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In Vijaya Bank and Another vs Prashant B Narnaware[1] a division bench of the Hon’ble Supreme Court of India has upheld the validity of a clause in an appointment letter requiring an employee to pay Rupees Two Lakh (INR 2,00,000/-) as liquidated damages if he resigned before completing three (3) years of service.
The Court held that the clause did not amount to restraint of trade under Section 27 of the Indian Contract Act, 1872 (the “Contract Act”), nor was it opposed to public policy under Section 23 of the Contract Act. The Hon’ble Supreme Court overturned the Hon’ble Karnataka High Court’s decision which had quashed the clause and directed the bank to refund the amount to the respondent-employee.
Background
In 2007, Vijaya Bank (now part of Bank of Baroda) issued a recruitment notification for managerial posts which required selected candidates to sign an indemnity bond agreeing to serve the bank for a minimum of three (3) years, failing which they would be required to pay Rupees Two Lakh (INR 2,00,000/-) as liquidated damages. The respondent, then already working as a Manager (MMG-II) in the same bank, applied for and was selected to the post of Senior Manager (MMG-III). He accepted the terms, resigned from his previous role, signed the indemnity bond, and joined the new post.
However, before completing the stipulated three (3) year period, he tendered resignation to join another bank. The resignation was accepted, but the respondent paid Rupees Two Lakh (INR 2,00,000/-) under protest. Subsequently, he approached the Hon’ble Karnataka High Court, challenging clause 11(k) of the appointment letter as unconstitutional and violative of the Contract Act. The Hon’ble High Court ruled in his favour, relying on a Division Bench decision of the Hon’ble Karnataka High Court in K.Y. Venkatesh Kumar v. BEML Ltd.[2] (the “BEML Case”), and directed the bank to refund the amount. Aggrieved by the decision of the Hon’ble Karnataka High Court, Vijaya Bank appealed the order before the Hon’ble Supreme Court.
Issues Before the Supreme Court
The Supreme Court was called upon to determine:
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- Whether clause 11(k), requiring a minimum service period or payment of Rupees Two Lakh (INR 2,00,000/-), constituted a restraint of trade under Section 27 of the Contract Act;
- Whether such a clause was unconscionable or opposed to public policy under Section 23 of the Contract Act; and
- Whether such a clause is violative of Articles 14 and 19 of the Indian Constitution.
Restraint of Trade
The Hon’ble Supreme Court categorically held that the clause did not restrain trade or employment. Citing Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co[3]. and Superintendence Co. v. Krishan Murgai[4], the Hon’ble Supreme Court reiterated that negative covenants operating during the term of employment are not hit by Section 27 of the Contract Act. The Hon’ble Supreme Court held that a clause stipulating continued employment or payment of damages in case of breach is not a restriction on future employment, but a mechanism to ensure contractual compliance during the employment term. Accordingly, clause 11(k) was held to be a reasonable contractual safeguard, not a restraint on trade.
Public Policy and Unequal Bargaining Power
The respondent contended that clause 11(k) was part of a standard form contract and imposed under conditions of unequal bargaining power. He argued that he had no meaningful choice but to accept the term, which was unreasonable and contrary to public policy.
The Hon’ble Supreme Court, however, took a nuanced view. Referring to Central Inland Water Transport Corp. v. Brojo Nath Ganguly[5], it acknowledged that standard form contracts entered under conditions of unequal bargaining power may be struck down if unconscionable. Nonetheless, it stressed that not every such clause would be invalid.
In the present case, the Court held that the clause in question was not arbitrary, oppressive, or harsh. The obligation to serve for three (3) years or pay Rupees Two Lakh (INR 2,00,000/-) was disclosed upfront and voluntarily accepted by the respondent. Furthermore, the clause did not bar the employee from resigning entirely but only imposed a pre-agreed consequence for doing so prematurely.
Rationale and Policy Considerations
The Hon’ble Supreme Court recognised the rationale behind such clauses. In a liberalised and competitive banking environment, public sector banks like Vijaya Bank face challenges in talent retention. Recruitment involves substantial investment of time and money. Premature resignations impose both financial burdens and operational disruptions. The Hon’ble Supreme Court accepted the bank’s submission that the Rupees Two Lakh (INR 2,00,000/-) bond was a necessary deterrent against attrition and a safeguard to ensure return on investment in recruitment and training. It found the amount reasonable, especially considering the managerial rank and salary of the employee.
Rejecting the High Court’s Reasoning
The Hon’ble Karnataka High Court had relied on the BEML Case to hold the clause unenforceable. The Hon’ble Supreme Court distinguished the BEML Case precedent, noting that in the BEML Case, the clause imposed a restriction not just on duration of service but also on future employability. In contrast, clause 11(k) did not bar future employment and merely set conditions for early resignation.
Further, the Hon’ble Karnataka High Court had failed to consider the financial implications and administrative costs incurred by the bank due to attrition. The Hon’ble Supreme Court emphasised that contractual clauses must be analysed in their specific factual and economic contexts, and blanket reliance on prior cases without such analysis was inappropriate.
Analysis
The judgment marks a significant reaffirmation of employers’ rights to include reasonable restrictions in employment contracts, particularly in sectors where attrition has substantial costs. By upholding a clause that links early resignation to liquidated damages, the Hon’ble Supreme Court has clarified that such clauses are not per se illegal or unconstitutional but must be evaluated in terms of reasonability and taking into account the surrounding circumstances.
The ruling also rebalances the discussion on unequal bargaining power. While reiterating that unconscionable terms in standard form contracts are not enforceable, the Hon’ble Supreme Court indicated that not all standardised employment conditions are automatically unfair. It placed the burden on the employer to justify such terms, which Vijaya Bank successfully did in this case. The Hon’ble Supreme Court acknowledged that modern economic conditions necessitate contractual terms that might have once been viewed as restrictive but are now reasonable and necessary.
Conclusion
This judgment is likely to have far-reaching implications for employers, particularly in the public sector. It gives legal backing to employment bonds and service tenure clauses, provided they are reasonable, disclosed in advance, and proportionate in consequence.
Employers would, however, be well advised to continue ensuring transparency, fairness, and proportionality in such contractual terms. Employees, on the other hand, must be mindful of the binding nature of terms they voluntarily accept at the time of joining.
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- Siddhartha George, Partner: [email protected]
- Bilal Lateefi, Principal Associate: [email protected]
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[1] 2025 SCC OnLine SC 1107.
[2] Karnataka HC DB in W.A. No. 2736/2009 disposed on 09.12.2009.
[3] 1967 SCC OnLine SC 72.
[4] (1981) 2 SCC 246.
[5] (1986) 3 SCC 156.