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Civil Law

Employment Bond and Section 27 of ICA

 15-May-2025

Vijaya Bank & Anr. v. Prashant B Narnaware

“Post-liberalization, public sector undertakings must compete with private players, necessitating policies to enhance efficiency and retain skilled staff, making minimum service clauses essential and legally valid.” 

Justice PS Narasimha and Justice Joymalya Bagchi   

Source:  Supreme Court  

Why in News? 

Recently, the bench of Justice PS Narasimha and Justice Joymalya Bagchi upheld the validity of a bond clause in employment contracts, ruling that a mandatory minimum service period is legally permissible and not violative of Section 27 of the Indian Contract Act(ICA) . 

  • The Supreme Court held this in the matter of Vijaya Bank & Anr. v. Prashant B Narnaware (2025). 

What was the Background of Vijaya Bank & Anr. v. Prashant B Narnaware (2025) Case? 

  • In 1999, Mr. Prashant B Narnaware joined Vijaya Bank as a Probationary Assistant Manager, was confirmed in 2001, and later promoted to Middle Management Scale II. 
  • In 2006, Vijaya Bank issued a recruitment notification for 349 officers across different grades, stipulating that selected candidates must execute an indemnity bond of ₹2 lakhs payable if they left service before completing 3 years. 
  • Mr. Narnaware applied for the post of Senior Manager-Cost Accountant with a basic pay of ₹18,240/-, was selected, and received an appointment letter containing clause 11(k) requiring minimum service of 3 years with execution of the ₹2 lakh indemnity bond. 
  • Accepting these conditions, Mr. Narnaware voluntarily resigned from his previous post as Manager (MMG-II), joined as Senior Manager (MMG-III) on 28th September 2007, and executed the required indemnity bond. 
  • On 17th July 2009, before completing the stipulated three-year period, Mr. Narnaware tendered his resignation to join IDBI Bank. 
  • Upon acceptance of his resignation, Mr. Narnaware paid ₹2 lakhs to Vijaya Bank under protest on 16.10.2009, in accordance with the indemnity bond. 
  • Subsequently, Mr. Narnaware filed a writ petition before the High Court challenging clause 9(w) of the recruitment notification and clause 11(k) of the appointment letter as violations of Articles 14 and 19(1)(g) of the Constitution and Sections 23 and 27 of  ICA 1872. 
  • The High Court allowed Mr. Narnaware's petition, which was subsequently upheld by its Division Bench, leading Vijaya Bank to appeal to the Supreme Court. 

What were the Court’s Observations? 

  • The Supreme Court observed that restrictive covenants operating during the subsistence of an employment contract do not amount to a restraint of trade under Section 27 of ICA as they are in furtherance of the employment relationship rather than restricting future employment. 
  • The Court noted that public policy considerations in employment contracts must be viewed through the lens of technological advancements affecting work nature, re-skilling requirements, and preservation of specialized workforce in a free market economy. 
  • The Court observed that following liberalization, public sector undertakings like Vijaya Bank needed to compete with efficient private players, necessitating review and recalibration of policies to enhance efficiency and rationalize administrative costs. 
  • The Court held that ensuring retention of efficient and experienced staff contributing to managerial skills was inalienable to the interest of such undertakings, and a covenant prescribing minimum service tenure to reduce attrition was neither unconscionable nor contrary to public policy. 
  • The Court remarked that as a public sector undertaking, Vijaya Bank could not resort to private or ad-hoc appointments and an untimely resignation would necessitate a prolix and expensive recruitment process involving open advertisement and fair competitive procedure to satisfy the constitutional mandate under Articles 14 and 16. 
  • The Court determined that the quantum of liquidated damages (₹2 lakhs) was not disproportionate considering the respondent's senior managerial position with a lucrative pay package, and did not render the possibility of resignation illusory, as evidenced by the respondent's actual resignation after paying the stipulated amount. 
  • The Court concluded that the High Court erred in mechanically applying precedent without considering the restrictive covenant in its proper perspective within the specific factual matrix of the case. 

What is Section 27 of ICA ? 

