The Supreme Court upheld the validity of Vijaya Bank’s employment bond clause requiring a minimum 3-year service period or payment of Rs. 2 lakhs for premature resignation. The Court ruled this condition does not violate Section 27 of the Indian Contract Act (restraint of trade) as it applies during employment, nor is it opposed to public policy under Section 23. The judgment clarified that while standard form contracts reflect unequal bargaining power, such terms remain enforceable unless proven unconscionable or unreasonable. The Court recognized the bank’s legitimate interest in maintaining workforce stability through such reasonable restrictions. This decision reinforces the distinction between restraints during employment versus post-employment and sets parameters for evaluating liquidated damages clauses in employment contracts.
Facts Of The Case:
The case centered on a dispute between Vijaya Bank (now merged with Bank of Baroda) and its employee Prashant B. Narnaware regarding a 3-year service bond clause. In 2006, the bank issued a recruitment notification for officers, requiring selected candidates to execute an indemnity bond of ₹2 lakh if they left service before completing three years. Narnaware, then a Middle Management Grade-II officer, applied for promotion to Senior Manager (Cost Accountant) and accepted these terms in his 2007 appointment letter. After joining the new role on 28 September 2007, he resigned on 17 July 2009 to join IDBI Bank, paying the penalty under protest.
He subsequently filed a writ petition before the Karnataka High Court, challenging the bond clause as unconstitutional (violating Articles 14 and 19(1)(g)) and illegal under Sections 23 (public policy) and 27 (restraint of trade) of the Indian Contract Act, 1872. The High Court quashed the clause, citing unequal bargaining power and reliance on a similar case (K.Y. Verkatesh Kumar v. BEML Ltd.). The bank appealed to the Supreme Court, which overturned the High Court’s decision, ruling the clause valid as it ensured workforce stability and imposed a reasonable restriction during employment, not after termination. The Court emphasized the bank’s legitimate operational needs in a competitive banking sector.
Procedural History:
The case of Vijaya Bank & Anr. v. Prashant B. Narnaware has a clear procedural history that traces its journey from the respondent’s employment dispute to the Supreme Court’s final ruling. The respondent, Prashant B. Narnaware, joined Vijaya Bank in 2007 as a Senior Manager under a contractual clause requiring him to serve for a minimum of three years or pay ₹2 lakh as liquidated damages if he resigned earlier. In 2009, he resigned before completing the stipulated period and paid the penalty under protest.
Challenging the legality of this clause, Narnaware filed a writ petition before the High Court, arguing that it violated Articles 14 (Right to Equality) and 19(1)(g) (Freedom of Profession) of the Constitution, as well as Sections 23 (Unlawful Consideration) and 27 (Restraint of Trade) of the Indian Contract Act, 1872. The High Court, relying on the precedent set in K.Y. Venkatesh Kumar v. BEML Ltd., ruled in Narnaware’s favor, quashing the clause as an unreasonable restraint on employment. Dissatisfied with this decision, Vijaya Bank appealed to the Supreme Court in 2016 (Civil Appeal No. 11708 of 2016), where the apex court ultimately overturned the High Court’s judgment, upholding the validity of the employment bond clause.
Court Observation:
The Supreme Court made several key observations while upholding the validity of Clause 11(k) of Vijaya Bank’s employment contract. The bench distinguished between restrictive covenants operating during employment and those applying post-employment, noting that Section 27 of the Contract Act primarily concerns restraints after termination of service. The Court emphasized that the three-year service condition was a reasonable term of employment rather than an unlawful restraint on trade, as it operated during the contract period and didn’t restrict future employment opportunities. Regarding public policy concerns, the Court acknowledged the unequal bargaining power in standard employment contracts but found the clause justified, considering the bank’s legitimate interest in retaining skilled personnel and avoiding frequent, costly recruitment processes.
The bench observed that the ₹2 lakh penalty was not unconscionable given the respondent’s senior managerial position and salary scale, nor did it amount to unjust enrichment for the bank. The Court also noted that public sector undertakings like Vijaya Bank require stability in staffing to compete effectively in a liberalized economy, making such service conditions a matter of public interest. Importantly, the judgment clarified that earlier precedents like BEML Ltd. case were distinguishable as they involved more restrictive post-employment conditions rather than reasonable in-service obligations.
Final Decision & Judgement:
In its final judgment, the Supreme Court allowed Vijaya Bank’s appeal and upheld the validity of Clause 11(k) of the employment contract, which mandated a minimum service period of three years with a ₹2 lakh penalty for premature resignation. The bench comprising Justices Pamidighantam Sri Narasimha and Joymalya Bagchi set aside the High Court’s decision, ruling that the clause did not violate Section 27 of the Indian Contract Act as it constituted a reasonable condition of service rather than an unlawful restraint on trade. The Court emphasized that such employment terms during the contract period are permissible when they serve legitimate business interests, particularly for public sector banks facing staffing challenges in a competitive market. Regarding the constitutional challenge, the Court found no violation of Articles 14 or 19(1)(g), noting that the liquidated damages clause was neither arbitrary nor disproportionate given the respondent’s senior managerial position and salary package.
The judgment established that standard employment contracts containing reasonable service conditions cannot be automatically struck down as unconscionable, especially when they address genuine organizational needs like employee retention and cost-effective recruitment. In the connected Civil Appeal No. 11499 of 2016 involving a similar challenge, the Court dismissed the appeal and affirmed the High Court’s decision, maintaining consistency in its interpretation of employment bond clauses. The verdict reinforces employers’ rights to impose reasonable service conditions while balancing employees’ career mobility interests.
Case Details:
Case Title: Vijaya Bank & Anr. vs. Prashant B. Narnaware Citation: 2025 INSC 691 Nature of Appeal: Civil Appeal No. 11708 of 2016 (along with connected Civil Appeal No. 11499 of 2016) Date of Judgment: May 14, 2025 Bench: Hon'ble Justices Pamidighantam Sri Narasimha & Hon'ble Justices Joymalya Bagchi
Download The Judgement Here