Evolving Judicial Approaches to Employment Bonds and Restrictive Covenants in INDIA

Employment contracts in India have traditionally included clauses that employers considered standard – yet not always equitable. Courts, however, are increasingly taking a nuanced view, emphasizing proportionality and fairness rather than blanket enforcement or invalidation.

At the core of this debate is the challenge of balancing an individual’s right to earn a living and pursue their profession with an employer’s legitimate business interests, such as operational continuity, confidentiality, training investment and brand protection.

Key Judicial Developments in 2025

1. Supreme Court’s Ruling in Vijaya Bank & Another v Prashant B Narnaware, 2025 SCC OnLine SC 1107

In a significant judgment in 2025, the Supreme Court of India upheld the enforceability of an employment bond that required an employee to serve a minimum period or compensate the employer upon early resignation. The court held that this did not amount to a restraint of trade under Section 27 of the Indian Contract Act, 1872 (ICA), and the stipulated damages were a genuine estimate of loss rather than a penal sum.

This decision was notable because it moves away from rigid contract invalidation and adopts a commercial, case-specific lens in examining employment bond clauses.

2. Delhi High Court on Post-Employment Restrictions

In contrast, the Delhi High Court in Varun Tyagi v Daffodil Software Pvt. Ltd., 2025 SCC OnLine Del 4589, reaffirmed that post-employment restrictive covenants, such as non-compete and non-solicitation clauses, are void under Section 27 of the ICA. According to the court, once the employment relationship ends, no contractual restriction can lawfully impede an employee’s right to seek employment elsewhere, regardless of how limited the restriction may seem.

The court observed that enforceable negative covenants are those that operate only during employment, or only extend beyond termination when tied to the protection of legitimate proprietary interests — such as intellectual property or confidential client information. Outside this narrow scope, such covenants place the former employee in an untenable position: working only for the previous employer or remaining idle.

Statutory and Constitutional Framework

Indian courts assess employment bonds and restrictive covenants against several core legal standards:

• • Section 27 of the ICA invalidates agreements restraining trade, barring exceptions articulated in law.
  • Section 23 of the ICA bars agreements that offend public policy or are entered into for an unlawful object.
  • Section 74 of the ICA governs liquidated damages, permitting recovery only where the sum represents a reasonable estimate of actual loss, not a penal deterrent.
  • Article 19(1)(g) of the Constitution guarantees every citizen the right to practise any profession or carry on an occupation, trade or business.

These provisions shape judicial scrutiny of contractual restraints and inform the courts’ evolving jurisprudence.

From Rigid Prohibition to Proportionality-Based Scrutiny

Traditionally, Indian courts drew a clear distinction:

• • Negative covenants during employment were generally upheld;
  • Post-employment restraints were struck down as void restraints of trade.

However, with increased recognition of industries where employers invest heavily in training and specialized skill development, courts have adopted a more measured, proportionality-based approach. This involves examining whether:

• • The restraint protects legitimate business interests,
  • The employee genuinely agreed to the clause, and
  • The contractual term reflects a fair, reasonable compromise between employer and employee rights.

Under this lens, financial employment bonds – where the stipulated payment relates to actual employer expenses – may be upheld, while excessive or punitive provisions are disallowed or reduced during enforcement.

Practical Implications and Emerging Trends

Judges have shown willingness to engage in granular assessments rather than blanket invalidations. For instance:

• • Courts may reduce liquidated damage amounts to reflect actual loss.
  • In sectors with high attrition costs (e.g., aviation or specialised technology), courts may find that proportionate compensation clauses are reasonable.
  • Employers are increasingly using alternative dispute resolution mechanisms, such as arbitration, to enforce restrictive covenants in a commercially pragmatic setting — a trend highlighted by disputes where non-compete clauses were invoked, leading to negotiated settlements.

Key Takeaways

The trajectory of Indian case law – from early doctrines rooted in strict prohibition to a modern proportionality-guided framework – reflects judicial efforts to balance employee mobility with employer rights. The Supreme Court’s recent clarification distinguishes enforceable financial deterrents from impermissible restraints on post-termination employment.

As a result, carefully drafted and reasonably structured restraint mechanisms, rooted in demonstrable business interests, are more likely to be upheld, particularly in sectors marked by specialized roles and significant mobility pressures.