A brief note on service agreement/bond......

i beleive some time in these cases its all depends on how you and the lawyers pursue these cases on behalf of the company.below is a brief note which relates to the other side of breach of service agreemnt:-

Human Resources Managers often insist on surety from new recruits by having them execute a bond stating that in case they commit a breach of the agreement, they will have to pay to the employer the damages as may be agreed upon. Generally the agreements stipulate that the appointee shall not leave the organization for a prescribed period especially when the employer trains the employee at his cost. The purpose behind such agreements is that the employers who spend money and impart training to their employees should get some benefit from the employees.

Experience however shows that several employees execute the bond but break the same within a short period and leave employment. Disputes arise about the legality of the conditions of employment. The agreements are questioned on the grounds of public policy. Disputes also arise about the quantum of damages, which an employer can recover, from the employee in breach. Here are some notable cases of breach of service agreements wherein the Courts have laid broad principles for recovery of damages.

In the case of Amar Singh v. Gopal Singh [AIR 1931 Lahore 133], one Amar Singh was employed under Gopal Singh, as a chauffer on monthly wages. He left the service without notice of his own accord and he was not paid his wages for 23 days. He had worked for only a fortnight and left service when his services were badly needed. Amar Singh filed suit against Gopal Singh for recovery of unpaid wages. Gopal Singh claimed damages for leaving service without notice. The dispute went up to the High Court of Lahore. In that case, it was held that when a servant whose wages are due periodically, leaves service without legal justification or without proper notice, he is entitled to be paid for the portion of the time during which he served since last periodical payment and the master would be entitled to a reasonable compensation for breach of contract. Very often, the question of quantity of damages, which an employer may recover from the employee who commits breach of agreement, also arises.

A student entered into a bond with the State of Mysore, which agreed to pay for his education expenses in the U.S.A. The condition for such payment was that after finishing his studies, he would serve the State Government for a period of not less than five years on such salary as the Government may fix. However, if he was not given employment within six months of his return, they should be deemed to have waived their right to claim his services. He would then be free to seek services elsewhere. In the event of a breach of the terms of the bond, the student would be obliged to refund all the expenses incurred by the Government, along with interest. The student finished his studies at the Polytechnic Institute of Brooklyn, New York in September 1949 and obtained diploma from that Institute on June 14, 1950 and with the permission of the State stayed on in the U.S.A. for practical training at his own expense. Before finishing his training he returned for domestic reasons and stayed in India for 6 months and again returned to U.S.A. to finish his training with the States permission. He finished his training and got employed in the U.S.A, claiming waiver by the State Government. It was held by the Supreme Court that staying on for six months in India, after his return on account of domestic reasons and his being permitted to return for finishing his training his training did not indicate that he was waiting for the State to offer him appointment. [M. Sham Singh v. State of Mysore, AIR 1972 SC 2440.]

The obligation to pay compensation or damages is a contractual obligation. The measure of damages in contract is compensation for the consequences, which follow as a natural and probable consequence of the breach; or in other words, which could reasonably be foreseen. [Cook v. S., (1967) 1 AII E.R. 299, 302.]

The rule is well settled, that damages due either for breach of contract, or for tort, are damages, which so far as money can compensate, will give the injured party reparation for the wrongful act and for all the natural and direct consequences of the wrongful act. In the absence of special circumstances the measure of damages cannot be the amount of loss ultimately sustained by the injured party. [Trojan & Co. v. Nagappa Chettiaar, (1953) S.C.R. 789. 799]. If the quantification of loss or damages is not possible, even the party who suffered can request the Court to assess the reasonable damages provided there is damage. [State of Kerala v. United Shippers and Dredgers, AIR 1982 Ker 281].

There is authority to the proposition that substantial damages can be claimed where a breach is proved even though the calculation of damages is 'not only difficult but incapable of being carried out with certainly or precision. In such cases, however, the via-media would be to stipulate the quantum of compensation in the agreement itself. When a contract has been broken and if a sum has been 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 by virtue of s. 74 of the Indian Contract Act. The Indian legislature, by enacting s. 74, sought to cut across the web of rules and presumptions under the English common law, by enacting a uniform principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty. [Fateh Chand v. Balkishan Das, AIR 1963 SC 1405].

