- within Employment and HR topic(s)
- within Employment and HR topic(s)
- with readers working within the Law Firm industries
The Supreme Court of India, in Vijaya Bank & Anr. v. Prashant B Narnaware 2025 INSC 691, considered the enforceability of employment bonds vis-à-vis Section 27 of the Indian Contract Act, 1872 ("Contract Act") and whether such bonds are against the public policy of India.
Factual Background
In 1999, Mr. Narnaware (the Respondent before the Supreme Court) joined Vijaya Bank (one of the Appellants before the Supreme Court) as a Probationary Assistant Manager. Subsequently, his service was confirmed in 2001 and he was further promoted. In 2006, the Bank issued a recruitment notification for selection of officers belonging to various grades. Clause 9(w) of the recruitment notification provided that an indemnity bond of INR 200,000 must be executed by a selected candidate in order to indemnify the Bank in case such candidate leaves the service of the Bank within 3 years of his/her selection.
Pursuant to the recruitment notification, Mr. Narnaware applied for the post of Senior Manager-Cost Accountant. On being selected for the said post, Mr. Narnaware was issued an Appointment Letter by the Bank, wherein under Clause 11(k), Mr. Narnaware was required to serve indemnity bond in favour of the Bank as mentioned in the recruitment notification. Mr. Narnaware accepted the said condition by executing an indemnity bond as per Clause 11(k) and joined as Senior Manager in September 2007.
On 17 July 2009, prior to the completion of 3 years from his date of joining, Mr. Narnaware tendered his resignation. His resignation was accepted by the Bank and on 16 October 2009, Mr. Narnaware paid the indemnity sum of INR 200,000 under protest.
Subsequently, Mr. Narnaware filed a writ petition before the Karnataka High Court challenging Clause 9(w) of the recruitment notification and Clause 11(k) of the Appointment Letter on the ground that they violated Articles 14 and 19(1)(g) of the Constitution of India and Sections 23 and 27 of the Contract Act.
A Single Judge of the High Court, ruled in favour of Mr. Narnaware and allowed the Writ Petition. This decision of the Single Judge was even upheld by a pision Bench of the High Court. Aggrieved by the decision of the pision Bench of the High Court, the Bank preferred appeal to the Supreme Court.
Issues for consideration
Before the Supreme Court, the issue which required consideration was whether Clause 11(k) of the Appointment Letter was:
- in restraint of trade under Section 27 of the Contract Act, which renders void any agreement restraining a person from exercising a lawful profession, trade, or business, subject to a limited exception relating to the sale of goodwill, and/or;
- opposed to public policy and thereby contrary to Section 23 of Contract Act and violative of Articles 14 and 19 of the Constitution of India
Decision of the Supreme Court
The Supreme Court, in a consistent line of precedent, has distinguished between covenants which operate during the term of the employment agreement and those which operate post-termination of such agreement, and held that covenants that operate during the term of the employment agreement are valid. Thus, covenants that require an employee to serve exclusively during the term of the employment agreement have been upheld and have been viewed as agreements not in restraint of trade under Section 27, provided such covenants are neither unconscionable nor excessively harsh.
Applying this settled position to the present case, the Supreme Court held that Clause 11(k)—which required an employee to serve a minimum of three years or pay damages—was in furtherance of the employment contract rather than a restriction on future trade, and therefore did not violate Section 27 of the Contract Act.
On the issue of public policy, Mr. Narnaware argued that Clause 11(k), being part of a standard form contract, was imposed through unequal bargaining power, which compelled him to accept it, thereby rendering it opposed to public policy.
The Supreme Court, after discussing past precedent, held that public policy relates to matters involving public good and public interest. It further held that the understanding of 'just, fair and reasonable' varies across time, and in the liberalized era, public sector undertakings had to compete with private players, and for this, it was essential that skilled staff was retained. Accordingly, the Court took the view that Clause 11(k) was necessary for reducing attrition and ensuring efficiency in the Bank, and such a stipulation was neither unconscionable nor unfair. The stipulation prescribing payment of INR 200,000 also was found to be valid on the ground that untimely exits caused financial and administrative hardship to the Bank, requiring fresh and costly recruitment through constitutionally mandated procedures. Given that Mr. Narnaware was in a senior managerial role and drew high remuneration, the payment stipulation was held to be not disproportionate.
Ultimately, the Supreme Court overturned the High Court's decision and allowed the Bank's appeal.
Our thoughts
This decision affirms that service bond clauses requiring employees, particularly in senior or managerial roles, to serve a minimum period or pay stipulated damages on premature exit are legally enforceable, as they operate only during the subsistence of employment and therefore do not attract the prohibition under Section 27 of the Contract Act. The Court clarified that such provisions, even when part of standard form contracts, do not offend the public policy of India unless shown to be unconscionable or grossly unfair, thereby rejecting arguments based merely on unequal bargaining power.
This ruling is of utmost significance for employers, especially in high-attrition sectors, because it now legitimises the use of service bonds as valid retention tools, as long as the terms are fair, and linked to real business needs. Employers invest substantial time, effort and money in hiring talent. It would be quite onerous for employers to be compelled to undertake expensive and cumbersome hiring exercises on a frequent basis on account of employees leaving the employer very shortly after their joining.
However, employers must also be cautious that not any and every bond clause in an employment contract may be upheld. The enforceability of a particular bond clause, on the ground of public policy especially, may depend on a multitude of factors. For instance, an apparently fair bond clause in an employment contract may be perceived with circumspection if the employee is forced to leave his employer before the end of the bond period for reasons such as harassment, intimidation, pressure to engage in illegal acts, whistleblowing or acts for which the employer himself may be culpable. In such cases, the Court will have to assess if enforcing the bond clause would be fair and just. Therefore, the enforceability of bond clauses will have to be judged on a case to case basis, and there cannot be one uniform formula for all cases.
From an employee perspective, this decision may appear quite burdensome as it means that leaving early may lead to enforceable financial penalties unless employees can prove that the terms are unfair or excessive. Therefore, employees must, while assessing whether to work with a certain employer or not assess the pros and cons very carefully before making a final decision. They must be sure that they would be willing to serve the employer for at least the bond period or be prepared to face any financial consequence that they may result from any premature resignation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
