By Jaslene Ahluwalia, an intern at PSA, with inputs from Aastha Mathur
1. Introduction
On May 14, 2025, the Supreme Court or SC passed a key judgement in the case of Vijaya Bank v. Prashant Narnaware[1] on the legality of service bonds in employment contracts. Service or employment bonds (“Employment Bonds”) refer to contractual agreements wherein an employee agrees to work in an organisation for a minimum specified period or pay a pre-decided sum (liquidated damages) in case of premature resignation, which are often a precondition for hiring and/or promotions. These are usually employed by an entity in an effort to protect its investment in the training, orientation, or upskilling of the employee. An employee bound by an employment bond must also consider the financial repercussions of leaving early, especially if they have already accepted the benefits of a promotion or specialist training funded by the employer.
Many argue that such bonds are prima facie illegal as they constitute a restraint of trade under Section 27 of the Indian Contract Act, 1872 (“Act”) and impinge on an employee’s constitutional freedom to choose their workplace. The SC however, has upheld their validity.
This blog post discusses the facts and reasoning behind the SC judgment, as well as its larger implications on the validity of employment bonds.
2. Factual Matrix
In 1999, Prashant was employed by Vijaya Bank as a Probationary Assistant Manager. Thereafter, in 2006, Vijaya Bank issued a recruitment notification for promoting current officers to Senior Managers. This notification also mentioned that selected candidates will be required to sign an indemnity bond of INR 200,000 (about USD 2,300) if they leave prior to completing three years. Prashant applied for this role and joined the new position on September 28, 2007. His offer letter explicitly recorded his agreement to the terms of his promotion, and he gave a bond to that effect. Subsequently, on July 17, 2009, Prashant accepted an offer to join IDBI Bank. Vijaya Bank accepted his resignation but insisted he pay the bond amount as he had not completed the three-year term. Prashant paid the bond amount under protest and resigned.
On September 16, 2009, Prashant filed a writ petition before Karnataka High Court challenging clause 11(k) of his appointment letter, pertaining to the employment bond, for violating Articles 14 and 19(1)(g) of the Constitution, as well as Sections 23 and 27 of the Act. The Karnataka High Court, relying on the ruling in K.Y. Venkatesh Kumar v. BEML[2], held that an employment bond constituted an unreasonable restraint, and directed Vijaya Bank to return the bond amount. Aggrieved, Vijaya Bank appealed to the SC.
Prashant argued that clause 11(k) is unreasonable and he was forced to accept the term as a condition of his promotion. Vijaya Bank countered that employment bonds are a necessary employee retention tool given the operational disruptions and costs incurred due to untimely resignations.
3. Supreme Court Ruling
In order to arrive at a decision, the SC looked at two key issues:
3.1 Restraint of Trade – Pre v. Post Termination
Section 27 of the Act states that any contract prohibiting a person from pursuing a legal profession, trade, or business is void to the extent of such prohibition, except restraints relating to the sale of goodwill or reasonable local restrictions. Section 27 thus operates as a bar to a restrictive covenant during the subsistence of an employment contract.
In Niranjan Shankar Golikari v. Century Spinning[3], the SC delved into the legality of restrictive covenants at length and distinguished between those operating during the subsistence of an employment contract and those upon termination, holding that the former would not be void under Section 27. This view was reiterated and endorsed in subsequent cases.[4] The distinction was justified as the doctrine of restraint of trade cannot apply while a contract of employment subsists, it can only apply after the employment has terminated. Applying these rulings to the facts at hand, SC held that clause 11(k) cannot be considered violative of Section 27 as its object was to retain the employee for a minimum period of three years. The clause does not restrain future employment.
The employee Prashant was in a senior middle managerial grade with a lucrative pay package. From that perspective, the quantum of INR 200,000 in damages was not so high as to render the possibility of resignation illusory. In fact, Prashant had paid the amount and resigned from the post.
In view of these facts, clause 11(k) cannot be considered void under Section 27.
3.2 Public Policy – Balancing Employee Freedom with the Employer Protocols
In order to determine whether clause 11(k) was against public policy, the SC first referred to Central Inland Water Transport Co. v. Brojo Nath Ganguly,[5] which held that there is a presumption in favor of the employee that an employment contract is onerous given the unequal bargaining power of both parties. An employee is seldom in a position to negotiate employment agreements and can be coerced into accepting onerous terms and conditions. Therefore, the onus to prove that an agreement or term is not onerous will lie on the employer.
Accordingly, the SC reviewed documents provided by Vijaya Bank and concurred that employment bonds are necessary given the costs and disruptions suffered. The SC also noted that Vijaya Bank, being a public sector bank, cannot resort to private or ad-hoc appointments. An untimely resignation requires the bank to undertake an expensive recruitment process involving open advertisement and a fair competitive procedure to ensure that any appointment is not challenged for being in violation of the Constitution.
The SC further observed that since India’s economic liberalization, public sector banks had to review and reset policies to compete with private banking entities. In view of these facts, requiring an “employment bond” is not against public policy.
4. Conclusion
This judgment provides key insights on the enforceability of employment bonds, and has emphasized the need to balance an employer’s interest in retaining key personnel with an employee’s right to pursue better opportunities. An employment bond cannot be so onerous as to make the option of leaving illusory. Moreover, while the ruling upheld the validity of employment bonds, its direct applicability to private companies remains limited. A key aspect in the case was that the appellant, being a public sector bank, was subject to constitutional constraints that do not apply to private employers.
Employers contemplating employment bonds ought to ensure that bond terms are clearly set out in the offer or promotion letter, avoid post-termination restrictions such as non-competes, keep bond amounts reasonable, and demonstrate a legitimate basis for the bond, i.e. to recover training or relocation costs. Employees should also exercise caution with employment bonds, carefully reviewing and understanding the terms before agreeing to them.
[1] 2025 INSC 691
[2] Karnataka High Court Division Bench in W.A. No. 2736/2009 disposed on 09.12.2009
[3] 967 SCC Online SC 72
[4] (1981) 2 SCC 246
[5] (1986) 3 SCC 156