By Vikrant Rana and Shantam Sharma
Introduction
In a significant judgment delivered on 14 May 2025, the Supreme Court of India in Vijaya Bank v. Prashant B. Narnaware (2025 INSC 691) upheld the enforceability of a minimum service clause contained in a public sector bank’s employment contract. The dispute revolved around Clause 11(k) of the appointment letter issued to an internal promotee—Mr. Prashant B. Narnaware—on his selection as Senior Manager (MMG-III) at Vijaya Bank.
The clause required the employee to either serve the Bank for a minimum period of three years or to pay ₹2,00,000 as liquidated damages in case of premature resignation. The Court held this clause to be valid under the Indian Contract Act and consistent with constitutional protections under Articles 14 and 19(1)(g), thereby reversing the decision of the Karnataka High Court which had struck it down.
This judgment raises important questions about the nature of standard form employment contracts, enforceability of bonds, and the shifting dynamics of employer-employee power under Indian labour law.
Factual Background
Mr. Prashant B. Narnaware was already serving as a Manager (Middle Management Grade-II) at Vijaya Bank when he applied for and was selected to the higher position of Senior Manager (MMG-III) under a fresh recruitment process initiated in 2006. As part of the new appointment, the Bank issued a formal offer letter dated 7 August 2007.
Clause 11(k) of that appointment letter mandated:
“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 ₹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.”
Mr. Narnaware accepted this condition, executed the bond, and joined the post on 28 September 2007. However, he resigned before the 3-year term to join IDBI Bank, paid ₹2 lakhs under protest, and challenged the legality of Clause 11(k) by filing a writ petition before the Karnataka High Court. The High Court quashed the clause, but on appeal, the Supreme Court reversed that decision.
Judicial Reasoning
The Supreme Court framed the core legal questions as follows:
- Whether Clause 11(k) amounts to a restraint of trade under Section 27 of the Indian Contract Act, 1872;
- Whether the clause is opposed to public policy and violative of Section 23 of the Act;
- Whether it violates the fundamental rights under Articles 14 and 19(1)(g) of the Constitution.
The Court held that negative covenants operative during the tenure of employment do not fall foul of Section 27, relying on Niranjan Shankar Golikari v. Century Spinning & Manufacturing Co. and Superintendence Co. v. Krishan Murgai[1]. The clause did not prohibit future employment after resignation, nor did it impose a ban on joining a competitor. It merely required compensation for not honouring a three-year minimum tenure, which the Court found to be a legitimate contractual stipulation.
On the question of public policy, the Court addressed the respondent’s contention that the clause was a part of a standard form contract imposed by a powerful public employer on a weaker employee without real bargaining choice. This line of argument drew from Central Inland Water Transport Corporation v. Brojo Nath Ganguly[2], where such contracts were struck down for being unfair and unconscionable.
However, the Supreme Court distinguished Brojo Nath by noting that the clause in question here had a rational basis—to reduce attrition and protect the institutional interest of a public sector bank operating in a competitive liberalised environment. The ₹2 lakh penalty was held to be a reasonable pre-estimate of damages under Section 74 of the Indian Contact Act, 1872[3], not a punitive or arbitrary imposition.
The Court also rejected the notion that the clause amounted to unjust enrichment or lacked proportionality. It accepted the Bank’s argument that frequent premature resignations lead to financial and administrative disruptions, especially since PSUs must follow constitutionally compliant recruitment methods under Articles 14 and 16. Private, ad hoc, or quick replacement hiring is not legally viable for them.
Analysis of Legal and Policy Implications
he judgment in Vijaya Bank v. Prashant B. Narnaware underscores a judicial approach that favours enforceability of contractual commitments in employment relationships, especially when grounded in administrative and institutional justifications. It reflects a broader recognition by the Court of the practical challenges faced by public sector employers in ensuring operational continuity and curbing attrition.
That said, this approach does raise important questions regarding the balance between contractual freedom and employee protection. By upholding Clause 11(k)—a standard-form condition incorporated without scope for negotiation—the Court appears to have relaxed the threshold for enforceability of tenure-based service bonds, particularly where the employee is transitioning within the same organisation.
This ruling may also be seen as potentially broadening the latitude available to employers in drafting fixed-term employment obligations. In high-mobility sectors like banking, information technology, and aviation, there remains a concern that rigid enforcement of such clauses could impact employee fluidity and competitiveness in the labour market, especially when the actual cost to the employer is marginal or unsubstantiated.
Nonetheless, the judgment reaffirms the need for employees to exercise diligence at the stage of appointment or internal promotion and encourages employers to support such clauses with rational, operational justifications that can withstand judicial scrutiny.
The Role of Public Sector Justification
The Court’s reliance on the unique challenges faced by public sector undertakings is understandable, given their inability to hire quickly or flexibly. However, such justification should not automatically validate employment conditions that resemble economic compulsion.
Mr. Narnaware was already employed with the Bank and only sought promotion. He had little real choice but to accept the clause if he wanted to advance his career. His situation exemplifies the kind of internal coercion that Brojo Nath Ganguly was meant to protect against.
SSRANA Insights
The Vijaya Bank decision clarifies the legal position on employment bonds but also calls for careful navigation of such clauses going forward. Here’s how different stakeholders should respond:
| Stakeholder | SSRANA Insight |
| Employers | Employment bonds linked to minimum tenure are valid if they apply during service and specify a reasonable, defensible liquidated damages amount. Avoid extending restraint beyond the employment term or restricting post-resignation employment. |
| Employees | It is advisable for employees, particularly those transitioning within the same organisation, to carefully examine all terms in appointment or promotion letters, including any bond or service tenure conditions. If a clause appears overly one-sided or financially burdensome, they should seek clarification or formally place their concerns on record at the time of acceptance. This may prove critical in any future legal challenge. |
| HR & Legal Departments | Justify the quantum of damages with internal metrics—training costs, time-to-hire data, and operational impact of attrition. Retain documentation to defend the clause under Sections 23 and 74 if challenged. |
| Litigators | Focus on building a factual matrix of coercion, absence of bargaining power, or excessive penalty. Distinguish from Vijaya Bank by showing that no real loss occurred or that the penalty was disproportionate. |
Conclusion
The Supreme Court’s decision in Vijaya Bank v. Prashant B. Narnaware underscores a growing emphasis on contractual clarity and enforceability in employment relationships, particularly within structured public sector frameworks. By validating a fixed-term service bond with a pre-determined compensation clause, the judgment affirms the legitimacy of institutional safeguards aimed at ensuring workforce stability and operational efficiency.
[1] 1980 AIR 1717
[2] 1986 AIR 1571
[3] Compensation for breach of contract where penalty stipulated for.—1 [When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.