Vijaya Bank & Anr. Vs. Prashant B Narnaware
The Interpretation of standard form employment contracts and validity of penalty clauses under Section 27 of the Indian Contract Act.
Judgement Details
Court
Supreme Court of India
Date of Decision
23 May 2025
Judges
Justice P.S. Narasimha ⦁ Justice Joymalya Bagchi
Citation
Acts / Provisions
Facts of the Case
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The respondent, an employee of Vijaya Bank (a public sector undertaking), resigned before completing a mandatory three-year service period.
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As per Clause 11(k) of the employment agreement, this triggered a penalty clause requiring him to pay ₹2 lakhs.
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The respondent challenged the penalty by filing a writ petition before the High Court, which ruled the bond as a restrictive trade practice under Section 27.
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Vijaya Bank appealed to the Supreme Court, contesting the High Court’s ruling.
Issues
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Whether standard form employment contracts create an unequal bargaining power and should be interpreted accordingly.
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Whether penalty clauses in employment contracts (such as a ₹2 lakh bond) amount to restraint of trade under Section 27 of the Contract Act.
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Who bears the burden of proof when a restrictive covenant is challenged.
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Whether exclusivity clauses that impose a penalty for premature resignation are unconscionable or against public policy.
Judgement
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The Supreme Court set aside the High Court’s judgment and upheld the validity of the ₹2 lakh penalty clause.
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The Court ruled that such exclusivity clauses do not violate Section 27 of the Contract Act since they do not restrict future employment, but rather impose liquidated damages for not fulfilling the contractual term.
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The clause was deemed reasonable and necessary, especially considering the public nature of the employer and the costs of re-recruitment.
Held
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Standard form contracts do reflect unequal bargaining power, but that alone doesn’t make them invalid.
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The onus is on the employer (covenantee) to justify that any restrictive covenant is not opposed to public policy.
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The penalty of ₹2 lakhs was reasonable, especially given the senior position and salary of the respondent.
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Section 27 was not violated, as the clause did not restrain future employment but required damages for early exit.
Analysis
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The Court carefully balanced contractual freedom with public interest and employee protection.
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It clarified that not all standard-form contracts are oppressive—only those that are unconscionable or against public policy.
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The decision underscores that public sector employers face unique challenges and must retain skilled staff through enforceable contracts.
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The judgment sets a precedent for enforcing employment bonds when reasonable and proportionate.