Restrictive Job Clauses in PSUs Not Restraint of Trade or Against Public Policy: Supreme Court

The Supreme Court 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 bench of Justices P S Narasimha and Joymalya Bagchi said, from the prism of employer-employee relationship, technological advancements impacting nature and character of work, re-skilling and preservation of scarce specialised 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.

The court allowed an appeal filed by Vijaya Bank and another, who challenged judgment and order of August 20, 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 the bank prior to three years and consequentially the appellant-bank was directed to refund the said sum to the respondent.

The bench held that to incorporate a minimum service tenure for employees, to reduce attrition and improve efficiency, the restrictive covenant prescribing a minimum term cannot be said to be unconscionable, unfair, or unreasonable and thereby in contravention of public policy.

Court also rejected the argument that the imposition of liquidated damages to the tune of Rs 2 Lakhs in the event of pre-mature resignation was disproportionate and caused unjust enrichment to the employer.

The stance of the appellant-bank is neither unjust nor unreasonable, the court held.

"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," the bench emphasised.

Generally speaking, the bench pointed out, the 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," the bench said.

The court noted that since the last decade of the 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, the bench said.

Background:

The terms of the contract were imposed on him through an unequal bargaining mechanism. The clause, being an unreasonable, onerous and ex-proportionate measure resulting in unjust enrichment for the appellant-bank is opposed to public policy. At the time of his resignation, the 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, his counsel argued.

Examining the matter, the apex court said the 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.

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, the bench held.

Citing previous judgment in case of Central Inland Water Transport Corporation Ltd Vs Brojo Nath Ganguly (1986), the court summarised the legal principles relating to interpretation of standard form employment contracts as standard form employment contracts prima facie evidence unequal bargaining power.

Court said it has been held 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 would examine such plea keeping in mind the unequal status of the parties and the context in which the contractual obligations were created, 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.   

Case Title: Vijaya Bank Vs Prashant B Narnaware

Download judgment here