Thursday, July 15, 2010
venghatsrinivas: Is employment Bond valid in india?
venghatsrinivas: Is employment Bond valid in india?: "Employment agreements between the Employer and Employee are governed by the Indian contract Act, 1872. Employment bond should not be confuse..."
Wednesday, July 14, 2010
Is employment Bond valid in india?
Employment agreements between the Employer and Employee are governed by the Indian contract Act, 1872. Employment bond should not be confused with bonded labour which is abolished in India.
The short answer to the question posed whether an employment bond is valid in india is YES.
An agreement enforcable by law is a contract. As per Sec 10 of the Indian contract Act, 1872
all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object.
Section 14 of the Indian Contract Act, 1872 defines free consent.
"Free consent" defined.-Consent is said to be free when it is
not caused by-
(1) coercion, as defined in section 15, or
(2) undue influence, as defined in section 16, or
(3) fraud, as defined in section 17, or
(4) misrepresentation, as defined in section 18, or
(5) mistake, subject to the provisions of sections 20, 21and 22.
Suppose if a employee is given an offer letter and he accepts it. Once he joins, if the employer asks him to sign a bond for 1 lakh rupees to continue in employment, then the court may view this as an undue influence since the employee has resigned from his previous job and he has no other option but to agree to the terms and conditions of the employer. So a lot of these things depends on the facts and circumstances of the case.
A Employment agreement is like a standard contract, where the employee can either accept the offer or not . Unless an Employee proves that the employment bond is obtained without his free consent, the bond can be enforced provided the terms are reasonable and not contrary to the public policy.
What is reasonable is a matter of law and depends on the ability of lawyers arguing the case.
Chapter VI of the Indian contract Act, 1872(Sections 73, 74, 75) discusses about remedies available to the breach of contract.
Every case of compensation for breach of contract has to be dealt with on the basis of S. 73 of the Act. In a particular case where the contract itself stipulates for payment of a sum of money on the breach of contract or contains any other stipulation for penalty, the principle additionally propounded by S. 74 also will have to be applied and that is why irrespective of the amount stipulated in the contract, the party suffering from the breach is entitled only to reasonable compensation which, however, shall not exceed the amount so stipulated in the contract. Whether it be a contract which stipulated a sum of money as being payable on breach of contract or whether it is a contract which does not contain any such clause, the party complaining of breach of contract cannot successfully claim compensation unless he makes out loss of damage referable to such breach. The best measure of reasonable compensation would of course be the extent of actual loss or damage sustained. If the extent of actual loss or damage sustained is capable of being proved that provides a safe guide for the Court to determine the quantum of reasonable compensation. If quantification of loss or damage is not possible, the party who has suffered on account of the breach is not without remedy. He can still request the Court to assess reasonable compensation on the materials available and award the same to him. The words in S. 74 'whether or not actual damage or loss is proved to have been caused thereby' have been employed to emphasise that reasonable compensation can be granted even in a case where extent of actual loss or damage is incapable of proof or not proved. That is why S. 74 of the Act deliberately states that what is to be awarded is reasonable compensation. In a case where the party complaining of breach of the contract has not suffered legal injury in the sense of sustaining loss or damage, there is nothing to compensate him for, there is nothing to recompense, satisfy or make amends. Therefore, he will not be entitled to compensation.
By reading the above mentioned sections it is very clear that suppose if an employee terminates an agreement with an employer before the bond period and there is a stipulated amount specified in the contract to be paid to the employer , then employer could sue the employee for breach of contract and ask for the stipulated amount.
If the stipulated amount is a genuine pre-estimate of the loss then it is called liquidated damages but if the amount specified in the contract is like a threat where the employee is forced to perform the employment contract , then it is a penalty (Savamalai Estates Limited v. Kannayan).
If the court finds that it is a penalty then it will award only an amount which would compensate the real damage the employer will suffer.
For eg if an IT employment contract specifies an amount of 1 crore to paid if it is breached , then court will view it is as a penalty and will only award genuine damages that the employer will suffer (like training costs ). But at the same time if the contract specifies an amount of 50,000 or so, then court might view it is a genuine pre-estimate and might treat them as liquidated damages.
