Resign Early, Pay ₹2 Lakh: Supreme Court Upholds Employment Bond Penalty

Introduction: Why this ruling matters

On May 14, 2025, in Vijaya Bank & Anr. v. Prashant B. Narnaware (2025 INSC 691), the Supreme Court of India upheld the enforceability of an employment bond clause compelling an employee to serve three years or pay ₹2 lakh as liquidated damages. This landmark verdict clarifies the legal framework for such bonds within public sector undertakings (PSUs) and deeply impacts the wider employment contracts landscape.

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Factual Background

• Employee: Prashant B. Narnaware, a Senior Manager in Vijaya Bank.

• Bond Clause: Clause 11(k) of his appointment letter mandated a ₹2 lakh indemnity bond if he resigned before completing three years.

• Timeline: Joined on 28 Sept 2007, resigned before 3-year completion in July 2009 to join another bank. Paid ₹2 lakh under protest.

• Legal Challenge: Karnataka High Court struck down the bond as an unlawful restraint on trade and violative of Articles 14 & 19(1)(g), and Sections 23 & 27 of the Indian Contract Act.

• Supreme Court Appeal: Reversed the High Court, upholding the bond’s legitimacy.

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Legal Analysis

A. Section 27: Restraint of Trade

Section 27 stipulates that agreements restraining lawful profession are void. However, the Court affirmed long-standing precedents (e.g. Golikari 1967, Murgai 1981) distinguishing between:

• During Employment: Restrictions are valid if reasonable.

• Post‑Employment: Restrictions curbing future trade violate Section 27.

Since 11(k) binds only during employment and doesn’t bar future employment, it's not a restraint of trade.

B. Section 23 & Public Policy

Section 23 voids contracts against public policy, especially unconscionable standard-form contracts.

1. The employee argued the clause was oppressive due to bargaining imbalances.

2. The Court referenced Brojo Nath (1986), emphasizing that public policy evolves with market dynamics.

3. The clause aimed to protect PSU interests, curtail attrition, and offset training and recruitment costs.

4. Keeping public sector recruitment lawful (via Articles 14 and 16) demands open, transparent processes—hiring temporary replacements is not cost-effective.

Thus, the clause was deemed not against public policy, but aligned with legitimate PSU objectives.

C. Reasonableness of ₹2 Lakh as Liquidated Damages

1. The benchmark is whether the amount reflects a genuine pre-estimate of loss and isn’t punitive (as per Sections 23 & 74 Contract Act).

2. The Court noted the employee was well-paid and that ₹2 lakh didn't make resignation "illusory"

3. Hence, the quantum was found justifiable and proportionate.

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4. Broader Implications

A. For PSUs

They now have satutory clarity to enforce similar bonds, safeguarding their investment in specialized personnel.

B. For Private Sector

Though the ruling centers on PSUs, the judicial principles apply broadly. Private companies can adopt similar clauses—if backed by proper documentation of investment/recruitment costs and reasonability .

C. For Employees

Prior scrutiny of contract terms is critical. Early resignation may bear serious financial consequences if such bonds exist.

D. National Talent Management

India’s sectors—especially those requiring upskilling and specialized hiring—may see better retention, mitigating the high attrition rates of ~18–20% in IT/BFSI sectors reported recently.

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Key Guidelines for Practitioners

PSUs should ensure such contracts align with Articles 14 and 16 procedural fairness. Private companies must also balance retention strategies with fairness and data-backed liability clauses.

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Conclusion

The Supreme Court’s decision in Vijaya Bank v. Narnaware marks a turning point in Indian labour jurisprudence. It affirms that:

1. Liquidated-damage bonds tied to training investments are enforceable.

2. Such bonds are not restraints of trade when limited to the term of employment.

3. If structured reasonably, they comply with Sections 23 & 27 and constitutional mandates.

4. This creates a compliance roadmap for bonds in both public and private employment contracts.

As India advances its skilling and employment ecosystems, this verdict underscores a crucial balance between employee mobility and employer investments—and empowers organizations to embed structured retention mechanisms within legally sound frameworks.