VIJAYA BANK & ANR.versusPRASHANT B NARNAWARE

                 [2025] 6 S.C.R. 240 : 2025 INSC 691

                           Vijaya Bank & Anr.
                                   v.
                         Prashant B Narnaware
                      (Civil Appeal No. 11708 of 2016)
                                 14 May 2025
[Pamidighantam Sri Narasimha and Joymalya Bagchi,* JJ.]


                           Issue for Consideration
       Matter pertains to whether clause 11(k) of the appointment letter
       that employee to work for minimum three years and in default to pay
       Rs 2 lakhs as liquidated damages on leaving employment amounts
       to restraint of trade u/s.27 of the Contract Act and/or opposed to
       public policy; and the correctness of order passed by the High Court
       quashing clause 11(k) of the appointment letter and thus, directing
       the bank to refund the said sum to the respondent-employee.

                                  Headnotes†
       Contract Act, 1872 – s.27 – Agreement in restraint of trade
       void – Restrictive covenant in the clause of the appointment
       letter that employee to work for minimum three years and in
       default to pay Rs 2 lakhs as liquidated damages on leaving
       employment – Respondent-employee tendered resignation
       before completion of three years and paid the sum under
       protest – Writ petition by the respondent seeking quashing
       of the clause of the appointment letter – High Court quashed
       the clause of the appointment letter and thus, directed the
       bank to refund the said sum to the respondent – Correctness:
       Held: Restrictive covenant in clause of the appointment letter
       does not amount to restraint of trade nor is it opposed to public
       policy – Validity of restrictive covenant in an employment agreement
       in regard to restraint in exercise of lawful profession, trade or
       business has to be tested on the touchstone of s.27 – Restrictive
       covenant operating during the subsistence of an employment
       contract does not put a clog on the freedom of a contracting party
       to trade or employment – Object of the restrictive covenant was in
       furtherance of the employment contract and not to restrain future
       employment – Hence, it cannot be said to be violative of s.27 –
       From the prism of employer-employee relationship, technological
* Author
[2025] 6 S.C.R.                                                               241

               Vijaya Bank & Anr. v. Prashant B Narnaware


     advancements impacting nature and character of work, re-skilling
     and preservation of scarce specialized workforce in a free market
     are emerging heads in the public policy domain which need to be
     factored when terms of employment contract is tested on the anvil
     of public policy – Public sector undertakings like the appellant-bank
     needed to compete with efficient private players operating in the
     same field – Ensuring retention of efficient and experienced staff
     contributing to managerial skills was one of the tools inalienable to
     the interest of such undertakings – This prompted the appellant-bank
     to incorporate a minimum service tenure for employees, to reduce
     attrition and improve efficiency – Restrictive covenant prescribing
     minimum term not unconscionable, unfair or unreasonable and
     thereby in contravention of public policy – Respondent was
     serving in a senior middle managerial grade having lucrative pay
     package, quantum of liquidated damages not so high as to render
     the possibility of resignation illusory – High Court failed to consider
     the restrictive covenant in its proper perspective – Constitution of
     India – Arts.14, 19. [Paras 12, 15-16, 24-27, 31, 32, 35, 36]
     Contract – Standard form employment contracts – Interpretation
     of – Legal principles – Discussed. [Para 21]

                               Case Law Cited
     K.Y Venkatesh Kumar v. BEML Ltd., Karnataka HC DB in W.A.
     No. 2736/2009 disposed on 09.12.2009; Niranjan Shankar
     Golikari v. Century Spinning and Manufacturing Co [1967] 2 SCR
     378 : 1967 SCC OnLine SC 72; Superintendence Company (P)
     Ltd. v. Krishan Murgai [1980] 3 SCR 1278 : (1981) 2 SCC 246;
     Central Inland Water Transport Corporation Ltd. v. Brojo Nath
     Ganguly [1986] 2 SCR 278 : (1986) 3 SCC 156; Haryana Financial
     Corporation v. Jagdamba Oil Mills [2002] 1 SCR 621 : (2002) 3
     SCC 496 – referred to.

