I. INTRODUCTION
On May 14, 2025, the Supreme Court of India (the "Supreme Court") delivered a significant judgment in Vijaya Bank & Anr. v. Prashant B. Narnaware1 ("Vijaya Bank") reaffirming that employment bonds which require employees to serve a minimum period or compensate the employer on early exit, are legally valid. While Indian courts have upheld such bonds in the past, this judgment is particularly important for employers in sectors where training and retention are significant investments by the employer.
The Supreme Court has clarified that employment bonds, if structured reasonably, do not violate Section 27 of the Indian Contract Act, 18722 ("Contract Act"), which prohibits agreements that restrain trade. The ruling distinguishes such bonds from non-compete clauses, which typically apply after employment ends and are unenforceable in India. This article examines the legal validity of employment bonds under the Indian laws, highlights their distinction from noncompete clauses, and outlines key measures employers should adopt to ensure enforceability.
II. THE LEGAL AND JUDICIAL FRAMEWORK
Under Section 27 of the Contract Act, any agreement that restrains a person from exercising a lawful profession, trade, or business is void. An exception has been carved out - when the goodwill of a business is sold, the seller can agree with the buyer to refrain from carrying on a similar business within specified local limits. This Section thus makes post-employment restrictive covenants void, as any such restriction will prevent an individual from the ability to earn a livelihood.
In the landmark case of Niranjan Shankar Golikari v. Century Spinning and Mfg. Co. Ltd.3, the Supreme Court differentiated between restraints operating during employment and those operating after termination of employment. The Supreme Court held that restrictions during employment are generally valid and not regarded as a restraint of trade. This principle was further clarified in Superintendence Company of India (P) Ltd. v. Krishan Murgai4, where the Supreme Court held that employers cannot restrict competition after employment ceases, but may protect legitimate interests, such as trade secrets and business relationships, during the course of employment.
III. EMPLOYMENT BONDS: NATURE AND PURPOSE
Employment bonds typically require employees to serve the employer for a minimum stipulated period or pay a predetermined amount as compensation for an early exit. In Fertiliser and Chemical Travancore Ltd. v. Ajay Kumar and Others5, the Kerala High Court recognised that in employment relationships where specialized or technical training is provided, these bonds are enforceable provided the terms are not arbitrary or excessively harsh, and help employers recover genuine costs incurred. Importantly, the Kerala High Court distinguished between post-employment restrictions, which may violate Section 27 of the Contract Act, and provisions that merely secure performance during employment or seek compensation for early exit, which are generally valid. The judgment emphasised that employment bonds are often necessary in sectors where skills imparted are specific, confidential, or costly, and their enforcement should be subjected to a test of proportionality
However, despite the carve outs for protecting an employer's interests, the bonds have been misused by unscrupulous employers as a method of forcing an employee to remain in employment, with no actual investment in the employee.
IV. CASE ANALYSIS: VIJAYA BANK & ANR. V. PRASHANT B. NARNAWARE6
In this case, Prashant Narnaware (the respondent) was promoted to Senior Manager at Vijaya Bank with the condition that he serve for a minimum of three years or pay INR 2 lakhs (approx. USD 2,330) as compensation for early resignation. The respondent voluntarily accepted these terms but resigned before completing the mandatory period to join a competitive bank. The Supreme Court considered two primary issues: (i) whether the clause requiring payment upon resignation before a minimum service period violates Section 27 of the Contract Act as a restraint on trade; and (ii) whether the clause was contrary to public policy and void under Section 23 of the Indian Contract Act.7 and unconstitutional under Articles 14 and 19(1)(g) of the Constitution8.
The Supreme Court held that the clause was valid, as it ensured performance during employment rather than restricting future employment. It also found the agreement fair, as the employee voluntarily accepted the terms, and the compensation amount was reasonable.
In K. Tapas K. Behera v. MD, O.H.P.C. and Ors.9, the Orrisa High Court had previously clarified that employment bonds are enforceable if they meet four key criteria: (i) the employer must show actual investment in the employee (such as training); (ii) the investment must be connected to a clear promise of continued service by the employee; (iii) the employer must demonstrate loss from early departure of the employee; and (iv) the bond amount should be proportionate to the loss. This principle was reinforced in Vijaya Bank, where the Court upheld an INR 2-lakh bond as reasonable and serving a legitimate business interest.
On the second issue on public policy, the Supreme Court rejected the argument that the employment agreement was imposed through unequal bargaining power, holding instead that the clause was part of a contractual arrangement voluntarily accepted by an experienced banking professional. The Supreme Court found that the compensation amount was neither arbitrary nor punitive but reflected legitimate institutional interests in a competitive market environment. With the evolution of business in India, the Supreme Court held that the inclusion of a minimum service period in contracts was reasonable to minimize attrition and maintain operational efficiency - premature resignations burden an employer with costly recruitment processes, impacting effectiveness and financial resources.
The Supreme Court's analysis reinforces the following distinctions between employment bonds and non-compete clauses:
1. Timing: Employment bonds operate during the course of employment, while non-compete clauses apply after termination of employment.
2. Purpose: Employment bonds seek to recover investments in employee training and development, while non-compete clauses restrict competition from former employees.
3. Freedom: Employment bonds allow employees to work elsewhere after paying the stipulated amount, while non-compete clauses prohibit certain types of employment entirely.
V. PRACTICAL GUIDELINES FOR EMPLOYERS
To ensure the enforceability of employment bonds, employers should implement the following practical measures:
1. Document Training and Development Costs: Employers should maintain detailed records of investments made in employee training, development, and onboarding.
2. Ensure Reasonableness of Terms: Bond periods and compensation amounts should be demonstrably proportionate to the actual investment made.
3. Distinguish from Post-Employment Restraints: Employment bonds should be clearly drafted to operate during the term of employment rather than after termination.
VI. CONCLUSION
The Supreme Court's ruling in Vijaya Bank reaffirms the validity of properly structured employment bonds, as long as they operate during employment and serve legitimate institutional interests. As the Indian economy continues to evolve, with increasing emphasis on specialised skills and knowledge-based industries, the framework established by the Supreme Court, provides a balanced approach that protects legitimate employer interests while preserving employee freedom without undue restriction.
Footnotes
1 2025 INSC 691.
2 Section 27 of the Contract Act states that "every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void."
3 1967 AIR 1098.
4 1980 AIR 1717.
5 1990 LLR 771.
6 2025 INSC 691.
7 Section 27 of the Contract Act states that "the consideration or object of an agreement is lawful, unless (i) it is forbidden by law; or (ii) is of such a nature that, if permitted, it would defeat the provisions of any law; or (iii) is fraudulent; or (iv) involves or implies injury to the person or property of another; or (v) the Court regards it as immoral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void."
8 Article 14 of the Constitution of India states, "the State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India." Article 19(1)(g) of the Constitution of India states, "all citizens shall have the right to practise any profession, or to carry on any occupation, trade or business."
9 W.P.(C) Nos. 576 of 2012, 4940 of 2011, 32791 of 2011, and 5302 of 2012.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
