Vijaya Bank vs Prashant B Narnaware 2025 INSC 691 - Employment Contract - Restrictive Covenant

Employment Contracts - Restrictive covenant prescribing a minimum term cannot be said to be unconscionable, unfair or unreasonable and thereby in contravention of public policy. [Context: SC held that the restrictive covenant in clause 11(k) of the appointment letter issued by Vijaya Bank does not amount to restraint of trade nor is it opposed to public policy.]

Indian Contract Act 1872 - Section 27 - A restrictive covenant operating during the subsistence of an employment contract does not put a clog on the freedom of a contracting party to trade or employment- In this case, the relevant clause was to work for a minimum term i.e. three years and in default to pay liquidated damages of Rs. 2 Lakhs. SC held: The clause sought to impose a restriction on the respondent’s option to resign and thereby perpetuated the employment contract for a specified term. The object of the restrictive covenant was in furtherance of the employment contract and not to restrain future employment. Hence, it cannot be said to be violative of Section 27 of the Contract Act. (Para 15-16) -Distinction between restrictive covenants operating during the subsistence of an employment contract and those operating after its termination - Referred to Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. (Para 13)

Precedents - judgments cannot be read as statutes and have to be applied keeping in mind the factual matrix peculiar to each case. (Para 34)

Standard form employment contracts - Interpretation of standard form employment contracts may be summarized as follows:- (i) Standard form employment contracts prima facie evidence unequal bargaining power. (ii) 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. (iii) 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. (Para 21)

Public Policy - Generally speaking, public policy relates to matters involving public good and public interest. What is ‘just, fair and reasonable’ in the eyes of society varies with time. Civilizational advancements, growth of knowledge and evolving standards of human rights and dignity alter the contours of public good and policy. From the prism of employer-employee relationship, technological advancements impacting nature and character of work, re-skilling and preservation of scarce specialized workforce in a free market are emerging heads in the public policy domain which need to be factored when terms of an employment contract is tested on the anvil of public policy. (Para 22-25)