Minimum-Service Bond With Liquidated Damages Is Not Restraint of Trade or Against Public Policy: Supreme Court

Vijaya Bank's 2006 recruitment notification required selected candidates to execute a Rs. 2 lakh indemnity bond, payable if they left within three years (para 2). The respondent, an officer of the bank since 1999, was appointed Senior Manager on 07.08.2007 under clause 11(k) of his appointment letter, which carried the same condition, and executed the bond (paras 2, 4-5). He resigned on 17.07.2009 to join IDBI and paid Rs. 2 lakh under protest (para 6). His writ petition invoking Articles 14 and 19(1)(g) and Sections 23 and 27 of the Contract Act was allowed and upheld in the High Court (paras 7-8).

Section 27 of the Contract Act is exhaustive, so an employment covenant restraining a profession must be tested against it (paras 11-12). Golikari and Murgai settle that negative covenants operating during the employment are generally not restraints of trade (paras 13-15). Clause 11(k) only fixed a minimum three-year term, in furtherance of the contract and not to restrain future employment (para 16). Standard form employment contracts prima facie show unequal bargaining power, and the employer carries the onus of proving that a restrictive covenant is not opposed to public policy (paras 19, 21). Public policy evolves, and preserving a scarce specialised workforce is an emerging head of it (paras 22-25). After liberalisation, a public sector bank competing with private players could fix a minimum tenure to reduce attrition (paras 26-27). The Rs. 2 lakh damages were not unjust, since such a bank must fill posts through an open and expensive recruitment process under Articles 14 and 16 (paras 28-29). For a senior manager on a lucrative package the sum did not make resignation illusory, and the respondent had paid it (para 31). The High Court mechanically applied BEML, which involved a clog on future employability (paras 32-34).