Legality and Enforcement of Employment Bonds

The age-old debate over the enforceability of employment bonds has resurfaced with the Supreme Court’s landmark decision in Vijaya Bank v. Prashant B. Narnaware (2025), which upheld a public sector bank’s bond requiring three years of service or payment of ₹2 lakhs. This ruling has reignited discussions on balancing employer investments with employee freedom.

Employment bonds are agreements where employees commit to work for a fixed period or pay compensation if they leave early. These contracts often specify a sum—termed liquidated damages—that becomes payable upon breach. Employers justify such clauses as essential to protect investments in training, relocation, or onboarding. However, such safeguards must operate within a legal regime that prioritises individual liberty and occupational freedom.

The Indian Contract Act, 1872, provides the statutory foundation. Section 10 mandates free consent and lawful consideration. Section 23 invalidates agreements contrary to public policy. Section 27 renders void any contract that restrains a person from carrying on a lawful profession, except in cases involving the sale of goodwill. Sections 73 and 74 deal with compensation for breach—allowing only reasonable compensation, not punitive sums. Constitutional protections under Article 19(1)(g) further guarantee the right to pursue any lawful occupation. Indian courts review employment bonds through both a contractual and constitutional lens.

Judicial scrutiny of such clauses began early. In 1963, the Supreme Court in Fateh Chand v. Balkishan Das held that under Section 74, the aggrieved party is entitled only to reasonable compensation, not automatically the full amount stipulated. The ruling emphasized that penalties disguised as compensation will not pass legal muster. A few years later, in Niranjan Shankar Golikari v. Century Spinning & Manufacturing Co. (1967), the Court distinguished between in-term and post-term restraints. It upheld the former, observing that negative covenants operative during employment could be valid if necessary and not unconscionable.

Even earlier, in Shree Gopal Paper Mills v. S.K.G. Malhotra (1962), a 20-year bond was struck down as excessive and oppressive. The decision underlined that overly long commitments conflict with the principle of free labor. This judicial caution continued in Superintendence Co. of India v. Krishan Murgai (1980), where the Supreme Court declared post-employment restraints void—even when limited in time or geography. It firmly rejected the idea that Section 27 allowed any exception based on reasonableness.

By the mid-1980s, courts began to reflect more deeply on power imbalances in employment. In Central Inland Water Transport Corp. v. Brojo Nath (1986), the Supreme Court struck down a clause that allowed termination without cause, branding it unconscionable and against public policy. The Court emphasized the need for fairness where one party had significantly less bargaining power. In Gujarat Bottling Co. Ltd. v. Coca-Cola Co. (1995), the Court affirmed that while in-term exclusivity clauses are enforceable, post-contractual restrictions remain void under Section 27.

The Court reaffirmed this principle in Percept D'Mark v. Zaheer Khan (2006), where a one-year post-contract non-compete was invalidated. The Court reiterated that Indian law does not recognize post-employment restraints, regardless of how narrowly they are drafted. Yet, exceptions based on public policy do exist. In Association of Medical Superspeciality Aspirants v. Union of India (2019), service bonds for doctors in government institutions were upheld. The Court found that such bonds served a compelling public interest and were linked to subsidized education.

At the High Court level, the Delhi High Court in Sicpa India Ltd. v. Manas Pratim Deb (2011) awarded only partial damages under a five-year bond. The employee had received overseas training but left before the bond term expired. While the bond stipulated ₹2 lakhs, the Court awarded just ₹22,000 based on the proportional training cost and tenure served. The case is often cited for its measured application of Section 74.

In the latest decision, Vijaya Bank v. Prashant B. Narnaware (2025), the Supreme Court upheld a three-year employment bond in the public sector. The employee either had to serve the full term or pay ₹2 lakhs as compensation. The Court found the clause enforceable. It reasoned that it did not restrain the employee from resigning or seeking other employment, but merely provided a mechanism for the employer to recover its investment. The decision marked a notable instance where the bond was upheld even against a constitutional challenge under Article 19(1)(g).

Together, these rulings establish clear principles. Negative covenants that operate during the term of employment are valid, but post-termination restraints are unenforceable. Compensation clauses must reflect genuine pre-estimates of loss and cannot be penal in nature. Employers bear the burden to prove actual investment or harm resulting from early resignation. Courts consistently refuse to enforce specific performance in personal service contracts, relying instead on damages as the sole remedy. Notably, confidentiality and non-solicitation clauses—if narrowly tailored—are on firmer legal footing than non-competes.

For employers, the practical lessons are clear. Bond terms must be proportionate and transparent. The amount should correspond to actual expenses, such as training, and ideally reduce over time as the employee serves the bond period. Post-employment restrictions should be avoided. Instead, employers should focus on enforceable protections like confidentiality and non-solicitation. Proper execution—on adequate stamp paper, with informed consent—is also vital. Retention bonuses or deferred incentives can often achieve better compliance than rigid penalties.

In conclusion, Indian courts do not frown upon employment bonds per se. But they demand that such clauses be fair, necessary, and limited in scope. A bond designed to recover actual losses is likely to be upheld. One that seeks to punish or prevent job mobility will not. Employers should align contractual practices with legal principles and evolving judicial trends. Employees, meanwhile, remain free to resign, liable only to the extent they agreed to compensate for genuine loss. As of 2025, Indian jurisprudence supports bonds grounded in fairness and mutual respect, not coercion.

About the author: Rishabh Gandhi is an Arbitration lawyer and former trial court Judge. Gandhi is also the founder of Rishabh Gandhi and Advocates.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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