Enforceability of Employment Bond in India

Introduction
The present era is experiencing phenomenal changes in the economy and
industrial processes, which has resulted in greater business competition. To
cope up with competition, the employers incur huge expenditure in
imparting training to their employees for improving the quality of goods and
services of the company. However, sometimes the employees leave their
employment after honing the skills & improving the knowledge of the
industry for better salary and incentives. The increasing rate of attrition
subjects the employers not only to financial losses but also delays in
completing the ongoing projects thereby directly impacting their goodwill &
reputation in the market. Therefore, in order to safeguard their interest,
employers have of late started to obtain an employment bond from their
employees who are found suitable for training or skill development. Such
employment bonds are agreements between the employer and employee
wherein among other terms & conditions of the employment, an additional
clause is incorporated which requires the employee to serve the employer
compulsorily for a specific time period else refund the amount specified as
bond value.
The question that arises here is whether such a method to retain employees
is effective, acceptable and enforceable under the law. This article discusses
the enforceability of employment bond and the rights available to the
employers and employees under the agreement in light of various court
decisions.

1. Employment bond: need and enforceability?

Generally before selecting employees for providing training or skill
enhancement program, employers take necessary safeguard of conducting
interviews, take assurances that employee will stick to complete the projects
for which he is being trained and shall also train the other co-employees so
that an effective and efficient work environment is created. However,
employees still tend to leave for greener pastures and, therefore, it is
increasingly becoming necessary for the employers to enter into an
employment bond to safeguard their interests. If employee leaves the
employment without serving the company for agreed time period, the
employer is expected to suffer due to the undue delay in completing the
work undertaken, which can ultimately affect its reputation/creditability in
the market. To prevent such situations, the employer can compensate the loss
incurred if a valid employment bond has been executed. Such bonds also
deter the employees from committing any breach of the agreed terms and
conditions.
Now, the most pertinent question that arises here is whether the employment
agreement with negative covenant is enforceable under Indian laws? The
simple answer is yes. Such employment agreements with the negative
covenant is valid and legally enforceable if the parties agree with their free
consent i.e. without force, coercion, undue influence, misrepresentation and
mistake. The courts in India have held in its various judgments that in the
event of breach of contract by the employee, the employer shall be entitled
to recover damages only if a considerable amount of money was spent on
providing training or incurred other expenses for the employee. Further, the

courts have been reluctant to restrain the employee from joining a

competitor/other employer. The employment bond will not be enforceable if
it is either one sided, unconscionable or unreasonable. Therefore, it is
pertinent to be cautious while drafting the employment bond because it is
mandatory that the conditions mentioned in the employment bond, including
the compulsory employment period and amount of penalty are reasonable in
order to be valid under the Indian law. The term "reasonable" is not defined
under the legislation and, therefore, the meaning has to be determined on a
case by case basis depending upon the issues involved and circumstances of
the case. In general, the conditions stipulated in the contract should justify
that it is necessary to safeguard the interest of the employer and to
compensate the loss in the event of breach of contract. Further, the penalty
or compulsory employment period stipulated in the contract should not be
exorbitant to be considered as valid and to be regarded as reasonable.
2. Challenging the enforceability of employment bond
The validity/enforceability of the employment bond can be challenged on
the ground that it restrains the lawful exercise of trade profession or trade or
business. As per section 27 of the Contract Act, 1872, any agreement in
restraint of trade or profession is void. Therefore, any terms and conditions
of the agreement which directly or indirectly either compels the employee to
serve the employer or restrict them from joining competitor or other
employer is not valid under the law. The employee, by signing a contract of
employment, does not sign a bond of slavery and, therefore, the employee
always has the right to resign the employment even if he has agreed to serve
the employer for specific time period.1 However, the restraints or negative
covenants in the agreement or contract may be valid if they are reasonable.

