Clarifying the Enforceability of Employment Bonds: A Closer Look at the Supreme Court’s Ruling in Vijaya Bank v. Prashant B. Narnaware

In a significant ruling that may reassure employers across sectors, the Supreme Court recently upheld the enforceability of a INR 2 lakh penalty clause for premature resignation in the case of Vijaya Bank & Anr. v. Prashant B. Narnaware[1]. The case revolved around the validity of an employment bond that required the employee to either serve for a minimum of three years or pay liquidated damages to the employer upon early resignation. While employment bonds have often raised questions around enforceability under Indian contract law, the Court’s verdict lends clarity—particularly on the scope of liquidated damages under Section 74 of the Indian Contract Act, 1872.

Background and the Dispute

Mr. Narnaware was appointed by Vijaya Bank, a public sector bank, in a middle management role with a competitive pay package. As part of his appointment, he agreed to serve a minimum period of three years, failing which he would be liable to pay INR 2 lakhs as compensation to the bank. However, he resigned within a year of joining. While he paid the stipulated amount, he later challenged the validity of this clause, arguing it was an unreasonable restraint on employment and therefore void under Section 27 of the Indian Contract Act.

The Karnataka High Court, agreeing with the employee, struck down the clause as an unlawful restraint on trade. However, this decision was overturned by the Supreme Court, which found the clause to be a valid stipulation of liquidated damages rather than a blanket restraint on employment mobility.

The Supreme Court’s Rationale

The Court emphasized that not all restrictions on employment mobility are void—particularly when they are not excessive and are intended to protect a legitimate business interest. In this case, Vijaya Bank, as a public sector entity, could not replace a mid-level employee through informal means. It would have to initiate a constitutionally compliant recruitment process, including advertisements and open competition, which would incur time and expense. The clause, therefore, was seen as a deterrent against abrupt resignation that could disrupt operations and impose costs on the institution.

Notably, the Court did not adopt an unqualified position in favour of employment bonds. It acknowledged that the enforceability of such clauses hinges on whether the stipulated damages are reasonable. While it upheld the INR 2 lakhs clause in this case, the ruling implicitly reinforces that disproportionate or punitive amounts—ones that effectively deter resignation altogether—could still be invalidated. In fact, the Court noted that the quantum demanded here was not so excessive as to make resignation illusory, particularly given the employee’s compensation and managerial level.

What This Means for Employers

For businesses, this decision offers both validation and guidance. It affirms that reasonable employment bonds—particularly those intended to recover actual training or recruitment-related costs—can be enforced, provided they are proportionate and clearly stated. The ruling is especially relevant for sectors where specialized training or recruitment of mid-to-senior level talent involves significant investment.

However, the decision stops short of endorsing overly restrictive employment bonds that could be construed as punitive or coercive. Employers should take care to document the rationale behind any liquidated damages clause and ensure that the amount claimed aligns with actual or foreseeable losses. Doing so not only strengthens enforceability but also aligns with the safeguards embedded in Section 74 of the Contract Act, which guards against penalties masquerading as compensation.

Conclusion

The Supreme Court’s judgment brings welcome clarity on the enforceability of employment bonds in India. It balances the interests of employers seeking to protect their investments with the need to preserve employee mobility. For businesses, the message is clear: liquidated damages can be a viable tool—but only when used judiciously, proportionately, and transparently.

[1] 2025 INSC 691