                                 List of Acts
     Constitution of India; Contract Act, 1872.

                              List of Keywords
     Restrictive covenant; Liquidated damages; Resignation before
     completion of 3 years; Restraint of trade; Clog on the freedom to
     trade or employment; Restrain future employment; Opposed to
     public policy; Legal principles relating to interpretation of standard
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       form employment contracts; Terms of employment contract;
       Scarce specialized workforce; Public good and policy; Deregulated
       free-market; Minimum service tenure for employees; Expensive
       recruitment process; Appointment letter; Public sector undertakings;
       Senior middle managerial grade.

                                  Case Arising From
       CIVIL APPELLATE JURISDICTION: Civil Appeal No. 11708 of 2016
       From the Judgment and Order dated 20.08.2014 of the High Court
       of Karnataka at Bangalore in WA No. 1159 of 2013
       With
       Civil Appeal No. 11499 of 2016

                                Appearances for Parties
       Advs. for the Appellants:
       S.R.Singh, Sr. Adv., Ms. Asha Gopalan Nair, Sushant Kumar Yadav,
       Prateek Yadav, Gaurav Lomes, Shashikant Pralhad Chaudhari,
       Rajesh Kr. Gautam, Likivi K Jakhalu, Deepanjal Choudhary, M/s.
       Mitter & Mitter Co.
       Advs. for the Respondent:
       Rahul Chitnis, Hersh Desai, Ms. Shwetal, Aditya Khanna, Chander
       Shekhar Ashri, Rajesh Kr. Gautam, Likivi K Jakhalu, Deepanjal
       Choudhary, M/s. Mitter & Mitter Co., Sanjay Kapur, Ms. Divya
       Singh Pundir, Arjun Bhatia, Ms. Shubhra Kapur, Ms. Mansi Kapur.

                      Judgment / Order of the Supreme Court

                                        Judgment

       Joymalya Bagchi, J.

       CIVIL APPEAL NO. 11708 of 2016
1.     Appellants have challenged judgment and order dated 20.08.2014
       passed by the High Court quashing clause 11(k) of the appointment
       letter whereby the respondent-employee 1 was required to pay



1    Hereinafter, respondent.
[2025] 6 S.C.R.                                                            243

                    Vijaya Bank & Anr. v. Prashant B Narnaware


      liquidated damages of Rs. 2 lakhs in the event of leaving employment
      of the first appellant-bank2 prior to three years and consequentially the
      appellant-bank was directed to refund the said sum to the respondent.
2.    In 1999, respondent had joined the appellant-bank as a Probationary
      Assistant Manager. His service was confirmed in 2001. Thereafter,
      he was promoted to Middle Management Scale-II. In 2006, appellant-
      bank issued a recruitment notification for appointment of 349 officers
      in different grades. Clause 9 (w) of the recruitment notification reads
      as follows:-
              “Selected candidates are required to execute an indemnity
              bond of Rs.2.00 Lakh (Rupees Two Lakh only) indemnifying
              that they will pay an amount of Rs.2.00 lakh to the Bank
              if they leave the service before completion of 3 years”
3.    Cognizant of the said condition, respondent applied to the post of
      Senior Manager-Cost Accountant at basic pay of Rs.18,240/- and
      was selected for the said post.
4.    On 07.08.2007, respondent was issued an appointment letter.
      Clause 11(k) of the said letter reads as follows:-
              “You are required to serve the Bank for a minimum period
              of 3 years from the date of joining the bank and should
              execute an indemnity bond for Rs.2.00 lakhs. The said
              amount has to be paid by you in case you resign from
              the services of the bank before completion of stipulated
              minimum period of 3 years. For this purpose, you have to
              bring a blank non-judicial stamp paper of Rs.100/- procured
              in the State of your posting.”
5.    Accepting the aforesaid condition, respondent voluntarily resigned
      from his erstwhile post i.e. Manager, MMG-II and joined the post of
      Senior Manager, MMG-III on 28.09.2007. Respondent also executed
      an indemnity bond in terms of the aforesaid clause.
6.    On 17.07.2009 i.e. before completion of three years from his date
      of joining, respondent tendered resignation for joining another Bank,
      namely, IDBI. His resignation was accepted and on 16.10.2009
      respondent under protest in terms of the aforesaid condition paid
      the sum of Rs.2 lakhs to the appellant-bank.


