Companies in India have often relied on employment bonds and post-employment restrictive agreements to safeguard their sensitive data, strategic relations and market positions. Although employment bonds have withstood legal challenges, albeit with considerable scrutiny, post-employment restrictions face far stricter judicial tests. Because employment practices continually change, courts have recently decided a number of cases that affect the enforceability of employment-related restrictions during and after a term of employment.
The courts have upheld the validity of employment bonds provided they apply only during the term of employment, safeguard the good faith interests of employers and set an amount that is in proportion to actual losses likely to occur. The amount cannot be coercive.
In Vijaya Bank and Anr v Prashant B Narnaware, the Supreme Court overturned a Karnataka High Court ruling, relying on its decision in Niranjan Shankar Golikari v Century Spinning and Manufacturing Company Limited. It reaffirmed that negative covenants during the existence of the term of employment do not, by themselves, breach section 27 of the Indian Contract Act, 1872 (ICA), provided that they are reasonable. The court, citing its decision in Central Inland Water Transport Corporation Limited and Anr v Brojo Nath Ganguly and Anr, also reaffirmed that bonds, voluntarily accepted, addressing the legitimate needs of the employer to curb losses in a competitive market, are valid contracts...
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