2025 INSC 691 Page 1 of 15

Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.11708 of 2016

Vijaya Bank & Anr. …..Appellant(s)

VERSUS

Prashant B Narnaware …..Respondent(s)

With

CIVIL APPEAL NO.11499 of 2016

J U D G M E N T

Joymalya Bagchi, J.

CIVIL APPEAL NO.11708 of 2016

1. Appellants have challenged judgment and order dated 20.08.2014

passed by the High Court quashing clause 11(k) of the

appointment letter whereby the respondent -employee

1 was

required to pay liquidated damages of Rs. 2 lakhs in the event of

leaving employment of the first appellant-bank

2 prior to three years

1

Hereinafter, respondent.

2

Hereinafter, appellant-bank.

Page 2 of 15

and consequentially the appellant-bank was directed to refund the

said sum to the respondent.

2. In 1999, respondent had joined the appellant-bank as a

Probationary Assistant Manager. His service was confirmed in

2001. Thereafter, he was promoted to Middle Management Scale-

II. In 2006, appellant-bank issued a recruitment notification for

appointment of 349 officers in different grades. Clause 9 (w) of the

recruitment notification reads as follows:-

“Selected candidates are required to execute an indemnity bond

of Rs.2.00 Lakh (Rupees Two Lakh only) indemnifying that they

will pay an amount of Rs.2.00 lakh to the Bank if they leave the

service before completion of 3 years”

3. Cognizant of the said condition, respondent applied to the post of

Senior Manager-Cost Accountant at basic pay of Rs.18,240/- and

was selected for the said post.

4. On 07.08.2007, respondent was issued an appointment letter.

Clause 11(k) of the said letter reads as follows:-

“You are required to serve the Bank for a minimum period of 3

years from the date of joining the bank and should execute an

indemnity bond for Rs.2.00 lakhs. The said amount has to be paid

by you in case you resign from the services of the bank before

completion of stipulated minimum period of 3 years. For this

purpose, you have to bring a blank non-judicial stamp paper of

Rs.100/- procured in the State of your posting.”

Page 3 of 15

5. Accepting the aforesaid condition, respondent voluntarily resigned

from his erstwhile post i.e. Manager, MMG-II and joined the post

of Senior Manager, MMG-III on 28.09.2007. Respondent also

executed an indemnity bond in terms of the aforesaid clause.

6. On 17.07.2009 i.e. before completion of three years from his date

of joining, respondent tendered resignation for joining another

Bank, namely, IDBI. His resignation was accepted and on

16.10.2009 respondent under protest in terms of the aforesaid

condition paid the sum of Rs.2 lakhs to the appellant-bank.

7. Thereafter, respondent filed a writ petition before the High Court

praying for quashing of clause 9 (w) of the recruitment notification

and clause 11 (k) of the appointment letter alleging the same were

in violation of Articles 14 and 19(1)(g) of the Constitution of India

and Sections 23 and 27 of the Indian Contract Act, 1872.

8. Appellant-bank opposed the prayer. Learned Single Judge relied

on the decision of a Division Bench of the High Court in K.Y

Page 4 of 15

Venkatesh Kumar v. BEML Ltd.

3 and allowed the writ petition. The

order came to be upheld by the Division Bench.

9. Heard Mr. Rajesh Kr. Gautam, learned counsel for the appellants

and Mr. Rahul Chitnis, learned counsel for the respondent.

10. The issue which falls for decision is whether clause 11 (k) of the

appointment letter amounts to :-

(i) restraint of trade under Section 27 of the Contract Act and/or

(ii) opposed to public policy and thereby contrary to Section 23 of

the Contract Act and violative of Articles 14 and 19 of the

Constitution.

RESTRAINT OF TRADE

11. Section 27 of the Contract Act provides every agreement which

restrains a person from exercising a lawful profession, trade or

business of any kind is to that extent void. A sole exception is

carved out in the proviso with regard to sale of goodwill of a

business, in which case the seller may be restrained from carrying

on similar business within a reasonable local limit.

3

Karnataka HC DB in W.A. No. 2736/2009 disposed on 09.12.2009.

Page 5 of 15

12. Though the Contract Act does not profess to be a complete code,

Act is exhaustive with regard to the subject matter contained

therein. That is to say, validity of a restrictive covenant in an

agreement including an employment agreement in regard to

restraint in exercise of lawful profession, trade or business has to

be tested on the touchstone of Section 27 of the Contract Act.

