By way of an update, the Supreme Court (“SC”) has recently addressed whether a public sector bank could enforce a clause requiring an employee to pay liquidated damages for resigning before completing the stipulated period of service in the employment contract.

Background: The employee joined Vijaya Bank (“Bank”), a public sector bank, in 1999 and was promoted in 2006, at which point he signed an indemnity bond agreeing to pay INR 2,00,000 if he resigned within three years. The employment recruitment notification issued in 2006 and the employee’s appointment letter included this stipulation. In 2009, the employee resigned before completing the minimum employment period of three years and paid the indemnity bond amount to the Bank, under protest. The employee then challenged the validity of the indemnity bond before the Karnataka High Court (“Karnataka HC”), arguing it violated Articles 14 (right to equality) and 19(1)(g) (right to practice profession, trade occupation or business) of the Constitution and Sections 23 (opposed to public policy) and 27 (restraint of trade) of the Indian Contract Act, 1872. The Karnataka HC ruled in favour of the employee, ordering the Bank to refund the amount. The Bank then appealed to the SC.

SC Judgment:

The SC opined that the Bank being a public sector bank needed such a policy to retain skilled talent and remain competitive against private sector banks. The indemnity bond was imposed due to the financial hardship which the Bank would suffer due to untimely recruitment drives owing to pre-mature resignations of employees. The object of the restrictive covenant was in furtherance of the employment contract and not to restrain future employment. The SC concluded that the indemnity bond was neither opposed to public policy nor was in restraint of trade and accordingly, ruled in favour of the Bank overturning the Karnataka HC’s decision.

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