Employment Bonds in the Cases of Specialized Training Provided by the Company – Conditions for Their Validity

 

Employment Bonds in the Cases of Specialized Training Provided by the Company – Conditions for Their Validity

Indian courts, however, have unequivocally held contracts containing restrictive covenants to be valid if the organization has spent significant resources on personnel training or skills enhancement of the employee. This proposition, however, comes with various caveats.

After the perusal of various Supreme Court judgments, the Madras High Court in Toshnial Brothers (Pvt) Ltd v E Eswarprasad & Ors held that the existence of a legal injury accruing as a consequence of breach is a pre-requisite for claiming liquidated damages in accordance with section 74 of the Indian Contract Act, 1872.  In other words, the employer must show a legal injury automatically resulting from the breach of the commitment to serve for a minimum period.According to the Court, a presumption of legal injury arises incases“where the employer or the management concerned was shown to have either incurred any expenditure or involved itself into financial commitments to either give any special training either within the country or abroad or in having conferred any special benefit or favour to the detriment of the claimant in favour of the violator involving monetary commitments.” The inevitable conclusion from the foregoing decision is that the employer must prove that the employee was the beneficiary of special favour or training or concession at the expense of the employer. Otherwise, actual injury accruing as a result of the breach would have to be proved.

However, just because a legal injury is proved, that does not per se entail that the court would grant the employer the whole of the damages stipulated by the contract. For example, in Sicpa India Limited vs Shri Manas Pratim Deb, the Court considered the actual loss suffered by the employer. As against the stipulated compensation of Rs 2,00,000, the Court granted damages of Rs 22,532. In this case, the employee resigned from employment after serving two years instead of three years as mandated by the bond.

Based on these cases, it becomes clear that employment bonds are unequivocally enforceable if following requirements are satisfied:

1.        The employer has actually spent money on the employee,

2.        The said expenditure is in lieu of a promise from the employee that he or she would not leave the employment for duration specified in the contract,

3.        The employee has breached the contract and left the employment before the stipulated period,

4.        On account of the breach, the employer has suffered loss.

In addition, Liquidated Damages must not be in the nature of penalty. The Supreme Court in Fateh Chand vs Balkishan Das held that such stipulations are void. If the actual loss (incurred by the employer on account of breach of the bond) can be computed, the same should be awarded and the stipulated damages should be kept as the upper cap. While courts may be willing to award liquidated damages (in accordance with section 74 of the Indian Contract Act), they have mostly been reluctant to grant specific performance of the covenant.

Further, the contract must not be too heavily one-sided such that it loses the character of a contract promoting trade and attains the character of a contract in restraint of trade. The cases of Jet Airways (I) Ltd v Jan Peter Ravi Karnik and Lalbhai Dalpatbhai & Co v Chittaranjan Chandulal Pandya expound this well-recognized legal principle.In the former case, the defendant resigned within six months of completion of the training, in violation of the employment bond. However, the Bombay High Court refused to grant injunction in favour of the company on the ground that the negative covenant was one-sided and unreasonable. The Court observed that there was no proprietary interest of the employer in need of protection. Similarly, a covenant that mandated the employee to serve for a period of 20 years was held to be oppressive and one-sided in Shree Gopal Paper Mills Ltd v Surendra K Ganeshdas Malhotra.

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