Restrictive Covenant Prescribing Minimum Employment Term Not Unreasonable: Supreme Court Upholds Condition Asking Bank Employee to Pay Rs 2 Lakh On Untimely Resignation

The appellants approached the Apex Court challenging the judgment passed by the High Court quashing clause 11(k) of the appointment letter whereby the respondent-employee was required to pay liquidated damages of Rs 2 lakh in the event of leaving employment of the first appellant-bank prior to three years and consequentially the bank was directed to refund the said sum to the respondent.

The Division Bench of Justice Pamidighantam Sri Narasimha and Justice Joymalya Bagchi noted, “Golden days of monopolistic public sector behemoths were gone. Public sector undertakings like the appellant bank needed to compete with efficient private players operating in the same field. To survive in an atmosphere of deregulated free-market, public sector undertakings were required to review and reset policies which increased efficiency and rationalized administrative overheads.”

“Viewed from this perspective, the restrictive covenant prescribing a minimum term cannot be said to be unconscionable, unfair or unreasonable and thereby in contravention of public policy”, it added.

Senior Advocate S.R. Singh represented the Appellant while Advocate Rajesh Kumar Gautam represented the Respondent.

Factual Background

In 1999, the respondent had joined the appellant bank as a Probationary Assistant Manager. His service was confirmed in 2001. In 2006, the bank issued a recruitment notification for the appointment of 349 officers in different grades. The respondent applied for the post of Senior Manager-Cost Accountant and was selected for the said post. He was issued an appointment letter containing the aforementioned Clause 11(k). Accepting the condition, the respondent also executed an indemnity bond in terms of the clause.

In 2009 i.e. before completion of three years from his date of joining, the respondent tendered resignation to join another Bank, namely, IDBI. His resignation was accepted, and the respondent, under protest, paid the sum of Rs 2 lakh to the appellant bank. The Respondent then filed a writ petition before the High Court praying for quashing of clause 9 (w) of the recruitment notification and clause 11 (k) of the appointment letter alleging the same were in violation of Articles 14 and 19(1)(g) of the Constitution and Sections 23 and 27 of the Indian Contract Act. This Petition was allowed and upheld by a Division Bench. Aggrieved thereby, the appellant approached the Apex Court.

Reasoning

The Bench, at the outset, explained that Section 27 of the Contract Act provides that every agreement which restrains a person from exercising a lawful profession, trade or business of any kind is to that extent void. A sole exception is carved out in the proviso with regard to the sale of the goodwill of a business, in which case the seller may be restrained from carrying on similar business within a reasonable local limit. “In view of these authoritative pronouncements, it can be safely concluded law is well settled that a restrictive covenant operating during the subsistence of an employment contract does not put a clog on the freedom of a contracting party to trade or employment”, the Bench said.

Referring to the clause in question, the Bench said, “A plain reading of clause 11 (k) shows restraint was imposed on the respondent to work for a minimum term i.e. three years and in default to pay liquidated damages of Rs. 2 Lakhs. The clause sought to impose a restriction on the respondent’s option to resign and thereby perpetuated the employment contract for a specified term. The object of the restrictive covenant was in furtherance of the employment contract and not to restrain future employment. Hence, it cannot be said to be violative of Section 27 of the Contract Act.”

Expounding on the legal principles relating to interpretation of standard form employment contracts, the Bench explained, “The onus to prove that a restrictive covenant in an employment contract is not in restraint of lawful employment or is not opposed to public policy, is on the covenantee i.e. the employer and not on the employee.”

On the issue of imposition of liquidated damages to the tune of Rs 2 Lakh in the event of pre-mature resignation, the Bench said, “The appellant-bank is a public sector undertaking and cannot resort to private or ad-hoc appointments through private contracts. An untimely resignation would require the Bank to undertake a prolix and expensive recruitment process involving open advertisement, fair competitive procedure lest the appointment falls foul of the constitutional mandate under Articles 14 & 16.”

Thus, allowing the appeal, the Bench held, “...we are of the view the restrictive covenant in clause 11(k) of the appointment letter does not amount to restraint of trade nor is it opposed to public policy.”

Cause Title: Vijaya Bank & Anr. v. Prashant B Narnaware (Neutral Citation: 2025 INSC 691)

Appearance:

Appellant: Senior Advocate S.R. Singh, Advocates Rajesh Kumar Gautam, Likivi K Jakhalu, Deepanjal Choudhary, AOR M/S. Mitter & Mitter Co., Advocates Sushant Kumar Yadav, Prateek Yadav, Gaurav Lomes, Prithvi Yadav, AOR Asha Gopalan Nair

Respondent: Advocates Rajesh Kumar Gautam, Likivi K Jakhalu, Deepanjal Choudhary, AOR M/S. Mitter & Mitter Co., Advocates Rahul Chitnis, Shwetal, Aditya Khanna, AOR Chander Shekhar Ashri, AOR Sanjay Kapur, Advocates Surya Prakash, Divya Singh Pundir, Devesh Dubey, Shubhra Kapur, Sanjiv Goel, Annu Mishra

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