In a significant ruling, the Supreme Court of India upheld the enforceability of employment bonds in the case of Vijaya Bank & Anr. v. Prashant B. Narnaware (2025 INSC 691). This judgment has substantial implications for employment contracts, particularly within public sector undertakings (PSUs).
Case Overview:
Mr. Prashant B. Narnaware joined Vijaya Bank in 1999. In 2006, the bank issued a recruitment notification requiring selected candidates to execute an indemnity bond of ₹2,00,000, enforceable if the employee resigned within three years. Mr. Narnaware, upon resigning before completing the stipulated period, challenged the bond's validity, arguing it violated his rights under Articles 14 and 19 of the Constitution and constituted a restraint of trade under Section 27 of the Indian Contract Act, 1872.
Supreme Court's Findings:
1. Restrictive Covenants During Employment: The Court distinguished between covenants operative during employment and those post-employment. It held that restrictions during the term of employment, like the one in question, do not amount to a restraint of trade under Section 27.
2. Public Policy Considerations: The Court recognized the rationale behind such clauses, especially in PSUs, where recruitment involves substantial investment. It found the bond amount reasonable and not opposed to public policy under Section 23 of the Contract Act.
3. Standard Form Contracts: Addressing concerns about unequal bargaining power, the Court noted that while standard form contracts can be scrutinized for unconscionability, the clause in question was disclosed upfront and voluntarily accepted, thus enforceable.
Implications:
This judgment reinforces the validity of employment bonds that stipulate a minimum service period or payment of liquidated damages upon premature resignation, provided they are reasonable and not unconscionable. While the ruling directly pertains to PSUs, it sets a precedent that could influence employment practices across sectors.
Case Overview:
Supreme Court's Findings:
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Restrictive Covenants During Employment:
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Public Policy Considerations:
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Standard Form Contracts:
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