Validity of employee bond in government job
On May 14, 2025, the Supreme Court of India delivered an important judgement in the case of Vijaya Bank and others vs Prashant B. Narnaware 2025, which addressed the validity of employee bonds in employment, i.e., the validity of restrictive employment clauses and their compliance with constitutional and contractual principles. In which the High Court held such restrictive conditions void, considering them to be in restraint of trade under Section 27 of the Indian Contract Act 1872. Aggrieved by this, the bank filed an appeal before the Supreme Court. In which the decision of the High Court was reversed, and the execution of the employee bond and such restrictive conditions were upheld.
Background and Facts of the Case
Terms of Employment and Dispute
- In 1999, the respondent joined Vijaya Bank as a probationary assistant manager and was subsequently promoted to the post of Middle Management Scale-II.
- In 2006, the Bank issued a recruitment notification for 349 officers which contained a clause 9(w) which required the selected candidates to execute an indemnity bond of Rs 2 lakhs in case of retirement within three years (paras 2-4).
- The respondent resigned from his earlier post and joined the post of MMG-III as Senior Manager on September 28, 2007 accepting the condition of its clause 11(k). The clause was – “You have to serve the Bank for a minimum period of 3 years from the date of joining and execute an indemnity bond for Rs. 2.00 lakhs. If you resign from the Bank services before completion of the stipulated minimum period of 3 years, you will have to pay the said amount. For this purpose, you have to bring a blank non-judicial affidavit of Rs. 100 purchased in the State of your posting.” (para 5).
- On 17th July, 2009, before completion of three years, the respondent resigned to take up the post in IDBI Bank and paid Rs. 2 lakhs under protest (para 6).
- He challenged clause 11(k) in the High Court, contending that it violated his fundamental rights and was against public policy (para 7).
Main Questions for Consideration
The Supreme Court examined the following questions in the case:
- Whether clause 11(k) of the appointment letter is a restraint of trade under Section 27 of the Contract Act, 1872?
- Whether the said clause is against public policy, thereby violative of Section 23 of the Contract Act, 1872 and violative of Articles 14 (Right to Equality) and 19 (Right to Liberty) of the Constitution of India?
Supreme Court’s Judgment and Analysis
1. Clause 11(k) does not violate Section 27 (Restrictions on Trade)
- Section 27 of the Contract Act provides that agreements which restrain the carrying on of a lawful trade or business are void, except in cases of sale of goodwill (para 11).
- The Court referred to its earlier judgment in Niranjan Shankar Golikari v. Century Spinning (1967) which distinguished between restrictive conditions imposed during employment (valid) and post-employment restrictions (potentially void). Held that negative conditions during employment are valid (paras 13-14)
- Superintendent Company v. Krishna Murgai (1981) – affirmed the view expressed in Golikari and held that a negative condition imposed during employment by a service contract not to perform any other service or work for a period specified therein is valid and such service contracts are enforceable. The doctrine of restraint of trade never applies during the continuance of the employment contract; it applies only when the contract comes to an end. (para 14).
- In view of these authoritative views, it may be concluded that it is well settled law that restrictive conditions imposed during the subsistence of a contract of employment do not restrict the freedom of the contracting party to carry on business or employment. A reading of clause 11(k) shows that the restriction on the respondent to execute a bond for a minimum period or Rs. 2 lakhs was intended to prolong the contract of employment and not to bar future employment. Therefore, it cannot be said to be violative of Section 27 of the Contract Act i.e. it does not bar future employment but ensures a minimum tenure, thereby making it valid under Section 27.(Para 15 & 16)
