Supreme Court Rules in Favor of Bank, Upholds Employment Bond Validity

In a significant ruling, the Supreme Court has upheld the validity of employment bond clauses in contracts, allowing a public sector bank to recover ₹2 lakhs from an employee who resigned before completing the mandatory three-year service period. The court emphasized that such clauses are legal and do not violate Section 27 of the Indian Contract Act, which prohibits agreements that restrain trade.

Why Are These Clauses Permissible?

The Court clarified that exclusivity clauses, which require employees to serve for a minimum period, are permissible because they operate during the term of employment, not after. They are not considered restrictive under the law.

Protecting Public Sector Entities

The Court highlighted the competitive pressures faced by public sector undertakings (PSUs) in today’s market. To remain efficient and retain skilled staff, which is crucial for their development, PSUs need tools like minimum service tenure clauses. The Court stated that requiring a minimum service period is a legitimate way to reduce attrition and maintain efficiency.

The Case: Vijaya Bank vs. Prashant B Narnaware

This case involved Vijaya Bank, which required selected officers to execute a ₹2 lakh indemnity bond if they resigned within 3 years. The Respondent, who had joined as a Senior Manager-Cost Accountant, resigned before the three-year mark and challenged the clause in court. The Karnataka High Court had initially ruled against the clause, but the Supreme Court overturned this decision.

Supreme Court’s Reasoning

The Supreme Court, in its judgment authored by Justice Bagchi, stated that exclusivity clauses do not restrict future employment but only impose a financial penalty for early exit. The Court rejected the argument that such clauses were unconscionable and part of a standard-form contract. It emphasized that public sector undertakings require skilled staff, and early resignations lead to costly recruitment processes.

The Penalty: Not Excessive, Says Court

The Court found that the ₹2 lakh penalty was not excessive, considering the Respondent’s position as a Senior Manager with a lucrative salary. The Court ultimately allowed the Bank’s appeal.