A few cases laws decided by courts in India regarding the validity of bond :
A student entered into a bond with the State of Mysore, which agreed to pay for his education expenses in the U.S.A. The condition for such payment was that after finishing his studies, he would serve the State Government for a period of not less than five years on such salary as the Government may fix. However, if he was not given employment within six months of his return, they should be deemed to have waived their right to claim his services. He would then be free to seek services elsewhere. In the event of a breach of the terms of the bond, the student would be obliged to refund all the expenses incurred by the Government, along with interest. The student finished his studies at the Polytechnic Institute of Brooklyn, New York in September 1949 and obtained diploma from that Institute on June 14, 1950 and with the permission of the State stayed on in the U.S.A. for practical training at his own expense. Before finishing his training he returned for domestic reasons and stayed in India for 6 months and again returned to U.S.A. to finish his training with the States permission. He finished his training and got employed in the U.S.A, claiming waiver by the State Government. It was held by the Supreme Court that staying on for six months in India, after his return on account of domestic reasons and his being permitted to return for finishing his training his training did not indicate that he was waiting for the State to offer him appointment. [M. Sham Singh v. State of Mysore]
In Fertiliser and Chemical Travancore Ltd. v. Ajay Kumar and others, the employer selected three trainees who then signed a bond that they would obtain two years training in the Company and after the training they will put in at least five years service in the company. In case of a breach of these conditions by the trainees, Rs.10,000/- was to be paid as reasonable compensation for the damages likely to be incurred by the employer. But the trainees resigned after five months. The employer filed a case for recovery of damages for breach of contract based on the bond executed by the trainees. High Court of Kerala observed that though the selection of trainees was for absorption into training, the employer was not bound to appoint them on permanent service. But a trainee, who accepts the selection and joins training after entering into bond, binds himself to undergo the training and then accept regular appointment, if offered, for a minimum period of five years. The process of selection itself involves time, energy and expenses for the employer. This is the case of training also. Over and above other expenses during training, each trainee is paid a stipend.
The employer will definitely incur loss when a trainee breaks the conditions of the bond and walks off. The employer is deprived of the expected service of a competent person, for which fresh selection and training may become necessary. Breach of bond by the trainee is, therefore an aspect involving damages to the employer. Only the question of the quantum of the damage then remains to be decided.
In Toshnial Brothers (Pvt.) Ltd. v. E. Eswarprasad & Ors. an employee who was engaged as Sale Engineer committed a breach of the undertaking when he left the services of the plaintiff after serving for 14 months only as against the contracted period of three years. In this case it was held that it becomes unnecessary for the employer to prove separately any post-breach damages. On the other hand, it would suffice to substantiate the fact that the concerned employee was the beneficiary of special favour or concession or training at the cost and expense wholly or in part of the employer and there had been a breach of the undertaking by the beneficiary of the same. In such cases, the breach would per se constitute the required legal injury resulting to the employer, out of the breach or violation by the employees. The High Court, also clarified that while awarding damages as stipulated, the statutory exception for mitigating the quantum of damages will have no bearing.
In Subir Ghosh v. Indian Iron and Steel Company, a Division Bench of the Calcutta High Court had an occasion to deal with the scope of S. 74 of the Indian Contract Act, in the context of an apprentice who under-went training under a contract, which contained a stipulation agreeing to serve the company for a particular period of time and to pay a fixed sum of damages in breach thereof. Division Bench of the Calcutta High Court took the view that since the stipulation in the agreement was for payment of liquidated damages in breach of the Government, it is immaterial to specifically plead or prove damages and that it is open to the management to sue for the recovery of the liquidated damages.
So an employment bond is enforceable in India and before signing such bonds, it is prudent to understand the terms and conditions associated with it.
A lot of people , lament about the bonds after joining the companies. Those people have to understand that they always have the option to refuse the offer and not to join the company. One of the main reason stated by freshers is that the company did not offer them good “technical” work . Companies never promised to give specific work nor they promise to deploy in any specific technology. Anyways most of those people who crib like this could not even basically write few good lines of code. Any IT company spends a lot of money to hire and train resources. It is basically their right to self guard their interests. If we don’t agree to terms and conditions in the employment, nothing stops us from accepting the offer. Let us not accept the offer ,sign the bond and then crib about it.