13. Whether Section 27 operates as a bar to a restrictive covenant

during the subsistence of an employment contract fell for decision

in Niranjan Shankar Golikari v. Century Spinning and

Manufacturing Co

4. After an illuminating discussion on the subject,

the Bench made a distinction between restrictive covenants

operating during the subsistence of an employment contract and

those operating after its termination. The Bench held as follows:-

“17. The result of the above discussion is that considerations

against restrictive covenants are different in cases where the

restriction is to apply during the period after the termination

of the contract than those in cases where it is to operate during

the period of the contract. Negative covenants operative during

the period of the contract of employment when the employee

is bound to serve his employer exclusively are generally not

regarded as restraint of trade and therefore do not fall under

Section 27 of the Contract Act. A negative covenant that the

employee would not engage himself in a trade or business or

would not get himself employed by any other master for whom

he would perform similar or substantially similar duties is not

therefore a restraint of trade unless the contract as aforesaid

4

1967 SCC OnLine SC 72

Page 6 of 15

is unconscionable or excessively harsh or unreasonable or

one-sided..”

14. This view was reiterated in the concurrent opinion of A.P. Sen, J.

in Superintendence Company (P) Ltd. v. Krishan Murgai

5. Endorsing

the ratio in Golikari (supra) with regard to validity of restrictive

covenants during the subsistence of a contract, A.P. Sen, J. held:-

“18. Agreements of service, containing a negative covenant

preventing the employee from working elsewhere during the term

covered by the agreement, are not void under Section 27 of the

Contract Act, on the ground that they are in restraint of trade.

Such agreements are enforceable. The reason is obvious. The

doctrine of restraint of trade never applies during the

continuance of a contract of employment; it applies only when

the contract comes to an end. While during the period of

employment, the courts undo ubtedly would not grant any

specific performance of a contract of personal service,

nevertheless Section 57 of the Specific Relief Act clearly provides

for the grant of an injunction to restrain the breach of such a

covenant, as it is not in restraint of, but in furtherance of trade.

19. In Niranjan Shankar Golikari case this Court drew a

distinction between a restriction in a contract of employment

which is operative during the period of employment and one

which is to operate after the termination of employment. After

referring to certain English cases where such distinction had

been drawn, the Court observed:

“A similar distinction has also been drawn by courts in India and

a restraint by which a person binds himself during the term of

his agreement directly or indirectly not to take service with any

other employer or be engaged by a third party has been held not

to be void and not against Section 27 of the Contract Act.”

15. In view of these authoritative pronouncements, it can be safely

concluded law is well settled that a restrictive covenant operating

5

(1981) 2 SCC 246

Page 7 of 15

during the subsistence of an employment contract does not put a

clog on the freedom of a contracting party to trade or employment.

16. A plain reading of clause 11 (k) shows restraint was imposed on

the respondent to work for a minimum term i.e. three years and in

default to pay liquidated damages of Rs. 2 Lakhs. The clause

sought to impose a restriction on the respondent’s option to resign

and thereby perpetuated the employment contract for a specified

term. The object of the restrictive covenant was in furtherance of

the employment contract and not to restrain future employment.

Hence, it cannot be said to be violative of Section 27 of the Contract

Act.

OPPOSED TO PUBLIC POLICY

17. Let us now examine whether the clause is opposed to public policy.

18. Mr. Chitnis has vehemently argued the clause is part of a standard

form contract and his client was compelled to sign on dotted lines.

If he did not do so, he would have to forsake career advancement.

The terms of the contract were imposed on him through an

unequal bargaining mechanism . Clause 11 (k) being an

unreasonable, onerous and ex-proportionate measure resulting in

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unjust enrichment for the appellant-bank is opposed to public

policy. At the time of his resignation respondent was compelled to

comply with the illegal condition and had done so under protest.

In these circumstances, he cannot be precluded from challenging

the condition as violative of fundamental rights and public policy.

