In a landmark ruling dated 14 May 2025 in the case of Vijaya Bank v. Prashant B Narnaware, the Supreme Court (SC) upheld the enforceability of a minimum service clause within an employment contract. The clause, which required the employee to either serve for a minimum period or pay a fixed sum as liquidated damages, was held to be valid, neither amounting to a restraint of trade under Section 27 of the Indian Contract Act, 1872 (ICA), nor opposed to public policy under Section 23 of the ICA. This judgment overturned a High Court ruling that had earlier declared the clause unenforceable and also clarifies how restrictive covenants are to be viewed given that the Indian employment landscape has changed.
Case Background
The facts of the case trace back to the employee’s employment with a public sector bank. The employee had initially joined the bank in 1999 and was later promoted to the position of Manager. In 2006, the bank issued a recruitment notification inviting applications for higher-grade posts. Among the terms of recruitment was a clause in the appointment letter, which mandated a minimum service of three years. It further specified that failure to complete the minimum term would require the employee to pay INR 200,000 (approximately GBP 1733) as liquidated damages (Clause). The respondent/ employee applied for and was selected to the post of Senior Manager, and in doing so, he voluntarily resigned from his previous role. He explicitly accepted the new terms, including the restrictive covenant in this Clause and executed an indemnity bond in accordance with the bank’s policy.
Despite this agreement, the employee resigned from the new position before completing the requisite three years of service and joined another bank. He paid the bond demanded by the employer but did so under protest. Thereafter, he filed a writ petition in the High Court challenging the enforceability of the minimum service clause.
