In a landmark ruling dated 14 May 2025 in the case of Vijaya Bank v. Prashant B Narnaware, the Supreme Court (SC) upheld the enforceability of a minimum service clause within an employment contract. The clause, which required the employee to either serve for a minimum period or pay a fixed sum as liquidated damages, was held to be valid, neither amounting to a restraint of trade under Section 27 of the Indian Contract Act, 1872 (ICA), nor opposed to public policy under Section 23 of the ICA. This judgment overturned a High Court ruling that had earlier declared the clause unenforceable and also clarifies how restrictive covenants are to be viewed given that the Indian employment landscape has changed.
Case Background
The facts of the case trace back to the employee's employment with a public sector bank. The employee had initially joined the bank in 1999 and was later promoted to the position of Manager. In 2006, the bank issued a recruitment notification inviting applications for higher-grade posts. Among the terms of recruitment was a clause in the appointment letter, which mandated a minimum service of three years. It further specified that failure to complete the minimum term would require the employee to pay INR 200,000 (approximately GBP 1733) as liquidated damages (Clause). The respondent/ employee applied for and was selected to the post of Senior Manager, and in doing so, he voluntarily resigned from his previous role. He explicitly accepted the new terms, including the restrictive covenant in this Clause and executed an indemnity bond in accordance with the bank's policy.
Despite this agreement, the employee resigned from the new position before completing the requisite three years of service and joined another bank. He paid the bond demanded by the employer but did so under protest. Thereafter, he filed a writ petition in the High Court challenging the enforceability of the minimum service clause. The respondent contended that the Clause violated his fundamental rights under Articles 14 and 19(1)(g) of the Indian Constitution, which guarantee equality before the law and the freedom to practice any trade, calling or profession. He also argued that the clause was contrary to Sections 23 and 27 of the ICA which provide that the contracts are not valid if they are in restraint of trade or opposed to public policy, thereby rendering the Clause void. The High Court accepted these arguments and directed the bank to refund the amount paid, holding the clause to be unconstitutional, arbitrary, and unenforceable. Thus, the employer bank filed the present appeal before the SC.
SC's Reasoning
The SC, however, offered a different interpretation. In its detailed judgment, the SC carefully distinguished between clauses that restrict post-employment opportunities and those that operate during the course of employment. Relying on landmark judgments, the SC found that the Clause did not amount to a post-employment restraint but was instead a valid conditional clause requiring the employee to either complete a minimum period of service or pay reasonable compensation for early termination. It clarified that negative covenants operating only during the term of employment do not constitute a restraint on trade under Section 27 of the ICA. While the freedom to resign is an important right, it does not override the enforceability of mutually agreed contractual obligations. Thus, the SC held that such a clause is lawful, enforceable, and does not violate public policy.
Turning to the issue of whether this contract was opposed to public policy, the SC acknowledged that standard form contracts can sometimes present an unequal bargaining position between employer and employee. However, it emphasized that public sector undertakings face unique operational challenges that justify certain restrictive clauses. Unlike private employers, public institutions must adhere to strict procedural norms in recruitment, while also striving to meet the competition faced from private entities in recruitment and talent acquisition. The SC highlighted that public sector bank cannot resort to ad-hoc appointments for short-term vacancies, thus, hiring new employees involves time-consuming processes, including notifications, examinations, and interviews, all under regulatory scrutiny. Premature resignations from senior positions in management disrupt workflow and impose additional costs on the organization. Against this backdrop, the SC found that the Clause served a legitimate institutional objective of such a public institution and was crafted not to penalize, but to protect against operational inefficiency and financial strain caused by early exits.
On the question of whether the sum of INR 200,000 was excessive or disproportionate, the SC concluded that the amount was justified. Considering the seniority of the post, the salary drawn by the respondent, and the cost of recruitment, the SC held that the liquidated damages constituted a reasonable pre-estimate of loss. The clause was therefore neither punitive nor arbitrary. It did not aim to achieve unjust enrichment for the bank, but rather to ensure accountability and deter casual resignations from key managerial roles.
The SC also rejected the argument that the clause violated Articles 14 and 19(1)(g) of the Indian Constitution. It held that the right to practice any profession is subject to reasonable restrictions and does not encompass a right to breach freely accepted contractual obligations. The employee had voluntarily agreed to the terms of employment and had full knowledge of the implications of early resignation. In such circumstances, invoking constitutional rights to override contractual obligations was found to be untenable.
While these principles were established in the context of public sector undertakings, they can equally be extended to the private sector where comparable circumstances exist. This is because the underlying rationale—ensuring contractual certainty, protecting legitimate business interests, and maintaining workforce stability—applies across both sectors.
Ultimately, the SC's ruling reaffirms the principle that employment contracts can include reasonable service conditions designed to safeguard institutional interests. The judgment does not undermine the rights of employees but seeks to strike a balance between individual freedoms and organizational needs. Whether the public or the private sector, it underscores the legitimacy of well-drafted employment clauses that promote workforce stability and prevent avoidable attrition.
Conclusion
This decision is expected to have a cascading impact on how employment agreements are drafted and enforced. Employers may now be more confident in incorporating minimum service clauses and enforcing them, provided that the terms are proportionate, reasonable, and communicated transparently. At the same time, employees are reminded of the legal weight of contractual promises and the importance of understanding their commitments before signing.
In conclusion, the SC's judgment in this case reinforces the sanctity of employment contracts in India. It sets a judicial precedent that validates the use of service tenure requirements in public sector employment, provided they are designed to meet legitimate institutional goals and do not overreach into the realm of employee exploitation. This balanced approach, rooted in constitutional principles and commercial pragmatism, reflects the evolving needs of a competitive economy governed by rule of law.
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