An employment bond is a contractual arrangement requiring an employee to remain in service for a stipulated period, with a pre-determined sum payable if the employee exits prematurely. The idea is simple – the company wants to make sure it doesn’t lose out after spending time and money on hiring, training, or relocating someone. For employers, such bonds act as a safety net: they protect the investment made in bringing a person on board, cover the costs of specialised training, ensure smooth business operations without sudden exits, and safeguard the company’s reputation from the instability caused by high employee attrition.
The Supreme Court in Vijaya Bank & Anr. v. Prashant B. Narnaware[1] recently reinforced a long debate on whether such employment bonds are legally valid in India. Answering in the affirmative, the court upheld PSU’s minimum service clause and liquidated damages provision in its employment agreement, reversing the Karnataka High Court’s contrary ruling. This landmark decision reaffirms that minimum service clauses in employment agreements, if reasonable, are enforceable.
PSUs vs Private Entities
The Vijaya Bank ruling arose in the PSU context, where operational and recruitment challenges differ significantly from the private sector. In PSUs, hiring is done through lengthy competitive processes with heavy investment in training and limited flexibility to quickly replace employees, making attrition more disruptive. Private employers, on the other hand, can recruit and train faster, so employment bonds in their context are often seen as less critical and more open to challenge.
The court in Vijaya Bank has acknowledged this by stating that PSUs cannot engage in ad-hoc hiring, expend substantial time and resources in conducting competitive recruitment drives, and are more vulnerable to losses from premature exits.
However, the principles articulated in this case are equally relevant for private employers, provided that the terms of the bond are reasonable and proportionate. In Lily Packers (P) Ltd. v. Vaishnavi Vijay Umak[2], the court upheld a three-year lock-in period with a private employer, observing that it served to protect the employer’s legitimate interests and did not amount to a restraint of trade. Likewise, in Captain Bindu Kelunni v. Blue Dart Aviation Ltd.[3], the court found that a trainee pilot’s agreement to pay an indemnity of INR 10 lakhs in the event of premature resignation was a voluntary undertaking and represented a reasonable pre-estimate of the employer’s losses.
Section 74 of the Indian Contract Act, 1872 plays a central role in the assessment of whether such restrictive provisions in the employment agreements are valid or not. The liquidated damages stipulated in an employment agreement must be commensurate with the actual loss or a reasonable pre-estimate of such loss. In situations where the employer cannot demonstrate expenditure on training or recruitment, courts have shown reluctance to award the full contractual amount. For instance, in Ledella Ravichander and Anr. v. Satyam Computer Services Ltd.[4], the Andhra Pradesh High Court reduced damages from the agreed contractual amount to one lakh rupees, finding the original figure excessive in contrast to the actual loss suffered.
Approach of the HC’s while ruling on the matters pertaining to employment bonds
In the absence of any ruling of the Supreme Court discussing the contours of the enforceability of the employment bonds, the approach adopted by the High Courts in these matters has primarily been based on the losses actually suffered by the employers due to premature exit.
Madras High Court in Toshniwal Brothers (Private) Limited v. Eswarprasad[5], recognised the enforceability of contracts bonding the employees to serve the employers. However, the court herein noted that for such contracts to be enforced against the employee, the employers must be able to display that they have incurred expenses in imparting special training to these employees. Furthermore, the court while allowing the liquidated damages also observed that it is quintessential to ascertain if the damages allotted are reasonable in the circumstances.
The courts in cases of M/S Sicpa India Limited v. Shri Manas Pratim Deb[6], Kailash Kumar v. M/S Syndicate Bank Limited[7] andM/S. Sopra India Pvt. Ltd v. Mr. Akhil Singhal[8], awarded the damages to the employers upon considering the costs incurred by the companies in training and hiring of the employees. The courts also considered the duration of service of the employee and even reduced the cost if it appeared excessive or disproportionate.