The Supreme Court in Fateh Chands case said: Section 74 declares the law as to liability upon breach of contract where compensation is - by agreement of parties, predetermined or where there is a stipulation by way of penalty. But the application of the enactment is not restricted to cases where the aggrieved party claims relief as a plaintiff. The section does not confer a special benefit upon any party. It merely declares the law that notwithstanding any term in the contract for determining the damages or providing for forfeiture of any property by way of penalty, the Court will award to the party aggrieved, only reasonable compensation not exceeding the amount named or penalty stipulated. The same proposition has also received the support of the Supreme Court in Nareshchand Sanyal v. Calcutta Stock Exchange Assn. Ltd., AIR 1977 SC 422, 428.

But in an English case, the House of Lords held: a clause in an artistes agreement suspending salary upon her failure to appear and perform does not prevent the employers from recovering damages for breach of contract as well as suspending her salary. The suspension of salary is not a penalty. [Gaumont British Picture Corporation v. Alexander, (1936) 2 All E.R. 1686, 1693]. A sum which is payable in pursuance of a contractual obligation is different from a sum payable on a breach of contractual obligation. The former is not a penalty. [Tool Metal Co. v. Tungsten Electric Co. (1955) 2 All E.R. 657, 688.] Liquidated damages is the term used to indicate the sum, which the parties have, by the contract assessed as the damages to be paid, whatever may be the actual damage. [Wallis v. Smith (1882) 21 Ch.D. 243, 267]

To claim penalty or liquidated damages, the onus of proof is on the plaintiff. The plaintiff has to prove that the amount of damages stipulated whether by way of liquidated damages or penalty is a reasonable pre-estimate of damages and he cannot be awarded a sum greater than the one stipulated. [George Pictures Ltd. v. Neelakandaru Gopalakrishna, AIR 1971 Ker 271; Narasimha Rao v. Supdt. of Excise, AIR 1974 AP. 157, 167].

But where the engagement is for one full year, say from 1st April, 1908, to 31st March 1909, and the salary is fixed at so much (say Rs. 18) per month, and the servant wrongfully leaves his employers service on 20th March, 1909, he is nevertheless entitled to his salary for the eleven months during which he actually served his employer, less the damages incurred by the employer by the breach, through the salary be payable under the terms of the agreement in a lump sum of Rs. 216 at the end of the year.

Though actual damage has not been proved, the sum stipulated in the contract towards liquidated damages can be recovered by the employer for the breach committed by the employee. [P. Nagarajan v. Southern Structurals Ltd., 1996 (2) LLN 810.

In Fertiliser and Chemical Travancore Ltd. v. Ajay Kumar and others, 1990 LLR 711, the employer selected three trainees who then signed a bond that they would obtain two years training in the Company and after the training they will put in at least five years service in the company. In case of a breach of these conditions by the trainees, Rs.10,000/- was to be paid as reasonable compensation for the damages likely to be incurred by the employer. But the trainees resigned after five months.

The employer filed a suit for recovery of damages on the basis of the bond executed by the employees. The trial court dismissed the suit holding that the work done by the trainees during the period of training would sufficiently compensate the management. However, their Lordships at the High Court of Kerala observed that though the selection of trainees was for absorption into training, the employer was not bound to appoint them on permanent service. But a trainee, who accepts the selection and joins training after entering into bond, binds himself to undergo the training and then accept regular appointment, if offered, for a minimum period of five years. The process of selection itself involves time, energy and expenses for the employer. This is the case of training also. Over and above other expenses during training, each trainee gets Rs.800/- per month for the first year and Rs.850/- per month for the next year from the employer.

The employer will definitely incur loss when a trainee breaks the conditions of the bond and walks off. The employer is deprived of the expected service of a competent person, for which fresh selection and training may become necessary. Breach of bond by the trainee is, therefore an aspect involving damages to the employer. Only the question of the quantum of the damage then remains to be decided.

The Court also observed that s. 73 the Indian Contract Act provides for compensation for failure to discharge obligation resembling those created by contract. When a contact is broken, what is recoverable is only the loss or damage caused, which naturally arose in the usual course of things from the breach or which the parties knew, when they made the contract, to be likely to result from the breach of it. Section 74 of the Indian Contract Act providing compensation for breach of contact where penalty stipulated for is to be read along with s. 73 as s. 74 is only supplementary to s. 73 irrespective of the amount stipulated in the contract. Whether it is liquidated damage or by way of penalty, the party complaining of breach is entitled to get reasonable compensation and the amount stipulated could be taken as the outer limit.

