), which mandated a three-year minimum service period or liquidated damages, was a valid, enforceable covenant operative during employment. It did not prevent the employee from future employment but merely required reimbursement of costs if the agreed term was not fulfilled.

On the second issue of public policy, the SC examined the doctrine through the lens of Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly[4], which emphasized that standard form contracts, especially those involving unequal bargaining power, must be scrutinized for fairness and reasonableness. The SC acknowledged the Employee’s argument that the clause was part of a standard form contract and potentially oppressive. However, the SC distinguished that case from the present case on two critical grounds:

  1. The clause in question did not unilaterally harm the Employee. It merely compensated the bank for premature attrition.
  2. The ₹2 lakh amount was not arbitrary or punitive; it reflected tangible losses such as recruitment and training costs, disruption in operations, and administrative restructuring.

The SC also considered the evolving nature of public policy, citing Golikari[5]again to highlight what constitutes public interest changes with time and context. It recognized that in a liberalized economy, public sector undertakings must compete with private players and thus require mechanisms like minimum service bonds to retain skilled personnel. The imposition of ₹2 lakhs as liquidated damages was deemed proportionate and not punitive, especially in light of the costs associated with recruitment and training. The SC also recognized that after India’s liberalization era (post-1990s), public sector banks faced private sector competition and needed to retain skilled manpower. The restrictive clause was seen as a reasonable tool to curb attrition and ensure stability and efficiency. Finally, the Court distinguished the High Court’s reliance on K.Y. Venkatesh Kumar v. BEML Ltd., noting that the facts in that case involved a broader restriction on future employability, which was not the case in the present matter.

Ruling of the Hon’ble SC

The Supreme Court allowed the appeal, set aside the High Court’s order, and upheld the enforceability of Clause 11(k). It ruled that:

The clause did not violate Section 27 as it operated during the term of employment.

  1. It was not opposed to public policy under Section 23, as it was neither unconscionable nor punitive.
  2. The clause served a legitimate commercial interest of the employer and was proportional to the costs incurred.

In a related appeal, involving similar facts and the same clause, the Court dismissed the employee’s challenge, further consolidating its position.

Key Insights for Employers

  1. Employers can enforce service obligations provided the terms are fair, proportionate, and clearly defined.
  2. Training expenses, recruitment efforts, and business continuity concerns should be explicitly recorded and documented to justify the quantum of liquidated damages.
  3. Clauses that bar future employability are likely to be struck down. Restrictions should apply during the tenure and relate to the repayment of investment in the employee.

Authors:

Gyanendra Mishra, Partner

Mudrika Purohit, Associate

Disclaimer: The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

[1] Civil Appeal No. 11708 of 2016

[2] 1967 SCC OnLine SC 72

[3] (1981) 2 SCC 246

[4] (1986) 3 SCC 156

[5] 1967 SCC OnLine SC 72