Employment agreements in India have traditionally been perceived as non-negotiable, but courts are now increasingly placing an accent on fairness and proportion
The enforceability of employment bond clauses and restrictive covenants occupies a complex and evolving space within the country’s employment jurisprudence. At the heart of this legal complexity lies the challenge of balancing an employee’s personal rights – such as freedom of expression and professional mobility – with the employer’s legitimate business interests including business confidentiality, operational continuity, brand protection, risk mitigation and the recovery of training or recruitment costs.
While this balancing act may appear straightforward, judicial interpretations over time have shaped a nuanced and intricate legal framework. Courts have consistently sought to reconcile these competing interests, resulting in a jurisprudence that reflects both the dynamic nature of employment relationships and the broader socio-economic context in which they operate.
This article critically examines the jurisprudential evolution, highlighting the courts’ growing emphasis on proportionality and contractual fairness in the enforcement of employment bonds and restrictive covenants.
Recent cases
Ravi Singhania
Managing Partner
Singhania & Partners
Email: ravi@singhania.in
In a significant ruling in Vijaya Bank & Another v Prashant B Narnaware earlier this year, the Supreme Court upheld the validity of an employment bond, directing payment of liquidated damages for resignation within a fixed term.
The court held that such a clause did not amount to a restraint of trade under section 27 of the Indian Contract Act, 1872 (ICA), and that the stipulated sum was not penal in nature but a genuine pre-estimate of loss.
This decision signals a judicial shift toward a case-sensitive and commercial evaluation of employment bond clauses, moving away from an earlier trend to strike them down on rigid contractual grounds.
On the contrary, more recently this year Delhi High Court, in Varun Tyagi v Daffodil Software Pvt Ltd, reaffirmed the principle settled in Niranjan Shankar Golikari v Century Spinning & Manufacturing Co, that post-employment blanket restraints through restrictive covenants such as non-compete and non-solicitation clauses are void under section 27 of the ICA.
The court clarified that once the employment relationship ceases, no contractual restriction can legally curtail an employee’s right to seek livelihood, regardless of whether the restraint is partial or limited in scope.
While negative covenants may be enforced during the subsistence of employment, their operation beyond termination is impermissible unless tied to the protection of proprietary interests such as intellectual property or confidential client information.
In the absence of such proprietary interests, restrictive covenants cannot be sustained, as they place the employee in the untenable position of either working for the former employer or remaining idle.
Legal framework
Jivesh Chandrayan
Partner
Singhania & Partners
Email: jivesh@singhania.in
Employment bond clauses typically attract scrutiny under three key provisions of the ICA:
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- Section 27 voids agreements that restrain trade, which courts interpret broadly to strike down post-employment restrictions;
- Section 23 bars agreements opposed to public policy or based on an unlawful object; and
- Section 74 governs liquidated damages, allowing recovery only if the sum stipulated is compensatory rather than penal.
These statutory provisions are reinforced by article 19(1)(g) of the Constitution of India, which guarantees the right to practise any profession or carry on any occupation, trade or business.
Evolving proportionality
The judicial approach to employment restraints has steadily evolved from a rigid rejection of post-employment restrictions to a more nuanced, case-based framework.
Early precedents established a clear distinction between negative covenants operative during the term of employment – which could be enforced – and those extending beyond termination, which were generally struck down as void restraints on trade under section 27 of the ICA.
Courts underscored the importance of fairness in standard-form employment contracts, particularly where unequal bargaining power left employees with little room for negotiation.
With the advent of economic liberalisation, however, the judiciary began to recognise that certain industries involve substantial investment in employee training and skill development. This recognition requires a more measured assessment of contractual restraints, with courts emphasising that while employers may legitimately seek to recoup such investments, they cannot do so by imposing unreasonable curbs on an employee’s fundamental right to pursue employment in the industry of their choice.
Over time, this doctrinal shift translated into closer scrutiny of financial employment bonds. Courts began to uphold such clauses where the stipulated consequences reflected a fair, genuine pre-estimate of the employer’s training or recruitment costs, while striking down amounts deemed excessive, punitive or disproportionate.
Neha Meena
Senior Associate
Singhania & Partners
Email: neha@singhania.in
In practice, this resulted in a granular application of section 74 of the ICA, with judges reducing or partially enforcing bond claims to the extent they represented actual loss, while disallowing the remainder as penal.
This trajectory culminated in the Supreme Court’s recent clarification in Vijaya Bank, distinguishing between absolute restraints on post-employment mobility, which remain void, and financial deterrents tied to genuine business costs, which may be upheld.
The court emphasised that such contractual stipulations – when voluntary, proportionate and not unconscionable – serve legitimate commercial objectives and do not offend constitutional guarantees or statutory protections.
By adopting this proportionality-based lens, the court signalled a departure from the earlier presumption of invalidity towards a fact-specific inquiry. This aligns Indian jurisprudence more closely with global standards that balance employee mobility with the protection of legitimate employer interests.
Courts have also acknowledged the inherent difficulty in quantifying losses in sectors such as aviation, where premature attrition could significantly disrupt operations, and therefore held pre-determined compensation to be reasonable under section 74 of the ICA.
Another dimension has emerged in sectors critical to public interest, where contractual enforcement intersected with regulatory vigilance. Ongoing disputes arising from resignations of pilots without serving their six-month notice period, for instance, highlight the tension between private contractual freedom and the imperative of workforce stability in essential services.
Delhi High Court’s ruling in this context is expected to clarify whether extended notice periods can be upheld in public interest, and whether sectoral regulators like the Directorate General of Civil Aviation (DGCA) can play a role in ensuring service continuity, thereby shaping future contractual practices in sectors where workforce stability is critical.
Alternative dispute resolution
Building on the trend of proportionality for enforcement, private sector employers have increasingly turned to arbitration to secure compensatory outcomes for breaches of restrictive covenants under employment obligations. In Wipro Limited v Jatin Pravinchandra Dalal (2024), the enforcement of a non-compete clause against a former CFO who joined a rival within a restricted period prompted a high-stakes arbitration under section 8 of the Arbitration and Conciliation Act, 1996, which ultimately concluded in a negotiated settlement without admission of liability.
This matter underscores the growing tendency among employers to rely on proportionality for enforcing restrictive covenants in employment contracts through alternative dispute resolution mechanisms. Read together with the Vijaya Bank ruling, this reflects a broader judicial and commercial convergence toward proportionality as the guiding principle in enforcement of employment bond and restrictive covenants.
Key takeaways
The legal trajectory from Niranjan Shankar Golikari to Vijaya Bank charts a course towards a more nuanced, commercially attuned approach to enforcing employment obligations. Courts may be willing to move beyond a rigid reading of section 27, focusing instead on whether a clause protects legitimate business interests, is voluntarily accepted, and meets the proportionality standard.
By recognising conditional deterrents as valid when reasonably structured and supported by demonstrable costs, the Supreme Court has reshaped the public policy lens in employment law, especially for sectors marked by high specialisation and mobility – such as aviation, IT and banking – setting clear enforceability thresholds grounded in proportionality, reasonableness, commercial logic and constitutional values.
For foreign controlled/owned companies in India, this jurisprudential trajectory signals a valuable opportunity. Carefully structured restraint mechanisms through bonds and restrictive covenants, if rooted in demonstrable business needs, may stand a good chance of being enforced, allowing employers to protect investments in training, technology, confidentiality, brand value and market stability, while staying aligned with India’s evolving public policy standards.
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