2    Hereinafter, appellant-bank.
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7.     Thereafter, respondent filed a writ petition before the High Court
       praying for quashing of clause 9 (w) of the recruitment notification
       and clause 11 (k) of the appointment letter alleging the same were
       in violation of Articles 14 and 19(1)(g) of the Constitution of India
       and Sections 23 and 27 of the Indian Contract Act, 1872.
8.     Appellant-bank opposed the prayer. Learned Single Judge relied on
       the decision of a Division Bench of the High Court in K.Y Venkatesh
       Kumar v. BEML Ltd. 3 and allowed the writ petition. The order came
       to be upheld by the Division Bench.
9.     Heard Mr. Rajesh Kr. Gautam, learned counsel for the appellants
       and Mr. Rahul Chitnis, learned counsel for the respondent.
10. The issue which falls for decision is whether clause 11 (k) of the
    appointment letter amounts to :-
       (i)    restraint of trade under Section 27 of the Contract Act and/or
       (ii)   opposed to public policy and thereby contrary to Section 23
              of the Contract Act and violative of Articles 14 and 19 of the
              Constitution.

       RESTRAINT OF TRADE
11. Section 27 of the Contract Act provides every agreement which
    restrains a person from exercising a lawful profession, trade or
    business of any kind is to that extent void. A sole exception is carved
    out in the proviso with regard to sale of goodwill of a business, in
    which case the seller may be restrained from carrying on similar
    business within a reasonable local limit.
12. Though the Contract Act does not profess to be a complete code, Act
    is exhaustive with regard to the subject matter contained therein. That
    is to say, validity of a restrictive covenant in an agreement including
    an employment agreement in regard to restraint in exercise of lawful
    profession, trade or business has to be tested on the touchstone of
    Section 27 of the Contract Act.
13. Whether Section 27 operates as a bar to a restrictive covenant
    during the subsistence of an employment contract fell for decision


3    Karnataka HC DB in W.A. No. 2736/2009 disposed on 09.12.2009.
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                 Vijaya Bank & Anr. v. Prashant B Narnaware


     in Niranjan Shankar Golikari v. Century Spinning and Manufacturing
     Co.4 After an illuminating discussion on the subject, the Bench made
     a distinction between restrictive covenants operating during the
     subsistence of an employment contract and those operating after
     its termination. The Bench held as follows:-
            “17. The result of the above discussion is that considerations
            against restrictive covenants are different in cases where
            the restriction is to apply during the period after the
            termination of the contract than those in cases where it
            is to operate during the period of the contract. Negative
            covenants operative during the period of the contract of
            employment when the employee is bound to serve his
            employer exclusively are generally not regarded as restraint
            of trade and therefore do not fall under Section 27 of
            the Contract Act. A negative covenant that the employee
            would not engage himself in a trade or business or would
            not get himself employed by any other master for whom
            he would perform similar or substantially similar duties
            is not therefore a restraint of trade unless the contract
            as aforesaid is unconscionable or excessively harsh or
            unreasonable or one-sided..”
14. This view was reiterated in the concurrent opinion of A.P. Sen, J. in
    Superintendence Company (P) Ltd. v. Krishan Murgai.5 Endorsing the
    ratio in Golikari (supra) with regard to validity of restrictive covenants
    during the subsistence of a contract, A.P. Sen, J. held:-
            “18. Agreements of service, containing a negative covenant
            preventing the employee from working elsewhere during
            the term covered by the agreement, are not void under
            Section 27 of the Contract Act, on the ground that they are
            in restraint of trade. Such agreements are enforceable. The
            reason is obvious. The doctrine of restraint of trade never
            applies during the continuance of a contract of employment;
            it applies only when the contract comes to an end. While
            during the period of employment, the courts undoubtedly
            would not grant any specific performance of a contract of