For a restraint clause in an agreement to be valid under law, it has to be

proved that it is necessary for the purpose of freedom of trade. For instance,
if the employer is able to prove that the employee is joining the competitor
to divulge its trade secrets then the court may issue an injunction order
restricting the employment of the employee to protect the interests of the
employer. Whenever an agreement is challenged on the ground of it being in
restraint of trade, the onus is upon the party supporting the contract to show
that the restraint is reasonably necessary to protect his interests.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.3
3. Remedies available to employer and employee
In the event of breach of employment bond, the employer might incur a loss
and, therefore, may be entitled for compensation.4 However, the
compensation awarded should be reasonable to compensate the loss incurred
and should not exceed the penalty, if any, stipulated in the contract.5
Usually, the court determines the reasonable compensation amount by
computing the actual loss incurred by the employer having regard to all

circumstances of the case. Even if the bond stipulates payment of any

penalty amount in the event of breach, it does not mean that the employer
shall be entitled to receive the stipulated amount in full as compensation on
the occurrence of such default; rather the employer shall be entitled only for
reasonable compensation as determined by the court. While exploring
alternate remedies available to the employer in the event of default by the
employee, it would be interesting and worthwhile to discuss whether the
employers are entitled to seek for reinstatement of their employee or obtain
restraining order against the employee from joining any competitor/alternate
employer because many such similar reliefs have been sought by the
employers in various suits. The apex court, while dealing with similar query,
has held that the specific performance action cannot be sought for breach of
contract of personal service or bond6 and, therefore, the employer shall not
be entitled to seek for reinstatement of their employees as relief in the event
of breach of bond. In another matter, the apex court has held that it is not
bound to grant an injunction in every case and an injunction to enforce a
negative covenant would be refused if it would indirectly compel the
employee to idleness or to serve the employer7 and, therefore, the courts are
also reluctant to grant injunction against the employees restricting their
employment with other employer unless it is necessary for the protection
proprietary interests or trade secrets of the employer.
As mentioned, the conditions stipulated in the employment bond should be
reasonable in order to be valid and, therefore, even if unreasonable
condition/clauses are stipulated in the contract such as imposing exorbitant
duration of compulsory employment period or huge penalty upon the
employee, the court shall award compensation only if it determines that the

employer has incurred loss by such breach of contract. The court normally
considers the actual expenses incurred by the employer, the period of service
by the employee, conditions stipulated in the contract to determine the loss
incurred by the employer to arrive at the reasonable compensation amount.
For instance, in the case of Sicpa India Limited v Shri Manas Pratim Deb,8
the plaintiff had incurred expenses of INR 67,595 towards imparting training
to the defendant for which an employment bond was executed under which
the defendant had agreed to serve the plaintiff company for a period of three
years or to make a payment of INR 200,000. The employee left the
employment within a period of two years. To enforce the agreement the
employer went to the court, which awarded a sum of INR 22,532 as
compensation for breach of contract by the employee. It is crucial to note
that though the bond stipulates a payment of INR 200,000 as compensation
for breach of contract, the judge had considered the total expenses incurred
by the employer and the employee's period of service while deciding the
compensation amount. Since the defendant had already completed two years
of service out of the agreed three year period, the judge divided the total
expenses of INR 67,595 incurred by the plaintiff into three equal parts for
three years period and awarded a sum of INR 22,532 as reasonable
compensation for leaving the employment a year before the agreed time
period. Similarly, the High Court of Andhra Pradesh in the case of Satyam
Computers v Leela Ravichander,9had also reduced the compensation
amount considering the period of service of the employee.
Conclusion

In view of the aforesaid discussions and various court decisions, the

employment bond is considered to be reasonable as it is necessary to protect
the interests of the employer. However, the restrains stipulated upon the
employee in the said contract should be "reasonable" and "necessary" to
safeguard the interests of the employer or else the validity of the bond may
be questioned. The employees are always free to decide their employment
and they cannot be compelled to work for any employer by enforcing the
employment bond. The court can; however, issue order restricting the
employment of the employee only if the said action is deemed necessary to
safeguard the trade secrets/proprietary interest of the employer. In the event
of breach of contract by the employee, the only remedy available to the
employer is to obtain a reasonable compensation amount. The compensation
amount awarded shall be based upon the actual loss incurred by the
employer by such breach.

FORMAT OF EMPLOYMENT CONTRACT

This contract entered into on the (Date)_______________________________________,
between
1) M/s ______Name of the Company_____, a company incorporated under the
Companies Act, 1956 with its registered office at Hyderabad represented by its
Director / Managing Director, Mr. _________, (Hereinafter referred to as the
company, which expression shall mean and include his heirs, executors,
administrators and assignees), and
2) Mr. _________(Name of the Manager)___, S/o ______(Fathers Name)____, aged
about ___(age)___, resident at ______(address)_____. (Hereinafter referred to as
the Manager unless context otherwise requires)
R E C I T A L S:

WHEREAS, the company is engaged in the business of Dealing in ____________Give

the Nature of Business___________, and such other items at various places like
______Give the Places of operations_____, etc.
WHEREAS, The company desires to employ the Manager, provided that in doing so it
can protect the customer lists, vendor lists, trade secrets and other proprietary intangible
assets of the Company.
Therefore, in consideration of the mutual promises, terms, covenants, and conditions set
forth herein and the performance of each, it is hereby agreed as follows:
AGREE ME NT
1.

