Lately, the concept of Employment Bond has gained importance and almost every organization, irrespective of the sector, is insisting for execution of the Employment Bond.

With rapidly changing economic conditions and industrial process, organizations are finding it difficult not only to retain employees but to protect and safeguard their interest and goodwill and thus the organizations are introducing Employment Bonds for prohibits an employee from leaving from the organization before completion of specified period of employment.

What is an Employment Bond?

An Employment Bond, in simple terms, is an agreement executed between the employee and the employer which comprises of the rules that will govern employment of the employee within the organization. It also provides for the amount of consideration which an employer spends on hiring and/or training an employee as well as term/duration for which the employee has to remain in employment with the employer.

However, before understanding the Employment Bond, one must comprehend the act which governs it. Since, Employment Bond is also a Contract but with negative covenant, it is also governed by the Indian Contract Act, 1872 and like any other contract, it is mandatory for the Employment Bond to be inclusive of the key parameters like offer, consideration, acceptance, object which must be lawful and parties with free consent to be legal and enforceable document.

Why organizations are insisting for Employment Bond?

Employment Bond are generally executed by organizations to ensure that the employee should maintain confidentiality, agree for a non-compete clause and if the employee leaves the organization, prior to completion of stipulated and agreed time, to get reimbursement for costs incurred by the employer in training the employee, so as to get competitive advantage over its competitors.

Requirement of Employment Bond

As above-referred, the basic purpose of execution of Employment Bond by any organization is to ensure and retain a trained employee for as long as possible in the organization and if an employee, despite execution of the Employment Bond decides to leave the organization, the employer can claim compensation for training the employee, in terms of time, energy, money and human resources.

For the matter of clarity, Employment Bond is nothing but an assurance provided by the employee to its employer that by acknowledging the terms of Employment Bond, without any coercion and with free will, the employee agrees to serve the employer for a stipulated time and any failure on employee's part will entitle the employer to seek "rational" and "legal" reimbursement/ compensation for the amount stipulated in the Employment Bond.

While, the term rational is not properly defined anywhere in India, in most of judgements Hon'ble Court(s) has directed that the Employment Bond should be rational and the term "rational" shall depend on the circumstances and facts of each cases.

Therefore, the Employment Bond should not only stipulate the conditions that are essential to protect organization's interest but should also provide for a reasonable and rational amount of compensation for the loss which the organization will suffer for the breach of the contract. Hence, the Employment Bond should ensure that the penalty/compensation or the mandatory/obligatory period of employment agreed upon by employer and employee is not unreasonable.

In Satyam Computer Services Limited v. Ladella Ravichander[1], the Andhra Pradesh High Court stated that the compensation claimed by the employer is too high in comparison to the actual cost which the employer has spent in recruiting and training of the employee as well as in hiring a replacement. The Court while upholding the validity of Employment Bond clarified that the employer can claim 'reasonable' amount as compensation but not the exorbitant amount mentioned in the contractual agreement and which cannot be substantiated.

Validity of Employment Bond

However, even for claiming a reasonable amount, the Employment Bond must be a valid contract under the Indian Contract Act, 1872 i.e. it is an agreement which is enforceable by law.

It would be prudent to mention here that, an employment agreement with negative covenant can be considered as valid and legally enforceable agreement, if the parties executing the agreement do with their free consent i.e. without any coercion, undue influence, misrepresentation and/or mistake. Hence, for ensuring that an Employment Bond is a valid contract, the employer must make sure that:

1. Employment Bond is signed by both the Parties i.e. employee and employer and with free consent;
2. Conditions stipulated in the Employment Bond are reasonable and can be backed with validations; and
3. Conditions stipulated in the Employment Bond should confirm that they were included to safeguard interest of the employer.
    

Whether validity of the Employment Bond can be challenged?

1. Article 19 (1)(g)[3] of the Indian Constitution: Right to practice any profession or to carry on any occupation, trade or business [2]
   Similarly, Article 19(1)(g)[3] of the Indian Constitution also clarifies and provide right to exercise a lawful profession, trade and business to its citizen, so the Employment Bond must not be in contrast with the defined Article and must be reasonable in nature. Every citizen must be provided with freedom to trade and to perform fair practices in relation to lawfully valid professions.
    
