The Supreme Court of India has upheld the validity of an employment bond clause, allowing a Public Sector Bank (Vijaya Bank) to recover ₹2 lakhs from an employee who resigned before completing the mandatory three-year service period.
The Supreme Court ruled that employment bonds with a minimum service period are legally valid and do not violate Section 27 of the Indian Contract Act, which prohibits agreements in restraint of trade. The Court emphasized that such clauses are enforceable as they apply during the term of employment rather than after termination, making them distinct from restrictive trade agreements.
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The Court highlighted the importance of retaining experienced employees in public sector undertakings to maintain operational efficiency. It noted that since the era of liberalization, public sector organizations like Vijaya Bank have faced competition from private players, making employee retention crucial.
"Since the last decade of 20th century, India witnessed an era of liberalization... Public sector undertakings like the appellant-bank needed to compete with efficient private players... Ensuring retention of an efficient and experienced staff... was one of the tools inalienable to the interest of such undertakings," the Court stated.
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Case Background
The case involved an employee of Vijaya Bank who joined as a Senior Manager (Cost Accountant) under a recruitment condition requiring a ₹2 lakh bond if they resigned before three years. The employee resigned before the completion of this period to join IDBI Bank, paid ₹2 lakhs under protest, and challenged the clause in court.
Initially, the Karnataka High Court ruled the bond clause as a "restraint of trade" under Section 27 of the Contract Act, but this decision was overturned by the Supreme Court.
The Supreme Court bench, including Justice PS Narasimha and Justice Joymalya Bagchi, stated that the exclusivity clause was reasonable and not unconscionable. It clarified that the clause did not prevent the employee from seeking future employment but merely imposed a financial condition for early resignation.
"A plain reading of clause 11(k) shows restraint was imposed on the respondent to work for a minimum term... in default to pay liquidated damages of Rs. 2 Lakhs... The object of the restrictive covenant was in furtherance of the employment contract and not to restrain future employment," the Court held.
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The Court further highlighted that premature resignations force public sector banks to incur high recruitment costs, making it essential to ensure employee retention through such clauses.
Upholding the employment bond, the Supreme Court allowed Vijaya Bank's appeal, confirming the legality of the ₹2 lakh penalty for the employee's premature resignation.
Case Title: Vijaya Bank & Anr. VERSUS Prashant B Narnaware
Appearances:
For Appellant(s) :Mr. S.R.Singh, Sr. Adv. Ms. Asha Gopalan Nair, AOR Mr. Sushant Kumar Yadav, Adv. Mr. Prateek Yadav, Adv. Mr. Gaurav Lomes, Adv. Mr. Shashikant Pralhad Chaudhari, Adv. Mr. Rajesh Kr. Gautam, Adv. Mr. Likivi K Jakhalu, Adv. Mr. Deepanjal Choudhary, Adv. Mr. M/S. Mitter & Mitter Co., AOR
For Respondent(s) :Mr. Rahul Chitnis, Adv. Mr. Hersh Desai, Adv. Ms. Shwetal, Adv. Mr. Aditya Khanna, Adv. Mr. Chander Shekhar Ashri, AOR Mr. Rajesh Kr. Gautam, Adv. Mr. Likivi K Jakhalu, Adv. Mr. Deepanjal Choudhary, Adv. M/S. Mitter & Mitter Co., AOR Mr. Sanjay Kapur, AOR Ms. Divya Singh Pundir, Adv. Mr. Arjun Bhatia, Adv. Ms. Shubhra Kapur, Adv. Ms. Mansi Kapur, Adv.
