Supreme Court Upholds Enforceability of Employment Bonds in India – Vijaya Bank and Anr. v. Prashant B Narnaware (May 2025)

The Hon’ble Supreme Court has held that a fixed‑term employment bond backed by proportionate, evidence‑based liquidated damages is enforceable under Indian law when it protects a legitimate employer interest and is entered into with free and informed consent.

Court’s Reasoning

The Supreme Court relied on the judgments of Niranjan Shankar Golikari  v. Century Spinning & Manufacturing Co. (1967), Superintendence Co. (P) Ltd. v. Krishan Murgai (1981), and Central Inland Water Transport Corporation Ltd. v.  Brojo Nath Ganguly (1986) to hold that:

1. Negative covenants during employment, such as a promise to serve for a minimum period, do not offend section 27 of the Indian Contract Act, because they facilitate trade rather than restrain it.

2. A bond clause that is just, fair, and reasonable is not opposed to public policy, even in a standard‑form contract, provided the employer discharges the burden of proving that the clause is proportionate and non‑oppressive.

3. The liquidated‑damages sum of ₹2 lakhs was upheld because Vijaya Bank produced concrete evidence of costs occasioned by premature exits (recruitment, training, and compliance), satisfying the test laid down in Articles 14 and 16 of the Constitution.

Drafting Checklist for Employers

Recommendation	Legal / Commercial Rationale
Quantify and record actual costs (recruitment, training, relocation).	Courts look for objective evidence of loss before enforcing damages.
Limit bond tenure to a reasonable period (typically 1–3 years).	Longer terms may be struck down as oppressive or excessive.
Explain the clause clearly and obtain express consent.	Transparency mitigates unequal‑bargaining‑power arguments.
Use calibrated liquidated damages rather than blanket forfeitures.	Reasoned damages are more likely to survive judicial scrutiny.
Track state‑specific labour‑code notifications.	Ongoing code roll‑outs could alter enforceability thresholds.

Immediate Action Points

1. Audit existing bond templates against the “just, fair and reasonable” benchmark reaffirmed in Vijaya Bank.

2. Maintain a cost matrix for each role to justify the chosen damages figure.

3. Insert a severability clause so that, if necessary, a court can read down the damages without voiding the bond.

4. Offer flexible exit routes (e.g., longer notice or hand‑over) to demonstrate good faith and proportionality.

Guidance for Employees

1. A bond voluntarily signed after full disclosure can be enforced; not every bond is a restraint of trade.

2. You may still challenge a clause that is punitive, ambiguous or disproportionate—once the employer establishes prima‑facie fairness, the evidentiary burden shifts to you.

Vijaya Bank confirms that well‑drafted employment bonds remain a viable talent‑retention tool in India. While the Supreme Court in Vijaya Bank did not refer to the Delhi High Court’s ruling in Lily Packers Private Limited vs. Vaishnavi Vijay Umak and Ors. (2024), it likewise held that a time‑bound minimum‑service bond secured by proportionate liquidated damages is not hit by Section 27 of the Contract Act. Employers who document legitimate costs and maintain proportionality will find their bonds upheld, while employees must scrutinize the quantum and consent terms before signing.

Authors: Abhinav Goyal, Anmol Singh and Nishika Godha 

Readers can direct their queries or comments to the authors.