2. Section 27 of Indian Contract Act: ​Agreement in restraint of trade, void
   Employment Bond validity can be challenged under Section 27 of the Indian Contract Act, 1872[3], as Section prohibits any agreement which is in restraint of trade and profession. In simple terms, any agreement, whether made directly or indirectly, if restricts someone from doing a fair trade and carrying out lawful profession shall be termed as Void.
   
   Therefore, the employer in order to prove that an Employment Bond is a valid contract, the employer has to substantiate (with documentary evidence) that necessary freedom of trade and business to the employee was provided and the employer has invested substantially in employee's training.
   
   Additionally, if an employer can also prove that the outgoing employee is joining the competitor and shall be disclosing the trade secret of the employer which were gathered/known during the employment, then the Court may restrict the employee in joining the competitor and may also issue an injunction order.
   
   It is important that, if the validity of the Employment Bond is challenged on violation of the above-referred provision, the onus is on the employer to show that restraint is reasonably necessary to protect his interests.

Can employer seek reinstatement of employee basis the restrictions/injunctions?

Hon'ble Supreme Court has also contemplated on this interesting topic and has held that while the employer can receive an injunction against the employee but it cannot seek specific performance action against the employee for the breach of contract/Employment Bond and therefore, the employer cannot insist the employee to be reinstated as relief unless the same is necessary for protection of proprietary interest/trade secrets of the employer.

Enforceability of Employment Bond

It is pertinent to note that, in most of judgements, Hon'ble Supreme Court as well as High Courts have stipulated that 'an employees' right to livelihood must prevail over any interest which an employer have basis the condition of the Employment Bond'.

In a landmark Judgment of Desiccant Rotors International (P) Ltd. Vs. Bappaditya Sarkar[4], Hon'ble Delhi High Court held that in instances where the employer is attempting to protect himself from its competitor and the employee its right to seek employment, "the right of livelihood of the latter must prevail"

However, Hon'ble Supreme Court in Niranjan Shankar Golikari vs The Century Spinning And Mfg. Co[5] referred Hon'ble Calcutta High Court's judgment of The Brahmaputra Tea Co. Ld. vs E. Scarth[6] and held that "there is nothing to prevent a court from granting a limited injunction to the extent that is necessary to protect employers' interests where the negative stipulation is not void." The Court also mentioned that "an agreement to serve a person exclusively for a definite term can be termed as a lawful agreement."

Therefore, the restrictive covenants provided in a contract shall be valid for the duration of employment and will not be a violation of Section 27 of the Indian Contract Act, 1872, however, the validity will come into question if the same extend to post-termination scenarios.

Additionally, in Toshnial Brothers (Pvt) Ltd v E Eswarprasad & Ors[7], Hon'ble Madras High Court held that "existence of a legal injury accruing as a consequence of breach is a pre-requisite for claiming liquidated damages and is in accordance with Section 74 of the Indian Contract Act, 1872."

In simple words, an employer has to demonstrate that the employer has suffered a legal injury resulting from the breach of the commitment by the employee and his failure to serve the minimum period at the employment.

Similarly, in Fertiliser and Chemical Travancore Pvt. Ltd v. Ajay Kumar and Others[8], Hon'ble Kerala High Court held that, "though the candidates were selected for training and not for the permanent service, the employer has spent considerable amount of time, energy and expenses and the employer will surely suffer loss when a trainee breaks the condition of bond and leaves the organization. The employer is derived of the expected service of a competent person.

Breach of Employment Bond by the trainee is aspect entailing damages to the employer.

Brief Facts of the Case:
Fertiliser and Chemical Travancore Pvt. Ltd. deployed 3 trainees and asked them to sign a bond, wherein it was stipulated that the trainees would obtain 2 years of training and after the training they will put in at least five years of service in the company and in the event of any breach, they will pay Rs. 10,000 as a compensation for the damages to be likely incurred by the company. The trainee resigned after five months of training.

Legality of Employment Bond
Notwithstanding, if a legal injury is proved by the employer against the employee, the Hon'ble Delhi High Court in Sicpa India Limited vs Shri Manas Pratim Deb[9], held that this would not entail the employer to seek whole amount of damages as mentioned in the contract and the employer has to substantiate the actual loss suffered by him".

