A. INTRODUCTION

Imagine investing months training a new employee, only for them to resign prematurely, disrupting operations and leaving behind sunk costs. To mitigate such risks, many employers incorporate strong clauses under employment agreements including minimum service clauses or provide pre- fixed compensation, in case of early resignation. These provisions are referred to as negative covenants and liquidated damages clauses, which aim to protect business interests, but how enforceable are they under Indian law? While employers seek to safeguard their investments in human resources, employees invoke their constitutional right to freely pursue a profession of their choice. The recent Supreme Court decision in Vijaya Bank v. Prashant B. Narnaware[1] offers fresh guidance on the matter. It affirms that minimum service period obligations and reasonable compensation for early exit are valid and enforceable—provided they are not oppressive, excessive or punitive. The ruling provides valuable clarity to employers on how such clauses should be structured to remain both legally sound and ethically defensible.

B. UNDERSTANDING THE JUDGMENT: Vijaya Bank v. Prashant B. Narnaware

The dispute arose when Mr Narnaware, a senior manager (Cost Accountant), having voluntarily joined Vijaya Bank under a recruitment scheme requiring a three-year minimum service commitment, backed by an indemnity bond of INR 2 lakhs. His employment terms included the following restrictive clauses:

1. Clause 9(w) of recruitment notification: “Selected candidates are required to execute an indemnity bond of Rs.2.00 Lakh (Rupees Two Lakh only) indemnifying that they will pay an amount of Rs.2.00 lakh to the Bank if they leave the service before completion of 3 years.”

2. Clause 11( k) of appointment letter :“You are required to serve the Bank for a minimum period of 3 years from the date of joining the bank and should execute an indemnity bond for Rs.2.00 lakhs. The said amount has to be paid by you in case you resign from the services of the bank before completion of stipulated minimum period of 3 years..”

Despite these terms, he resigned within two years to join another bank. While he paid the stipulated amount of ₹2 lakhs under protest, he approached the Karnataka High Court challenging the validity of these clauses on the following grounds : 1. Violation of Fundamental Rights - Articles 14 and 19(1)(g) of Constitution. 2. Section 23 of the Indian Contract Act, 1872 – alleging the clause was arbitrary, imposed an excessive burden, and was against public policy. 3. Violation of 27 of the Indian Contract Act – asserting the clause is void as it constitutes unlawful restraint of trade.

The High Court accepted his arguments and directed the Bank to refund the amount. It Relied on a previous judgment of its Division Bench in K.Y. Venkatesh Kumar v. BEML[2] Ltd. and held that the clauses were unenforceable, as they placed a disproportionate and arbitrary burden on the employee. Challenging this decision, Vijaya Bank filed an appeal before the Honourable Supreme Court of India. The Supreme Court reversed the decision, ruling in the favour of Vijaya Bank and upholding the clause as valid, reasonable and not violative of section 27 or public policy.

C. ANALYSIS AND IMPLICATIONS

1. Restraint of Trade - Section 27 Section 27 renders void any agreement restraining lawful trade or profession. Indian courts interpret this provision strictly, though, a consistent distinction has been drawn between clauses operative during employment (typically upheld) and those operative post-employment (typically void unless exceptional). The Court reaffirmed that a restrictive covenant operating during the term of employment does not attract the prohibition under Section 27. In line with important precedents such as Niranjan Shankar Golikari v. Century Spinning[3] and Superintendence Co. v. Krishan Murgai[4] , the Supreme Court reiterated that: “A covenant requiring an employee to serve for a minimum period, when voluntarily undertaken and operative only during the tenure of employment, cannot be construed as a restraint on lawful profession.”

2. Public Policy and Unconscionability: Section 23 and Standard Form Contracts In Central Inland Water Transport Corp. v. Brojo Nath Ganguly (1986)[5] , the Court highlighted the risks of unconscionable terms in standard form contracts, especially when bargaining power is unequal. In Vijaya Bank, while the Court acknowledged the concerns, it distinguished the facts—emphasizing the employee’s seniority, voluntary agreement, and the operational need for public banks to retain skilled personnel amidst private competition. At the same time, the ruling reinforces that courts must closely scrutinize such clauses for coercion, undue influence, or economic compulsion. The enforceability of such clauses depends on the employee’s role, bargaining power, and the voluntariness of consent. While standard form contracts are permissible, they must not cross into oppressiveness or unconscionability under Section 23. Courts remain cautious of imbalanced clauses, especially in hierarchical or non-negotiable employment settings.

3. Liquidated Damages – Section 74 The Court upheld liquidated damages of INR 2 lakhs as a reasonable and proportionate pre-estimate of the losses incurred considering recruitment and training expenses, and operational disruptions caused by premature resignation. Liquidated damages as provided under Section 74 are enforceable when they are a genuine pre estimate of loss, neither penal nor disproportionate. In view of Fateh Chand v. Balkishan Das (1963)[6] and ONGC v. Saw Pipes (2003)[7] , the Court reiterated that clauses must not be penal in nature and Employers must demonstrate a legitimate commercial interest and not mere inconvenience or speculative loss.

D. CONCLUSION

The Vijaya Bank ruling brings welcome clarity to employment contracts. While the facts of Vijaya Bank arose from a public sector context, the underlying jurisprudence is rooted in the Indian Contract Act—making the principles equally applicable to private sector employers. Minimum service period clauses are legally permissible, so long as they apply during the tenure of employment, are reasonable in duration, and do not restrict post-employment freedom. Liquidated damages must be proportionate, and employers are expected to justify such amounts with a demonstrable basis, such as recruitment expenses, training investments, or business disruption due to sudden exits. Standard form contracts are not inherently invalid, but courts will assess the voluntariness, clarity, and power dynamics involved. Clauses imposed on junior employees, or presented without negotiation, may invite closer judicial scrutiny. That said, enforceability will remain context-specific depending on the nature of employment, the role's significance, and the costs associated with employee onboarding.

At Zentrum Law Partners, we view this as an opportunity for organizations to revisit their employment frameworks and build resilience through legally sound and strategically aligned employment documentation, with a focus on enforceability.

[1] Vijaya Bank v Prashant B Narnaware (2025) INSC 691 (SC) (https://indiankanoon.org/doc/42763766/)

[2] K Y Venkatesh Kumar v BEML Ltd (Karnataka High Court, 27 July 2009)(https://indiankanoon.org/doc/1198878/).

[3] Niranjan Shankar Golikari v The Century Spinning And Mfg. Co. Ltd (1967) AIR 1098 (https://indiankanoon.org/doc/452434/).

[4] Superintendence Company Of India (P) v Krishan Murgai (1980) AIR 1717 (https://indiankanoon.org/doc/1576087/).

[5] Central Inland Water v Brojo Nath Ganguly & Anr (1986) AIR 1571  (https://indiankanoon.org/doc/477313/).

[6] Fateh Chand v Balkishan Das (1963) AIR 1405  (https://indiankanoon.org/doc/584252/).

[7] Oil & Natural Gas Corporation Ltd v Saw Pipes Ltd (2003) AIR 2629 (https://indiankanoon.org/doc/919241/).

Authors-

1. Mr. Ravi Vaswani (Partner)

2. Miss Aarti Kumari ( 4th Year student NLIU Bhopal)