Background of the Case
In 2006, Vijaya Bank introduced a policy for new hires that anyone joining as an officer had to sign a bond agreeing to pay ₹2 lakh if they resigned before completing three years of service.
A Senior Manager, who had signed the bond at the time of joining the employment resigned after 1.5 years of employment. When the bank enforced the indemnity bond, the employee paid the bond amount of ₹2 lakh. Subsequently, he filed a case against the bank.
The Hon'ble High Court sided with the employee, calling the bond unreasonable. However, the bank appealed to the Hon'ble Supreme Court, which ultimately reversed the decision of the Hon'ble High Court.
What were the grounds of challenge by the employee and defence of the employer?
The Employee contended that:
- The ₹2 lakh bond was unfair, violated his right to equality and freedom to work, and also amounted to an unlawful "restraint of trade" under Section 27 of the Indian Contract Act, 1872.
- The bond was punitive, disproportionate, and against public policy, given the unequal bargaining power contained in the standard form contract.
The Employer contended that:
- The bond applied only during the term of employment and not post cessation of employment. It further stated that the clause did not block the employee from securing future jobs once the bond amount was paid, and therefore fell outside the scope of Section 27 the Indian Contract Act, 1872.
- It argued that ₹2 lakhs reflected the genuine recruitment and training costs, and that early exit of employees disrupted its operations. It further claimed that the said employee chose to resign and pay voluntarily, making the clause fair, balanced, and consistent with public policy.
What Did the Supreme Court Say?
The Court ruled in favour of the bank, clarifying two key issues:
- The bond was not a "restraint of trade".
Under the Indian law, a trade restraint clause is unenforceable post cessation of employment. However, the bank's bond only applied during employment. The Court explained that requiring employees to stay for a fixed period (or pay a reasonable penalty) is allowed if it protects the employer's legitimate interests, like recovering recruitment and training costs.
- The bond was fair and proportional.
Given that the employee, was a senior manager earning a high salary, having the financial capacity and professional autonomy to either continue employment or pay the bond, his position negated claims of coercion. Further, the bond was deemed consistent with public policy as stabilizing workforce retention in competitive banking sector benefits organizational efficiency and aligns with broader economic interests, ensuring employers ability to safeguard investments without stifling employee rights.
Significance of the ruling
- This ruling aligns with the earlier rulings and further strengthens the position that bonds which impose reasonable liquidated damages for early resignation during the contract period are enforceable.
- This ruling confirms that employers can legally enforce agreements requiring employees to stay for a minimum period, with financial penalties, as long as the terms are reasonable and justified by business needs.
- As a way forward, employers may design these retention/employment bonds to reflect actual hiring and training costs while ensuring that the employee rights are also protected
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