- Short Answer
This Article elucidates key aspects of employment bonds and their legal ramifications. It underscores the Supreme Court of India’s affirmation of the validity of clauses in employment contracts, particularly regarding reimbursement of training expenses should an employee resign prematurely. Furthermore, the requisites for a valid employment bond are delineated, emphasizing the importance of free consent, reasonable conditions, and protection of the employer’s interests. Additionally, the enforceability of negative covenants, designed to restrict an employee’s activities during employment, is clarified, aiming to strike a balance between protecting the employer’s interests and safeguarding the employee’s right to earn a livelihood.
- Judicial Precedents
- Niranjan S. Golikari vs. The Century Spinning & Manufacturing Company[1]
The Supreme Court of India, while interpreting a clause in the employment contract stipulating that the appellant employee shall serve the respondent company for a period of five years, during which he shall undergo training and in the event he resigned from the job before the expiry of five years, he would be liable to reimburse the training expenses incurred on him by the company and also be liable to pay damages, upheld the validity of the above clause on the ground that the restriction on taking up a similar employment being operative only for the period agreed upon in the contract of employment, there is no restraint of trade.
- IBS Software Services Group v Leo Thomas[2]
In order to execute a valid employment bond, the parties have to ensure that the following requisites have been complied: (i) the agreement has to be signed by the parties with free consent; (ii) the conditions stipulated must be reasonable; and (iii) the conditions imposed on the employee must be proved to be necessary to safeguard the interests of the employer. Further, the employment bond stipulating conditions such as to serve the employer compulsorily for a specific time period or penalty for incurring the expenses is in the nature of the indemnity bond and, therefore, such kind of employment bond has to be executed on a stamp paper of appropriate value in order to be valid and enforceable.
- Nandganj Sihori Sugar Company Ltd v Badrinath Dixit, & Ors[3]
The court typically calculates reasonable compensation by considering the actual losses suffered by the employer, taking into account all relevant factors. Even if a bond specifies a penalty amount for breach, it doesn’t guarantee the employer will receive that full amount as compensation in case of default. Instead, the court decides what constitutes reasonable compensation based on the circumstances of the case.
- Sicpa India Limited v Shri Manas Pratim Deb[4]
The plaintiff spent INR 67,595 on training the defendant under an employment bond where the defendant agreed to work for three years or pay INR 200,000 if leaving early. The defendant left after two years, prompting the employer to seek legal action. Despite the bond specifying a payment of INR 200,000 for breach, the court awarded INR 22,532 as compensation. The judge considered both the expenses incurred and the employee’s duration of service, dividing the total expenses over three years. Since the defendant worked for two out of the three agreed years, the judge deemed INR 22,532 as reasonable compensation for leaving a year early.
- Gujarat Bottling Company Limited vs. Coca Cola Company[5]
Supreme Court has established that a “negative covenant” in an employment contract, which restricts the employee’s activities during the term of employment when they are obligated to work exclusively for the employer, is typically not considered a restraint of trade. This interpretation aims to strike a balance between protecting the employer’s interests and upholding the employee’s right to earn a livelihood. As such, such clauses generally do not fall under the scope of Section 27 of the Act, which governs agreements in restraint of trade.
- Fertiliser and Chemical Travancore Pvt.Ltd v. Ajay Kumar and Others[6]
Three trainees were selected by the employer under the condition that they would undergo two years of training with the company and subsequently work for at least five years. The bond specified that if this condition was breached, the trainee would pay Rs. 10,000 as reasonable compensation for potential damages to the employer. One of the trainees resigned after just five months of training.
The High Court of Kerala ruled that even though the candidates were selected for training and not permanent employment, it still involved significant investment of time, energy, and expenses by the employer. The employer would suffer losses when a trainee breaks the bond, depriving them of expected services from a competent individual. The breach of the bond by the trainee constituted damages to the employer, and only the exact amount of damages needed to be determined.
- Relevant Statutory Provisions
Section 27 of the Indian Contract Act, 1872 (the “Act”) is relevant in this context. This Section reads as under:
“27. Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void
Damages: Section 73 of the Act provides the general right to compensation for loss or damage caused by breach of contract. Section 73 of the Act reads as under:
“73. When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.”
Liquidated Damages: Section 74 of the Act reads as follows:
“74. When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.
- Conclusion
This Article outlines several key points regarding employment bonds and their enforceability:
- Validity of Employment Contracts: The Supreme Court of India upheld the validity of an employment contract clause requiring reimbursement of training expenses if the employee resigns before the agreed-upon period.
- Requisites for Employment Bonds: To be valid, employment bonds must be signed with free consent, stipulate reasonable conditions, and safeguard the employer’s interests.
- Calculation of Compensation: Courts determine reasonable compensation for breach of employment bonds based on actual losses suffered by the employer and relevant circumstances, regardless of specified penalty amounts.
- Enforceability of Negative Covenants: Negative covenants in employment contracts, which restrict an employee’s activities during employment, are generally not considered restraints of trade and are upheld to protect the employer’s interests.
- 5.Breach of Training Bonds: Breach of training bonds by employees, even if they were selected for training and not permanent employment, can result in damages to the employer, and compensation is determined based on the losses suffered.
In conclusion, this Article emphasizes the importance of upholding employment contracts, the reasonableness of conditions, and the determination of fair compensation in case of breach, while also balancing the interests of both employers and employees.
[1] (1967) 2 SCR 378
[2] (2009) 4 KLT 797
[3] (1991) 3 SCC 54
[4] (2011) SCC Online Del 4805
[5] (1995) 3 SCC 545
[6] 1990 LLR 711