Is a restrictive covenant in an agreement for employment, restraint of trade and/or opposed to public policy and contrary to Section 23 of the Contract Act and violative of Articles 14 and 19?

Is a restrictive covenant in an agreement for employment,  restraint of trade and/or opposed to public policy and contrary to Section 23 of the Contract Act and violative of Articles 14 and 19 of the Constitution?   Supreme Court answers  

The Respondent joined the appellant-bank as a Probationary Assistant Manager and was later promoted to middle management. Thereafter, the Respondent applied for and was selected as Senior Manager. As per the terms of the appointment letter for the Senior manager, the Respondent was required to serve the bank in the present capacity for a minimum period of 3 years and was also required to execute an Indemnity Bond for Rs. 2 lacs. The Bond stipuated that if the Respondent was to resign before the period of 3 years, the sum of Rs. 2 lacs would be payable by him to the Appellant Bank.   

The Respondent resigned from his post of the  Senior manager before the period of 3 year and as per the terms of the aforesaid condition, paid the sum of Rs. 2 lacs, under protest.   

Thereafter the Respondent filed a writ petition before the High Court praying for quashing of clause 9 (w) of the recruitment notification and clause 11 (k) of the appointment letter alleging the same were in violation of Articles 14 and 19(1)(g) of the Constitution of India and Sections 23 and 27 of the Indian Contract Act, 1872. 

The Single Bench allowed the Writ Petiton which was then challenged before the Division  

Bench who also upheld the order of the Single Bench. 

The Appellant bank challenged the impugned order.  

The Apex Court discussed the distinction between restrictive covenants operating during the subsistence of an employment contract and those operating after its termination and held that a restrictive covenant operating  during the subsistence of an employment contract cannot be said to be violative of Section 27 of the Contract Act. 

 The court observed that the appellant-bank would have suffered financial loss due to pre mature resignations as Bank is required to undertake an expensive recruitment process involving open advertisement, fair competitive procedure lest the appointment falls foul of the constitutional mandate under Articles 14 and 16.    

In the circumstances, the court was of the view that the restrictive covenant of the appointment letter does not amount to restraint of trade nor is it opposed to public policy.    

The court allowed the appeal and set aside the impugned order.  

IN THE SUPREME COURT OF INDIA  

CIVIL APPELLATE JURISDICTION  

CIVIL APPEAL NO.11708 of 2016 

Vijaya Bank & Anr. Appellant(s)  

VERSUS  

Prashant B. Nawnavare  Respondent(s)  

Dated 14th May 2025