Supreme Court: While considering the instant appeal revolving around the validity of a restrictive covenant in the appointment letter issued by Vijaya Bank, whereby an indemnity bond of Rs 2 Lakh was required to be furnished in case respondent resigns prematurely; the Division Bench of P.S. Narasimha and Joymalya Bagchi*, JJ., upheld the validity of the restrictive clause stating that it does not amount to restraint of trade nor is it opposed to public policy. The Court opined that Vijaya Bank is a public sector undertaking and cannot resort to private or ad-hoc appointments through private contracts. An untimely resignation would require the Bank to undertake a prolix and expensive recruitment process involving open advertisement, fair competitive procedure lest the appointment falls foul of the constitutional mandate under Articles 14 and 16 of the Constitution.
Background:
The respondent joined Vijaya Bank in 1999 as a Probationary Assistant Manager and his service was confirmed in 2001. Thereafter, he was promoted to Middle Management Scale-II. In 2006, Vijaya Bank issued a recruitment notification for appointment of 349 officers in different grades. Clause 9 (w) of the recruitment notification stated that “Selected candidates are required to execute an indemnity bond of Rs 2 Lakh indemnifying that they will pay an amount of Rs 2 lakh to the Bank if they leave the service before completion of 3 years”.
Cognizant of the afore-said condition, respondent applied to the post of Senior Manager-Cost Accountant and was selected for the said post. On 07-08-2007, respondent was issued an appointment letter. Clause 11(k) of the said letter stated that the respondent was required to serve the Bank for a minimum period of 3 years from the date of joining the bank and should execute an indemnity bond for Rs.2.00 lakhs in case he resigns from the services of the bank before completion of stipulated minimum period of 3 years.
Accepting the aforesaid condition, respondent voluntarily resigned from his erstwhile post and joined the post of Senior Manager, MMG-III on 28-09-2007. Respondent also executed an indemnity bond in terms of the aforesaid clause.
On 17-07-2009 i.e. before completion of three years from his date of joining, respondent tendered resignation for joining another Bank. His resignation was accepted and on 16-10-2009 respondent under protest in terms of the aforesaid condition paid the sum of Rs 2 lakhs to Vijaya Bank.
Thereafter, the respondent filed a writ petition before Karnataka High Court praying for quashing of clause 9 (w) of the recruitment notification and clause 11 (k) of the appointment letter alleging the same were in violation of Articles 14 and 19(1)(g) of the Constitution and Sections 23 and 27 of the Contract Act, 1872. The High Court allowed the writ petition, which was affirmed by the Division Bench as well.
Court’s Assessment:
Issue 1: Whether the impugned clause in the appointment letter amounted to restraint of trade under Section 27 of the Contract Act?
Perusing the matter and the afore-stated issues, the Court said that though the Contract Act does not profess to be a complete code, the statute is exhaustive about the subject matter contained therein. Hence, validity of a restrictive covenant in an agreement including an employment agreement in regard to restraint in exercise of lawful profession, trade or business must be tested on the touchstone of Section 27 of the Contract Act.
The Court relied on Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co, 1967 SCC OnLine SC 72, wherein operation of Section 27 as a bar to a restrictive covenant during the subsistence of an employment contract was considered. Therein the Supreme Court had made a distinction between restrictive covenants operating during the subsistence of an employment contract and those operating after its termination. Therein it was held that a negative covenant that the employee would not engage himself in a trade or business or would not get himself employed by any other master for whom he would perform similar or substantially similar duties is not a restraint of trade unless the contract is unconscionable or excessively harsh or unreasonable or one-sided.
Therefore, in the instant case, the Court pointed out that the law is well-settled that a restrictive covenant operating during the subsistence of an employment contract does not put a clog on the freedom of a contracting party to trade or employment.
Examining the impugned clause in the appointment letter, the Court pointed out that as per the clause 11 (k), restraint was imposed on the respondent to work for a minimum term i.e. 3 years and in default to pay liquidated damages of Rs. 2 Lakhs. The clause sought to impose a restriction on the respondent’s option to resign and thereby perpetuated the employment contract for a specified term. The object of the restrictive covenant was in furtherance of the employment contract and not to restrain future employment. Hence, clause 11(k) could not have been said to be violative of Section 27 of the Contract Act.