Companies do send legal notices and file cases in the court for breach of employment agreement. This would mean that if your future employer does background checks on court records for civil and criminal cases , then there is a likelihood of not them hiring you. In certain situations, employers not only file cases against the employee but includes the employer who has hired them also as a party to the dispute. If the employer who has hired you feels the heat, he may ditch you and try to avoid getting in to prolonged judicial proceedings.
At the same time companies do get over board and try to put negative covenants on the contract. Few employers are putting terms such as on termination of the contract, employee should not take up work with their competitors. This is not valid as per Section 27 of the Indian contract Act 1872.
Section 27 of the contract act states
Agreement in restraint of trade void.-Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.
As per Sec 27 of the Indian contract Act, terms and conditions stipulated in the contract are valid only during the existence of the contract. It cannot be enforced after the contract is terminated .
In Superintendance of company vs Kirshna mugai it was stated that A contract in restraint of trade is one by which a party restricts his future liberty to carry on his trade,business or profession in such manner and with such persons as he chooses. A contract of this class is prima facie void, but it becomes binding upon proof that the restriction is justifiable in the circumstances as being reasonable from the point of view of the parties themselves and also of the community . Restrictions on competitions during the period of service are normally valid and indeed may be implied by law by virtue of the servant's duty of fidelity. In such cases the restriction is generally reasonable, having regard to the interest of the employer and does not cause any undue hardship to the employee, who will receive a wage or salary for the period in question. But if the covenant is to operate after the termination of services, or is too widely worded, the Court may refuse to enforce it.
The same guidelines was given by the court in Gujarat Pottling Co.Ltd. & Ors vs The Coca Cola Co. & Ors, Pepsi Foods Ltd. And Others vs Bharat Coca-Cola Holdings Pvt Ltd.
One of the persistent questions that is being asked is whether employer can force the employee to work in the company. The answer is no since specific relief act which can be used to enforce the contracts cannot be used for personal services like employment . The only thing that an employer can do is to sue for damages.
At the same time if the employment did involve some trade secrets and if the court feels that the past employer's concern is genuienly valid then it can give an injunction restraining the employee to take up the work. But this is done in rarest of rare cases .
The short answer to the question posed whether an employment bond is valid in india is YES.
An agreement enforcable by law is a contract. As per Sec 10 of the Indian contract Act, 1872
all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object.
Section 14 of the Indian Contract Act, 1872 defines free consent.
"Free consent" defined.-Consent is said to be free when it is
not caused by-
(1) coercion, as defined in section 15, or
(2) undue influence, as defined in section 16, or
(3) fraud, as defined in section 17, or
(4) misrepresentation, as defined in section 18, or
(5) mistake, subject to the provisions of sections 20, 21and 22.
Suppose if a employee is given an offer letter and he accepts it. Once he joins, if the employer asks him to sign a bond for 1 lakh rupees to continue in employment, then the court may view this as an undue influence since the employee has resigned from his previous job and he has no other option but to agree to the terms and conditions of the employer. So a lot of these things depends on the facts and circumstances of the case.
A Employment agreement is like a standard contract, where the employee can either accept the offer or not . Unless an Employee proves that the employment bond is obtained without his free consent, the bond can be enforced provided the terms are reasonable and not contrary to the public policy.
What is reasonable is a matter of law and depends on the ability of lawyers arguing the case.
Chapter VI of the Indian contract Act, 1872(Sections 73, 74, 75) discusses about remedies available to the breach of contract.