Employment.
(a) The Company hereby employs the Manager as Showroom Manager of
_________ showroom. As such, the Manager shall have responsibilities, duties, and
authority commensurate with such position and will report to the Board of
Directors of the Company. The Manager hereby accepts this employment upon the
terms and conditions herein contained and agrees to devote Managers time,
attention, and best efforts to promote and further the business of the Company.
(b) The Manager shall faithfully adhere to, execute, and fulfill all policies, duties
established by the Company as described in paragraph 3 hereof.
(c) Manager shall not, during the term of Managers employment hereunder, be
engaged in any other business activity pursued for gain, profit, or other pecuniary
advantage if such activity interferes with Managers duties and responsibilities
hereunder. However, foregoing limitations shall not be construed as prohibiting
Manager from making personal investments in such form or manner as will neither
require Managers services in the operation or affairs of the companies or enterprises
in which such investments are made nor violate the terms of paragraph 4 hereof.
(d) The managers appointment is liable for re-location / transfer to anywhere in
India under the same organization or its branches on account of business work
exigencies.

2. Compensation. For all services rendered by Manager, The company shall compensate
Manager as follows:
(a)

Basic Salary. Beginning on the date of the execution hereof, the base salary
payable to Manager shall be _________ per month, payable on a regular
basis in accordance with The companys standard payroll procedures. On at
least an annual basis, Managers performance will be reviewed and increases

(b)
(c)
(d)
(e)
(f)

to such basic salary may be recommended if, in the discretion of the Board
of Directors of the The company, any such increase is warranted.
House Rent Allowance: The Manager shall be paid a House Rent allowance
at the rate of 40% of the basic salary.
Conveyance Allowance: The Manager shall be paid a Conveyance
Allowance of Rs. 800/- per month
Bonus: The Manager shall be paid bonus at the rate of ____
Commission: The Manager shall be paid commission at the rate of _% on
sales / purchases.
Perquisites, Benefits and Other Compensation. Manager shall be entitled to
receive additional benefits and compensation in such form and to such extent
as specified below:
(1) Participation in health, hospitalization, disability, dental and other
insurance Plans that the Company may have in effect.
(2) Reimbursement for all business travel and other out-of-pocket
expenses reasonably incurred by Manager in the performance of Managers
services pursuant to this Agreement. All reimbursable expenses shall be
appropriately documented in reasonable detail by Manager upon submission
of any request for reimbursement, and in a format and manner consistent
with the Companys expense reporting policy.
(3)

(g)

3.

(2) weeks of paid vacation per year.

Taxes: The above amounts payable to the Manager are subject to the Tax
Deduction at Source (TDS) provisions under the Income tax act, 1981 as
applicable from time to time.

Terms and conditions and general duties:

(a)
(b)

(c)
(d)

The Manager shall be incharge of the showroom and all other employees /
staff shall report to him.
The Manager shall be accountable for all the stock coming into, stored at and
going out of the showroom and shall maintain proper records as per the
companys standard policies and shall produce the said records as and when
demanded by the board of directors / auditors of the company.
He shall take proper care and follow the standard safety methods of the
company for prevention of any damage to the stocks of The company.
The Manager shall ensure apart from the companys stocks, only stock of
franchisees authorized by the board of directors by way of a board
resolution, shall enter the showroom and be allowed to be traded at the
showroom. If it is found that the manager has allowed any stocks to be
traded in the showroom without a proper board resolution, he shall be liable
to account for the sales and pay to the company, the profits earned on the

(e)

(f)

(g)
(h)
(i)
(j)

4.

