Restrictive covenants in employment contracts requiring liquidated damages for premature resignation are enforceable and not inherently against public policy, provided they are reasonable and serve legitimate business interests.

JUDGMENT

Joymalya Bagchi, J.

CIVIL APPEAL NO.11708 of 2016

1. Appellants have challenged judgment and order dated 20.08.2014 passed by the High Court quashing clause 11(k) of the appointment letter whereby the respondent-employee [Hereinafter, respondent] was required to pay liquidated damages of Rs. 2 lakhs in the event of leaving employment of the first appellant-bank [Hereinafter, appellant-bank] prior to three years and consequentially the appellant-bank was directed to refund the said sum to the respondent.

2. In 1999, respondent had joined the appellant-bank as a Probationary Assistant Manager. His service was confirmed in 2001. Thereafter, he was promoted to Middle Management Scale-II. In 2006, appellant-bank issued a recruitment notification for appointment of 349 officers in different grades. Clause 9 (w) of the recruitment notification reads as follows:-

“Selected candidates are required to execute an indemnity bond of Rs.2.00 Lakh (Rupees Two Lakh only) indemnifying that they will pay an amount of Rs.2.00 lakh to the Bank if they leave the service before completion of 3 years”

3. Cognizant of the said condition, respondent applied to the post of Senior Manager-Cost Accountant at basic pay of Rs.18,240/- and was selected for the said post.

4. On 07.08.2007, respondent was issued an appointment letter.

Clause 11(k) of the said letter reads as follows:-

“You are required to serve the Bank for a minimum period of 3 years from the date of joining the bank and should execute an indemnity bond for Rs.2.00 lakhs. The said amount has to be paid by you in case you resign from the services of the bank before completion of stipulated minimum period of 3 years. For this purpose, you have to bring a blank non-judicial stamp paper of Rs.100/- procured in the State of your posting.”

5. Accepting the aforesaid condition, respondent voluntarily resigned from his erstwhile post i.e. Manager, MMG-II and joined the post of Senior Manager, MMG-III on 28.09.2007. Respondent also executed an indemnity bond in terms of the aforesaid clause.

6. On 17.07.2009 i.e. before completion of three years from his date of joining, respondent tendered resignation for joining another Bank, namely, IDBI. His resignation was accepted and on 16.10.2009 respondent under protest in terms of the aforesaid condition paid the sum of Rs.2 lakhs to the appellant-bank.

7. Thereafter, respondent filed a writ petition before the High Court praying for quashing of clause 9 (w) of the recruitment notification and clause 11 (k) of the appointment letter alleging the same were in violation of Articles 14 and 19(1)(g) of the Constitution of India and Sections 23 and 27 of the Indian CONTRACT ACT , 1872.

8. Appellant-bank opposed the prayer. Learned Single Judge relied on the decision of a Division Bench of the High Court in K.Y Venkatesh Kumar v. BEML Ltd.³ [Karnataka HC DB in W.A. No. 2736/2009 disposed on 09.12.2009] and allowed the writ petition. The order came to be upheld by the Division Bench.

9. Heard Mr. Rajesh Kr. Gautam, learned counsel for the appellants and Mr. Rahul Chitnis, learned counsel for the respondent.

10. The issue which falls for decision is whether clause 11 (k) of the appointment letter amounts to :-

(i) restraint of trade under Section 27 of the Contract Act and/or

(ii) opposed to public policy and thereby contrary to Section 23 of the CONTRACT ACT and violative of Ar