Andhra Pradesh High Court, in Ledella Ravichander and Anr. v. Satyam Computer Services Limited[9], while adjudicating a dispute wherein the employee was required to serve for a minimum period of 2 years observed that the damages imposed upon the employee for an early exit and consequent breach of the contract was unreasonable. The court while upholding the validity of minimum service requirement held that in the absence of any substantial loss or damage to the company due to employee’s early exit, the liquidated damages must be reasonable. The court thus awarded 1 lakh rupees to the company towards damages payable by the employee.
Non-Compete and Non-Solicitation
The enforceability of employment bonds is closely tied to the larger framework of restrictive covenants intended to be applied on employees under employment contracts. While bonds typically secure an employee’s commitment to serve for a minimum period or compensate the employer for an early exit, other contractual restrictions – such as non-compete and non-solicitation clauses often appear alongside them in employment agreements. These clauses are scrutinised through the same lens of reasonableness and proportionality.
Indian courts typically consider post termination non-compete clauses as restrictive and unenforceable, unless such restrictions are reasonable.[10] This is because such covenants restrain the freedom of an employee to obtain different job opportunities and impact the ability to earn a livelihood.[11] Nevertheless, there are precedents where the courts have considered reasonability of the restrictions in determining their enforceability.[12] It varies on a case to case basis and can be enforced only if the intended benefit is not simply unilateral or the clause is not mischievously framed.
Placed alongside the jurisprudence on employment bonds, this reasoning reinforces a common principle: restrictions in employment contracts will be upheld only when they are designed to protect legitimate business interests, are proportionate to the harm sought to be prevented, and do not unreasonably curtail an employee’s freedom to pursue their career.
Key Considerations for Employers and Employees
Employers should ensure that employment bonds are drafted in clear and precise language, specifying the service period and the amount payable in case of an early exit. The liquidated damages should be directly linked to actual or estimated losses, such as costs incurred for training, relocation or recruitment, and must not be excessive or punitive. Records substantiating the costs claimed should be maintained, and clauses dealing with minimum service, confidentiality and non-solicitation should be kept distinct to avoid overbreadth and ambiguity.
Employees, on the other hand, should carefully review the terms of an employment bond before signing, paying particular attention to the stipulated service period, the calculation of training costs, and the quantum of damages payable in case of an early exit. They should be aware that resigning before completion of the stipulated term may create a genuine financial liability. If the terms appear disproportionate to the benefits received, negotiation is advisable. Employees should retain copies of all agreements and correspondence for their records.
Conclusion
The Vijaya Bank judgment confirms that minimum service clauses and proportionate liquidated damages in employment bonds are enforceable where they operate during employment and protect legitimate interests. The decision also reinforces the role of Section 74 in ensuring that damages remain compensatory rather than punitive. While the law is now lucid for PSUs, private employers can also structure bonds in accordance with these principles to enhance enforceability.
Nevertheless, certain grey areas remain unresolved. The judgment does not definitively prescribe parameters for assessing reasonableness across industries or in cases where there is no substantial training or recruitment expenditure. As a result, the determination will depend on the specific facts of each case, including the nature of the role, the costs incurred by the employer and the industry context. Going forward, transparency and proportionality in the drafting and enforcement of employment bonds will be critical in balancing institutional stability with individual freedom of employment.
Written by: Nidhi Arora (Partner) and Shruti Mandora (Associate)
[1] 2025 SCC OnLine SC 1107.
[2] 2024 SCC OnLine Del 4725.
[3] (2017) 06 MAD CK 0083.
[4] 2011 SCC OnLine AP 76.
[5] 1997 LLR 500.
[6] (2011)11 DEL CK 0262.
[7] 2017 SCC OnLine Del 12532.
[8] Civil Suit no. 215/12, Karkardooma District Court (Delhi).
[9] 2011 SCC OnLine AP 76.
[10] American Express Bank Ltd. v. Priya Puri, 2006 SCC OnLine Del 638.
[11] Pepsi Foods Ltd. and Ors. v. Bharat Coca-cola Holdings Pvt. Ltd. and Ors, (1999) ILR 2 Delhi 193.
[12] Niranjan Shankar Golikari v. The Century Spinning And Mfg. Co, 1967 SCR (2) 378; Wipro Limited v. Beckman Coulter International SA, 2006 SCC OnLine Del 743.
