The Supreme Court upholds the validity of employment bond to enforce lock-in period

In a recent judgment, the Supreme Court of India (“SC”) has given impetus to the including ‘restrictive covenants’ by employers in employer-employee relationships. In the case of Vijaya Bank & Anr. vs. Prashant B Narnaware, the SC affirmed validity of restrictive covenants. The present case emanates from appeal against the order of the Karnataka High Court (“HC”) whereby an employee (i.e. the Respondent in this case) was appointed in the post of ‘Probationary Assistant Manager’ in the Vijaya Bank (“Appellant Bank”). Later, he applied for the post of Senior Manager-Cost Accountant in the Appellant Bank and was selected for the said post. However, this post had a lock-in period of 3 years and an indemnity bond of 2 lakh rupees was executed to this effect. Hence, the aforesaid indemnity bond made the Respondent liable for payment of the said amount if he resigns from the services of the Appellant Bank within 3 years from the date of appointment. The Respondent resigned from the post and filed a writ petition before the HC challenging the lock-in period and the indemnity bond. The respondent contended that the said lock-in period and the indemnity bond were violative of his right to work and life and was an ‘agreement in restraint of trade. Therefore, the indemnity bond restricted the Respondent’s employability.  The HC ruled in favour of the Respondent against which the Appellant Bank appealed.

The SC while considering the arguments in this matter noted that, restrictive covenants can operate during the subsistence of an employment to ensure exclusive service by the employee. Further, the SC delved into the interpretation and a plain reading of aspects of the indemnity bond and the lock in period. The SC held that the indemnity bond, shows restraint was imposed on the respondent to work for a minimum term of 3 years. In case of default, the Respondent was to pay liquidated damages of 2 lakh rupees. The indemnity bond sought to perpetuate the employment contract and its term for a specified term. The SC further opined that the object of the restrictive covenant was in furtherance of the employment contract and not to restrain future employment.  Hence, the SC ruled in favour of the Appellant Bank in enforcing the indemnity bond.

The SC in its judgment gave consideration to public sector undertakings (PSU) like the appellant-bank and their necessity to compete with efficient private players. To survive in this atmosphere of deregulated free-market, PSUs were required to review and reset policies which increased efficiency by ensuring retention of an efficient and experienced staff. This prompted the Appellant-Bank to incorporate a minimum service tenure for employees, to reduce attrition and improve efficiency. Hence, the SC judgment viewed from this perspective of restrictive covenant prescribing a minimum term cannot be said to be unconscionable, unfair or unreasonable and thereby in contravention of public policy.

Considering the aforementioned facts and taking into account that the Appellant-Bank was a PSU which cannot resort to private or ad-hoc appointments through private contracts. An untimely resignation would require the Appellant Bank to undertake a prolix and expensive recruitment process involving open advertisement, fair competitive procedure, etc. Hence, the SC order does not amount to restraint of trade nor is it opposed to public policy.

Private Companies should view this judgment with caution. While the applicability of ‘restrictive covenants’ have been upheld, the same has been done in view of ‘public policy’. Courts may view such aspects differently in case there are no aspects of ‘public policy’ to review. I.e. the parties and dispute are ‘private’ in nature.