Supreme Court Upholds Minimum-Service Bonds with Liquidated Damages in Public Sector Employment

Commentary on Vijaya Bank & Anr. v. Prashant B. Narnaware (2025 INSC 691)

1. Introduction

Vijaya Bank v. Prashant B. Narnaware is a landmark 2025 Supreme Court of India decision that clarifies the legality of “minimum-service” covenants coupled with liquidated-damage clauses in public sector employment contracts. The respondent, an officer who resigned before completing the stipulated three-year tenure, challenged a ₹2-lakh indemnity bond, arguing it violated constitutional freedoms and the Indian Contract Act, 1872. The Court’s pronouncement not only reverses the Karnataka High Court but also establishes the circumstances in which such covenants are valid, balancing individual mobility and organisational stability in a liberalised economy.

2. Summary of the Judgment

• The contractual clause (11(k)) requiring three years’ compulsory service or payment of ₹2,00,000 was held valid and enforceable.
• The clause does not amount to restraint of trade under Section 27 of the Contract Act because it operates during the subsistence of employment, not afterwards.
• The covenant is not opposed to public policy under Section 23; instead, it furthers legitimate public-sector interests in curbing attrition and recruitment costs.
• Liquidated damages of ₹2 lakh were found proportionate for a middle-management officer.
• The High Court’s reliance on K.Y. Venkatesh Kumar v. BEML Ltd. was distinguished; that case involved an additional post-employment restriction.
• The companion appeal where the High Court had upheld a similar clause was left undisturbed, ensuring doctrinal consistency.

3. Analysis

3.1 Precedents Cited and Their Influence

1. Niranjan Shankar Golikari v. Century Spinning & Mfg. Co. (1967)
   • Drew a critical distinction between restraints during employment (generally valid) and those after employment (presumptively void).
   • Provided the primary doctrinal foundation; the present judgment expressly follows Golikari’s formulation.
2. Superintendence Co. of India v. Krishan Murgai (1981)
   • Affirmed Golikari; emphasised that Section 27 does not strike down negative covenants operative during employment.
   • Cited to reinforce that injunctions can issue to restrain breach during service.
3. Central Inland Water Transport Corp. v. Brojo Nath Ganguly (1986)
   • Expanded “public policy” by invalidating unconscionable clauses in standard-form contracts due to unequal bargaining power.
   • The respondent relied heavily on this decision; the Court accepted its principles but held the present clause not unconscionable.
4. K.Y. Venkatesh Kumar v. BEML Ltd. (Karnataka HC, 2009)
   • Struck down a bond that also restricted future employment.
   • The Supreme Court distinguished it on facts, underscoring that each covenant must be assessed contextually.
5. Haryana Financial Corp. v. Jagdamba Oil Mills (2002)
   • Cited for the caution that judgments are not to be applied as statutes; factual matrices matter.

3.2 Court’s Legal Reasoning

(a) Section 27 – Restraint of Trade
The Court reiterated that Section 27 renders void only those covenants that restrain a person from exercising a lawful profession. By referencing Golikari, it affirmed that negative covenants operative during employment do not offend Section 27 unless they are excessively harsh. Clause 11(k) merely obligates the employee to stay for three years or compensate the bank; it does not inhibit future employment, hence passes muster.

(b) Section 23 – Public Policy
Although standard-form contracts raise concerns of unequal bargaining power, the Court introduced a three-step test (¶21):

1. Identify the inequality of bargaining power.
2. Assess pleaded unfairness in light of that inequality.
3. Place the onus on the employer to justify the covenant’s reasonableness.

Applying the test, the covenant advanced legitimate institutional goals—staff retention, cost control, continuity of public services—which align with contemporary conceptions of public interest in a deregulated banking sector.

(c) Liquidated Damages
The quantum was upheld because:

• The bank showed actual recruitment-related losses and administrative disruption.
• ₹2 lakh was not punitive relative to the respondent’s senior-manager salary.
• Payment did not make resignation “illusory”; the respondent in fact resigned and paid.

Thus the amount was a genuine pre-estimate, not a penalty.

3.3 Impact on Future Litigation and Industry Practice

• Public Sector Employment: PSUs may confidently use minimum-service bonds, provided tenure and damages are reasonable and no post-exit restraints exist.
• Private Sector Adaptation: Private employers can cite the decision, but reasonableness and proportionality remain key; courts will scrutinise tech-industry “training bonds” under the articulated test.
• Standard-Form Contracts Jurisprudence: The judgment refines Brojo Nath by clarifying that not all standard-form clauses are void; contextual public-interest inquiry is essential.
• Shifting Burden of Proof: Employers now bear an explicit burden to justify covenants when challenged, ushering in more detailed pleadings regarding operational losses.
• Employee Strategy: Prospective employees must factor the enforceability of bonds; exit negotiations will be influenced by this precedent.

4. Complex Concepts Simplified

Section 27 (Restraint of Trade)	Makes agreements void if they restrict a person’s right to work, unless the restriction is reasonable and applies only during employment.
Section 23 (Public Policy)	Invalidates agreements whose purpose or consideration harms public good. What counts as “public good” evolves with societal changes.
Liquidated Damages	A sum agreed in advance, representing a fair forecast of loss if the contract is breached. It differs from a penalty, which is an excessive sum meant to deter breach.
Standard-Form Contract	A pre-drafted agreement offered on a “take-it-or-leave-it” basis, typically indicating unequal bargaining power.
Unequal Bargaining Power	When one party is in a significantly weaker position to negotiate terms, making judicial scrutiny necessary.

5. Conclusion

Vijaya Bank v. Prashant B. Narnaware recalibrates Indian labour-contract law for an era of competition and mobility. While reaffirming employee freedoms, the Supreme Court recognises the operational imperatives of public sector entities. The ruling crystallises three doctrinal points: (1) Minimum-service bonds, without post-employment shackles, are not restraints of trade; (2) Standard-form covenants survive scrutiny if they demonstrably further public interest and are proportionate; (3) Employers must justify reasonableness, but employees cannot evade fairly negotiated obligations. Consequently, the decision strikes a pragmatic balance between safeguarding individual career choices and ensuring institutional efficiency—setting a persuasive precedent for courts and organisations navigating similar contractual controversies.