This article is written by Saurabh Mishra, a student of HNLU, on the topic whether the employment bonds are legal in India or not.
The competition in the corporate world has increased manifold. The business houses are incurring expenditure on imparting training to their employees with the aim of improving quality of the goods and services of the company. However, we have witnessed a number of instances where the employees after honing the skills and increasing the knowledge of the industry leave the employer. The increased attrition rate has forced the employers to obtain an employment bond from their employees who are found suitable for training and skill development. The employment bonds are agreements between employee and employer where it contains the terms and conditions of employment. The employment bond contains a clause which requires the employee to serve the employer compulsorily for a specific period of time or else refund the amount specified as bond value.
There is a need to discuss the need and enforceability of employee bonds under the Indian law.
Employment bonds are employment agreements with negative covenant. Under the Indian Law, the employment agreements with negative covenants is valid and legally enforceable if the parties agree with their free consent i.e. without fraud, coercion, undue influence, mistake and misrepresentation. The Indian courts have held that in the event of a breach of contract by the employee, the employer shall be entitled to recover damages only if a considerable amount of expenditure was borne by the employer. Indian law mandates the employment bonds to be “reasonable” in order to be valid. The term reasonable remains undefined anywhere in the Indian law and therefore the courts have given meaning to “reasonable” depending upon the facts and circumstances of the cases. The proposition which has emerged till now is that conditions stipulated in the contract should be necessary to protect the interest of the employer and compensate the loss caused by breach of contract. Additionally, the penalty or compulsory employment period stipulated should not exorbitant.
How to Challenge the enforceability of Employment Bond?
The validity of Employment bonds can be challenged on the basis of Section27 of the Indian Contract Act. Section 27 of the Indian Contract Act, 1872 prohibits any agreement in restraint of trade and profession. Any agreement in trade and profession according to Section 27 is void.
As per the mandate of Section 27, any terms and conditions of an agreement which directly or indirectly compels the employee to serve the employer or puts a restriction on them joining the competitor or other employer is not valid under the Indian law, The employee has right to resign from the employment even if he has agreed in the employment bond to serve the employer for a specific period of time.
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.
Following are the requirements of a valid employment bond agreement.
- The agreement must be signed by the parties with free consent.
- The conditions stipulated must be reasonable and:
- The conditions imposed on the employee must be proved to be necessary to safeguard the interest of the employer.
- The employment bond is to be executed on a stamp paper of appropriate value in order to be valid and enforceable.
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. We have witnessed the trend that 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.
The court considers the actual expenses incurred by the employer, the period of service by the employee, the conditions stipulated in the contract to determine the loss incurred by the employer to arrive at reasonable compensation amount. In the case of Sicpa India Limited v. Shri Manas Pratim Deb, The plaintiff had incurred expenses of Rs. 67, 595 while imparting training to the defendant in respect of which an employment bond was executed for which the defendant had agreed to serve the plaintiff for a period of three years or to make a payment of Rs. 200,000. After serving for two years, the employee left the company. The court determined reasonable amount as Rs. 22, 532. The court took into consideration the total expenses incurred by the employer and employee’s period of service while deciding the amount.
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.
Important Points When a Company has Employment Board
- Ensure that the bond is reasonable
- Ensure that Non-Competition clause is not unreasonable
- Ensure that bond amount is reasonable and reflects the expenditure of the company on the Employee
- Ensure that there is training material that can be produced to prove in court that the Employee was given training.
- Ensure that there is confidentiality clause to ensure company’s trade secrets are protected.
Leading Case Laws On Employment Bonds
- Sham Singh vs. State of Mysore
A bond was executed between a Student and State of Mysore, The state of Mysore agreed to pay for his education expenses in the United States of America. The stipulation for such payment was that after finishing his studies he would serve the State Government for a period of not less than 5 years. Another clause in the bond stated that if the student was not given employment within six months of his return from USA, the State of Mysore would have deemed to waive the right to claim his services. In the event of a breach of the bond, the Student was obliged to refund all the expenses incurred by the Government with interest. The student finished his studies and obtained a diploma in 1950 and with the permission of State stayed in USA for completing his practical training on his expenses. The Supreme Court held that staying in for 6 months in India after his return on account of domestic reasons did not indicate that he was waiting for the State to offer him an appointment.
Fertiliser and Chemical Travancore Pvt. Ltd v. Ajay Kumar and Others
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.
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.
Subir Ghosh v. Indian Iron and Steel Company
The Calcutta High Court dealt with the scope of Section 74 of the Indian Contract Act, in the context of a trainee. The terms of trainee contract contained a provision agreeing to serve the company for a particular period of time and to pay a fixed sum of damages in the event of a breach. The High Court held that since the stipulation in the agreement was for payment of liquidated damages, it is immaterial to specifically plead or prove damages and that it is open to the management to sue for recovery of the liquidated damages.
According to Section 27 of the Indian Contract Act, 1872, the terms and conditions of the contract are valid only during the existence of the contract. It cannot be enforced after the contract is terminated.
In Superintendence of Company v. Krishan Mugai, it was held that, in a contract of restraint of trade a restriction is put on the future liberty by one party on the other party to carry on his trade, profession or business in such manner and with such person as he chooses. 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. But if the covenant is to operate after the termination of services, or is too widely worded, the court may refuse to enforce it.
The employment bond is considered reasonable as it is necessary to protect the interest of the employer. However, the restraints stipulated upon the employee in the contract should be “reasonable” and “necessary” to safeguard the interests of the employer or validity of bonds comes under scrutiny. The employee cannot be compelled to work for any employer by enforcing the employment bond. In the event of a breach of contract by the employee, the only remedy available to the employer is to obtain a reasonable compensation amount.
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 Central Inland Water Transport Corporation v. Brojonath Ganguly (1986) IILJ 171 SC
 Niranjan Shankar Golikari v. The Century Spinning and Manufacturing Company Ltd. AIR 1967 SC 1098.