  • Section 27 declares that any agreement which restrains a person from exercising a lawful profession, trade or business of any kind is void to that extent. 
  • The fundamental principle embodied in this section is that freedom to trade and conduct business is essential to public welfare, and contractual clauses restricting such freedom are prima facie void. 
  • The section establishes a general prohibition against all restraints of trade, adopting a stricter approach than English common law which permits reasonable restraints. 
  • The sole statutory exception to this prohibition concerns agreements related to the sale of goodwill, wherein the seller may be restrained from carrying on similar business within specified local limits. 
  • For the goodwill exception to apply, three conditions must be satisfied: the restraint must be confined to specified local limits, it must be operative only so long as the buyer or his successor in title carries on like business within those limits, and the limits must appear reasonable to the Court considering the nature of the business. 
  • The reasonableness of local limits under the exception is a question of fact to be determined judicially with regard to the particular nature and circumstances of each business. 
  • The section adopts an absolute approach toward post-contractual restraints on employment, rendering covenants that prevent an employee from working elsewhere after termination void, regardless of their reasonableness. 
  • The prohibition extends to both direct and indirect restraints, encompassing not only express prohibitions but also any contractual mechanism that effectively prevents a person from exercising their profession or trade. 

Civil Law

Section 10 of Transfer of Property Act, 1882

 15-May-2025

The State of Telengana v. Dr. Pasupuleti Nirmala Hanumantha Rao Charitable Trust

“This Court is also of the opinion that Rules 1975 and the Board of Revenue Standing Orders operate in a completely distinct space and are not eclipsed by Section 10 of the TPA.” 

Justice Dipankar Datta and Justice Manmohan

Source: Supreme Court 

Why in News? 

A bench of Justice Dipankar Datta and Justice Manmohan held that Section 10 of Transfer of Property Act, 1882 does not apply to government allotments. 

  • The Supreme Court held this in the case of The State of Telangana v. Dr. Pasupuleti Nirmala Hanumantha Rao Charitable Trust  (2025). 

What was the Background of The State of Telangana v. Dr. Pasupuleti Nirmala Hanumantha Rao Charitable Trust  (2025) Case?   

  • The case involves an appeal filed challenging the judgment dated 5th July 2022 of the High Court of Telangana, which dismissed the Appellant-State's Writ Appeal. 
  • The dispute concerns land located at Chinnathimmapur village, Mulugu Mandal, Medak District. 
  • The High Court held that the Respondent-Trust is the absolute owner of the land, as the Appellant-State had sold the land at market value. 
  • The High Court determined that the State could not place conditions restricting land enjoyment after selling it at market value, considering such restrictions void under Section 10 of the Transfer of Property Act, 1882 (TPA). 
  • The Appellant-State argues that the land was allotted under the Telangana Alienation of State Lands and Land Revenue Rules 1975, which allows for conditional alienation of land. 
  • The District Collector of Medak had allotted the land on 8th February 2001 under G.O.Ms. No. 635 dated 2nd July 1990, with specific conditions regarding land usage. 
  • The Appellant-State contends they intended to allot the land to a charitable trust for public benefit, not to sell it outright. 
  • The Appellant alleges that the Respondent-Trust executed a General Power of Attorney on 18th June 2011 without referencing the original allotment conditions. 
  • The Appellant claims the Power of Attorney holder developed a colony called 'Eden Orchard' on the land and sold plots to third parties without disclosing the original allotment conditions. 
  • The Respondent-Trust argues that the alienation was a sale at market value, not a concessional allotment, and contained only a general condition without specifying exact purpose. 
  • The Respondent further contends that any restrictive conditions would violate Section 10 of the TPA, as held by the High Court. 
  • The Respondent also argued that the resumption order dated 19th January 2012 violated principles of natural justice. 

What were the Court’s Observations? 

