Supreme Court Validates Employment Bond: Vijaya Bank v. Prashant B. Narnaware

Introduction

In a landmark judgment dated 14 May 2025, the Supreme Court of India upheld the enforceability of a clause in an employment contract requiring an employee to either complete a minimum service period or pay a stipulated sum as liquidated damages upon premature resignation. This decision in Vijaya Bank & Anr. v. Prashant B. Narnaware clarifies the legal standing of employment bonds within the Indian contractual framework.

Case Background

Mr. Prashant B. Narnaware initially joined Vijaya Bank in 1999 and was promoted over time. In 2007, he applied for and was appointed as a Senior Manager, which necessitated signing an indemnity bond under Clause 11(k) of the appointment letter. This clause mandated a minimum service period of three years or payment of ₹2,00,000 as liquidated damages in case of early resignation. Mr. Narnaware accepted these terms and joined the new position.

However, in 2009, before completing the stipulated service period, he resigned to join another bank and paid the bond amount under protest. Subsequently, he challenged the validity of Clause 11(k) before the Karnataka High Court, arguing that it violated Sections 23 and 27 of the Indian Contract Act, 1872, and Articles 14 and 19(1)(g) of the Constitution of India. The High Court ruled in his favor, declaring the clause unenforceable. Vijaya Bank appealed this decision to the Supreme Court.

Supreme Court's Analysis and Ruling

1. Restraint of Trade (Section 27, Indian Contract Act, 1872)

The Court examined whether Clause 11(k) constituted a restraint of trade. Relying on precedents such as Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. and Superintendence Co. v. Krishan Murgai, the Court distinguished between covenants operative during employment and those post-termination. It held that the clause in question operated during the term of employment and did not restrict future employment opportunities, thus not violating Section 27.

2. Public Policy (Section 23, Indian Contract Act, 1872)

Addressing the argument that the clause was opposed to public policy, the Court referred to Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly, emphasizing that not all standard form contracts are unconscionable. The Court noted that the clause was a reasonable measure to ensure employee retention and recover recruitment and training costs, especially pertinent for public sector banks facing competition in a liberalized economy.

3. Constitutional Validity

The Court found no violation of Articles 14 and 19(1)(g) of the Constitution, as the clause did not impose an unreasonable restriction on the employee's right to practice a profession or trade.

Implications for Employers and HR Professionals

Enforceability of Employment Bonds

Employers can include clauses requiring a minimum service period or payment of liquidated damages in employment contracts, provided they are reasonable and not oppressive.

Drafting Considerations

Such clauses should be clearly articulated, specifying the service duration and the rationale for the bond amount, ensuring transparency and mutual consent.

Sector-Specific Application

While this judgment pertains to a public sector bank, private sector employers should exercise caution and ensure that similar clauses are proportionate and justifiable, considering the nature of employment and training investments.

Conclusion

The Supreme Court's decision in Vijaya Bank v. Prashant B. Narnaware provides clarity on the legal standing of employment bonds in India. It underscores the importance of balancing the employer's interest in retaining talent and recovering training costs with the employee's right to career mobility. Employers are advised to draft such clauses with precision, ensuring they are fair, reasonable, and in compliance with the legal framework.