The Supreme Court upheld an employment bond clause, permitting a Public Sector Bank to recover ₹2 lakhs from an employee who resigned before completing the required three-year service term.
The Court was hearing a case involving Vijaya Bank, which had required newly appointed officers to sign a ₹2 lakh indemnity bond in case they resigned within three years. The respondent, who joined as a Senior Manager-Cost Accountant and accepted this condition, resigned early to join IDBI Bank and paid the amount under protest while challenging the bond's validity. The Karnataka High Court struck down the clause as a "restraint of trade" under Section 27 of the Contract Act, prompting the bank to appeal to the Supreme Court.
The bench comprising Justice PS Narasimha and Justice Joymalya Bagchi observed held that requiring a minimum service period in employment contracts is a legitimate and reasonable way to reduce attrition and enhance efficiency. It stated that such clauses are not oppressive, unfair, or against public policy. Allowing premature resignations would burden the bank with costly and time-consuming recruitment processes, which the Court found unjustified.
The Court ruled that exclusivity clauses requiring a minimum service period in employment contracts are legally valid and not a restraint of trade under Section 27 of the Indian Contract Act, as they apply during employment and not after termination.
“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.” the Court said.
The Court upheld the ₹2 lakh penalty for premature resignation, stating it was reasonable for a well-paid Senior Manager. It emphasized that, as a public sector entity, the bank must follow a fair and open recruitment process under constitutional mandates, making early resignations costly and burdensome. The Court allowed the bank's appeal.
Read Here: