EMPLOYMENT BOND AND DAMAGES

This article seeks to examine the widely discussed and debated subject matter of employment law in India namely - Employment Bonds and Damages and specifically seeks to address the following issues:

• Is an ‘employment bond’, which provides for reimbursement of training expenses, if the employee were to leave the employment prior to the expiry of the agreed period, legally valid and binding?

• In case of breach of contract by the employee, is the employer entitled to claim damages / liquidated damages?

Reimbursement of Training Expenses under Employment Bond

Section 27 of the Indian Contract Act, 1872 (the “Act”) is relevant in this context which states: “Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.”

In the case of N. S. Golikari vs. Century Spinning & Manufacturing Company[1], the Supreme Court, while interpreting a clause in the employment contract stipulating that the appellant employee shall serve the respondent company for a period of five years, during which period he shall undergo training and in the event he resigned from the job before the expiry of five years, he would be liable to reimburse the training expenses incurred by the company and also be liable to pay damages, upheld the validity of the aforesaid clause on the ground that the restriction on taking up a similar employment being operative only for the period agreed upon in the contract of employment, cannot be construed as restraint of trade.

The Supreme Court in the case of M/s Gujarat Bottling Company Limited vs. Coca Cola Company,[2] keeping in view the need to balance the employer’s interests with the rights of the employee to livelihood, decided that a negative covenant, which is operative during the period of the contract of employment, when the employee is bound to serve his employer exclusively is generally not regarded as restraint of trade and therefore will not fall within the purview of Section 27 of the Act.[3]

In view of the aforementioned judicial pronouncements, it may be concluded that an employment bond, which provides for reimbursement of training expenses, if the employee were to leave the employment prior to the expiry of the agreed period of employment, is legally valid and binding.

Damages under Contract Act

Damages under Section 73: Section 73 of the Act provides the general right to compensation for loss or damage caused by the breach of contract. Damages under Section 73 of the Act are compensatory in nature as distinguished from being punitive. Furthermore, Section 73 of the Act stipulates that compensation or damages are not to be given for any remote and indirect loss or damage sustained by reason of the breach.

Accordingly, if an employee (who has left the employment prior to the agreed term) initiates legal action against the employer, in view of Section 73 of the Act, for recovering the amount appropriated by the employer in lieu of training expenses, the employer to succeed in such action, will have to prove that it has actually suffered direct damages (including by way of training costs), equal to or higher than the training expenses, on account of the breach committed by the employee.

Liquidated Damages under Section 74:

Section 74 of the Act provides for damages stipulated in the contract itself which are payable in the event of a breach of the contract, however, the damages so stipulated should not be unreasonable or by way of penalty. The position under Section 74 was summarized by the Supreme Court of India in the case ONGC Ltd. vs. SAW Pipes Ltd.[4] as follows:

• “Terms of the contract are required to be taken into consideration before arriving at the conclusion whether the party claiming damages is entitled to the same.

• If the terms are clear and unambiguous stipulating the liquidated damages in case of the breach of the contract unless it is held that such estimate of damages/compensation is unreasonable or is by way of penalty, party who has committed the breach is required to pay such compensation and that is what is provided in Section 73 of the Act. 

• Section 74 of the Act is to be read along with Section 73 of the Act and, therefore, in every case of breach of contract, the person aggrieved by the breach is not required to prove actual loss or damage suffered by him before he can claim a decree. The Court is competent to award reasonable compensation in case of breach even if no actual damage is proved to have been suffered in consequences of the breach of a contract.
• In some contracts, it would be impossible for the Court to assess the compensation arising from breach and if the compensation contemplated is not by way of penalty or unreasonable, Court can award the same if it is genuine pre-estimate by the parties as the measure of reasonable compensation.”

In view of the aforesaid, if: (a) the training expense amount were structured as a genuine pre-estimate of losses that the employer will incur (liquidated damages); (b) the employee were to leave the employment prior to the agreed period; and (c) the Court is not in a position to assess the losses incurred by the employer on account of such breach, then the Court is likely to dismiss the legal action initiated by the employee against the employer for recovering the training expense amount appropriated by the employer.

Concluding Remarks

Therefore, according to the judicial dicta and the aforesaid discussion, it can be concluded that any legal action brought by the employee against the employer to recover the training expenses appropriated by the employer can be dismissed in the following events:

• the employment contract does not provide for liquidated damages, the employer will have to prove that the loss suffered by it, was equal to or greater than the training expenses appropriated by the employer; or
• the employment contract provides for liquidated damages, the employer will not be required to prove any actual damages suffered by it, unless the liquidated damages are unreasonable or are by way of penalty.

The views and opinions expressed in this article belong solely to the author and do not reflect the position of Tatva Legal, Hyderabad.

[1]    AIR 1967 SC 1098

[2]    AIR 1995 SC 2372

[3]    This principle has been reiterated on 10 December 2007 by the Bombay High Court in the case ‘VFS Global Services v. Suprit Roy’, Suit No. 3171 of 2007

[4]    AIR 2003 SC 2629