Are Employment Bonds Enforceable? Unpacking the Legal Side of Restrictive Clauses

Hi everybody,

I have noticed plenty of articles on the legal enforcement of bonds. Well, I don't want to play spoilsport to many self-acclaimed lawyers' opinions. Let me give you the other/real side of enforcement.

Section 27 of the Indian Contract Act, 1872, provides that agreements restraining a person from exercising a lawful business, trade, or profession are, to that extent, void.

Any clause which prohibits employees from working with competitors after the cessation of current employment has been struck down by courts repeatedly.

Restrictive clauses during the term of employment have been upheld in a few cases. (In ISO 27001, one of the 127 controls, asks people to desist from discussing company matters on the cellphone in a public place: guess why: not because of the lack of freedom of speech and expression but safeguarding company/client information.)

Last but not least, it is simply not allowed in any of the standards like Social Accountability SA8000, which is growing in popularity in ITES too, Worldwide Responsible Apparel Production (WRAP), ETI, any of the ILO conventions, etc.

Regards,

Suryavrat

Hi Suryavrat,

It's really great to see your post contents, but it opens lots of curious thoughts in one's mind. What is the legality of the employment bonds that employees sign with employers for training programs or international assignments? Understanding the legal language is difficult for any layman like me.

Nisha Binner
HR Manager

Hi,

I would like to know if obtaining a bond from an employee is legally enforceable or not. My company invests a lot in employee training, so we are considering having employees sign bonds. I would appreciate your valuable suggestions on this matter.

Hi to all my colleagues,

I had the good fortune of learning PF/ESI/CLRA, etc., from "H L Kumar," the industry veteran and writer of all aspects of IR. He is presently the editor of "Labour Law Reporter," and you may send an email and get free advice too.

I have worked with various industry majors like HCL, Paras, VSNL, etc., and presently am a compliance manager for a US retail chain.

In HCL too, I never came across a single litigation in support of a bond, though the company maintains lawyers.

But lawyers are there for a different reason. Since we operate around the globe, we have to ensure compliance with Telemarketing sales rule, distance selling directive, fair debt collection practices act, data protection act, etc.

In my experience, if an employee/worker has a grievance against the management, rather than approaching the labor department/trade union, it makes more sense to consult a good lawyer. A top-ranking lawyer charges approximately 5k.

Yet, employees prefer to wallow in the dark.

Giving a loan to an employee in excess of his paying capacity is also a form of "Bonded Labour." My colleagues who have experience with SA 8000/WRAP, etc., would agree with the same.

Warm regards,

suryavrat

Hi,

A bond is an agreement between the employee/trainee and the company whereby a certain burden, either monetary or otherwise, is imposed on the employee.

Companies invest a significant amount of money in training their employees, and if the concerned employee absconds, it results in a great loss for the company.

In cases where a company invests money in the training of employees, it is advisable to have the concerned employee sign a bond. However, this bond should not be for an extended period.

Although Section 27 of the Indian Contract Act, 1872, states that any agreement in restraint of trade is void, the Constitution of India guarantees that every individual is entitled to engage in any lawful trade of their choice.

When preparing a bond agreement, a negative covenant may be included to motivate the employee to stay with the company. For instance, if an employee continues for a specific period, the company will reward them with a certain amount. If the employee fails to serve for the specified period, the company may recover that amount from the employee.

Regards,

Prasad

Getting a bond from an employee who is deputed for overseas training is surely the only hold the company has on the employee.

Dear All,

Sometime back, I read a case on the Supreme Court website www.judis.nic.in, where a lady was sent abroad by AMEX. When she returned, her hands were full of better offers. Eventually, she forgot about the bond and joined a new assignment. Later, she received a notice from the court to submit a few lakh rupees as compensation for breaching the service bond. She went to the labor court, and finally, after a few years in the Supreme Court, the Court held it Void.

I recently came across some interesting queries and answers related to service bonds in India that you all might benefit from.

One more thing, it's for sure that if one breaks the service bond, he/she will go through a lot of mental tension as well as spending a huge sum of money dealing with court-related matters.

Warm regards,

Umesh Chaudhary

(welcomeumesh@yahoo.com)

---

A company has offered me a job assignment, but they also want me to sign a service bond for at least a year. I fear I may lose out on better options that may come my way. If I were to breach the bond, can they, through the court, compel me to continue with the assignment? Does this bond secure my job with the company for at least a year if I join?

Manoj, Delhi

A contract of service is not capable of specific enforcement and hence need not be specifically performed. Normally, in a bond of this kind, there is also a compensation clause. In case you breach the contract, you may have to pay the specified amount. The apex court has held that a contract of personal service cannot ordinarily be enforced by or against an employer, and a court normally would not give a declaration that the contract subsists. The rationale is the unwillingness of courts to compel persons who are not desirous of maintaining continuous personal relations with one another to continue those relations. The grant of specific performance is a purely discretionary relief and can be refused when not warranted by the ends of justice.