19. In Central Inland Water Transport Corporation Ltd. v. Brojo Nath

Ganguly

6, this Court dealt with interpretation of standard form

employment contracts in the backdrop of unequal bargaining

power of employees. The Bench opined if such contracts are

unconscionable, unfair, unreasonable and injurious to public

interest, they shall be deemed void in law being opposed to public

policy. The Bench elucidated the proposition in the following

words:-

“91……………… the majority of such contracts are in a standard

or prescribed form or consist of a set of rules. They are not

contracts between individuals containing terms meant for those

individuals alone. Contracts in prescribed or standard forms or

which embody a set of rules as part of the contract are entered

into by the party with superior bargaining power with a large

number of persons who have far less bargaining power or no

bargaining power at all. Such contracts which affect a large

number of persons or a group or groups of persons, if they are

unconscionable, unfair and unreasonable, are injurious to the

public interest. To say that such a contract is only voidable

would be to compel each person with whom the party with

superior bargaining power had contracted to go to court to have

6

(1986) 3 SCC 156

Page 9 of 15

the contract adjudged voidable. This would only result in

multiplicity of litigation which no court should encourage and

would also not be in the public interest. Such a contract or such

a clause in a contract ought, therefore, to be adjudged void.

While the law of contracts in England is mostly judge-made, the

law of contracts in India is enacted in a statute, namely, the

Indian Contract Act, 1872. In order that such a contract should

be void, it must fall under one of the relevant sections of the

Indian Contract Act. The only relevant provision in the Indian

Contract Act which can apply is Section 23 when it states that

“The consideration or object of an agreement is lawful, unless ...

the court regards it as ... opposed to public policy.” (Emphasis

supplied)

20. It may not be out of place to note A.P. Sen, J., a member of

the coram in Brojo Nath (supra) had expressed a similar

view earlier in Murgai (supra):-

“59. It is well settled that employee covenants should be carefully

scrutinised because there is inequality of bargaining power

between the parties; indeed no bargaining power may occur

because the employee is presented with a standard form of

contract to accept or reject. At the time of the agreement, the

employee may have given little thought to the restriction because

of his eagerness for a job; such contracts “tempt improvident

persons, for the sake of present gain, to deprive themselves of

the power to make future acquisitions, and expose them to

imposition and oppression”.

21. The legal principles relating to interpretation of standard form

employment contracts may be summarized as follows:-

(i) Standard form employment contracts prima facie evidence

unequal bargaining power.

(ii) Whenever the weaker party to such a contract pleads undue

influence/coercion or alleges that the contract or any term

Page 10 of 15

thereof is opposed to public policy, the Court shall examine

such plea keeping in mind the unequal status of the parties

and the context in which the contractual obligations were

created.

(iii) The onus to prove that a restrictive covenant in an

employment contract is not in restraint of lawful employment

or is not opposed to public policy, is on the covenantee i.e.

the employer and not on the employee.

22. This brings us to the issue as to what is public policy? In Brojo

Nath (supra) the expression ‘public policy’ under the Contract Act

was expounded as follows:-

“92. The Indian Contract Act does not define the expression

“public policy” or “opposed to public policy”. From the very

nature of things, the expressions “public policy”, “opposed to

public policy”, or “contrary to public policy” are incapable of

precise definition. Public policy, however, is not the policy of a

particular government. It connotes some matter which concerns

the public good and the public interest. The concept of what is

for the public good or in the public interest or what would be

injurious or harmful to the public good or the public interest has

varied from time to time. As new concepts take the place of old,

transactions which were once considered against public policy

are now being upheld by the courts and similarly where there

has been a well recognized head of public policy, the courts have

not shirked from extending it to new transactions and changed

circumstances and have at times not even flinched from

inventing a new head of public policy..”

Page 11 of 15

23. In Golikari (supra), the Bench noted the evolving nature of public

policy in following words :-

“12…….The attitude of the courts as regards public policy

however has not been inflexible. Decisions on public policy have

been subject to change and development with the change in

trade and in economic thought and the general principle once

applicable to agreements in restraints of trade have been

considerably modified by later decisions. The rule now is that

restraints whether general or partial may be good if they are

reasonable. A restraint upon freedom of contract must be shown

to be reasonably necessary for the purpose of freedom of trade.

A restraint reasonably necessary for the protection of the

covenantee must prevail unless some specific ground of public

policy can be clearly established against it.”

24. Generally speaking, public policy relates to matters involving

public good and public interest. What is ‘just, fair and reasonable’

in the eyes of society varies with time. Civilizational advancements,

growth of knowledge and evolving standards of human rights and

dignity alter the contours of public good and policy.

25. From the prism of employer-employee relationship, technological

advancements impacting nature and character of work, re-skilling

and preservation of scarce specialized workforce in a free market

are emerging heads in the public policy domain which need to be

factored when terms of an employment contract is tested on the

anvil of public policy.