4   1967 SCC OnLine SC 72
5   (1981) 2 SCC 246
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          personal service, nevertheless Section 57 of the Specific
          Relief Act clearly provides for the grant of an injunction
          to restrain the breach of such a covenant, as it is not in
          restraint of, but in furtherance of trade.
          19. In Niranjan Shankar Golikari case this Court drew a
          distinction between a restriction in a contract of employment
          which is operative during the period of employment and one
          which is to operate after the termination of employment.
          After referring to certain English cases where such
          distinction had been drawn, the Court observed:
          “A similar distinction has also been drawn by courts in
          India and a restraint by which a person binds himself
          during the term of his agreement directly or indirectly not
          to take service with any other employer or be engaged by
          a third party has been held not to be void and not against
          Section 27 of the Contract Act.”
15. In view of these authoritative pronouncements, it can be safely
    concluded law is well settled that a restrictive covenant operating
    during the subsistence of an employment contract does not put a
    clog on the freedom of a contracting party to trade or employment.
16. A plain reading of clause 11 (k) shows restraint was imposed on
    the respondent to work for a minimum term i.e. three years and
    in default to pay liquidated damages of Rs. 2 Lakhs. The clause
    sought to impose a restriction on the respondent’s option to resign
    and thereby perpetuated the employment contract for a specified
    term. The object of the restrictive covenant was in furtherance of the
    employment contract and not to restrain future employment. Hence,
    it cannot be said to be violative of Section 27 of the Contract Act.

       OPPOSED TO PUBLIC POLICY
17. Let us now examine whether the clause is opposed to public policy.
18. Mr. Chitnis has vehemently argued the clause is part of a standard
    form contract and his client was compelled to sign on dotted lines.
    If he did not do so, he would have to forsake career advancement.
    The terms of the contract were imposed on him through an unequal
    bargaining mechanism. Clause 11 (k) being an unreasonable, onerous
    and ex-proportionate measure resulting in unjust enrichment for
[2025] 6 S.C.R.                                                             247

                 Vijaya Bank & Anr. v. Prashant B Narnaware


     the appellant-bank is opposed to public policy. At the time of his
     resignation respondent was compelled to comply with the illegal
     condition and had done so under protest. In these circumstances,
     he cannot be precluded from challenging the condition as violative
     of fundamental rights and public policy.
19. In Central Inland Water Transport Corporation Ltd. v. Brojo Nath
    Ganguly, 6 this Court dealt with interpretation of standard form
    employment contracts in the backdrop of unequal bargaining power of
    employees. The Bench opined if such contracts are unconscionable,
    unfair, unreasonable and injurious to public interest, they shall be
    deemed void in law being opposed to public policy. The Bench
    elucidated the proposition in the following words:-
            “91………………the majority of such contracts are in a
            standard or prescribed form or consist of a set of rules.
            They are not contracts between individuals containing
            terms meant for those individuals alone. Contracts in
            prescribed or standard forms or which embody a set of rules
            as part of the contract are entered into by the party with
            superior bargaining power with a large number of persons
            who have far less bargaining power or no bargaining
            power at all. Such contracts which affect a large number
            of persons or a group or groups of persons, if they are
            unconscionable, unfair and unreasonable, are injurious
            to the public interest. To say that such a contract is only
            voidable would be to compel each person with whom the
            party with superior bargaining power had contracted to
            go to court to have the contract adjudged voidable. This
            would only result in multiplicity of litigation which no court
            should encourage and would also not be in the public
            interest. Such a contract or such a clause in a contract
            ought, therefore, to be adjudged void. While the law of
            contracts in England is mostly judge-made, the law of
            contracts in India is enacted in a statute, namely, the Indian
            Contract Act, 1872. In order that such a contract should
            be void, it must fall under one of the relevant sections of
            the Indian Contract Act. The only relevant provision in the