said stocks. However the company is not liable for any losses incurred on
such sale. Further the company reserves the right to confiscate any unsold
stocks which are intended to be traded without a proper board resolution.
The Manager shall periodically verify the stocks put on display / stored in
the showroom by the franchisees and ensure that only the goods described in
the board resolution are being traded. If the manager notices any
discrepancy, he shall inform the board of directors immediately and
implement their instructions.
General Duties: Administering the day-to-day operations of the Company
and performing administrative functions necessary in the management of the
showroom, including the collection of revenues, the payment of the
Company's expenses, debts and obligations and the maintenance of
appropriate computer services to perform such administrative functions
Enforce discipline among the staff and ensure that the day to day operations
are smoothly conducted.
Furnish reports and information as may be required by the board of directors
from time to time.
The Manager shall ensure no illegal activities are carried out at the
showroom and bring to the notice of the board of directors any such
activities noticed by him.
The Manager shall advice the company about any changes that might bring
in economy / efficiency / improved margins, etc.

Non-Competition Agreement.
(a) The Manager will not, during the period of his / her employment by or with the
Company, and for a period of six (6) months from the date of his / her resignation /
termination for any reason whatsoever, directly or on behalf of or in conjunction
with any other person, persons, company, partnership, corporation or business of
whatever nature:
(i) engage, as an officer, director, shareholder, owner, partner, joint venturer, or
in a managerial capacity, whether as an employee, independent contractor,
consultant or advisor, or as a sales representative, in any business selling any
products or services in direct competition with the Company or any of the
Companys subsidiaries or divisions, within 100 miles of the Companys principal
place of business or the principal place of business of any of the Companys
subsidiaries or divisions.
(ii) call upon any person who is, at that time, within the Territory, an employee
of the Company (including its subsidiaries) in a managerial capacity for the purpose

or with the intent of enticing such employee away from or out of the employ of the
Company (including its subsidiaries), provided that, after Employee has ceased
employment hereunder, Employee shall be permitted to call upon and hire any
member of Employees immediate family;
(iii) call upon any person or entity which is, at that time, or which has been,
within one (1) year prior to that time, a customer of the Company (including its
subsidiaries) within the Territory for the purpose of soliciting or selling products or
services in direct competition with the Company within the Territory;
(b) The Manager shall make good the losses if any incurred by the company by
breach of any condition in paragraph 4.
5.

Termination of Contract / Resignation of Employee.

(a) The company has the right to terminate this contract by giving a notice of 1
month to the Manager or by paying the Manager an amount equal to 1 month
gross salary, in lieu of the notice period.
(b) If there are any breach of conditions in any part of this agreement, The
company can terminate the contract without giving any notice period or salary
in lieu of notice period, i.e., with immediate effect.
(c) The manager can resign from his employment by giving 1 month notice or by
paying an amount equal to 1 month gross salary. The managers resignation is
deemed to be accepted only after the company provides the manager a
relieving letter. Till that time he has to provide the services as required by the
board of directors irrespective of the fact that he has paid / agreed to pay the
amount in lieu of notice period.

6. Return of Company Property. All records, designs, patents, business plans,

financial statements, manuals, memoranda, lists and other property delivered to or
compiled by Employee by or on behalf of the Company or the representatives, vendors or
customers thereof which pertain to the business of the Company shall be and remain the
property of the Company and be subject at all times to the discretion and control thereof.
Likewise, all correspondence, reports, records, charts, advertising materials and other
similar data pertaining to the business, activities or future plans of the Company which is
collected by Employee shall be delivered promptly to the Company without request by it
upon termination of Employees employment
7. Trade Secrets. Employee agrees that Employee will not, during or after the term
of this Agreement with the Company and for six (6) months thereafter (unless terminated
without cause) disclose the specific terms of the Company relationships or agreements
with its significant vendors or customers or any other significant and material trade secret
of the Company, whether in existence or proposed, to any person, firm, partnership,
corporation or business for any reason or purpose whatsoever.
hich was in existence as of the date of this Agreement.

8. Arbitration: In the event of any dispute, difference or question arising out of or in

respect of this agreement or the commission of any breach of any terms thereof or of
compensation payable thereof or in any manner whatsoever in connection with it, the
same shall be referred to _____________ or such other person mutually acceptable to
both the parties, for arbitration and the decision or award so given shall be binding on the
parties hereto.
9. Jurisdiction: Any dispute arising out of or in conjunction with thisAgreement shall be
referred to the Courts in State of _______.

Witness:-

Signatures

1. _____________________

1. ____________________________

2. _____________________

2. ____________________________