Author: Pushpendra | Fourth Year
Hidayatullah National Law University, Raipur

INTRODUCTION

The Apex Court recently delivered a judgment in Vijaya Bank v. Prashant B Narnaware (‘Vijaya Bank’) pertaining to the enforceability of employment bonds in India. The deliberations in the judgment referred to section 23 and 27 of the Indian Contract Act, 1872 (‘the Act’), wherein the court upheld the legal validity of the contract providing for a minimum service period along with a corresponding liquidated damages clause for violation thereof. Through this judgment, the Apex Court has reinforced that restrictive covenants are valid provided that they are reasonable and operate during the subsistence of employment. However, the prominence of this pronouncement comes from its unfounded interpretation of the liquidated damages clause grounded primarily in the backdrop of a Public Sector Undertaking (‘PSU’).

Prior to Vijaya Bank, the legal position on validity of employment bonds was largely developed by the judgments of different high courts. These judgments had undertaken a balanced and reasoned approach with respect to the interpretation of legal injury under section 74 of the act while examining the liquidated damages clauses. Concomitantly, these judgments also employed an active and equitable approach in awarding the quantum of damages. Additionally, these high court judgments had treated PSUs at par with private employers with respect to enforcement of such covenants. These judgments are elaborated upon in subsequent sections of this piece.

The ruling in Vijaya Bank, however, marks an unwarranted departure from this jurisprudential consistency, especially in its interpretation of the liquidated damages clause and awarding of the quantum of damages. Accordingly, this blog piece has three principal objectives. First, it aims to demonstrate that the judgment in Vijaya Bank runs contrary to the settled legal position on legal injury under section 74 of the Act. Second, it aims to establish that the court undertook an erroneous approach in determining the quantum of damages. Third, it posits that this judgment is solely applicable to PSUs and has no implications for private employers.

PREREQUISITE OF LEGAL INJURY: NOT APPLICABLE TO PSUs

The legal force of an employment bond is derived from the liquidated damages clause which provides for the payment of a stipulated sum in case of non-compliance with the minimum service period requirement. In this context, it is pertinent to note that liquidated damages clauses in contracts are governed by section 74 of the Act. Several landmark judgments have underscored that the existence of legal injury is a sine qua non for the enforcement of a liquidated damages clause. In Toshniwal Brothers (P) Ltd. v. Eswarprasad, E. And Others, the Madras High Court placed reliance on the Apex Court judgment in Fateh Chand v. Balkishan Das and comprehensively deliberated upon liquidated damages clause specifically in the context of employment bonds. It stated that a perusal of the Apex Court judgments clearly establishes that under Section 74 of act, proof of actual loss or damage is dispensed with in applicable cases, as legal injury could be safely presumed to have resulted in a case where the employer or the management concerned was shown to have either incurred any expenditure or involved itself into financial commitments to either give any special training either within the country or abroad or in having conferred any special benefit or favour to the detriment of the claimant in favour of the violator involving monetary commitments.

In K Tapas Kumar Behera v. MD, O.H.P.C and others, the Orissa High Court reiterated that the existence of a legal injury accruing as a consequence of breach is a prerequisite for claiming liquidated damages in accordance with Section 74 of the Act. It categorically stated that the employer must prove that the employee was the beneficiary of special favour or training or concession at the expense of the employer. Otherwise, actual injury accruing as a result of the breach would have to be proved.

It is apparent from these judgments that the courts have presumed legal injury and upheld the validity of employment bonds where the employer had incurred some cost in favour of the employee and this investment was sought to be protected through the instrument of employment bonds.

The Position of the SC in Vijaya Bank

In Vijaya Bank, the Apex Court did not refer to any prior judgment in its interpretation of the liquidated damages clause at hand and consequently failed to consider the prerequisite of legal injury under Section 74 of Act. The court stated that a pre-mature resignation would result in an expensive and elongated recruitment process which was considered to be a legitimate interest sought to be protected through the minimum service period requirement. In arguendo, it would be in conformity with the established legal position to state, as the appellant bank had also submitted, that the PSUs make an investment in the employee while appointing an employee after an elaborate and expensive recruitment process and it is this investment which is sought to be protected by way of an employment bond. However, the ruling of the Apex Court went a step further and essentially laid down that even though no cost had been incurred in the recruitment of the employee as he was simply promoted in the case at hand, the employee was liable for the future expenses which would potentially incur to fill the vacancy.

Notably, in Kailash Kumar v. M/S Syndicate Bank Ltd, the Delhi High Court stated that the claim of the compensation made by the bank cannot include the expenses incurred by the respondent Bank for carrying out the process of appointment including advertisement, which resulted in the appointment of the petitioner or for that matter incurring expenses in future for making appointment against the vacancy arisen because of his resignation.

Therefore, it can be conclusively stated that the Apex Court has rendered the previously established legal position on employment bonds inapplicable to PSUs. They are not required to show any cost having been incurred in favour of the employee either by way of recruitment costs or special training for the enforcement of the employment contracts, and hence are not required to demonstrate any legal injury.

