Early Resignation Damages Clause Valid – No Restraint of Trade | SC

Case Details: Vijaya Bank vs. Prashant B Narnaware - [2025] 181 taxmann.com 894 (SC)

Judiciary and Counsel Details

• Joymalya Bagchi & Pamidighantam Sri Narasimha, JJ.
• Rajesh Kumar Gautam, Likivi K. Jakhalu, Deepanjal Choudhary, Sushant Kumar Yadav, Prateek Yadav, Gaurav Lomes, Prithvi Yadav, Rahul Chitnis, Ms Shwetal, Aditya Khanna, Surya Prakash, Ms Divya Singh Pundir, Devesh Dubey, Ms Shubhra Kapur, Sanjiv Goel, Annu Mishra, Advs., Chander Shekhar Ashri, Sanjay Kapur, Ms Asha Gopalan Nair, AORs and S.R. Singh, Sr. Adv. for the Appearing Parties.

Facts of the Case

In the instant case, the Respondent was appointed as Senior Manager in the appellant bank. In his appointment letter, Clause 11(k) stated that he was required to serve the bank for a minimum period of three years and execute an indemnity bond for ₹2 lakhs, payable in the event he resigned from the services of the bank before completion of the stipulated minimum period of three years.

The Respondent tendered his resignation before completion of three years in order to join another bank and paid a sum of ₹2 lakhs to the appellant bank. Thereafter, the Respondent filed a writ petition before the High Court seeking the quashing of Clause 11(k) of the appointment letter, alleging that the same was in violation of Section 27. The High Court allowed the writ petition.

Supreme Court Held

The Supreme Court observed that a restrictive covenant operating during the subsistence of an employment contract does not place a clog on the freedom of a contracting party to engage in trade or employment. Clause 11(k) sought to impose a restriction on the Respondent’s option to resign, thereby perpetuating the employment contract for a specified term.

Further, Clause 11(k) of the appointment letter amounted to a restraint of trade or was opposed to public policy. The object of the restrictive covenant was in furtherance of the employment contract and not to restrain future employment and, hence, was not violative of Section 27.

Accordingly, the Supreme Court held that the impugned order passed by the High Court was liable to be set aside.

List of Cases Reviewed

• Order of High Court, Karnataka at Bengaluru in WA-1159-2013, dated 20-08-2014 (para 36) set aside

List of Cases Referred to

• K.Y. Venkatesh Kumar v. BEML Ltd [Writ Appeal No.2736 of 2009, dated 9-12-2009] (para 8)
• Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co 1967 SCC OnLine SC 72 (para 13)
• Superintendence Company (P) Ltd. v. Krishan Murgai (1981) 2 SCC 246 (para 14)
• Central Inland Water Transport Corpn. Ltd. v. Brojo Nath Ganguly [1986] 60 COMP CASE 797 (SC) (para 19)
• Haryana Financial Corporation v. Jagdamba Oil Mills (2002) 3 SCC 496 (para 34).