On May 14, 2025, the Supreme Court in Vijaya Bank v. Prashant B. Narnaware upheld the legality of an employment bond requiring a minimum three-year service commitment or payment of ₹2 lakhs for premature resignation. This ruling has reignited debate over the enforceability of restrictive covenants in employment contracts—particularly under Section 27 of the Indian Contract Act, 1872 (Contract Act) and its implications for private employers.
The respondent, a probationary officer at Vijaya Bank, signed an indemnity bond committing to a three-year tenure. On resigning within two years, he paid the indemnity bond amount “under protest” and subsequently challenged the bond. While the Karnataka High Court deemed the clause violative of Section 27 of the Contract Act, the Supreme Court reversed this finding. The Court held that negative covenants operative during the term of employment do not amount to restraint of trade. The court also examined if the bond was opposed to public policy and thus void under Section 23 of the Contract Act. It held that minimum service tenure clauses were introduced to protect legitimate public policy concerns relating to Public Sector Units (PSUs) facing attrition to private competitors. The damages sought were found neither excessive nor punitive as: (i) untimely resignation would require bank to carry expensive recruitment process compliant with constitutional principles; and (ii) the employee being in senior middle management was in a financially sound position to pay the damages.
Existing Legal Landscape
Section 27 of the Indian Contract Act renders void any agreement restraining lawful trade, profession, or business, with the sole exception of agreements involving the sale of goodwill. However, courts have drawn a line between in-term and post-employment restrictions: – In Niranjan Shankar Golikari v. Century Spg. & Mfg. Co. Ltd., the Supreme Court upheld a clause preventing the employee from joining a competitor during the term of his contract. Conversely, in Superintendence Co. of India v. Krishan Murgai, a post-employment restraint was struck down. The Court adopted principles from Mills v. Dunham, holding that only narrowly tailored in-term restrictions survive scrutiny.
Implications for Private Employers
Although Vijaya Bank involved a PSU, the judgment has relevance across sectors. Courts have similarly upheld bonds in private employment when found to be reasonable and fairly negotiated in various judgements. Courts have also in some cases upheld bonds in private employment but rationalized the damages.
In Lily Packers (P) Ltd. v. Vaishnavi Vijay Umak, the court held that a 3-year lock-in period of employment with a private employer was necessary for the protection on employers’ legitimate interests and not in restraint of trade. Similarly, in Bindu Kelunni v. Blue Dart Aviation Ltd. an indemnity of ₹10 lakhs for premature resignation by a trainee pilot was held to be voluntarily executed and a reasonable pre-estimate of damages suffered by employer.
In Ledalla Ravichandar v. Satyam Computer Services Ltd., and Sicpa India Ltd. v. Manas Pratim Deb, the courts upheld employment bonds of private employers but reduced the damages of the basis of time served, training provided, and pay scale of the employees.
Section 73–74: Contractual Compensation and Limits
Sections 73 and 74 of the Contract Act govern compensation for breach. Liquidated damages that are genuine pre-estimates of foreseeable loss are enforceable. However, penalties disguised as compensation will be reduced to reasonable amounts. The courts evaluate proportionality, intention, and actual impact—factoring in recruitment, training, and revenue implications.
Despite its PSU context, Vijaya Bank reinforces well-settled principles: employment bonds can be valid, but only when proportionate and non-punitive. In such cases the courts do not generally compel employees to continue their employment against their volition rather grant monetary damages. One of the key considerations for an enforceable employment bond is ensuring that the bond period reasonably reflects the nature and cost of training or benefits conferred. It is also helpful if the employers can show that the employee must have voluntarily consented to the terms, ideally with time to review, negotiate, and seek independent advice. Employers should maintain evidence of actual training-related expenses to support claims of genuine loss, and avoid penalty clauses by ensuring compensation amounts are reasonable and not excessive which may be assessed in light of the employee’s pay scale. To enforce employment bonds, employers may consider filing a suit for damages.
The Vijaya Bank judgment affirms that in-term employment bonds, when reasonable and justified, are enforceable under Indian contract law. For private employers, it provides useful judicial guidance—highlighting how thoughtful, proportionate drafting can help secure business interests without running afoul of Section 27 of the Contract Act.