There are certain exceptions to this rule, such as in the case of a public servant who was dismissed from service in contravention of Article 311 of the Constitution, reinstatement of a dismissed worker under industrial law, a statutory body acting in breach of statutory obligations, and the like. But these do not seem to apply in your case. The remedy in cases like yours is to sue for damages. Such relief can be granted only on sound legal principles.

Regarding your query about the security of the job for at least a year, if the employer rightfully ends the contract, there can be no complaint. But if the employer wrongfully terminates the contract, you can pursue a claim for damages.

---

Dear Sir,

A friend of mine signed a 3-year bond with a software company in Chennai in March 2004, and the company obtained an undated check in case of a breach of the bond.

My friend did not receive proper training, and he realized he was not paid properly (though it was according to the service agreement). Consequently, he left the company after serving 1.5 years, breaking the bond.

The company sent a letter to him and his father to rejoin, listing conditions for legal action if they did not comply. However, my friend did not respond. Now, almost a year later, the company has sent his father a court summons, claiming the check of 2 lakhs given by his father bounced and he needs to appear in court.

My friend has since joined a company in Singapore and is concerned about how to deal with this issue.

I would like to know if such bonds are valid and how to counteract and resolve this issue. Please suggest the best possible solution.

Thank you in advance.

---

Question:

Hi,

For the past one and a half years, I have been working in a company. Eight months ago, the company sent me to France for a one-month training purpose. During that time, the company asked me to sign a bond agreeing to work for 3 years from the time of my return. The bond states that if I want to leave before the contract period ends or if the company terminates my service due to inefficiency, I have to pay a sum of 10 lakhs. The bond does not include any salary increments or benefits that the company should provide me during the contract period. The contract is on a stamp paper, and I signed on an attached sheet (not on the stamp paper). Now, I have received a good offer from another company, and I want to leave my current company. If I break the bond without a settlement (without paying the amount in the contract), can the company file a case against me? Is this type of contract between an employee and employer valid or not? Please advise on this matter.

Regards,

---

Dear Saji,

The signing of the bond is a commitment with your employer for a specified period. At the time of your employment, you willingly signed the bond to serve for the specified period. Now, considering other opportunities, you may be inclined to breach the terms of the bond.

There are several factors to consider, such as your commitment to the bond, the state in which the bond is executed, the stamp duty applicable, your initial appointment with the company, and your pay after returning from France.

If the company terminates your service, there is no cause for them to claim the specified amount in the bond as there would be no breach. However, if you choose to leave the company, the commitment must be honored.

If the company views the breach seriously, they can hold you responsible for the payment as agreed in the bond.

Regards,

Javed Razack

Thank you for your early reply. I would like to provide more information regarding this contract. The bond is executed in Pune, Maharashtra, on Rs. 20 stamp paper. The signature is on an attached sheet of the contract, not on the stamp paper. As per the bond, all expenses during my foreign travel were covered by the company. The training in France was not effective; in fact, we worked for the company's benefit. I have not received any salary increments, including the compulsory annual increments, after returning from France. The initial appointment given at the beginning of my service is still continuing.

If I am medically unfit for a short term (for one year) due to health problems, what will be the impact on the bond? Do I have to compensate for this period of non-working to fulfill the contract period? I hope this additional information will help you provide further advice on my situation.

Hi, I am working with a private firm in West Bengal. I had signed a bond with the company 2 years ago, which stated that the company would sponsor me for a post-graduation course, and I would have to work with the company for 2 years after completing the course. According to the bond, the company promised to offer me a salary as per the current market trend. However, now that I have completed the course, the company is offering me half the salary compared to what they offer to management trainees who have completed the same course from the same institute and do not have any experience. When I inquired about the reason for this pay scale, they mentioned that it is because they have invested money in me. The bond is signed on a stamp paper, but only the first page is a stamp paper. If I decide to quit the company, what actions can they take against me?

Dear friends,

Please see the recent article written by an advocate of the Supreme Court on the issue attached by me in reply to the following post: https://www.citehr.com/30808-bond-legal-india.html. Courts have held that service bonds are in contravention of the provisions of Section 27 of the Indian Contract Act and hence not enforceable.

Regards

Dear all,

I want to know what will happen if anybody is not in a position to continue banking service in a nationalized bank. As per the appointment letter, if one fails to serve the bank for three years, according to the bond, the candidate has to pay one lakh rupees to the bank. However, as per the Department of Public Enterprises guidelines, the bond is transferable, but the bank says they are not covered by the guideline. In a case where one has been selected in a government company or government organization through the proper procedure, what is the remedy?