1. Employment contract — Minimum service tenure — Indemnity bond for liquidated damages — Resignation before completion of term — Challenge to validity of restrictive covenant. (Para 1 , 2 , 3 , 4 , 5 , 6 )
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2025 Supreme(SC) 831
SUPREME COURT OF INDIA
PAMIDIGHANTAM SRI NARASIMHA, JOYMALYA BAGCHI, JJ.
Vijaya Bank & Anr. – Appellant
Versus
Prashant B Narnaware – Respondent
Civil Appeal No. 11708 of 2016 With Civil Appeal No. 11499 of 2016
Decided On : 14-05-2025
Advocates appeared:
For the Appellant(s) : Mr. Rajesh Kumar Gautam, Adv. Mr. Likivi K Jakhalu, Adv. Mr. Deepanjal Choudhary, Adv. M/S. Mitter & Mitter Co., AOR Mr. S.R. Singh, Sr. Adv. Mr. Sushant Kumar Yadav, Adv. Mr. Prateek Yadav, Adv. Mr. Gaurav Lomes, Adv. Mr. Prithvi Yadav, Adv. Ms. Asha Gopalan Nair, AOR
For the Respondent(s): Mr. Rajesh Kumar Gautam, Adv. Mr. Likivi K Jakhalu, Adv. Mr. Deepanjal Choudhary, Adv. M/S. Mitter & Mitter Co., AOR Mr. Rahul Chitnis, Adv. Ms. Shwetal, Adv. Mr. Aditya Khanna, Adv. Mr. Chander Shekhar Ashri, AOR Mr. Sanjay Kapur, AOR Mr. Surya Prakash, Adv. Ms. Divya Singh Pundir, Adv. Mr. Devesh Dubey, Adv. Ms. Shubhra Kapur, Adv. Mr. Sanjiv Goel, Adv. Mr. Annu Mishra, Adv.
For the Appellant(s) : Mr. Rajesh Kumar Gautam, Adv. Mr. Likivi K Jakhalu, Adv. Mr. Deepanjal Choudhary, Adv. M/S. Mitter & Mitter Co., AOR Mr. S.R. Singh, Sr. Adv. Mr. Sushant Kumar Yadav, Adv. Mr. Prateek Yadav, Adv. Mr. Gaurav Lomes, Adv. Mr. Prithvi Yadav, Adv. Ms. Asha Gopalan Nair, AOR
For the Respondent(s): Mr. Rajesh Kumar Gautam, Adv. Mr. Likivi K Jakhalu, Adv. Mr. Deepanjal Choudhary, Adv. M/S. Mitter & Mitter Co., AOR Mr. Rahul Chitnis, Adv. Ms. Shwetal, Adv. Mr. Aditya Khanna, Adv. Mr. Chander Shekhar Ashri, AOR Mr. Sanjay Kapur, AOR Mr. Surya Prakash, Adv. Ms. Divya Singh Pundir, Adv. Mr. Devesh Dubey, Adv. Ms. Shubhra Kapur, Adv. Mr. Sanjiv Goel, Adv. Mr. Annu Mishra, Adv.
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.
Headnote:(A) Indian Contract Act, 1872 - Sections 23 and 27 - Restrictive covenants in employment contracts - Clause 11(k) imposing liquidated damages for premature resignation upheld, not considered as restraint of trade or opposed to public policy - Courts must examine employment covenants with attention to bargaining power and public interest. (Paras 10, 11, 15, 36)
(B) Public Policy and Employment Contracts - Standard form contracts requiring employees to execute indemnity bonds are not void; enforcement depends on their reasonableness and context; considerations of public good and employee rights are pivotal. (Paras 18, 19, 20)
Facts of the case:
The respondent joined the appellant-bank and accepted an appointment letter with a clause requiring payment of liquidated damages for premature resignation. He resigned early and later challenged the clause as unconstitutional and violative of contract law.
Findings of Court:
The court held that the contested clause was enforceable and not against public policy, recognizing the need for such terms within employment agreements to ensure stability in public sector undertakings.
Issues: The main issues were whether the liquidated damages clause constituted a restraint of trade and whether it violated public policy under the Indian Contract Act and the Constitution.
Ratio Decidendi: The court reasoned that clauses restraining employment during the subsistence of a contract are valid and necessary for the operational integrity of public sector banks, thus not oppressing the rights of the employee.
Result: Appeals allowed; the impugned judgment was set aside.
Legal Category Hierarchy
- contract law
- constitutional law
Table of Contents
2. Validity of minimum service clause — Restraint of trade under Section 27, Contract Act — Opposed to public policy under Section 23 — Violation of Articles 14 and 19, Constitution. (Para 7 , 18 )
3. Restrictive covenants during employment differ from post-termination restrictions — Standard form contracts scrutinized for unequal bargaining power — Retention of skilled staff in free market is public interest. (Para 11 , 12 , 13 , 14 , 15 , 17 , 19 , 20 , 21 , 22 , 23 , 24 , 25 , 26 , 27 , 28 , 29 , 30 , 31 , 33 , 34 )
4. Restrictive covenants operating during the subsistence of an employment contract are not restraint of trade under Section 27, provided they are not unconscionable or opposed to public policy. (Para 16 , 35 )
5. Appeal allowed — High Court order quashing the restrictive covenant set aside — Validity of the liquidated damages clause upheld. (Para 36 , 37 )
6. Does a negative covenant preventing an employee from leaving during the contract term constitute a restraint of trade under Section 27 of the Contract Act?
No. Negative covenants operative during the period of employment are generally not regarded as restraint of trade and are enforceable, unless the contract is unconscionable, excessively harsh, unreasonable, or one-sided. (Para 13 , 14 , 15 )
7. How are standard form employment contracts evaluated when there is unequal bargaining power between the employer and employee?
Such contracts are scrutinized for being unconscionable, unfair, or unreasonable. If they are injurious to public interest, they may be deemed void as opposed to public policy under Section 23 of the Contract Act. (Para 19 , 20 , 21 )
8. Is a clause requiring a minimum service tenure to reduce attrition and improve efficiency opposed to public policy?
No. In a deregulated free-market, ensuring the retention of efficient and experienced staff is a valid tool for public sector undertakings to increase efficiency and is not considered unconscionable or unreasonable. (Para 26 , 27 )
9. Are liquidated damages for premature resignation in a public sector employment contract considered unreasonable or unjust enrichment?
Not necessarily. Such damages are reasonable if they secure the employer's interests against the financial and administrative hardships of expensive and time-consuming recruitment processes required by constitutional mandates. (Para 28 , 29 , 30 , 31 )
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 Articles 14 and 19 of the Constitution.
RESTRAINT OF TRADE
11. Section 27 of the CONTRACT ACT provides every agreement which restrains a person from exercising a lawful profession, trade or business of any kind is to that extent void. A sole exception is carved out in the proviso with regard to sale of goodwill of a business, in which case the seller may be restrained from carrying on similar business within a reasonable local limit.
12. Though the CONTRACT ACT does not profess to be a complete code, Act is exhaustive with regard to the subject matter contained therein. That is to say, validity of a r