In this case, the Hon'ble Court has granted damages of INR 22,532/- whereas the loss claimed by the employer was INR 2,00,000/- stating that the employee left the organization within 2 years instead of serving 3 years as mandated under the Employment Bond.

Basis the above judgment, one can conclude that the Employment bond can be termed as unequivocal enforceable, if it meets the below-referred requirements:

1. Actual money was spent on employee training and development by the employer;
   The money spent on the employee was basis the assurance of employee that he/she will not leave the organization for the duration specified in the employment contract;
   
   Despite giving assurance for serving the specified duration, the employee breached the contract and left the employment; and
   This breach has resulted in loss of employer.
   
   In continuation of the above, Hon'ble Supreme Court in Fateh Chand vs Balkishan Das[10] clarified that the Liquidated Damages cannot be compensated in nature of penalty and such stipulations shall be void. The employer has to compute (with substantiation) the actual loss suffered by him on account of breach by the employee.
   
   The Hon'ble Court simplified that the actual loss, if backed with substantiation, can be awarded and the stipulated damages should be kept as the upper cap. The Hon'ble Court further clarified that, Section 74 of the Indian Contract Act, 1872 merely dispenses with proof of actual loss or damages, but it does not mean that compensation may be claimed even when there is no loss or damage, hence Section 74 refers to actual loss or damage and not to stipulated damages.
    
2. Employment Bond should be balanced
   The employer has to ensure that for seeking injunction and claiming damages for the losses, the Employment Bond are equally balanced and are not one-sided.
   
   Hon'ble Apex Court in Jet Airways (I) Ltd v Jan Peter Ravi Karnik[11] and Lalbhai Dalpatbhai & Co v Chittaranjan Chandulal Pandya[12] specified that the Employment Bond should not lose its character and should not attain character of contract in restraint of trade.
   
   In Jet Airways matter, the Apex Court upheld Hon'ble Bombay High Court order wherein the High Court refuse to grant injunction on the ground that negative covenant was one-sided and unreasonable whereas, in Lalbhai Dalpatbhai matter, it was stated that the employer has not put any material on record which proves that how the plaintiffs would be prejudiced if the defendant is not restrained from serving any other employer.
   
   Similarly, in Shree Gopal Paper Mills Ltd v Surendra K Ganeshdas Malhotra[13], the Hon'ble Calcutta High Court stated that, a covenant which mandates an employee to serve the organization for a period of 20 years is not only oppressive but also one-sided.
    
3. Whether Employment Bond enforceable only on Employees?
   In Subhir Ghosh v Indian Iron and Steel Company[14], Hon'ble Calcutta High Court recognized that if a reasonable and balanced bond is executed, the same can be termed as valid. In this, case the trainees were asked to execute a bond wherein it was mandated for the trainees to accept the employment offer post completion of the training period. The Hon'ble Court held that such clause is valid and shall not be termed as contract in restraint of trade.

Conclusion:
From the above-referred case laws and the explanation, one thing is clear that the Employment Bond is an important document which protects employer's interests with a caveat that the conditions mentioned in the Bond should be reasonable. The restrains put in the Employment Bond is required to be "just" and "reasonable."

Additionally, the restraints should not extend beyond the employment and should not prevent the employee from being forced to work for another company as the restrictions/restraints operating subsequent to termination would be considered invalid and shall be violation of Section 27 of Indian Contracts Act, 1872.

However, in the event of breach by the employee, the liquidated damages claimed by employer must be justified and substantiated.

End-Notes:

1. 2011 AIR CC 2827
2. Constitution of India
3. The Indian Contract Act, 1872
4. I.A. No.5455/2008
5. 1967 AIR 1098, 1967 SCR (2) 378
6. (1885) ILR 11 Cal 545
7. 1997 LLR 500
8. 1990 LLR 711
9. RFA No.596/2002
10. 1963 AIR 1405
11. (2000 (4) Bom CR 487)
12. AIR 1966 Guj 189
13. AIR 1962 Cal 61
14. (1977) IILLJ 120 Cal