1. Factual Background and Procedural History
The present civil appeals arose from a challenge to Clause 11(k) of an appointment letter issued by Vijaya Bank (the appellant) to its employee, Prashant B. Narnaware (the respondent). The clause required the employee to serve a minimum term of three years and execute an indemnity bond of ₹2,00,000, payable as liquidated damages if he resigned before completing the stipulated term.
The respondent, initially employed as a Probationary Assistant Manager in 1999, was confirmed in 2001 and promoted to Middle Management Scale-II. In 2006, the bank issued a recruitment notification for 349 officers, explicitly mentioning the indemnity condition. The respondent applied for and was appointed as a Senior Manager (Cost Accountant) in 2007, after voluntarily resigning from his previous post and executing the indemnity bond.
Before completing three years, the respondent resigned in July 2009 to join IDBI Bank. The appellant accepted his resignation but demanded ₹2 lakhs under Clause 11(k), which he paid under protest.
Subsequently, the respondent filed a writ petition before the High Court, challenging Clause 11(k) as violative of Articles 14 and 19(1)(g) of the Constitution and Sections 23 and 27 of the Indian Contract Act, 1872. The Single Judge quashed the clause, following K.Y. Venkatesh Kumar v. BEML Ltd. (Karnataka HC, 2009). The Division Bench affirmed the decision.
Aggrieved, the bank approached the Supreme Court. The matter was heard by a Bench comprising Joymalya Bagchi and Pamidighantam Sri Narasimha, JJ., which delivered its judgment on 14 May 2025.
2. Identification of Legal Issues
The Supreme Court addressed two key legal questions:
- Whether Clause 11(k) of the appointment letter, requiring a three-year minimum service and indemnity bond, constituted a restraint of trade under Section 27 of the Indian Contract Act, 1872.
- Whether such a clause was opposed to public policy under Section 23 of the Indian Contract Act and violative of Articles 14 and 19(1)(g) of the Constitution.
3. Arguments of the Parties
Appellants (Vijaya Bank & Anr.)
- The clause served a legitimate business purpose, ensuring employee retention and reducing attrition costs in the context of liberalized banking competition.
- The requirement of liquidated damages was a reasonable safeguard to recover costs arising from frequent recruitments and training.
- The clause did not prevent the employee from future employment, but only enforced a contractual obligation voluntarily accepted.
- Hence, the restriction was not a restraint of trade under Section 27.
Respondent (Prashant B. Narnaware)
- The clause was unconstitutional, violating Articles 14 and 19(1)(g), and void under Sections 23 and 27.
- It was part of a standard form contract imposed through unequal bargaining power, compelling the employee to “sign on the dotted line.”
- The demand for ₹2 lakhs as liquidated damages was disproportionate, unconscionable, and contrary to public policy.
- The High Court rightly quashed the clause relying on K.Y. Venkatesh Kumar v. BEML Ltd.
4. Court’s Analysis and Reasoning
(a) On Restraint of Trade – Section 27 of the Contract Act
The Court reiterated the well-settled principle from Niranjan Shankar Golikari v. Century Spinning (1967) and Superintendence Co. (P) Ltd. v. Krishan Murgai (1981):
“Restrictive covenants operative during the subsistence of an employment contract are not in restraint of trade.”
The Court distinguished between negative covenants that operate during employment (permissible) and those that operate post-termination (void).
Clause 11(k) imposed an obligation during the period of service, ensuring the employee remained with the bank for three years or paid a reasonable sum for early exit. Hence, it did not restrain trade and was outside the purview of Section 27.
(b) On Public Policy – Section 23 of the Contract Act
The respondent argued that the clause was unconscionable due to unequal bargaining power, relying on Central Inland Water Transport Corp. v. Brojo Nath Ganguly (1986). The Supreme Court, while acknowledging the principle, clarified that not every standard form contract is void merely because it limits employee autonomy.
The Court summarized guiding principles:
- Standard form contracts do reflect inequality, but they must be assessed in the factual and industrial context.
- The onus lies on the employer to prove that the restrictive clause is reasonable and not contrary to public policy.
- Public policy is dynamic, evolving with economic realities and social welfare needs.
(c) Application to the Present Case
The Court noted that the post-liberalization banking environment required public sector undertakings to compete with private entities. Retention of skilled managerial employees was crucial for operational efficiency.
Thus, requiring a minimum service period was a legitimate measure to balance institutional stability and employee mobility.
Regarding the ₹2 lakh liquidated damages, the Court found the sum reasonable and proportionate, considering:
- The training and recruitment costs borne by the bank.
- The constitutional obligation under Articles 14 and 16 to follow a fair, open recruitment process upon each resignation.
- The employee’s senior managerial position and salary, which made the penalty non-excessive.
Consequently, the clause was neither unconscionable nor unjust, and did not offend public policy.
(d) Distinguishing BEML Case
The Court observed that BEML Ltd. involved a dual restriction — minimum service tenure and a prohibition on future employment, making it a clear restraint on trade. In contrast, Vijaya Bank’s clause did not restrict future employability, merely imposed a condition for premature exit.
Hence, the High Court’s reliance on BEML was misplaced.
5. Final Conclusion and Holding
The Supreme Court allowed Vijaya Bank’s appeal, holding that:
- Clause 11(k) was valid and enforceable.
- It did not amount to restraint of trade under Section 27.
- It was not opposed to public policy under Section 23.
- The High Court’s orders quashing the clause were set aside.
In the connected appeal (Civil Appeal No. 11499 of 2016), the Court upheld the High Court’s decision since the facts differed slightly but did not warrant interference.
The ruling reinforces judicial recognition that reasonable employment bonds — aimed at ensuring commitment and protecting organizational investment — are legally permissible when proportionate and not exploitative.
FAQs:
1. Are employment bonds legal in India?
Yes. Employment bonds are valid if they are reasonable, proportionate, and designed to protect legitimate business interests, without restraining future employment opportunities.
2. Can an employee challenge a service bond in court?
Yes. A service bond can be challenged if it is unconscionable, coercive, or contrary to public policy, such as restricting future employment or imposing disproportionate penalties.
3. Does a minimum service period amount to restraint of trade?
No. As held in Vijaya Bank v. Prashant Narnaware (2025), a clause requiring minimum service or proportionate liquidated damages does not constitute restraint of trade under Section 27.
4. How does public policy affect employment contracts?
Contracts contrary to fairness, equality, or societal welfare may be void under Section 23 of the Indian Contract Act. However, reasonable terms ensuring efficiency or stability are consistent with public policy.
5. What factors determine if a liquidated damages clause is enforceable?
Courts assess whether the sum is reasonable, compensatory, and not punitive, considering the cost of training, recruitment, and loss caused by premature resignation.
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