Supreme Court Clarifies Legality of Employment Bonds: Vijaya Bank & Anr. v. Prashant B Narnaware
The Supreme Court of India, in the case of Vijaya Bank & Anr. v. Prashant B Narnaware (Civil Appeal No. 11708 of 2016, judgment dated 14 May 2025), addressed the enforceability of an employment bond that required an employee to pay liquidated damages if they resigned before completing a stipulated minimum service period. The respondent, who initially joined Vijaya Bank as a Probationary Assistant Manager in 1999 and was later promoted, applied for and was appointed to the post of Senior Manager—Cost Accountant in 2007. The appointment was subject to a condition, as stated in Clause 11(k) of the appointment letter, that mandated a minimum service of three years, failing which the employee was required to pay an indemnity of ₹2 lakhs. The respondent accepted the condition, executed the required bond, and joined the new post. However, before completing three years, he resigned to join another bank and, under protest, paid the stipulated amount to Vijaya Bank.
Subsequently, the respondent challenged the validity of the bond before the High Court, alleging that it violated Articles 14 and 19(1)(g) of the Constitution of India and Sections 23 and 27 of the Indian Contract Act, 1872. The High Court, relying on previous decisions, quashed the bond clause and directed the bank to refund the amount. Vijaya Bank appealed to the Supreme Court, raising the central issue of whether Clause 11(k) amounted to a restraint of trade under Section 27 of the Contract Act, was opposed to public policy under Section 23, and whether it violated constitutional rights.
The Supreme Court examined the legal framework regarding restrictive covenants in employment contracts. It referred to established precedents, including Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. (1967 SCC OnLine SC 72) and Superintendence Company (P) Ltd. v. Krishan Murgai ((1981) 2 SCC 246), which clarified that negative covenants operative during the period of employment are not considered restraints of trade under Section 27, unless they are unconscionable, excessively harsh, or one-sided. The Court emphasized that such covenants are generally enforceable as they further the employment contract rather than restrain future employment. The Supreme Court also addressed the argument that the bond was part of a standard form contract imposed through unequal bargaining power, referencing Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly ((1986) 3 SCC 156), which held that unconscionable, unfair, or unreasonable contractual terms in standard form contracts are void if opposed to public policy.
The Court summarized the legal principles regarding standard form employment contracts, noting that they prima facie evidence unequal bargaining power, and that the onus to prove the reasonableness of restrictive covenants lies on the employer. The Court further elaborated on the concept of public policy, observing that it is an evolving standard linked to public good and interest, and that what is considered just, fair, and reasonable may change over time. In the context of the present case, the Court found that the restriction imposed by Clause 11(k) was not in restraint of trade, as it operated during the employment period and was intended to further the employment relationship. The clause was not found to be opposed to public policy, given the modest sum involved and the legitimate objective of retaining skilled personnel.
Consequently, the Supreme Court allowed the appeal, set aside the High Court’s order, and upheld the validity of the employment bond. The judgment clarifies that while restrictive covenants in employment contracts are subject to scrutiny for reasonableness and fairness, not all such clauses are void, and their enforceability depends on the specific context and terms involved. The decision reiterates that the enforceability of employment bonds must be assessed on a case-by-case basis, considering the nature of the restriction, the context of the employment, and the proportionality of the conditions imposed.
Author: Abhishek Jat, Advocate
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