6   (1986) 3 SCC 156
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              Indian Contract Act which can apply is Section 23 when it
              states that “The consideration or object of an agreement
              is lawful, unless ... the court regards it as ... opposed to
              public policy.”
                                                    (Emphasis supplied)

20. It may not be out of place to note A.P. Sen, J., a member of the
    coram in Brojo Nath (supra) had expressed a similar view earlier in
    Murgai (supra):-
              “59. It is well settled that employee covenants should
              be carefully scrutinised because there is inequality
              of bargaining power between the parties; indeed no
              bargaining power may occur because the employee is
              presented with a standard form of contract to accept or
              reject. At the time of the agreement, the employee may
              have given little thought to the restriction because of his
              eagerness for a job; such contracts “tempt improvident
              persons, for the sake of present gain, to deprive themselves
              of the power to make future acquisitions, and expose them
              to imposition and oppression”.
21. The legal principles relating to interpretation of standard form
    employment contracts may be summarized as follows:-
       (i)    Standard form employment contracts prima facie evidence
              unequal bargaining power.
       (ii)   Whenever the weaker party to such a contract pleads undue
              influence/coercion or alleges that the contract or any term
              thereof is opposed to public policy, the Court shall examine
              such plea keeping in mind the unequal status of the parties and
              the context in which the contractual obligations were created.
       (iii) The onus to prove that a restrictive covenant in an employment
             contract is not in restraint of lawful employment or is not opposed
             to public policy, is on the covenantee i.e. the employer and not
             on the employee.
22. This brings us to the issue as to what is public policy? In Brojo Nath
    (supra) the expression ‘public policy’ under the Contract Act was
    expounded as follows:-
[2025] 6 S.C.R.                                                             249

               Vijaya Bank & Anr. v. Prashant B Narnaware


           “92. The Indian Contract Act does not define the expression
           “public policy” or “opposed to public policy”. From the very
           nature of things, the expressions “public policy”, “opposed
           to public policy”, or “contrary to public policy” are incapable
           of precise definition. Public policy, however, is not the
           policy of a particular government. It connotes some matter
           which concerns the public good and the public interest.
           The concept of what is for the public good or in the public
           interest or what would be injurious or harmful to the public
           good or the public interest has varied from time to time.
           As new concepts take the place of old, transactions which
           were once considered against public policy are now being
           upheld by the courts and similarly where there has been a
           well recognized head of public policy, the courts have not
           shirked from extending it to new transactions and changed
           circumstances and have at times not even flinched from
           inventing a new head of public policy..”
23. In Golikari (supra), the Bench noted the evolving nature of public
    policy in following words :-
           “12…….The attitude of the courts as regards public policy
           however has not been inflexible. Decisions on public
           policy have been subject to change and development
           with the change in trade and in economic thought and
           the general principle once applicable to agreements in
           restraints of trade have been considerably modified by
           later decisions. The rule now is that restraints whether
           general or partial may be good if they are reasonable. A
           restraint upon freedom of contract must be shown to be
           reasonably necessary for the purpose of freedom of trade.
           A restraint reasonably necessary for the protection of the
           covenantee must prevail unless some specific ground of
           public policy can be clearly established against it.”
24. Generally speaking, public policy relates to matters involving public
    good and public interest. What is ‘just, fair and reasonable’ in the
    eyes of society varies with time. Civilizational advancements, growth
    of knowledge and evolving standards of human rights and dignity
    alter the contours of public good and policy.
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25. From the prism of employer-employee relationship, technological
    advancements impacting nature and character of work, re-skilling
    and preservation of scarce specialized workforce in a free market
    are emerging heads in the public policy domain which need to be
    factored when terms of an employment contract is tested on the
    anvil of public policy.
26. Since the last decade of 20th century, India witnessed an era of
    liberalization. Golden days of monopolistic public sector behemoths
    were gone. Public sector undertakings like the appellant-bank
    needed to compete with efficient private players operating in the
    same field. To survive in an atmosphere of deregulated free-market,
    public sector undertakings were required to review and reset policies
    which increased efficiency and rationalized administrative overheads.
    Ensuring retention of an efficient and experienced staff contributing
    to managerial skills was one of the tools inalienable to the interest
    of such undertakings including the appellant-bank.
27. This prompted the appellant-bank to incorporate a minimum service
    tenure for employees, to reduce attrition and improve efficiency.
    Viewed from this perspective, the restrictive covenant prescribing
    a minimum term cannot be said to be unconscionable, unfair or
    unreasonable and thereby in contravention of public policy.
28. The other aspect involves imposition of liquidated damages to the
    tune of Rs.2 Lakhs in the event of pre-mature resignation. Mr. Chitnis
    has strenuously argued the quantum is disproportionate and causes
    unjust enrichment to the employer. We are unable to agree with this
    submission. In their pleadings before the High Court the appellant-
    bank has clarified the financial hardship which it would suffer due to
    untimely recruitment drives owing to pre-mature resignations. The
    Bank pleaded as follows:-
          “The Indemnity Bond obtained by the Bank was done so
          with a view to secure the interests of the Bank and to place
          adequate safeguards against premature resignations-
          tendered by employees. In the usual course, appointments
          are into service of the Bank after a detailed and elaborate
          process of recruitment and the Banks interest would be
          seriously prejudiced in the event premature resignations
          are tendered which would render the entire recruitment
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                  Vijaya Bank & Anr. v. Prashant B Narnaware