Issue 2: Whether the clause opposed to public policy and thereby contrary to Section 23 of the Contract Act and violative of Articles 14 and 19 of the Constitution?
Perusing the 2nd issue, the Court referred to Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly, (1986) 3 SCC 156, wherein the Supreme Court dealt with interpretation of standard form employment contracts in the backdrop of unequal bargaining power. The Court had opined that if such contracts are unconscionable, unfair, unreasonable and injurious to public interest, they shall be deemed void in law being opposed to public policy.
The Court thus summarised the following legal principles relating to interpretation of standard form employment contracts:
- Standard form employment contracts prima facie evidence unequal bargaining power.
- Whenever the weaker party to such a contract pleads undue influence/coercion or alleges that the contract or any term thereof is opposed to public policy, the Court shall examine such plea keeping in mind the unequal status of the parties and the context in which the contractual obligations were created.
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The onus to prove that a restrictive covenant in an employment contract is not in restraint of lawful employment or is not opposed to public policy, is on the covenantee i.e. the employer and not on the employee.
The Court further elucidated that ‘public policy’ relates to matters involving public good and public interest. “What is ‘just, fair and reasonable’ in the eyes of society varies with time. Civilizational advancements, growth of knowledge and evolving standards of human rights and dignity alter the contours of public good and policy”. The Court explained that from the point-of-view of employer-employee relationship, technological advancements impacting nature and character of work, re-skilling and preservation of scarce specialized workforce in a free market are emerging heads in the public policy domain which need to be factored when terms of an employment contract is tested on the anvil of public policy.
The Court observed that in the era of liberalisation, public sector undertakings (PSUs) such as Vijaya Bank needed to compete with efficient private players operating in the same field.
“To survive in an atmosphere of deregulated free-market, public sector undertakings were required to review and reset policies which increased efficiency and rationalized administrative overheads. Ensuring retention of an efficient and experienced staff contributing to managerial skills was one of the tools inalienable to the interest of such undertakings”.
The afore-stated necessity of the situation prompted Vijaya Bank to incorporate a minimum service tenure for employees, to reduce attrition and improve efficiency. “Viewed from this perspective, the restrictive covenant prescribing a minimum term cannot be said to be unconscionable, unfair or unreasonable and thereby in contravention of public policy”.
Perusing the Vijaya Bank’s contention vis-a-vis imposition of liquidated damages in the event of pre-mature resignation, the Court stated that Vijaya Bank had highlighted the financial hardship which it would suffer due to untimely recruitment drives owing to pre-mature resignations, which led to the Bank incorporating the liquidated damage clause in the appointment contract. It was held that the stance of Vijaya Bank was neither unjust nor unreasonable.
The Court pointed out that the respondent was serving in a senior middle managerial grade having a lucrative pay package. Judged from that perspective, the quantum of liquidated damages was not high so as to render the possibility of resignation illusory.
Therefore, the Court held that the restrictive covenant in clause 11(k) of the appointment letter, was not illegal.
[Vijaya Bank v. Prashant B Narnaware, 2025 SCC OnLine SC 1107, decided on 14-5-2025]
*Judgment by Justice Joymalya Bagchi
Advocates who appeared in this case:
For Appellant(s): Mr. Rajesh Kumar Gautam, Adv. Mr. Likivi K Jakhalu, Adv. Mr. Deepanjal Choudhary, Adv. M/S. Mitter & Mitter Co., AOR Mr. S.R. Singh, Sr. Adv. Mr. Sushant Kumar Yadav, Adv. Mr. Prateek Yadav, Adv. Mr. Gaurav Lomes, Adv. Mr. Prithvi Yadav, Adv. Ms. Asha Gopalan Nair, AOR
For Respondent(s): Mr. Rajesh Kumar Gautam, Adv. Mr. Likivi K Jakhalu, Adv. Mr. Deepanjal Choudhary, Adv. M/S. Mitter & Mitter Co., AOR Mr. Rahul Chitnis, Adv. Ms. Shwetal, Adv. Mr. Aditya Khanna, Adv. Mr. Chander Shekhar Ashri, AOR Mr. Sanjay Kapur, AOR Mr. Surya Prakash, Adv. Ms. Divya Singh Pundir, Adv. Mr. Devesh Dubey, Adv. Ms. Shubhra Kapur, Adv. Mr. Sanjiv Goel, Adv. Mr. Annu Mishra, Adv.
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