Page 12 of 15

26. Since the last decade of 20

th century, India witnessed an era of

liberalization. Golden days of monopolistic public sector

behemoths were gone. Public sector undertakings like the

appellant-bank needed to compete with efficient private players

operating in the same field. To survive in an atmosphere of

deregulated free-market, public sector undertakings were required

to review and reset policies which increased efficiency and

rationalized administrative overheads. Ensuring retention of an

efficient and experienced staff contributing to managerial skills

was one of the tools inalienable to the interest of such

undertakings including the appellant-bank.

27. This prompted the appellant-bank to incorporate a minimum

service tenure for employees, to reduce attrition and improve

efficiency. Viewed from this perspective, the restrictive covenant

prescribing a minimum term cannot be said to be unconscionable,

unfair or unreasonable and thereby in contravention of public

policy.

28. The other aspect involves imposition of liquidated damages to the

tune of Rs.2 Lakhs in the event of pre-mature resignation. Mr.

Chitnis has strenuously argued the quantum is disproportionate

Page 13 of 15

and causes unjust enrichment to the employer. We are unable to

agree with this submission. In their pleadings before the High

Court the appellant-bank has clarified the financial hardship

which it would suffer due to untimely recruitment drives owing to

pre-mature resignations. The Bank pleaded as follows:-

“The Indemnity Bond obtained by the Bank was done so with a

view to secure the interests of the Bank and to place adequate

safeguards against premature resignations -tendered by

employees. In the usual course, appointments are into service of

the Bank after a detailed and elaborate process of recruitment and

the Banks interest would be seriously prejudiced in the event

premature resignations are tendered which would render the

entire recruitment process redundant. That apart the Bank would

also suffer the consequences of the loss in continuance of the said

post which would necessitate alternative arrangements and

restructuring to ensure smooth functioning of day to day business

activities. That apart, the bank would have to initiate a fresh

process of recruitment which would be time consuming and also

expensive.”

29. The stance of the appellant-bank is neither unjust nor

unreasonable. The appellant-bank is a public sector undertaking

and cannot resort to private or ad-hoc appointments through

private contracts. An untimely resignation would require the Bank

to undertake a prolix and expensive recruitment process involving

open advertisement, fair competitive procedure lest the

appointment falls foul of the constitutional mandate under Articles

14 and 16.

Page 14 of 15

30. Keeping these exigencies in mind, the appellant-bank had

incorporated the liquidated damage clause in the appointment

contract.

31. Respondent was serving in a senior middle managerial grade

having a lucrative pay package. Judged from that perspective, the

quantum of liquidated damages was not so high as to render the

possibility of resignation illusory. In fact, the appellant had paid

the said quantum and resigned from the post.

32. The High Court failed to consider the restrictive covenant in its

proper perspective in the factual matrix of the case and

mechanically relied on BEML (supra) to set aside the covenant as

barred by law.

33. In BEML (supra), a coordinate Bench of the High Court was

considering a restrictive covenant which not only imposed a

minimum term of employment but also a clog on future

employability.

34. That apart, in BEML (supra) the issue of financial loss suffered by

the public sector undertaking owing to time consuming and

expensive recruitment drives due to pre-mature resignations had

not fallen for consideration. It is trite judgments cannot be read as

Page 15 of 15

statutes and have to be applied keeping in mind the factual matrix

peculiar to each case

7.

35. In light of the aforesaid discussion, we are of the view the restrictive

covenant in clause 11(k) of the appointment letter does not amount

to restraint of trade nor is it opposed to public policy.

36. Consequently, the appeal is allowed. Impugned judgment and

order of the High Court is set aside.

CIVIL APPEAL NO.11499 of 2016

37. Similar issue with regard to validity of clause 11(k) in the

appointment letter fell for consideration in Civil Appeal No.

11708 of 2016. High Court dismissed the appellant-employee’s

challenge. In view of the order passed in the aforesaid appeal,

we find no reason to interfere with the order of the High Court.

The appeal is dismissed.

……………………………………………., J

(PAMIDIGHANTAM SRI NARASIMHA )

…………………………………………, J

(JOYMALYA BAGCHI )

New Delhi,

May 14, 2025

7

Haryana Financial Corporation v. Jagdamba Oil Mills (2002) 3 SCC 496