Another case is Toshnial Brothers (Pvt.) Ltd. v. E. Eswarprasad & Ors., 1997 LLR 500 decided by the Madras High Court. In this case, an employee who was engaged as Sale Engineer committed a breach of the undertaking when he left the services of the plaintiff after serving for 14 months only as against the contracted period of three years. When the case reached the High Court, the High Court of Madras held that in such a case, it becomes unnecessary for the employer to prove separately any post-breach damages. On the other hand, it would suffice to substantiate the fact that the concerned employee was the beneficiary of special favour or concession or training at the cost and expense wholly or in part of the employer and there had been a beach of the undertaking by the beneficiary of the same. In such cases, the breach would per se constitute the required legal injury resulting to the employer, out of the breach or violation by the employees. The High Court, also clarified that while awarding damages as stipulated, the statutory exception for mitigating the quantum of damages will have no bearing.


Rajat sahotra

Hi Indulekha,

While a "Service Bond" may not be tenable, a proper "Service Agreement", may somewhat be tenable in a court of law as long as the exit clause is defined and is seen as fair to both parties i.e. the employer and the employee. It is a lengthy procedure to file a suit to recover the money and also establish the exact amount of loss incurred by the company to impart training. However, even if the employee is leaving the country to pursue higher studies abroad, you can still file a suit and wait for years before it even comes up for hearing!! The current status is that more than 3,00,00,000 cases are pending in various Indian courts.

Alternatively, you can send a legal notice to both the employee as well as the surety/ies quoting the relevant portions of the agreement and claiming the amount agreed upon for breach of agreement. If the employee refuses to respond after two or more such notices, you can appoint an Arbitrator (through your lawyer) and issue a notice to appear for arbitration, again through your lawyer, giving sufficient time for the employee to appear before the arbitrator. If the employee appears for the hearing, the Arbitrator can decide a suitable amount as the compensation to be paid by the employee depending on the evidences produced by both parties. If the employee does not appear for arbitrattion, the employer can issue an advertisement through the lawyer in the local paper where the employee resides giving a fresh date for arbitration. If the employee still doesnt appear, the Arbitrator can give an ex parte ruling. Once the ruling is given by the Arbitrator, the employer can file an execution petition for recovering the amount from the employee/surety/ies.

Hope the information is of some use to you as implementation of a service agreement depends on the conditions, ability to quantify the losses etc. Any legal route is time consuming and various options are available for the employee to keep appealing in higher courts and live his full life without paying a single paise.

However, most employees would prefer to settle the issue amicably because of their inability to fight a case continuously and also because of the stigma that will be attached to them in the job market.



From India, Madras
In my view, the HR people who are trying to deprive the rights of young budding professionals in the name of bond or whatever the nomenclature, are detrimental to the interests of any organisation or the whole society. such bad HR policies shall be curtailed. In this era, you can not hold any person leaving. Why they are leaving a organisation? becoz of such bad HR executives.

From India, Lucknow
Dear Mr/Ms.RPP- whilst bonds may be a detrimental endeavor, they are NOT HR policies, but are usually directed by the top leaders in any company.- Deebyay
From India, Bangalore
Dear Mdam, Bonds those are one sided are not at all sustainable in the court of law. It’s an encroachment to one’s fundamental right as per section 19 of the constitution of india.
From India, New Delhi
Hi Everyone, Can someone help me to give insights that we are not supposed to keep any employee on direct contract beyond 6 months as per Shops & Estt act? Thank you, Srivalli Hyderabad 9885198930
From India, Hyderabad
Hi All,
Iam Srikanth, recently i attended an interview in hyderabad, there the GM-HR asked me a question that " the company hired 10 contractors each with 30 contarct labour but enable to start the work because of some issues, so all the contract workers went on strike because their contractors has not paid them salaries for 3 months and as a principal employer your management is not giving you funds to contarctor as there is no work. He asked me in that situation what you will do.
I told him so many things but he is not satified, and after the Interview i asked him personally but he smiled and went away from that cabin, please can anybody please let me know as a HR what we can do to handle the situation.

From India, Hyderabad

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