  • The Supreme Court identified three key issues: whether the land transfer was a sale or an allotment, whether conditions were imposed, and whether such conditions would violate Section 10 of the TPA. 
  • The Court determined that the land in question (Ac. 3.01 gts in Survey No.72/31) was Government (Poramboke) land as per records declared in 1989. 
  • The Respondent-Trust, being a charitable organization, had applied for land allotment which was processed according to G.O.Ms. No.635 dated 2nd July 1990. 
  • The District Collector of Medak conditionally allotted the land on 8th February 2001 under the Telangana Alienation of State Lands and Land Revenue Rules, 1975. 
  • The allotment came with three specific conditions: the land must be used only for the purpose allotted, construction work must be completed within two years, and trees must be planted in open areas. 
  • The Court found that the land transfer was an allotment under a statutory scheme, not a sale as claimed by the Respondent-Trust and determined by the High Court. 
  • The Court observed that while no specific purpose was mentioned in the allotment letter, the land could only be used for charitable purposes as it was allotted to a charitable trust. 
  • The Respondent-Trust had previously acknowledged the conditional nature of the allotment in their correspondence dated 29th November 2011 and in their writ petition. 
  • The Court determined that the High Court erred in treating the transaction as a sale, ignoring the statutory scheme of alienation/allotment. 
  • The Court ruled that Section 10 of the TPA does not override or eclipse the Rules of 1975 and Board of Revenue Standing Orders, as they operate in a completely distinct legal space. 
  • The Court noted that in 2011, Dr. Pasupuleti Niramala Hanumantha Rao executed a General Power of Attorney without disclosing the conditions of the allotment, which reflected malafides. 
  • The Court found that the Respondent-Trust violated the conditions of allotment by developing a colony and selling plots to third parties, which constituted "fraud on the statute." 
  • Based on these findings, the Supreme Court set aside the High Court judgments and allowed the appeal.

What is Section 10 of TPA? 

  • Section 10 of the TPA prohibits conditions in property transfers that absolutely restrain the transferee from disposing of their interest in the property. 
  • Any condition or limitation that completely prevents the new owner from selling, gifting, or otherwise transferring the property is considered void and unenforceable under law. 
  • The law considers such absolute restraints on alienation to be against public policy as they unduly restrict property rights and impede the free flow of property in the market. 
  • There is a specific exception for lease agreements, where conditions restricting transfer are allowed if they benefit the lessor (landlord) or those claiming under the lessor. 
  • Another exception exists for property transferred to certain women (excluding Hindu, Muslim, or Buddhist women), where conditions may be imposed preventing them from transferring the property during their marriage. 
  • This section essentially balances property rights with freedom of contract, ensuring that once property is transferred, the new owner generally has full rights to further transfer it. 
  • The principle behind this section is that the law favors free alienability of property and generally disapproves of perpetual restrictions on property transfers. 

Mercantile Law

Application for Appointment of Arbitrator

 15-May-2025

Hindustan Construction Company Ltd v. Indian Strategic Petroleum Reserves Ltd 

“The issues of res judicata cannot be examined under a Section 11 Arbitration petition and must be decided by the Arbitral Tribunal.  ” 

Justice Jyoti Singh 

Source: Delhi High Court  

Why in News? 

Recently, Justice Jyoti Singh has held that in a petition under Section 11 of the Arbitration and Conciliation Act, 1996 (A&C Act) , the referral court cannot decide whether claims are barred by res judicata, as such issues fall exclusively within the domain of the Arbitral Tribunal. 

  • The Delhi High Court held this in the matter of Hindustan Construction Company Ltd v. Indian Strategic Petroleum Reserves Ltd. (2025). 

What was the Background of Hindustan Construction Company Ltd v. Indian Strategic Petroleum Reserves Ltd.,2025 Case? 

