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TMI Blog2025 (5) TMI 1122X X X X Extracts X X X X X X X X Extracts X X X X ..... ereby the respondent-employee Hereinafter, respondent. was required to pay liquidated damages of Rs. 2 lakhs in the event of leaving employment of the first appellant-bank Hereinafter, appellant-bank. prior to three years and consequentially the appellant-bank was directed to refund the said sum to the respondent. 2. In 1999, respondent had joined the appellant-bank as a Probationary Assistant Manager. His service was confirmed in 2001. Thereafter, he was promoted to Middle Management Scale- II. In 2006, appellant-bank issued a recruitment notification for appointment of 349 officers in different grades. Clause 9 (w) of the recruitment notification reads as follows:- "Selected candidates are required to execute an indemnity bond of Rs.2.00 Lakh (Rupees Two Lakh only) indemnifying that they will pay an amount of Rs.2.00 lakh to the Bank if they leave the service before completion of 3 years" 3. Cognizant of the said condition, respondent applied to the post of Senior Manager-Cost Accountant at basic pay of Rs.18,240/- and was selected for the said post. 4. On 07.08.2007, respondent was issued an appointment letter. Clause 11(k) of the said letter reads as follows:- "You are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om carrying on similar business within a reasonable local limit. 12. Though the Contract Act does not profess to be a complete code, Act is exhaustive with regard to the subject matter contained therein. That is to say, validity of a restrictive covenant in an agreement including an employment agreement in regard to restraint in exercise of lawful profession, trade or business has to be tested on the touchstone of Section 27 of the Contract Act. 13. Whether Section 27 operates as a bar to a restrictive covenant during the subsistence of an employment contract fell for decision in Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co 1967 SCC OnLine SC 72. After an illuminating discussion on the subject, the Bench made a distinction between restrictive covenants operating during the subsistence of an employment contract and those operating after its termination. The Bench held as follows:- "17. The result of the above discussion is that considerations against restrictive covenants are different in cases where the restriction is to apply during the period after the termination of the contract than those in cases where it is to operate during the period of the contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts, it can be safely concluded law is well settled that a restrictive covenant operating during the subsistence of an employment contract does not put a clog on the freedom of a contracting party to trade or employment. 16. 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. Hence, it cannot be said to be violative of Section 27 of the Contract Act. OPPOSED TO PUBLIC POLICY 17. Let us now examine whether the clause is opposed to public policy. 18. Mr. Chitnis has vehemently argued the clause is part of a standard form contract and his client was compelled to sign on dotted lines. If he did not do so, he would have to forsake career advancement. The terms of the contract were imposed on him through an unequal bargaining mechanism. Clause 11 (k) being an unreasonable, onerous and ex-p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s supplied) 20. It may not be out of place to note A.P. Sen, J., a member of the coram in Brojo Nath (supra) had expressed a similar view earlier in Murgai (supra):- "59. It is well settled that employee covenants should be carefully scrutinised because there is inequality of bargaining power between the parties; indeed no bargaining power may occur because the employee is presented with a standard form of contract to accept or reject. At the time of the agreement, the employee may have given little thought to the restriction because of his eagerness for a job; such contracts "tempt improvident persons, for the sake of present gain, to deprive themselves of the power to make future acquisitions, and expose them to imposition and oppression". 21. The legal principles relating to interpretation of standard form employment contracts may be summarized as follows:- (i) Standard form employment contracts prima facie evidence unequal bargaining power. (ii) Whenever the weaker party to such a contract pleads undue influence/coercion or alleges that the contract or any term thereof is opposed to public policy, the Court shall examine such plea keeping in mind the unequal status of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 25. 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. 26. Since the last decade of 20th century, India witnessed an era of liberalization. Golden days of monopolistic public sector behemoths were gone. Public sector undertakings like the appellant-bank needed to compete with efficient private players operating in the same field. To survive in an atmosphere of deregulated free-market, public sector undertakings were required to review and reset policies which increased efficiency and rationalized administrative overheads. Ensuring retention of an efficient and experienced staff contributing to managerial skills was one of the tools inalienable to the interest of such undertakings including ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of liquidated damages was not so high as to render the possibility of resignation illusory. In fact, the appellant had paid the said quantum and resigned from the post. 32. The High Court failed to consider the restrictive covenant in its proper perspective in the factual matrix of the case and mechanically relied on BEML (supra) to set aside the covenant as barred by law. 33. In BEML (supra), a coordinate Bench of the High Court was considering a restrictive covenant which not only imposed a minimum term of employment but also a clog on future employability. 34. That apart, in BEML (supra) the issue of financial loss suffered by the public sector undertaking owing to time consuming and expensive recruitment drives due to pre-mature resignations had not fallen for consideration. It is trite judgments cannot be read as statutes and have to be applied keeping in mind the factual matrix peculiar to each case Haryana Financial Corporation v. Jagdamba Oil Mills (2002) 3 SCC 496. 35. In light of the aforesaid discussion, we are of the view the restrictive covenant in clause 11(k) of the appointment letter does not amount to restraint of trade nor is it opposed to public policy. 36. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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