             process redundant. That apart the Bank would also suffer
             the consequences of the loss in continuance of the said
             post which would necessitate alternative arrangements
             and restructuring to ensure smooth functioning of day to
             day business activities. That apart, the bank would have
             to initiate a fresh process of recruitment which would be
             time consuming and also expensive.”
29. The stance of the appellant-bank is neither unjust nor unreasonable.
    The appellant-bank is a public sector undertaking and cannot resort
    to private or ad-hoc appointments through private contracts. An
    untimely resignation would require the Bank to undertake a prolix
    and expensive recruitment process involving open advertisement,
    fair competitive procedure lest the appointment falls foul of the
    constitutional mandate under Articles 14 and 16.
30. Keeping these exigencies in mind, the appellant-bank had incorporated
    the liquidated damage clause in the appointment contract.
31. Respondent was serving in a senior middle managerial grade having
    a lucrative pay package. Judged from that perspective, the quantum
    of liquidated damages was not so high as to render the possibility of
    resignation illusory. In fact, the appellant had paid the said quantum
    and resigned from the post.
32. The High Court failed to consider the restrictive covenant in its proper
    perspective in the factual matrix of the case and mechanically relied
    on BEML (supra) to set aside the covenant as barred by law.
33. In BEML (supra), a coordinate Bench of the High Court was
    considering a restrictive covenant which not only imposed a minimum
    term of employment but also a clog on future employability.
34. That apart, in BEML (supra) the issue of financial loss suffered by the
    public sector undertaking owing to time consuming and expensive
    recruitment drives due to pre-mature resignations had not fallen for
    consideration. It is trite judgments cannot be read as statutes and
    have to be applied keeping in mind the factual matrix peculiar to
    each case.7


7   Haryana Financial Corporation v. Jagdamba Oil Mills (2002) 3 SCC 496
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35. In light of the aforesaid discussion, we are of the view the restrictive
    covenant in clause 11(k) of the appointment letter does not amount
    to restraint of trade nor is it opposed to public policy.
36. Consequently, the appeal is allowed. Impugned judgment and order
    of the High Court is set aside.

       CIVIL APPEAL NO.11499 of 2016
37. Similar issue with regard to validity of clause 11(k) in the appointment
    letter fell for consideration in Civil Appeal No. 11708 of 2016. High
    Court dismissed the appellant-employee’s challenge. In view of the
    order passed in the aforesaid appeal, we find no reason to interfere
    with the order of the High Court.
       The appeal is dismissed.

       Result of the case: Civil Appeal No. 11708 allowed.
                           Civil Appeal No. 11499 dismissed.



       †
           Headnotes prepared by: Nidhi Jain