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Enforceability Of Employment Bonds In India

Last Updated: 26 September 2016

Article by Krishna Vijay Singh

Kochhar & Co.

Over the last decade, change in business environment due to globalization has resulted in greater business competition. To survive this competition, organizations have been competing for skilled employees to ensure better products and services. The increase in demand for skilled workers together with their limited availability has created a war of talent amongst these organizations.

To cope up with this competition, organizations often invest huge amount of time and money on imparting training and skills to their employees. Unfortunately, several of them after acquiring these valuable skills, move out of the organization for better prospects thereby causing huge loss to the employer, which , from the perspective of an employer, cannot be compensated merely by money. The employer in order to safeguard its interest often makes its employee sign an employment bond. These bonds are contracts / undertakings given by the employee wherein employee agrees to serve the employer compulsorily for a certain minimum fixed period of time failing which the employee promises to furnish / pay the amount as specified in the bond. Such promise not to leave the employment for a specified period is usually a negative covenant. Often, along with the bonds, the employers also obtain some kind of security, such as signed undated cheques. The purpose is to deter the employee from leaving the employment before the specified time period.

However, in the current scenario, the most pertinent issue that comes to our mind is whether such method to retain employees is effectual, acceptable and enforceable under the law. Such contracts, in appropriate circumstance, can be challenged on the ground that they restrict the fundamental right of the employee to profess his or her trade or profession. Further, the validity of such bonds would also depend on whether the bond is in fact a valid contract under the Indian Contract Act, 1872 or not. A contract is valid only if it has been made with free consent of the parties, i.e. without force, undue influence, misrepresentation and mistake.

As far as validity of the contracts with respect to the negative covenant is concerned, these contracts have been held to be valid if the organization has invested resources on personnel training or skill enhancement of the employee. Thus, the employer is entitled to recover damages only if money has actually been spent in providing training to the employee, such training being such that the employee otherwise would not have received as a result of his employment or the work that he undertakes. The amount spent has to enhance or impart new skills, over and above what an employee would otherwise be expected to know or learn in the position that he holds in the company.

Therefore, if the employer has actually spent money in training the employee as aforesaid, and there is a breach of contract by the employee, liquidity damages, as stipulated in the contract or the bond may become payable by the employee to compensate the organization for the time and money spent on the training. In Toshnial Brothers (Pvt.) Ltd. v. E. Eswarprasad & Ors (MANU/TN/0511/1996), the Madras High Court held that a legal injury to the employer can be presumed where the employer establishes that the employee was the beneficiary of any special favour or training or concession at the expense of the employer and there has been breach of contract by the beneficiary of the same. In such cases, the breach would per se constitute the required legal injury. However, it is to be noted that compensation should not exceed the amount, if any, stipulated in the contract and should not be imposed by way of a penalty. Generally courts in India do not grant damages automatically merely because the employment contract executed says so. In order to ensure that liquidated damages or compensation are granted by the court, the organization may have to prove the loss incurred because of the employee's early departure from the services.

While granting liquidated damages under the employment bond, Courts apart from going into the legal injury caused to the employer also take into consideration factors like actual loss suffered by the employer, period of service already completed by the employee under the contract and other conditions, if any, stipulated under the contract. Only after going into these factors, courts determine the loss suffered by the employer to reach a reasonable compensation figure. For instance, in the case of Sicpa India Limited vs Shri Manas Pratim Deb (MANU/DE/6554/2011), the employer incurred expenses, while imparting training to the employee for which an employment bond was executed. According to the bond, the employee was to serve the employer for period of three years or to make payment of rupees two lakhs to the employer. The employee left the employment within two year of signing the bond. To enforce the agreement the employer went to the court, which awarded sum of only Rs 22,532 to the employer as against the compensation amount of Rupess two lakhs stipulated in the contract. While coming to such conclusion, the Court relied upon the law laid down by Supreme Court regarding liquidated damages. The law with respect to liquidated damages have been crystallized by the Supreme Court vide two landmark decisions. First is the decision in case of Sir Chunilal V. Mehta And Sons, Ltd vs The Century Spinning (1962 AIR 1314), wherein it was held that liquidated damages are not in the nature of penalty and can be awarded as mentioned in the contract if loss from the breach of contract cannot be calculated for the remaining period of the contract. Whereas, in the case of Fateh Chand vs. Balkishan Das (AIR 1963 SC 1405), the provision of liquidated damages in the nature of penalty was held to be void, since the actual damages could be calculated and, thus the liquidated damages were held as the upper limit which are to be paid once the actual damages are proved. Since in the present case the damages could be calculated, Court considered the total expenses borne by the employer and the period of service completed by the employee under the contract and thus, divided the total expenses incurred into three parts for three years and awarded the damages for the remaining one year of the employment due to the breach of contract.

Therefore, from the above discussion, it is evident that employment bond stipulating a specified sum as payable by the employee in case of breach of contract is enforceable only if employer has actually spent money on the employee against a promise from the employee that he or she would not leave the employment for the specified duration and has consequently suffered a loss on account of the employee having received the training and leaving the employment before the stipulated period in breach of the employment bond / contract. With the employees in our country free to decide their employment these bonds play an important role to protect the interest of the employer and enable the employer, in appropriate circumstances, to recover the money spent or incurred by the employer in case of an early resignation by the employee.

Originally published in Human Capital, January 2015

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.


Enforceability Of Employment Bonds In India - Employment and HR - India
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