Employment bonds are widely used to retain talent, especially in sectors that require significant training investment. These agreements often stipulate that the employee must serve the employer for a minimum period or compensate for early resignation. But does such a stipulation amount to “unfair enrichment”? The recent Supreme Court judgment in Vijaya Bank & Anr. v. Prashant B Narnaware (2025 INSC 691) sheds light on this crucial issue.
The Court upheld the validity of a clause requiring an employee to pay ₹2 lakhs upon resigning before completing three years of service, rejecting the argument that it amounted to restraint of trade or unjust enrichment.
This article provides an in-depth analysis of the case, discussing the legal issues, judicial reasoning, and its implications on employment contracts in India.
Background of the Case
The respondent, Prashant B. Narnaware, joined Vijaya Bank in 1999 and was promoted to Middle Management Grade-II (MMG-II). In 2006, Vijaya Bank released a recruitment notification for various posts, including that of Senior Manager—Cost Accountant. Clause 9(w) of the recruitment notification required selected candidates to execute an indemnity bond of ₹2,00,000, payable if they left before completing three years of service.
Accepting this condition, the respondent resigned from his existing post and joined as Senior Manager (MMG-III) in 2007. He executed the bond and accepted Clause 11(k) of the appointment letter, binding him to serve a minimum of three years or pay the stipulated amount upon early resignation.
However, in July 2009—before completing three years—he resigned to join another bank (IDBI) and paid ₹2 lakhs under protest. He then challenged the legality of the bond in the High Court, which ruled in his favour. The Bank appealed to the Supreme Court.
Issues
The case raised the following critical legal questions:
- Whether Clause 11(k) of the appointment letter was a restraint of trade under Section 27 of the Indian Contract Act, 1872.
- Whether the clause was opposed to public policy under Section 23 of the Contract Act.
- Whether the requirement of ₹2 lakhs upon resignation before the bond period resulted in unfair enrichment for the employer.
Arguments Before the Court
Respondent’s Arguments
- The clause was part of a standard form contract, leaving no room for negotiation.
- It was coercive and imposed under unequal bargaining conditions.
- Payment of ₹2 lakhs was disproportionate and amounted to an unreasonable penalty.
- The clause violated Articles 14 and 19(1)(g) of the Constitution of India.
Appellant-Bank’s Arguments
- The bond was a necessary tool for ensuring retention and managerial continuity.
- The ₹2 lakh sum was a pre-estimated compensation for administrative costs arising from early attrition.
- The clause did not prevent the employee from joining another job post-resignation, and thus was not a restraint on trade.
Judgment of the Supreme Court
1. Clause Does Not Violate Section 27 of the Indian Contract Act
The Court drew heavily on the precedent set in Niranjan Shankar Golikari v. Century Spinning & Manufacturing Co. (1967), where it was held that:
“Negative covenants operative during the period of the contract of employment are not considered restraint of trade under Section 27.”
The Court reasoned that Clause 11(k) only operated during the tenure of employment and did not prohibit post-resignation employment. Hence, it did not violate the provisions of Section 27.
2. Clause Not Opposed to Public Policy (Section 23)
The Court addressed the question of whether the clause was unconscionable or unfair. It noted that:
“Contracts in standard form are subject to scrutiny, especially where unequal bargaining power exists”
However, the Court emphasized the context—public sector banks operate under strict recruitment policies and cannot resort to ad-hoc hiring. Resignations disrupt workflow, demand fresh recruitment, and incur costs. Hence, the clause was a legitimate attempt to safeguard institutional interests
Referring to Central Inland Water Transport Corp. v. Brojo Nath Ganguly (1986), the Court agreed that standard form contracts must not be unconscionable. But it clarified that Clause 11(k) was reasonable, proportional, and justified by administrative necessity.
3. No Unfair Enrichment
The Supreme Court found that ₹2 lakhs was a reasonable pre-estimate of damages. The Bank had laid out detailed grounds on how premature resignations cause financial loss:
- Repetitive, costly recruitment drives;
- Disruption of workflow;
- Delays in service delivery.
The Court concluded that the clause did not amount to unjust enrichment, especially since the employee knowingly entered into the contract and voluntarily paid the amount before switching jobs.
Distinction from BEML Judgment
The High Court had relied on K.Y. Venkatesh Kumar v. BEML Ltd.(2009) to invalidate Clause 11(k). However, the Supreme Court distinguished the facts:
- In BEML, the clause imposed restrictions even after termination, making it harsher.
- There was no detailed assessment in BEML on the financial loss due to resignation.
- Therefore, BEML could not be treated as binding precedent for this case
Key Legal Principles Evolved
1. Validity of Employment Bonds
The Court upheld that employment bonds are not illegal per se if they:
- Apply during the period of employment,
- Serve a legitimate business interest,
- Are not harsh, one-sided, or unconscionable.
2. Standard Form Contracts
While such contracts deserve careful judicial scrutiny, courts must assess:
- The context of employment (public vs private sector),
- Bargaining power of the parties,
- Proportionality of compensation clauses.
3. Reasonableness and Public Policy
The Court reaffirmed that public policy is dynamic. The transformation of India into a liberalized economy demands flexibility in interpreting employment terms. Provisions aimed at enhancing productivity and reducing attrition align with evolving notions of public interest
Implications of the Judgment
For Employers
- Public and private employers can rely on well-drafted bond clauses to ensure employee retention.
- They must ensure that compensation clauses are justifiable and not punitive.
For Employees
- Once a bond is signed voluntarily, challenging it becomes difficult unless proven to be manifestly unjust.
- Awareness of legal consequences is vital before entering employment contracts.
For the Legal Community
- This ruling reaffirms the enforceability of in-service negative covenants.
- Legal advisors must guide clients to craft clauses that reflect proportionality and necessity.
Conclusion
The Supreme Court’s ruling in Vijaya Bank v. Prashant B Narnaware settles a critical area of employment law. It clearly distinguishes between legitimate bond enforcement and oppressive contractual obligations. The decision reinforces the principle that freedom of contract must be balanced with fairness and public interest.
The Supreme Court held that early resignation doesn’t amount to unfair enrichment if the employment bond is fair, lawful, and mutually agreed upon. Far from being unfair enrichment, such clauses are a means to ensure continuity, efficiency, and accountability in the modern workforce.