Case Note & Summary
The Supreme Court allowed the appeals filed by Vijaya Bank and another against the judgment of the High Court of Karnataka which had quashed clause 11(k) of the appointment letter and directed refund of Rs. 2 lakhs paid by the respondent-employee, Prashant B Narnaware. The respondent joined the bank as a Probationary Assistant Manager in 1999 and was later promoted. In 2006, the bank issued a recruitment notification for officers, which included clause 9(w) requiring selected candidates to execute an indemnity bond of Rs. 2 lakhs if they left service before three years. The respondent applied and was selected as Senior Manager - Cost Accountant. He was issued an appointment letter on 07.08.2007 containing clause 11(k) which required him to serve for a minimum of three years and pay Rs. 2 lakhs as liquidated damages if he resigned earlier. The respondent accepted the condition, resigned from his previous post, joined the new post on 28.09.2007, and executed the indemnity bond. On 17.07.2009, before completing three years, he resigned to join IDBI Bank. His resignation was accepted, and he paid Rs. 2 lakhs under protest on 16.10.2009. He then filed a writ petition challenging clauses 9(w) and 11(k) as violative of Articles 14 and 19 of the Constitution and Sections 23 and 27 of the Indian Contract Act, 1872. The learned Single Judge, relying on a Division Bench decision in K.Y. Venkatesh Kumar v. BEML Ltd., allowed the petition, and the Division Bench upheld the order. The Supreme Court framed the issue whether clause 11(k) amounts to restraint of trade under Section 27 and/or is opposed to public policy under Section 23. The Court examined Section 27 and the distinction between restrictive covenants during and after employment, citing Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. and Superintendence Company (P) Ltd. v. Krishan Murgai, which held that negative covenants during the subsistence of a contract are not restraint of trade. The Court found that clause 11(k) imposed a restriction during the employment term, not after termination, and was in furtherance of the contract, hence not violative of Section 27. On the issue of public policy, the Court considered the argument of unequal bargaining power in standard form contracts, relying on Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly, which held that unconscionable, unfair, and unreasonable clauses in such contracts may be void. However, the Court noted that the respondent voluntarily accepted the condition for career advancement, the amount of Rs. 2 lakhs was not exorbitant, and the clause was not unconscionable or unreasonable. The Court also rejected the argument that the clause violated Articles 14 and 19, as it was a reasonable restriction. Consequently, the Supreme Court set aside the High Court's judgment, upheld clause 11(k), and dismissed the respondent's writ petition. The appeals were allowed, and no order as to costs.
Headnote
A) Contract Law - Restraint of Trade - Section 27 Indian Contract Act, 1872 - Restrictive Covenant During Employment - Clause requiring employee to serve minimum three years and pay liquidated damages on early resignation is a restriction during subsistence of contract, not after termination, and thus not void under Section 27 - Held that such negative covenants are generally not regarded as restraint of trade unless unconscionable or excessively harsh (Paras 11-16). B) Contract Law - Public Policy - Section 23 Indian Contract Act, 1872 - Standard Form Contract - Unequal Bargaining Power - Clause in standard form employment contract with unequal bargaining power may be void if unconscionable, unfair, unreasonable, and injurious to public interest - Held that on facts, clause 11(k) was not unconscionable or unreasonable as employee voluntarily accepted the condition for career advancement and the amount was not exorbitant (Paras 17-22). C) Constitutional Law - Articles 14 and 19 - Fundamental Rights - Clause requiring payment of liquidated damages for early resignation does not violate Articles 14 and 19 as it is a reasonable restriction in furtherance of employment contract and not a restraint on profession - Held that the clause is valid and enforceable (Paras 10, 22).
Issue of Consideration
Whether clause 11(k) of the appointment letter requiring payment of liquidated damages of Rs. 2 lakhs if employee leaves before three years amounts to restraint of trade under Section 27 of the Indian Contract Act, 1872, and/or is opposed to public policy under Section 23 of the Indian Contract Act, 1872, and violative of Articles 14 and 19 of the Constitution of India.
Final Decision
Appeals allowed. Judgment and order dated 20.08.2014 of the High Court of Karnataka quashing clause 11(k) of the appointment letter and directing refund of Rs. 2 lakhs is set aside. Clause 11(k) is held valid and not violative of Section 27 or Section 23 of the Indian Contract Act, 1872, or Articles 14 and 19 of the Constitution. The respondent's writ petition stands dismissed. No order as to costs.
Law Points
- Restrictive covenant during subsistence of employment contract is not restraint of trade under Section 27 of Indian Contract Act
- 1872
- Standard form contract with unequal bargaining power may be void if unconscionable
- unfair
- unreasonable
- and injurious to public interest under Section 23 of Indian Contract Act
