Introduction
Historically, Indian courts have approached restrictive covenants in employment contracts with caution, often striking down clauses that limit an employee’s freedom to work, citing Section 27 of the Indian Contract Act, 1872, which voids agreements restraining trade.
Early judicial interpretations leaned heavily on protecting employees from exploitative terms, particularly in cases of unequal bargaining power.
However, the Supreme Court’s recent judgment delivered on 14 May 2025 in the matter of Vijaya Bank & Anr. v. Prashant B. Narnaware (2025) marks a significant shift, balancing employer interests with employee rights in a liberalized economic context.
This ruling upholds a covenant requiring a minimum service term or payment of liquidated damages, reflecting evolving judicial perspectives on workforce retention in competitive markets.
Ronin Legal examines this landmark decision to trace the judiciary’s changing stance on restrictive covenants and its implications for employers.
Background: From Golikari to Vijaya Bank
The Indian judiciary’s approach to restrictive covenants in employment contracts has evolved, balancing employee autonomy with employer interests amid economic shifts.
In Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. (1967), the Supreme Court held that negative covenants requiring exclusive service during employment, such as prohibiting work for another employer, are not restraints of trade under Section 27 of the Indian Contract Act, 1872, unless unconscionable, harsh, or one-sided, distinguishing them from post-termination restrictions that face stricter scrutiny.
This was reaffirmed in Superintendence Company v. Krishan Murgai (1981), where Justice A.P. Sen ruled that such covenants are enforceable during employment as they further trade, supported by the possibility of injunctions under Section 57 of the Specific Relief Act.
In Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly (1986), the Supreme Court voided a standard form contract’s termination clause as unconscionable under Section 23, citing the employer’s superior bargaining power and harm to public interest, emphasizing that such contracts affecting many employees should be deemed void to prevent widespread litigation.
Similarly, in K.Y. Venkatesh Kumar v. BEML Ltd. (2009), the Karnataka High Court struck down a covenant imposing a minimum service term and a bar on future employability, reflecting judicial aversion to post-employment restrictions.
These rulings prioritized employee rights, but India’s economic liberalization in the 1990s pushed public sector entities to adopt retention strategies to compete with private firms, setting the stage for the Vijaya Bank ruling to address modern workforce retention needs within a refined public policy framework.
Vijaya Bank v. Prashant B. Narnaware: A Landmark Ruling
Facts of the Case
Prashant B. Narnaware joined Vijaya Bank in 1999 as a Probationary Assistant Manager, his service being confirmed in 2001 with a subsequent promotion to Middle Management Scale-II.
In 2006, the bank issued a recruitment notification for Senior Manager-Cost Accountant, including clause 9(w), which required a Rs. 2 lakh indemnity bond for resigning within three years.
Narnaware applied, was selected, and joined on September 28, 2007, under an appointment letter with clause 11(k) mandating the same condition.
He executed the bond, resigned on July 17, 2009, to join IDBI Bank, and paid Rs. 2 lakhs under protest.
He challenged clauses 9(w) and 11(k) in the High Court, alleging violations of Articles 14 and 19(1)(g) of the Constitution and Sections 23 and 27 of the Indian Contract Act, 1872. The High Court, relying on K.Y. Venkatesh Kumar v. BEML Ltd., quashed the clause, prompting the bank’s appeal to the Supreme Court.
Issues Before the Court
The Supreme Court, presided over by Justices Pamidighantam Sri Narasimha and Joymalya Bagchi, examined two issues: whether clause 11(k) constituted a restraint of trade under Section 27, and whether it was opposed to public policy under Section 23, violating Articles 14 and 19.
Restraint of Trade
The Court evaluated clause 11(k) against Section 27, which voids agreements restraining lawful profession, trade, or business, except for goodwill sales.
Applying Golikari and Murgai (See Background), the Court held that clause 11(k), requiring a three-year service term and liquidated damages, did not violate Section 27.
It aimed to reduce attrition and protect the bank’s recruitment investments by ensuring employment continuity, without restricting future employment, consistent with the principle that restrictive or negative covenants during employment are enforceable unless unconscionable, excessively harsh, unreasonable, or one-sided.
Public Policy
Narnaware contended that clause 11(k), embedded in a standard form contract, was unconscionable due to unequal bargaining power and excessive damages, rendering it oppressive.
Citing Brojo Nath, the Court acknowledged the need to scrutinize standard form contracts for fairness, given the employer’s superior bargaining power.
However, the Court distinguished this case, finding that clause 11(k) did not unilaterally harm Narnaware but served to compensate the bank for losses from premature attrition, such as recruitment, training, operational disruptions, and administrative restructuring.
The ₹2 lakh liquidated damages were deemed proportionate, not arbitrary or punitive, reflecting tangible costs and reasonable given Narnaware’s senior managerial role with a lucrative salary, which ensured resignation remained feasible.
The Court further noted the evolving nature of public policy, observing that India’s economic liberalization since the 1990s compelled public sector banks like Vijaya Bank to adopt retention strategies to compete with private firms, justifying the three-year service term as a reasonable tool to curb attrition and ensure operational stability.
The Court distinguished BEML Ltd., which involved a broader restriction on future employability and did not consider recruitment losses, unlike the present case. Applying Haryana Financial Corporation v. Jagdamba Oil Mills (2002), the Court emphasized that judgments must be interpreted contextually, reinforcing the clause’s validity.
Held
The Court held that clause 11(k) neither restrained trade nor violated public policy, as it was reasonable and served the bank’s legitimate interest in staff retention. The appeal was allowed, the High Court’s order was set aside, and the connected appeal was dismissed.
Conclusion
The Vijaya Bank judgment marks a pivotal shift in Indian contract law, affirming that employers can enforce reasonable service term clauses during employment if they are fair, proportionate, and supported by documented costs, without restricting future employability.
Employers are now well-advised to craft clear, proportionate service obligations, document expenses to justify liquidated damages, and ensure restrictions apply only during employment to align with judicial standards and safeguard business interests in a competitive market.
Authors: Shantanu Mukherjee, Alan Baiju
