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Vijaya Bank v. Prashant B Narnaware

Civil Appeal · 2025 INSC 691Decided 14 May 2025
Civil Appeal No. 11708 of 2016 (with Civil Appeal No. 11499 of 2016)
Justice Pamidighantam Sri Narasimha · Justice Joymalya Bagchi

Background

Prashant B Narnaware joined Vijaya Bank in 1999 and was later selected, through an open recruitment drive, to the post of Senior Manager in 2007. His appointment letter required him to serve the bank for a minimum of three years or pay Rs. 2 lakh in liquidated damages if he resigned earlier, backed by an indemnity bond. He resigned in 2009, before completing three years, to join another bank, and paid the Rs. 2 lakh "under protest." He then challenged the clause in the Gujarat High Court as an unlawful restraint of trade and against public policy; the High Court, relying on an earlier Karnataka High Court ruling, struck the clause down and ordered a refund. Vijaya Bank appealed to the Supreme Court.

Decision Breakdown

The Supreme Court held that a minimum-service clause operating during the subsistence of employment (as opposed to restricting a person's activities after employment ends) does not amount to a "restraint of trade" under Section 27 of the Contract Act, following established precedent (Niranjan Shankar Golikari, Superintendence Company v. Krishan Murgai). On the "public policy" question, the Court reasoned that public sector banks, operating in a competitive, liberalized market, have a legitimate interest in retaining trained staff and avoiding the cost and disruption of repeated recruitment drives; a Rs. 2 lakh liquidated-damages clause for a senior, well-paid managerial employee was not so disproportionate as to be unconscionable or to amount to unjust enrichment. The Court distinguished the earlier BEML case, which had also barred future employability (not just imposed a minimum term). The appeal by the bank was allowed and the High Court's order set aside; a connected appeal by another employee on the same clause was dismissed for the same reasons.

Lesson Learnt

An employer can lawfully require an employee to serve a reasonable minimum term (with liquidated damages for early exit) without violating the law against "restraint of trade," so long as the restriction operates only during employment and the damages are not grossly disproportionate: such clauses are not automatically void just because they were part of a standard-form contract.

Official source (sci.gov.in)View Judgment (PDF)

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