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.
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.
GROUNDS OF LEGALITY OF AN EMPLOYMENT BOND:
The most pertinent query that comes to our mind is whether such routine to retain an employee is
effectual, acceptable and enforceable under the law.

 Bonds are applicable only if the company has spent money on the personal grooming and
enhancement of the employees, but not just a training that helps employees perform better.
Also, to prove that the bond is legal, it should not be one sided or just favour the employer.
The court always questions the reasonability of the bond for it to be accepted legally.
 For e.g., if an employer has developed a particular software and the employee has the
knowledge of that software then, refraining that employee via bond from using that software
for another employment is legal hence valid.
 Under unreasonable circumstances, an employment bond is not recognised as legal. 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 for it to be valid under the
Indian law.

VALIDITY OF AN EMPLOYMENT BOND IN INDIA (LEGAL PERSPECTIVE):

The first thing to be kept in mind while trying to understand if the bond is valid is ascertaining that the
bond is a valid contract under the Indian Contract Act, 1872 i.e., it must be an agreement enforceable
by law. Employment agreement 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. Since an employment bond needs to be a valid contract, hence, there needs to be an offer
made by an employer and acceptance of that offer by an employee.
1. S. 27 of Indian Contract Act:
The validity of Employment bonds can be challenged on the basis of Section27 of the Indian Contract
Act. This provision of the Indian Contract Act prohibits any agreement in restraint of fair trade and
the legal profession. As per this section, if any agreement, directly or indirectly, restricts someone
from a fair trade and lawful profession, then it is void.

