14 May 2025 Civil Appeals >> Civil & Consumer Law  

In Vijaya Bank & Another v/s Prashant B Narnaware the Supreme Court overturned a High Court judgment that had quashed Clause 11(k) of an appointment letter issued by a bank. This clause required an employee to pay liquidated damages of Rs. 2 lakhs if they resigned before completing a three-year tenure. Consequently, the bank is no longer mandated to refund the said sum to the employee.

The case originated when the respondent-employee, who joined the appellant-bank in 1999 and was promoted to Senior Manager in 2007, resigned on July 17, 2009, before completing the stipulated three-year period. He paid the Rs. 2 lakh under protest and subsequently filed a writ petition in the High Court, challenging Clause 11(k) (and a similar clause 9(w) in the recruitment notification) as violative of Articles 14 and 19(1)(g) of the Constitution of India and Sections 23 and 27 of the Indian Contract Act, 1872. The High Court had sided with the employee.

The Supreme Court examined two primary issues:

1. Restraint of Trade (Section 27 of the Contract Act): The Court reiterated established legal principles that restrictive covenants operating during the subsistence of an employment contract are generally not considered a restraint of trade. Clause 11(k) imposed a restriction on the employee's option to resign prematurely, thereby ensuring a minimum service term. The Court held that the clause's object was to further the employment contract, not to restrain future employment. Thus, it was not violative of Section 27.
2. Opposed to Public Policy (Section 23 of the Contract Act) and Constitutional Rights (Articles 14 & 19): The respondent argued that the clause was part of a standard form contract, unconscionable due to unequal bargaining power, and disproportionate. The Court acknowledged the principle of scrutinizing standard form contracts for unfairness, unreasonableness, or unconscionability, especially in cases of unequal bargaining power, as established in Central Inland Water Transport Corporation Ltd. vs. Brojo Nath Ganguly.

However, the Supreme Court considered the evolving nature of "public policy" in the context of India's liberalized economy. It noted that public sector undertakings like the appellant-bank need to ensure retention of efficient and experienced staff to compete effectively and reduce attrition. The bank's affidavit highlighted the "financial hardship" and the "prolix and expensive recruitment process" involved in replacing prematurely resigned employees, which requires adherence to constitutional mandates of open advertisement and fair competitive procedures.

Given that the respondent was in a senior managerial role with a lucrative pay package, the Court found the Rs. 2 lakh liquidated damages not to be so high as to render resignation illusory. The Court concluded that the restrictive covenant, viewed from the perspective of ensuring efficiency and rationalizing administrative overheads for a public sector bank, was neither unconscionable, unfair, unreasonable, nor in contravention of public policy.

The Supreme Court distinguished the High Court's reliance on a previous judgment (K.Y Venkatesh Kumar v. BEML Ltd.), stating that the factual matrix and specific issue of financial loss due to recruitment drives were not considered in that case.

In light of these findings, the Supreme Court ruled that Clause 11(k) does not amount to a restraint of trade nor is it opposed to public policy. Consequently, the appeal was allowed, and the High Court's judgment was set aside. A similar appeal concerning the same clause was also dismissed, upholding the High Court's decision against the employee in that instance.