In the current business environment, where talent mobility has become the hallmark of modern employment relationships, a question that often arises is how courts should strike a balance between the legitimate interests of employers in retaining skilled personnel on one hand, and employees’ fundamental rights to pursue their chosen trade, business or profession on the other. In Vijaya Bank v Prashant B Narnaware (2025), the Supreme Court of India was most recently faced with this question.
Factual matrix
Rachit Bahl
Senior Partner
AZB & Partners
Delhi
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The employee, Prashant B Narnaware, joined Vijaya Bank in 1999 and applied for a new senior position within the same organisation in 2006. The advertisement for this new position had an explicit condition that selected candidates would execute an indemnity bond of INR200,000 (USD2,268), payable if they left the employment of the bank before completing three years.
Cognisant of this condition, the employee applied for and secured the said senior position, and accepted an appointment letter containing a clause that mandated such minimum service tenure of three years and execution of an indemnity bond for the aforesaid sum.
He joined the position in September 2007, and executed the required bond pursuant to the employment bond clause. However, he resigned in July 2009 – before completing the stipulated minimum service tenure of three years – to join another bank, and paid the bank INR200,000 as per the employment bond clause, albeit under protest.
The employee subsequently filed a writ petition before the Karnataka High Court, challenging the employment bond clause as violative of articles 14 and 19(1)(g) of the Constitution of India, 1950 (Constitution) and sections 23 and 27 of the Indian Contract Act, 1872 (ICA). The court ruled in the employee’s favour and directed the bank to return the bond amount paid by the employee under protest. The bank appealed this decision before the SC.
Issues considered by SC
In view of the facts of the case, the key issues that arose before the SC were whether the employment bond clause:
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- Was an agreement in restraint of trade under section 27 of the ICA (which renders void every agreement restraining a person from exercising a lawful profession, trade or business); and/or
- Was opposed to public policy (since it was a standard form contract in which the respondent had no bargaining position), and hence violative of section 23 of the ICA, and articles 14 and 19 of the Constitution.
The decision
Jatinder Singh Saluja
Partner
AZB & Partners
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The SC upheld the validity of the employment bond clause and reversed the High Court’s decision. More specifically, on each of the issues, the SC’s findings were as follows.
On restraint of trade, the SC’s analysis began with section 27 of the ICA. Relying on its earlier judgments, including the landmark judgment of Niranjan Shankar Golikari v Century Spinning and Manufacturing Co (1967), the SC held that:
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- Restrictive covenants operative during the term of employment do not constitute an agreement in restraint of trade;
- The employment bond clause sought to restrict the employee’s option to resign and so perpetuated the employment contract for a specified term; and
- The objective of the employment bond clause was not to restrain future employment, and hence it cannot be said to be violative of section 27 of the ICA.
On the issue of public policy, the SC held that:
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- The employment bond clause cannot be said to be unconscionable, unfair or unreasonable since it was incorporated by the bank to reduce attrition and improve efficiency, and was therefore not opposed to public policy;
- The INR200,000 liquidated damages amount was not disproportionate and did not cause unjust enrichment of the bank, considering an ultimely resignation would cause the bank financial hardship as it 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”; and
- The employment bond clause was therefore not unconscionable or opposed to public policy.
In conclusion, the SC ultimately held that the employment bond clause neither amounts to a restraint of trade nor is against public policy.
Key considerations
Bhagwati Tiwari
Associate
AZB & Partners
Delhi
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It is pertinent to note that the Supreme Court took cognisance of certain critical industry-wide considerations while coming to its conclusions.
First, by distinguishing between covenants that operate during the subsistence of employment and those that restrain future employment opportunities, the SC has re-emphasised the need for accommodating legitimate employer interests while preserving employee mobility rights, which have predominantly guided courts in India thus far.
Second, the SC’s public policy analysis proved more complex and revealing of contemporary employment law tensions. Responding to arguments that the employment bond clause constituted an unconscionable standard form contract imposed through unequal bargaining power that resulted in unjust enrichment, the court engaged with fundamental questions about contractual fairness in employment relationships.
Third, and perhaps most significantly, the SC’s analysis extended to contemporary economic realities faced by employers today, particularly by public sector undertakings in India. In this regard, the court noted that “technological advancements impacting nature and character of work, re-skilling and preservation of scarce specialised workforce in a free market are emerging heads in the public policy domain”, and that since liberalisation, “public sector undertakings like the appellant bank needed to compete with efficient private players”. This analysis demonstrates judicial recognition of the unique constraints within which public sector employers operate.
This recognition led the SC to con-clude that incorporation of a minimum service tenure “to reduce attrition and improve efficiency” was reasonable in
the circumstances.
The SC’s treatment of the INR200,000 indemnity bond quantum reveals a sophisticated analysis of liquidated damages principles in the employment context. The court not only considered the bank’s pleadings regarding financial hardship and administrative efforts expended due to premature and untimely resignations, but also that the employee held a senior middle managerial grade with a lucrative pay package, while concluding that the amount was justifiable.
Going forward
While this judgment was rendered based on a pragmatic view taken by the SC, in context of a public sector bank, it is likely to have far-reaching implications not only for public sector employers but also for the private sector.
The judgment may even provide a legal basis for private sector employers to now amend their employment agreements and recruitment notices to include similar restrictions. For any such clause to be enforceable, it is imperative that the nexus between the employee’s early resignation and the liquidated damages sought to be imposed for such exit is sufficiently established, as this formed the basis for the SC’s decision in this case.
Such clauses should also not restrict the future employability of the employee or impose an unreasonable penalty or duration of restriction.
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