Supreme Court Rules on Validity of Employment Bonds: Key Highlights in Vijaya Bank v. Prashant B Narnaware

 

I. What Happened?

The Supreme Court of India recently delivered a significant judgment regarding the enforceability of employment bonds. The matter arose when an employee of Vijaya Bank, Prashant B Narnaware, was required to pay Rs. 2 lakhs to the Bank after resigning before completing the stipulated three-year minimum service period, as per the terms of his appointment. The High Court had earlier invalidated this clause, but the Supreme Court reversed that decision, holding that such contractual provisions are not void for being in restraint of trade.

II. Background

Under Section 27 of the Indian Contract Act, 1872, any agreement that restrains a person from exercising a lawful profession, trade, or business is generally void, except in limited situations such as the sale of goodwill. The legal issue in this case was whether an employment bond, which requires an employee to serve a minimum period or pay liquidated damages if they resign early, violates this provision or is otherwise opposed to public policy.

Prashant B Narnaware had joined Vijaya Bank as a Senior Manager after accepting a condition in his appointment letter that required a three-year minimum service or payment of Rs. 2 lakhs as liquidated damages for early resignation. After resigning to join another bank before the completion of three years, he paid the amount under protest and challenged the validity of the clause in court.

III. Judgment/Decision Highlights

Key Observations:

• The Supreme Court clarified that restrictive covenants requiring a minimum service period or payment of damages for early exit, when applicable during the period of employment, do not amount to restraint of trade.
• The Court made a clear distinction between restrictions operative during employment (which are generally valid) and those extending beyond the employment period (which may be void if they restrain trade).
• The clause in question was found to be a condition in furtherance of the employment contract, not a prohibition on future employment, and was therefore not violative of Section 27.

Relevant Laws and Case Laws Discussed:

• Section 27 and Section 23 of the Indian Contract Act, 1872
• Articles 14 and 19(1)(g) of the Constitution of India

Precedents including:

• Niranjan Shankar Golikari v. Century Spinning & Manufacturing Co.
• Superintendence Company (P) Ltd. v. Krishan Murgai
• Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly

Bench:

Justice Joymalya Bagchi (authored the judgment)

IV. Legal Implications

• For Employers: The judgment affirms the enforceability of employment bonds that require a minimum service period or payment of reasonable damages for early resignation, so long as they do not restrict future employment after the contract ends.
• For Employees: Employees are bound by such clauses if they have voluntarily agreed to them, and cannot claim them as void unless the terms are unconscionable or excessively harsh.
• For Legal Practice: This decision provides clarity for similar disputes, establishing a precedent that such employment bonds are not inherently void under Indian law.

V. Author’s Commentary

This Supreme Court decision offers much-needed clarity on the legal standing of employment bonds in India. It strikes a balance between the employer’s legitimate interest in retaining talent and recovering costs, and the employee’s right to seek better opportunities. The distinction drawn between restrictions during and after employment is particularly significant, ensuring that only reasonable and proportionate restrictions are upheld.

Scope for Review/Appeal:

Given the comprehensive analysis and reliance on established precedents, the scope for further review is limited unless new legal questions emerge.

Written by Adv. Abhishek Jat, Gwalior High Court

Disclaimer:

This article is for informational purposes only and does not constitute legal advice. Readers should consult a qualified legal professional for specific guidance.