Contract Act, 1872 – s.27 – Agreement in restraint of trade void – Restrictive covenant in the clause of the appointment letter that employee to work for minimum three years and in default to pay Rs 2 lakhs as liquidated damages on leaving employment – Respondent-employee tendered resignation before completion of three years and paid the sum under protest – Writ petition by the respondent seeking quashing of the clause of the appointment letter – High Court quashed the clause of the appointment letter and thus, directed the bank to refund the said sum to the respondent – Correctness: Held: Restrictive covenant in clause of the appointment letter does not amount to restraint of trade nor is it opposed to public policy – Validity of restrictive covenant in an employment agreement in regard to restraint in exercise of lawful profession, trade or business has to be tested on the touchstone of s.27 – 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 – 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 s.27 – 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 employment contract is tested on the anvil of public policy – Public sector undertakings like the appellant-bank needed to compete with efficient private players operating in the same field – Ensuring retention of efficient and experienced staff contributing to managerial skills was one of the tools inalienable to the interest of such undertakings – This prompted the appellant-bank to incorporate a minimum service tenure for employees, to reduce attrition and improve efficiency – Restrictive covenant prescribing minimum term not unconscionable, unfair or unreasonable and thereby in contravention of public policy – Respondent was serving in a senior middle managerial grade having lucrative pay package, quantum of liquidated damages not so high as to render the possibility of resignation illusory – High Court failed to consider the restrictive covenant in its proper perspective – Constitution of India – Arts.14, 19. [Paras 12, 15-16, 24-27, 31, 32, 35, 36] Contract – Standard form employment contracts – Interpretation of – Legal principles – Discussed. [Para 21]
As published in the Supreme Court Reports, Supreme Court of India. Headnotes prepared by: Nidhi Jain. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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