2. Art. 19 (1)(g)[3] of the Indian Constitution:

Article 19(1)(g)[3] of the Indian Constitution also gives rights to exercise a lawful profession, trade
and business. For an employment bond to be valid in India, it must not in contrast with the above-
mentioned provisions and also should be reasonable in nature. There should be freedom of trade and
fair practices with regard to lawfully valid professions.
For an employment bond to be valid under Indian law, it has to be proved that it is necessary for the
freedom of trade. In the case where the employer is able to prove that the employee is joining the
competitor to disclose the trade secret then the court may issue an injunction order restricting the
employee from joining the competitor. If an agreement is challenged on the grounds of violating the
provision relating to restraint of trade, the onus is on the party supporting the contract to show that
restraint is reasonably necessary to protect his interests.
Remedies Available to Employer and Employee: If an employment bond is breached, the employer
might be entitled to compensation. The compensation awarded should be reasonable to compensate
the loss and should not exceed the penalty, if any stipulated in the contract. The court computes the
reasonable compensation amount by computing the actual loss incurred by the employer having
regard to all facts and 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; the courts shall determine the reasonable amount of compensation to be
paid.
One interesting question arises, whether the employers are entitled to seek for reinstatement of their
employee or obtain restraining order against the employee from joining any competitor or another
employer? The Supreme Court while dealing with a similar situation has held that specific
performance action cannot be sought for breach of contract of personal service or bond and therefore
employer shall not be entitled for reinstatement of their employees as relief in the event of breach of
bond. Courts are not willing to grant an injunction against the employees restricting their employment
with another employer unless it is necessary for the protection of proprietary interests or trade secrets
of the employer.
If the bond is a valid contract, one may move to the court. However, any act on the part of company
e.g. retaining the original educational certificates/ creating any kind of impediments for the concerned
employee to join a job (i.e. to earn) manhandling the concerned person etc. adversely tarnishes the
cause of the company. Also, the amount of compensation a company can claim must be proportionate
to the loss caused, and not more.
In case an employer has incurred monetary expenses for training the employee for the particular
employment, he can claim for damages in respect of the monetary loss that he has incurred.
Courts have generally held that employees’ rights to livelihood must prevail over employers’
interests, notwithstanding a pre-existing agreement between the two.
Course Followed by Company after Violation of Employment Bond- The first step which companies
take after violation of Employment bond is that they send legal notice calling upon the employee to
report for duty immediately, failing which the notice should call upon the employee to pay the sum
agreed in bond. After the employee fails to pay the amount, a suit is filed in court of appropriate
jurisdiction depending upon the terms and condition of employment for recovery of the due amount.
CASE LAWS:
1. The Supreme Court in Niranjan Shankar Golikari v The Century Spinning And Mfg Co. cited a
Calcutta High Court judgment with approval. It provides in clear terms that: “An agreement to serve a
person exclusively for a definite term is a lawful agreement, and it is difficult to see how that can be
unlawful which is essential to its fulfilment, and to the due protection of the interests of the employer,
while the agreement is in force.” Thus, it implies that the restrictive covenants are valid for the
duration of employment and not violative of section 27 of the Indian Contract Act, 1872. The validity
of the restrictive covenants comes into question if they extend to post-termination scenarios.
2. After the perusal of various Supreme Court judgments, the Madras High Court in Toshnial
Brothers (Pvt) Ltd v E Eswarprasad & Ors held that the existence of a legal injury accruing as a
consequence of breach is a pre-requisite for claiming liquidated damages in accordance with section
74 of the Indian Contract Act, 1872. In other words, the employer must show a legal injury
automatically resulting from the breach of the commitment to serve for a minimum period.
3. In Pepsi Foods Ltd v Bharat Coca-Cola Holdings (P) Ltd, the Delhi High Court held that a
negative covenant that restrained employees from undertaking employment for 12 months after they
left the plaintiff’s service amounted to a violation of Section 27. It held that such contracts are
unenforceable, void and against public policy, and that what the law prohibits cannot be permitted by
an injunction.
4. Fertiliser and Chemical Travancore Pvt. Ltd v. Ajay Kumar and Others- It has been held that in
the said case that three trainees were selected by the employer who signed a bond stating that they
would obtain two years of training in the company and after the training they will put in at least five
years of service in the company. In the event of breach of this condition Rs. 10,000 was to be paid as
reasonable amount of compensation for the damages to be likely incurred by the employer. The
trainee resigned after five months of training. The High Court of Kerala held in this case that though
the candidates were selected for training and not for permanent service, it still involved a lot of time,
energy and expenses of the employer. The employer will surely suffer loss when a trainee breaks the
condition of bond and walks off. The employer is derived of the expected service of a competent
person. Breach of bond by the trainee is aspect entailing damages to the employer. Only the quantum
of damages needs to be decided.
5. Toshinial Brothers (Pvt.) Ltd v. Eswarprasad- An employee was engaged as Sale engineer; He
was contracted for a period of three years however he left the undertaking after serving for 14 months
only. In this case it was held that it is not necessary for the employer to prove any post breach
damages separately. It is to be kept in mind that the concerned employee was recipient of special
favour or concession or training at the cost and expenses wholly or in part of the employer, and the
employee has breached the bond. The breach constitutes legal injury resulting to the employer. The
High Court also clarified the position that the statutory exception for mitigating the quantum of
damages will have no bearing.
6. Superintendence of Company v. Krishan Mugai- In this case, it was held by the court that, if an
agreement restricts trade for a party in a future event to carry on a trade then such nature agreement is
prima facie void. A contract of this nature is prima facie void but becomes binding and valid if it can
be proved that it is necessary from the point of view of parties and also to the community. Such
interests are valid as they take care of the interest of the employer and do not cause any undue
hardship to the employee, who will receive a wage or salary for the period in question.
7. In Shree Gopal Paper Mills Ltd v Surendra K Ganeshdas Malhotra the Bombay High Court
observed that there was no proprietary interest of the employer in need of protection as a covenant
that mandated the employee to serve for a period of 20 years was held to be oppressive and one-sided.
Further, the contract must not be too heavily one-sided such that it loses the character of a contract
promoting trade and attains the character of a contract in restraint of trade. The Bombay High Court
refused to grant injunction in favour of the company on the ground that the negative covenant was
one-sided and unreasonable.