In a landmark decision, the Supreme Court of India has upheld the enforceability of employment bond clauses requiring employees to pay liquidated damages if they resign before completing a stipulated minimum service period. In the case of Vijaya Bank v. Prashant B. Narnaware, the Court validated a ₹2 lakh penalty imposed on an employee who left the bank before fulfilling a three-year commitment.
The Court emphasized that such clauses are not in violation of Section 27 of the Indian Contract Act, which prohibits agreements in restraint of trade. It clarified that the restriction operates during the term of employment and does not prevent future employment opportunities. The ruling underscores the importance of protecting employers’ investments in training and recruitment.
However, the Court also noted that the enforceability of such clauses depends on their reasonableness. Employers must ensure that the terms are fair and proportionate to the actual costs incurred, and not punitive in nature.
This judgment provides clarity on the legal standing of employment bonds in India, particularly within public sector undertakings, and may influence employment practices across various sectors.
Background of the Case
In 2006, Vijaya Bank initiated a recruitment drive to appoint 349 officers across various grades. Clause 9(w) of the recruitment notification stipulated that selected candidates must execute an indemnity bond of ₹2 lakh, agreeing to pay this amount if they left the bank’s service before completing a three-year tenure.
Prashant B. Narnaware applied for the position of Senior Manager-Cost Accountant and was selected. On August 7, 2007, he received an appointment letter that reiterated the requirement to serve a minimum of three years and execute the ₹2 lakh indemnity bond. Accepting these terms, Narnaware resigned from his previous position and joined the bank.
However, on July 17, 2009, before completing the three-year period, Narnaware tendered his resignation to join IDBI Bank. Upon acceptance of his resignation, he paid ₹2 lakh to Vijaya Bank on October 16, 2009, under protest, as per the terms of the indemnity bond.
Subsequently, Narnaware filed a writ petition in the High Court of Karnataka, challenging Clause 9(w) of the recruitment notification and Clause 11(k) of the appointment letter. He argued that these clauses violated Articles 14 and 19(1)(g) of the Constitution of India and Sections 23 and 27 of the Indian Contract Act, 1872. The High Court, relying on the decision in K.Y. Venkatesh Kumar v. BEML Ltd., allowed the writ petition and quashed the clauses. The High Court directed Vijaya Bank to refund the ₹2 lakh paid by Narnaware. The bank appealed this decision to the Supreme Court.
The appellants, Vijaya Bank, contended that the clause was a legitimate measure to ensure the retention of employees and to protect the bank’s interests. They argued that the liquidated damages were not disproportionate and were necessary to cover the bank’s losses due to premature resignations. The bank maintained that the clause did not amount to restraint of trade and was not opposed to public policy.
On the other hand, Narnaware argued that the clause was unreasonable and oppressive, given the unequal bargaining power between the bank and the employee. He contended that the liquidated damages were disproportionately high and resulted in unjust enrichment for the bank. Narnaware further argued that the clause violated fundamental rights and public policy.
The Supreme Court analysed the clause in the context of restraint of trade and public policy. The court held that the clause did not amount to restraint of trade. The restriction was to ensure a minimum service period and was in furtherance of the employment contract, not to restrain future employment. The court further examined whether the clause was unconscionable, unfair, or unreasonable. It considered the bank’s need to retain employees to maintain efficiency and reduce attrition. The court found that the liquidated damages were not disproportionate and were justified given the bank’s recruitment costs and potential losses.
Supreme Court allowed the appeal, setting aside the High Court’s judgment, and upheld the validity of the ₹2 lakh penalty for premature resignation. The Court’s decision clarified the enforceability of employment bonds in India, particularly within public sector undertakings, and may influence employment practices across various sectors.
Final Reflections
The Supreme Court’s judgment in Vijaya Bank & Anr. v. Prashant B. Narnaware (2025 INSC 691) offers significant clarity on the enforceability of employment contract clauses that mandate liquidated damages for premature resignation. The Court emphasized the importance of balancing the interests of employers in retaining key personnel with the rights of employees to seek better opportunities. It highlighted that such clauses, when reasonable and proportionate, serve to protect the employer’s investment in recruitment and training, and do not constitute an unlawful restraint of trade under Section 27 of the Indian Contract Act, 1872. The decision underscores the evolving nature of public policy and the need for courts to consider the broader economic context when interpreting employment contracts