Whether the employment contract clause stipulating the employee to work for a minimum term and in default to pay liquidated damage is violative of Section 27 of the Contract Act ?. ‘Not so’ as the Supreme Court held in Vijaya Bank & Anr V/s Prashant B Narnaware (Civil Appeal No.11708 of 2016) (2025 INSC 691) (May 14, 2025)
Facts of the Case
Prashant B Narnaware had joined the Vijaya Bank in 1999, as a Probationary Assistant Manager. His service was confirmed in 2001. Thereafter, he was promoted to Middle Management Scale-II.
In 2006, the bank issued a recruitment notification for appointment of 349 officers in different grades.
Clause 9 (w) of the recruitment notification reads as : “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”.
Cognizant of the said condition, respondent applied and was selected.
On 07.08.2007, respondent was issued an appointment letter, inter alia , with the following clause:
“11 (k): 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.” [ hereinafter referred as ‘clause 11 (k)]
Prashant B Narnaware accepted the aforesaid condition and joined the new posting.
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.
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.
Learned Single Judge relied on the decision of a Division Bench of the High Court in K.Y Venkatesh Kumar v. BEML Ltd (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.
Accordingly, this civil appeal before Supreme Court
Issues before the Supreme Court
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
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.
In the light of the decisions in (i) Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co 1967 SCC OnLine SC 72 and (ii) Superintendence Company (P) Ltd. v. Krishan Murgai (1981) 2 SCC 246, the Supreme Court concluded that a restrictive covenant operating during the subsistence of an employment contract does not put a clog on the freedom of a contracting party to trade or employment.
The clause 11 (k) was imposed on the respondent to work for a minimum term i.e. three years and in default to pay liquidated damages of Rs. 2 Lakhs. The clause sought to impose a restriction on the respondent’s option to resign and thereby perpetuated the employment contract for a specified term. The object of the restrictive covenant was in furtherance of the employment contract and not to restrain future employment. Hence, it cannot be said to be violative of Section 27 of the Contract Act.
Opposed to Public Policy
The argument of Prashant B Narnaware was that the clause is part of a standard form contract and his client was compelled to sign on dotted lines. If he did not do so, he would have to forsake career advancement. The terms of the contract were imposed on him through an unequal bargaining mechanism. Clause 11 (k) being an unreasonable, onerous and ex-proportionate measure resulting in unjust enrichment for the appellant-bank is opposed to public policy. At the time of his resignation respondent was compelled to comply with the illegal condition and had done so under protest. In these circumstances, he cannot be precluded from challenging the condition as violative of fundamental rights and public policy.
Referring (i) Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly (1986) 3 SCC 156 and (ii) Superintendence Company (P) Ltd. v. Krishan Murgai (1981) 2 SCC 246 the Supreme Court Observed:
- Standard form employment contracts prima facie evidence unequal bargaining power;
- Whenever the weaker party to such a contract pleads undue influence/coercion or alleges that the contract or any term thereof is opposed to public policy, the Court shall examine such plea keeping in mind the unequal status of the parties and the context in which the contractual obligations were created and
- The onus to prove that a restrictive covenant in an employment contract is not in restraint of lawful employment or is not opposed to public policy, is on the covenantee i.e. the employer and not on the employee.
Coming to public policy the Supreme Court observed :
‘Generally speaking, public policy relates to matters involving public good and public interest. What is ‘just, fair and reasonable’ in the eyes of society varies with time. Civilizational advancements, growth of knowledge and evolving standards of human rights and dignity alter the contours of public good and policy.’
‘From the prism of employer-employee relationship, technological advancements impacting nature and character of work, re-skilling and preservation of scarce specialized workforce in a free market are emerging heads in the public policy domain which need to be factored when terms of an employment contract is tested on the anvil of public policy’.
‘…the last decade of 20th century, India witnessed an era of liberalization. Golden days of monopolistic public sector behemoths were gone. Public sector undertakings like the appellant-bank needed to compete with efficient private players operating in the same field. To survive in an atmosphere of deregulated free-market, public sector undertakings were required to review and reset policies which increased efficiency and rationalized administrative overheads. Ensuring retention of an efficient and experienced staff contributing to managerial skills was one of the tools inalienable to the interest of such undertakings including the appellant-bank’.
‘This prompted the appellant-bank to incorporate a minimum service tenure for employees, to reduce attrition and improve efficiency. Viewed from this perspective, the restrictive covenant
prescribing a minimum term cannot be said to be unconscionable, unfair or unreasonable and thereby in contravention of public policy.
On liquidated damages
The other aspect involves imposition of liquidated damages to the tune of Rs.2 Lakhs in the event of pre-mature resignation. The stance of the appellant-bank is neither unjust nor unreasonable. The appellant-bank is a public sector undertaking and cannot resort to private or ad-hoc appointments through private contracts. An untimely resignation would require the Bank to undertake a prolix and expensive recruitment process involving open advertisement, fair competitive procedure lest the appointment falls foul of the constitutional mandate under Articles 14 and 16. Keeping these exigencies in mind, the appellant-bank had incorporated the liquidated damage clause in the appointment contract.
Respondent was serving in a senior middle managerial grade having a lucrative pay package. Judged from that perspective, the quantum of liquidated damages was not so high as to render the possibility of resignation illusory.
Use of earlier judgments
The Supreme Court reminded: ‘..trite judgments cannot be read as statutes and have to be applied keeping in mind the factual matrix peculiar to each case’ (Haryana Financial Corporation v. Jagdamba Oil Mills (2002) 3 SCC 496).
Decision of the Supreme Court
In light of the aforesaid discussion, the Supreme Court held that the restrictive covenant in clause 11(k) of the appointment letter does not amount to restraint of trade nor is it opposed to public policy.