LIQUIDATED DAMAGES: NO LONGER THE UPPER LIMIT

It is crucial to ascertain the legal position on awarding of damages in cases involving employment bonds before examining the propriety of the quantum of damages awarded in Vijaya Bank. InM/S. Sicpa India Limited vs Shri Manas Pratim Deb, the Delhi High Court examined the three landmark judgments of the Apex Court on liquidated damages which are Fateh Chand Vs Balkishan Das,Maula Bux Vs. UOI,and Union of India Vs. Raman Iron Foundry. The court stated that as per the ratio of these judgments, liquidated damages are only the upper limit of the damages which may be awarded once actual damages are proved, not the minimum. This legal position applies when losses from the breach of contract can otherwise be proved. Accordingly, the court in this case stated that while adjudicating on the quantum of damages, the court ought to ascertain reasonable compensation. Therefore, the Delhi High Court did not award the stipulated sum of two lakh rupees and took into consideration the actual amount of loss which came out to be sixty-seven thousand rupees while also factoring in the fact that the employee had already served for two years out of the three-year bond period.

The Delhi High Court delivered another pioneering judgment in Vijaya Kumar Anugandula v. Dedicated Freight Corridor Corporation of India Ltd. This caseis particularly relevant as it involved an employment bond executed in favour of DFCCIL, which is a central PSU. The liquidated damages clause provided for a sum of six lakh rupees in the event of pre-mature resignation by the employee. The court stated that the amount stated in the service bond is the maximum extent of the liability of the petitioners for failing to complete the minimum term of service of five years. The court held that DFCCIL is only entitled to reasonable damages and awarded a sum of two lakh rupees (the actual amount incurred by DFCCIL) instead of the stipulated amount of six lakh rupees.

The Position of the SC in Vijaya Bank

In Vijaya Bank, the respondent employee had argued that the stipulated sum of two lakh rupees is a disproportionate amount and would result in unjust enrichment. The court made no pertinent observation on this argument apart from stating that the respondent has a “lucrative salary package” and that he had already paid the said amount. Neither of these factors has any jurisprudential backing, as opposed to the Court’s obligation of reasonably ascertaining the damage caused, and awarding proportional compensation in the nature of ‘indemnity,’ as stipulated in the aforementioned cases.

In the above-cited cases on the quantum of damages awarded, the courts have made an active effort to estimate the extent of loss suffered by the employer and award only the reasonable damages. However, in Vijaya Bank, the court awarded the entire stipulated amount of Rupees two lakh rupees without even attempting to estimate the cost of recruitment against a single vacancy. Additionally, the court also failed to consider that the respondent had already served the bank for almost two years out of the three-year service period, hence failing to account for the equivalent deduction which should have been applied in assessing the extent of the injury and the consequent damages out of the stipulated sum of two lakh rupees. Therefore, the court in this case failed to discharge its solemn obligation of ascertaining the magnitude of the loss suffered by the employer and awarding only reasonable damages.

IMPLICATIONS FOR THE PRIVATE SECTOR

The judgment in Vijaya Bank laid emphasis on the challenges faced by the PSUs in terms of market competition and proper recruitment requirements under the law as PSUs cannot resort to private or ad-hoc appointments through private contracts in justifying the validity of such contractual bonds. However, the ongoing discourse on this judgment, seems to suggest that this judgment could have implications for entities other than PSUs. At this juncture, it is pertinent to note that the appeal before the Apex Court in Vijaya Bank was filed against the judgment of the division bench of the Karnataka High Court wherein it had held the employment bond to be invalid. The Karnatak High Court had placed reliance on its division bench judgment in K.Y Venkatesh kumar v. BEML Ltd. The Apex Court differentiated the judgment in BEML Ltd. from the factual scenario in Vijaya Bank by stating that (in para 34):

“34. That apart, in BEML (supra) the issue of financial loss suffered by the public sector undertaking owing to time consuming and expensive recruitment drives due to pre-mature resignations had not fallen for consideration. It is trite judgments cannot be read as statutes and have to be applied keeping in mind the factual matrix peculiar to each case.” (emphasis added).

The court’s definitive differentiation between the two cases clearly reveals its intent to limit the ratio of Vijaya Bank to PSUs. Had the court intended to lay down the law uniformly for employers of all kinds, it would have affirmed the Karnataka High Court’s reliance on BEML as precedentially sound. It can be conclusively stated that the judgment in Vijaya Bank is based solely on the economic hardships faced by the PSUs in their recruitment process. Therefore, the judgment in Vijaya Bank has no direct implications for the employers in private sector.

CONCLUSION

The apparent objective of the Court in Vijaya Bank was to ensure that PSUs maintain a stable workforce and that their operations are not disrupted due to premature resignations of employees. To this end, the judgment has expanded the scope of enforceability of the employment bonds specifically in the case of PSUs. Despite the noble objective, this judgment has unsettled the diligently laid down jurisprudence on employment bonds in order to preserve the interests of the PSUs while grossly disregarding salient considerations such as pre-requisite of legal injury and awarding of only reasonable damages. A precedent has been set for the PSUs to claim the entire stipulated sum in contract as damages without adducing any evidence of actual loss. Such a practice could seriously undermine the interests of the employees and effectively take away their ability to leave employment, even when faced with genuine hardships.