Supreme Court Upholds Employment Indemnity Bond: Clarity on Enforcement Parameters for Employers

On May 14, 2025, the Supreme Court of India (SC) in its decision in the matter of Vijaya Bank & Anr. v. Prashant B Narnaware upheld the enforcement of an employment indemnity bond. The indemnity bond required an employee to pay Rs. 2,00,000 to their employer (a public sector undertaking (PSU)) in the event the employee resigned from service prior to completion of a mandatory 3-year service period. Following are the key findings of the SC in Vijaya Bank & Anr. v. Prashant B Narnaware:

• Holding that bond and its conditions were not a ‘restraint of trade’, the SC observed the following: “A plain reading of Clause 11 (k) shows restraint was imposed on the Respondent to work for a minimum term i.e. three years and in default to pay liquidated damages of Rs. 2 Lakhs. 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”.
• The employer’s justifications for the enforcement were held to be reasonable. The SC accepted the contention of the employer bank that “inthe usual course, appointments are into service of the Bank after a detailed and elaborate process of recruitment and the Banks interest would be seriously prejudiced in the event premature resignations are tendered which would render the entire recruitment process redundant” and that “the Bank would also suffer the consequences of the loss in continuance of the said post which would necessitate alternative arrangements and restructuring to ensure smooth functioning of day to day business activities”. Consequently, it held that the employer bank, being a PSU “cannot resort to private or ad-hoc appointments through private contracts. An untimely resignation would require the Bank to undertake a prolix and expensive recruitment process involving open advertisement, fair competitive procedure …..” and that “keeping these exigencies in mind, the Appellant-bank had incorporated the liquidated damage clause in the appointment contract”.
• Notwithstanding the employee’s contentions of being “compelled to sign on dotted lines” by virtue of his inferior bargaining power, the bond was found not to be opposed to ‘public policy’. Acknowledging the evolving nature of ‘public policy’, the SC observed as follows: “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.” Defending the stipulations of the bond to not be in contravention of ‘public policy’, it held that “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.”

Employment indemnity bonds are widely utilized by employers to secure specific obligations of employees under their employment contracts, including completion of minimum service tenures. They require an employee breaching such obligations to pay a pre-agreed sum of money.

Employment bonds, however, are not a blanket permission for employers to claim the entire sum upon breach. Instead, they are subject to judicial scrutiny under Section 74 of the Indian Contract Act, 1872 (Contract Act). In their application of Section 74 in respect of employment indemnity bonds, courts assess whether the sum is proportionate and reasonable against losses suffered. While courts have historically be known to exercise restraint in enforcement of the pre-agreed sum in full where employers fail to demonstrate existence of losses, when employers successfully demonstrate that losses on account of an employee resigning prior to completion of an agreed minimum service tenure cannot be quantified, courts may be inclined to award the same in full.

Previous instances where the entire amount pre-agreed in an employment indemnity bond has been upheld to be payable as liquidated damages include a 2014 Delhi High Court judgment and a 2017 Madras High Court Judgment, both of which however have been in specific context of pilots resigning prior to completion of an agreed minimum service tenure:

• In Ashwani Bahl v. Air India Limited (2014 SCC OnLine Del 275), the Delhi High Court in this case held that “losses which are caused to an Airline on account of a Pilot leaving before the contractual period has various ramifications of which the cost of the training is only but one aspect. Therefore, in such cases, once the actual damages which are caused to the Airline, cannot be exactly calculated and proved, then, there is no illegality in awarding fixed/liquidated damages as specified in the contract and which in the facts of the present case thus would not be in the nature of penalty as specified in Section 74of the Indian Contract Act, 1872”.
• Similarly in Captain Bindu Kelunni v. Blue Dart Aviation Limited ((2017) 06 MAD CK 0083), the Madras High Court opined that as hiring a replacement pilot inter alia requires a time period of several months, an abrupt resignation by the employee pilot resulted in revenue loss to the employer and awarded payment of the amount agreed in the bond to be payable as liquidated damages. On the question relating to proving losses caused, the court ruled that “if a compensation named in the Bond for a party’s breach was a genuine pre-estimate of loss which the parties knew when they made the contract to be likely to result from the breach of it, it is not necessary for the parties to prove such a loss and the parties are not required to prove the loss suffered by them by leading evidence”. 

The Vijaya Bank judgment reaffirms the principle that similar to enforcement of liquidated damages in commercial contracts, payment obligations under employment indemnity bonds may be enforceable in full when such structured appropriately, provided that (a) the amount payable is not deemed unreasonable and can be argued as payable basis a legitimate business rationale and (b) it can be demonstrated that losses caused cannot be quantified and the amount payable was agreed by the parties as a genuine pre-estimate of loss.