Source: Supreme Court  

Why in News? 

Recently, the bench of Justices PS Narasimha and Joymalya Bagchi held that standard form employment contracts reflect unequal bargaining power, and when challenged, such contracts must be examined in light of this inequality—placing the burden on the employer to prove that any restrictive covenant is not oppressive, unconscionable, or against public policy. 

• 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 ? 

• The respondent employee initially joined Vijaya Bank in 1999 as a Probationary Assistant Manager and was confirmed in service in 2001, subsequently being promoted to Middle Management Scale II.  
• In 2006, the appellant-bank issued a recruitment notification for 349 officers across different grades, which contained a specific condition requiring selected candidates to execute an indemnity bond of Rs. 2 lakh, stipulating payment of this amount if they left service before completing three years. 
• The respondent, being cognizant of this condition, voluntarily applied for the position of Senior Manager-Cost Accountant with a basic pay of Rs. 18,240 and was duly selected for the post. 
• Upon receiving his appointment letter dated 7th August 2007, clause 11(k) explicitly required him to serve the bank for a minimum period of three years and execute an indemnity bond for Rs. 2 lakh, with the amount being payable in case of resignation before completion of the stipulated minimum period. 
• The respondent voluntarily resigned from his erstwhile position as Manager, MMG-II and joined as Senior Manager, MMG-III on 28th September 2007, while also executing the required indemnity bond.  
• However, on 17th July 2009, before completing the mandatory three-year tenure, the respondent tendered his resignation to join IDBI Bank, and his resignation was accepted by the appellant-bank. Consequently, on 16th October 2009, the respondent paid the sum of Rs. 2 lakh to the appellant-bank under protest, as per the terms of the indemnity bond.  
• Subsequently, the respondent filed a writ petition before the High Court challenging clause 9(w) of the recruitment notification and clause 11(k) of the appointment letter, alleging violations of Articles 14 and 19(1)(g) of the Constitution of India and Sections 23 and 27 of the Indian Contract Act, 1872.  
  • The Single Judge of the High Court, relying on the decision in K.Y Venkatesh Kumar v. BEML Ltd., allowed the writ petition and quashed the impugned clause, directing the appellant-bank to refund the amount, which decision was subsequently upheld by the Division Bench.

What were the Court’s Observations? 

• The Supreme Court observed that standard form employment contracts prima facie evidence unequal bargaining power between employers and employees, requiring careful judicial scrutiny when challenged.  
• The Court established that whenever the weaker party to such a contract pleads undue influence, coercion, or alleges that any term is opposed to public policy, courts must examine such pleas while keeping in mind the unequal status of parties and the context in which contractual obligations were created.  
• The Court held that the onus to prove that a restrictive covenant in an employment contract is not in restraint of lawful employment or opposed to public policy lies on the covenantee (employer) and not on the employee. 
• The Court distinguished between restrictive covenants operating during the subsistence of an employment contract versus those operating after its termination, emphasising that negative covenants operative during the contract period, when employees are bound to serve exclusively, are generally not regarded as restraint of trade under Section 27 of the Contract Act.  
• The bench noted that public policy relates to matters involving public good and public interest, and what is considered 'just, fair and reasonable' in society varies with time, with civilisational advancements and evolving standards of human rights altering the contours of public policy.  
• In the context of employer-employee relationships, the Court recognized that technological advancements, re-skilling requirements, and preservation of specialised workforce in a free market are emerging considerations in the public policy domain. 
• The Court observed that public sector undertakings like the appellant-bank, operating in a deregulated free-market environment, require tools to retain efficient and experienced staff to survive competition with private players.  
• Finally, the Court found that the liquidated damages clause was reasonable considering the bank's position as a public sector undertaking that cannot resort to private appointments and must undertake expensive, time-consuming recruitment processes involving open advertisement and fair competitive procedures to comply with constitutional mandates under Articles 14 and 16. 

What are the Legal Principles Relating to Interpretation of Standard Form Employment Contracts? 

• Standard form employment contracts prima facie evidence unequal bargaining power.  
• 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 shall 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 Referred  

• Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. (1967), which established the crucial distinction between restrictive covenants operating during the subsistence of an employment contract versus those operating after its termination, holding that negative covenants during employment are generally not considered restraint of trade under Section 27 of the Contract Act.  
• Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly (1986), which laid down the principle that standard form contracts affecting large groups of persons, if unconscionable, unfair and unreasonable, are injurious to public interest and should be deemed void under Section 23 of the Contract Act as being opposed to public policy. 
• K.Y Venkatesh Kumar v. BEML Ltd. (2009), noting that the BEML case involved a restrictive covenant that imposed both a minimum employment term and a clog on future employability, unlike the present case which only imposed financial consequences for early resignation without restricting future employment opportunities.