  • Hindustan Construction Company Ltd. (Petitioner) was awarded a Contract by Indian Strategic Petroleum Reserves Ltd. (Respondent) vide Letter of Acceptance dated 29th December 2009 for civil works for underground rock caverns for strategic storage of crude oil at Padur, Karnataka. 
  • A formal Contract valued at Rs. 374,65,80,000/- was signed on 30.07.2010 with the original stipulated date of completion being 29th March 2012. 
  • Disputes arose between the parties, leading the Petitioner to invoke arbitration on 24.02.2017 in terms of Clause 9.0.1.0 of the General Conditions of Contract. 
  • Upon receiving no response, the Petitioner filed a petition under Section 11 of the A&C Act (ARB.P. 403/2017), which was allowed on 24th July 2017 with the appointment of a Sole Arbitrator. 
  • The arbitrator rendered an Award on 26.06.2021 granting Rs. 35,99,86,464/- with 9% interest to the Petitioner while rejecting some of its claims. 
  • Both parties challenged the Award through separate petitions - the Respondent challenged the Award in its entirety (O.M.P.(COMM.) 366/2021), while the Petitioner contested the partial and complete disallowance of several claims (O.M.P.(COMM.) 78/2022). 
  • On 02th August 2024, both petitions were disposed of by a common order where, with the consent of the parties, the Respondent's petition was allowed, setting aside the Award of Rs. 35,99,86,464/-, and the Petitioner's petition was declared infructuous. 
  • Following this disposition, the Petitioner invoked fresh arbitration on 13th September  2024, proposing three names of independent Arbitrators for adjudication of the disputes. 
  • The Respondent sent a reply on 12th October 2024 declining arbitration, contending that the Petitioner was committing an offence against proper legal procedure by attempting to reagitate claims that had already been conclusively determined. 

What were the Court’s Observations? 

  • The Delhi High Court determined that the central issue for consideration was whether a Court, while entertaining a petition under Section 11 of the A&C Act, possesses jurisdiction to examine whether a claim is barred by the principle of res judicata. 
  • The Court held that it is not within the purview of the referral Court in a petition filed under Section 11 to examine whether the claim is barred by res judicata, as such determination falls exclusively within the domain of the Arbitral Tribunal. 
  • The Court affirmed that the scope of jurisdiction under Section 11 does not permit examination of the tenability of claims sought to be referred to arbitration by the applicant, but is restricted solely to determining the existence of an Arbitration Agreement and whether the petition itself is barred by limitation. 
  • The Court placed reliance on the Supreme Court's judgment in Indian Oil Corporation Limited v. SPS Engineering Limited (2011), which established that the limited scope of Section 11 does not permit examination into the contention that the claim is barred by res judicata. 
  • The Court observed that raising the bar of res judicata at the threshold stage would constitute an offence against established principles of arbitration jurisprudence, as there can be no threshold consideration and rejection of a claim on the ground of res judicata while considering an application under Section 11. 
  • The Court allowed the petition and appointed Justice Swatanter Kumar, former Judge of the Supreme Court, as the Sole Arbitrator to adjudicate the disputes between the parties, with the specific direction that the fee of the Arbitrator shall be as per the Fourth Schedule of the 1996 Act. 
  • The Court explicitly left open the issue of whether the claims sought to be referred to arbitration are barred by the principle of res judicata, to be raised by the Respondent before the learned Arbitrator and adjudicated in accordance with law.

What is Section 11 of the Act ?

  • Section 11 deals with the appointment of arbitrators in arbitration proceedings. 
  • Section 11(1) establishes that a person of any nationality may be an arbitrator, unless the parties agree otherwise. 
  • Section 11(2) grants parties the freedom to agree on a procedure for appointing arbitrators, subject to the provisions of sub-section (6). 
  • Section 11(3)-(5) provides default mechanisms for appointment of arbitrators when parties fail to agree on such appointments. 
  • Section 11(6) allows a party to request the Supreme Court or High Court to take necessary measures when there are failures in the agreed appointment procedure. 
  • Section 11(6A) limits the court's examination, while considering applications under sub-sections (4), (5), or (6), to only the existence of an arbitration agreement, notwithstanding any judgment, decree, or order of any court. 
  • Section 11(7) establishes that decisions made by the Supreme Court or High Court under sub-sections (4), (5), or (6) are final, with no appeals permitted. 
  • Section 11(8) requires the court to seek written disclosure from prospective arbitrators and consider qualifications required by the parties' agreement and other factors to secure independent and impartial arbitrators. 
  • Section 11(13) mandates expeditious disposal of applications for appointment of arbitrators, with an endeavor to dispose of such matters within 60 days from the date of service of notice on the opposite party. 
  • Section 11(14) empowers High Courts to frame rules for determination of arbitrators' fees, taking into consideration rates specified in the Fourth Schedule (except for international commercial arbitration or when parties have agreed on determination of fees as per rules of an arbitral institution).