A Note on Legality of Employment Bond [Series-II] By CS Deepesh Maheshwari


Summary of the Previous Note:

In the previous series of discussion, we are quite clear that what is ‘Employment Bonds’ and what is the ‘legality’ on them.

To sum up, under the Indian Law, the employment agreements with ‘Negative Covenants is ‘Valid’ and ‘Legally Enforceable’ if the parties agree with their ‘Free Consent’.

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 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 until now is that conditions stipulated in the contract should be necessary to protect the interest of the employer and compensate for the loss caused by a breach of contract. Additionally, the penalty or compulsory employment period stipulated should not be ‘Exorbitant’.

How to Challenge the enforceability of Employment Bond?

As again mentioned above the validity of Employment Bonds can be challenged on the basis of Section 27 of the Indian Contract Act, 1872 (ICA).

Further, 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 or her interests.

Requirements of a Valid Employment Bond: (PRECAUTIONS)

  • The agreement must be signed by the parties with Free Consent,
  • The Conditions stipulated must be reasonable,
  • 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:

If an employment bond is breached, the employer is legally entitled to compensation. The compensation awarded should be reasonable to compensate for 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 the payment of any penalty amount in the event of a 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 a 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 (Section 41) action granted under the Specific Relief Act, 1963 cannot be sought for breach of contract of personal service or bond and therefore employer shall not be entitled to reinstatement of their employees as relief in the event of breach of bond.

It is witnessed 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.

CASE LAW:

  • In the Landmark Judgement of Delhi High Court: -
High Polymer Labs. Pvt. Ltd. Vs. R.K. Mukreja & Anr. In this case, it was held that Section 27 of Indian Contract Act is applicable when there is a contract in restraint of trade after the cessation of employment whether by resignation or in any other manner and such a restrictive covenant is void and unenforceable.

However, such a restrictive covenant is enforceable and is not hit by Section 27 of the Indian Contract Act if same is during the continuance of service of a whole time employee provided that such a covenant or contract is neither unreasonable nor unconscionable not excessively harsh nor one-sided.

  • In the Case of New Delhi District Court: -
Pawan Hans Helicopter Ltd. Vs. 4 defendants. In this case, the Plaintiff (Pawan Hans) filed a case against the employee (defendant) for Breach of Contract, Injunction & Recovery of Damages. It was held by the Court of Law that the employee breached the contract and was held liable for paying the damages to the employer (Plaintiff – Pawan Hans) but didn’t grant the Injunction.

The Court held that: - “Since the plaintiff can be adequately compensated for non-compliance with term and conditions of Bond of Indemnity and Service on the part of Defendant No. 1 (Employee), the Negative Covenant contained in the bond of indemnity and service cannot be specifically enforced. Section 41 (e) of Specific ­17­ Relief Act lays down that an injunction cannot be granted to prevent Breach of Performance of which would not be specifically enforced”.  

Conclusion:

From the above, we can make out that the Employer can make the employee sign the Employment Bond or can take Indemnity Bond in a specific case to case basis.  Further, the employee cannot take the shelter under Section 27 (Restraint of Trade) if there is a breach of contract in the continuance of service of a whole-time employee provided the contract’s covenant is neither unreasonable nor unconscionable not excessively harsh or Exorbitant.

Also, one should take note that Section 27 shall be applicable in case the employment bond talks about the negative convents after the cessation or resignation by the employee from the employment, which means the negative convents or such other restrictive conditions to the agreement or contract after the termination of employment will be void and unenforceable.

One should also remember that the employment bond should convey justifiable or reasonable damages or such estimated damages which the employer would be incurring on the employee for imparting him or her such training or training in due course of employment.

Further, the reliefs available to the employer through the employment bond is that it can demand from the employee such valid and reasonable Indemnity or ask for sureties, or fix the period of employment, or impose such other restrictions which are reasonable, conscionable and justifiable in the interest of the employee.

Whereas, the employer cannot demand Specific Relief or Injunction from the Courts of law in case of Breach of Contract by the employee.

If you have missed reading Series 1, Click here https://blogs.compliancecalendar.in/a-note-on-legality-of-employment-bond-series-i-by-cs-deepesh-maheshwari-988

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