Case: Vijaya Bank & Anr. v. Prashant B. Narnaware

Citation: Civil Appeal No. 11708 of 2016 | Judgment dated 14 May 2025

Background

The respondent employee was appointed by Vijaya Bank to the post of Senior Manager pursuant to a recruitment process. As a condition of employment, he was required to execute a bond agreeing to serve the Bank for a minimum period of three years, failing which he would be liable to pay Rs. 2 lakhs as liquidated damages.

He resigned in less than two years to join another bank, paid the amount under protest, and challenged the clause as arbitrary, a restraint of trade under Section 27 of the Indian Contract Act, and contrary to public policy under Section 23.

The High Court struck down the clause. The Bank appealed to the Supreme Court.

Key Findings

• No restraint of trade: The Court reiterated that minimum service obligations that operate during employment are not hit by Section 27. Restrictions applicable post-employment are treated differently.
• Not opposed to public policy: The Court clarified that what constitutes public policy must be viewed in context. Conditions designed to retain trained staff and avoid administrative inefficiencies are not per se unjust or against public interest.
• Liquidated damages justified: Rs. 2 lakhs was held to be a reasonable pre-estimate of loss, especially considering the seniority of the role and cost of recruitment through open process.

Legal Principles: Standard Form Employment Contracts

The Court acknowledged the inequality of bargaining power inherent in standard form employment contracts. However, it held that such terms are not automatically invalid. Courts will assess whether the clause is:

• unconscionable or unreasonable,
• disproportionate in its effect,
• imposed through undue influence or coercion.

Where these factors are not present, standard form terms like minimum service clauses may be upheld as valid contractual obligations.

Conclusion

The Supreme Court allowed the appeal, holding that the employment bond clause requiring a three-year minimum service or payment of Rs. 2 lakhs in liquidated damages was valid and enforceable. It found no violation of the Contract Act or the Constitution, and held that the clause was not arbitrary, excessive, or opposed to public policy.

Implications

This judgment provides critical guidance for both employers and employees navigating standard form employment contracts, particularly those involving minimum service periods and pre-agreed exit obligations. Key takeaways include:

• Employers, including those in the private sector, can validly include minimum service clauses with liquidated damages, provided they are reasonable, transparent, and proportionate to the role and responsibilities of the employee.
• The Court’s recognition of organisational interests such as cost and effort of recruitment, loss of trained personnel, and operational disruption can offer legal justification for enforcing such bonds, especially in technical, managerial, or high-investment roles.
• For employees, the judgment reinforces that once a bond is knowingly accepted and not shown to be unconscionable or imposed by coercion, it will be enforceable. Mere dissatisfaction with its consequences after resignation is not sufficient to invalidate it.
• Finally, it signals that courts will closely examine challenges to standard form contracts, but only invalidate clauses that are oppressive or shock the conscience—not those that serve legitimate business objectives.