Restrictive Clause In Employment Not Restraint Of Trade Or Opposed To Public Policy: SC
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, Court observed.;
The Supreme Court has on May 14, 2025 said the restrictive covenant in the appointment letter of an employee in a public sector undertaking does not amount to restraint of trade nor is it opposed to public policy.
A Division Bench of Justice PS Narasimha and Justice Joymalya Bagchi, while allowing the appeal, observed, “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.”
Precise issue before the Court was, 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.
In the newly de-regulated and competitive market environment, public sector undertakings had to reform their internal policies to enhance efficiency; Retaining skilled and experienced personnel, particularly those contributing to managerial expertise became a critical strategy for them, ensuring continued viability and competitiveness, Court added rationalizing the act of the appellant bank.
Brief Background
The Appellants 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 was required to pay liquidated damages of Rs. 2 lakhs in the event of leaving employment of the appellant bank prior to three years, and consequently the appellant bank was directed to refund the said sum to the respondent.
The respondent joined the appellant bank in 1999.
In 2006, the appellant-bank issued a recruitment notification for appointment of 349 officers in different grades. Clause 9(w) of the notification read 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”
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.
Clause 11(k) of the respondent’s appointment letter provided that;
“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.”
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, in terms of the aforesaid condition paid the sum of Rs.2 lakhs to the appellant-bank.
Case Title: Vijaya Bank Vs Prashant B Narnaware