The Vijaya Bank Case: A Turning Point in Employment Bond Enforcement in India?

(Mansi Singh and Riya Jain)

In today’s competitive talent landscape, employers usually invest significant resources in onboarding and training employees. Take aviation industry, for instance, where airlines spend lakhs in training new pilots. If a pilot leaves soon after to join a competitor, it causes both financial loss and operational disruption. To address such risks, employers frequently rely on employment bonds—agreements requiring employees to serve a minimum period or pay specific compensation if they resign early.

Under Indian contract law, contractual restrictions on employment must be reasonable and aimed at protecting legitimate business interests or recovering actual costs such as training costs to avoid being struck down as restraint of trade.

The Evolving Framework of Employment Bond Enforceability

Indian courts have previously ruled that employers need to prove actual loss (such as training costs) for an employment bond to be enforceable in cases of early resignation. In Toshniwal Brothers (Private) Limited v Eswarprasad, the Madras High Court noted that for enforceability of a bond, the employer must be able to prove actual training costs incurred, highlighting the need for quantifiable loss.

A more commercially pragmatic view has been taken by the Supreme Court of India in the recent case of Vijaya Bank & Ors. v. Prashant B. Narnaware. Prashant, a senior employee at Vijaya Bank (a public sector undertaking “PSU”), resigned before completing the three-year bond period, triggering a clause that required him to pay INR 200,000 (~USD 2,500) in liquidated damages. He challenged the bond as an unreasonable restraint on trade and otherwise opposed to public policy thus being in violation of the Indian Contract Act, 1872 and the rights guaranteed under the Constitution of India.

While the Karnataka High Court held that the bond is invalid, the Supreme Court reversed this decision on 14 May 2025. While analysing the facts of the case, the Supreme Court noted that Vijaya Bank being a public sector bank is required to comply with a rigorous hiring process and incurs substantial cost on recruitment. It cannot resort to ad-hoc appointments through private contracts. Therefore, the Court found the bond terms reasonable and enforceable. Importantly, it upheld the bond despite no actual training costs being incurred by the employer, thus broadening the scope for enforceable retention clauses, especially for public sector employers.

Points to consider

Employment bonds may be enforceable even if the employers have not incurred any actual training costs, especially in the case of PSUs. Enforceability hinges on:

• Reasonableness and proportionality of liquidated damages;

• The clauses are not coercive with restrictions on future employment, but a genuine attempt to prevent inconvenience and hardship to the employer;

• Appropriateness of the bond duration (depending on the industry); and

• Full disclosure of bond covenants and employee’s free consent.

From PSUs to Private Sector: Broader Implications of the Judgment

Although the facts of the Vijaya Bank case pertain to a PSU, the judgment’s rationale can also be extended logically to private employment bonds if the factors stated above are reasonably incorporated in such bonds. However, courts may apply a stricter standard of scrutiny to employment bonds in the private sector, because, unlike PSUs, private employers typically lack the structured statutory recruitment protocols and demonstrable investment in hiring and onboarding.

Final Takeaways on Legal Validity and Fairness

The Vijaya Bank case provides clarity on the enforceability of employment bonds, confirming that restrictive covenants with reasonable liquidated damages are not inherently violative of the Contract Act or the Constitution of India. By upholding retention clauses that are reasonable and serve legitimate interests of the employer, the judgment reinforces their validity in the public sector and, to a limited extent, influences their validity in the private sector as well.

It is crucial that employment bonds function as legitimate retention mechanism rather than instruments of undue restraint, making it beneficial for both the employer as well as the employee. However, the employment bonds must be fair in scope and duration, especially in private employment where quantifiable loss suffered by the employer becomes difficult to assess in most cases.