Every case of compensation for breach of contract has to be dealt with on the basis of S. 73 of the Act. In a particular case where the contract itself stipulates for payment of a sum of money on the breach of contract or contains any other stipulation for penalty, the principle additionally propounded by S. 74 also will have to be applied and that is why irrespective of the amount stipulated in the contract, the party suffering from the breach is entitled only to reasonable compensation which, however, shall not exceed the amount so stipulated in the contract. Whether it be a contract which stipulated a sum of money as being payable on breach of contract or whether it is a contract which does not contain any such clause, the party complaining of breach of contract cannot successfully claim compensation unless he makes out loss of damage referable to such breach. The best measure of reasonable compensation would of course be the extent of actual loss or damage sustained. If the extent of actual loss or damage sustained is capable of being proved that provides a safe guide for the Court to determine the quantum of reasonable compensation. If quantification of loss or damage is not possible, the party who has suffered on account of the breach is not without remedy. He can still request the Court to assess reasonable compensation on the materials available and award the same to him. The words in S. 74 'whether or not actual damage or loss is proved to have been caused thereby' have been employed to emphasise that reasonable compensation can be granted even in a case where extent of actual loss or damage is incapable of proof or not proved. That is why S. 74 of the Act deliberately states that what is to be awarded is reasonable compensation. In a case where the party complaining of breach of the contract has not suffered legal injury in the sense of sustaining loss or damage, there is nothing to compensate him for, there is nothing to recompense, satisfy or make amends. Therefore, he will not be entitled to compensation.
By reading the above mentioned sections it is very clear that suppose if an employee terminates an agreement with an employer before the bond period and there is a stipulated amount specified in the contract to be paid to the employer , then employer could sue the employee for breach of contract and ask for the stipulated amount.
If the stipulated amount is a genuine pre-estimate of the loss then it is called liquidated damages but if the amount specified in the contract is like a threat where the employee is forced to perform the employment contract , then it is a penalty (Savamalai Estates Limited v. Kannayan).
If the court finds that it is a penalty then it will award only an amount which would compensate the real damage the employer will suffer.
For eg if an IT employment contract specifies an amount of 1 crore to paid if it is breached , then court will view it is as a penalty and will only award genuine damages that the employer will suffer (like training costs ). But at the same time if the contract specifies an amount of 50,000 or so, then court might view it is a genuine pre-estimate and might treat them as liquidated damages.
A few cases laws decided by courts in India regarding the validity of bond :
A student entered into a bond with the State of Mysore, which agreed to pay for his education expenses in the U.S.A. The condition for such payment was that after finishing his studies, he would serve the State Government for a period of not less than five years on such salary as the Government may fix. However, if he was not given employment within six months of his return, they should be deemed to have waived their right to claim his services. He would then be free to seek services elsewhere. In the event of a breach of the terms of the bond, the student would be obliged to refund all the expenses incurred by the Government, along with interest. The student finished his studies at the Polytechnic Institute of Brooklyn, New York in September 1949 and obtained diploma from that Institute on June 14, 1950 and with the permission of the State stayed on in the U.S.A. for practical training at his own expense. Before finishing his training he returned for domestic reasons and stayed in India for 6 months and again returned to U.S.A. to finish his training with the States permission. He finished his training and got employed in the U.S.A, claiming waiver by the State Government. It was held by the Supreme Court that staying on for six months in India, after his return on account of domestic reasons and his being permitted to return for finishing his training his training did not indicate that he was waiting for the State to offer him appointment. [M. Sham Singh v. State of Mysore]
In Fertiliser and Chemical Travancore Ltd. v. Ajay Kumar and others, the employer selected three trainees who then signed a bond that they would obtain two years training in the Company and after the training they will put in at least five years service in the company. In case of a breach of these conditions by the trainees, Rs.10,000/- was to be paid as reasonable compensation for the damages likely to be incurred by the employer. But the trainees resigned after five months. The employer filed a case for recovery of damages for breach of contract based on the bond executed by the trainees. High Court of Kerala observed that though the selection of trainees was for absorption into training, the employer was not bound to appoint them on permanent service. But a trainee, who accepts the selection and joins training after entering into bond, binds himself to undergo the training and then accept regular appointment, if offered, for a minimum period of five years. The process of selection itself involves time, energy and expenses for the employer. This is the case of training also. Over and above other expenses during training, each trainee is paid a stipend.
The employer will definitely incur loss when a trainee breaks the conditions of the bond and walks off. The employer is deprived of the expected service of a competent person, for which fresh selection and training may become necessary. Breach of bond by the trainee is, therefore an aspect involving damages to the employer. Only the question of the quantum of the damage then remains to be decided.
In Toshnial Brothers (Pvt.) Ltd. v. E. Eswarprasad & Ors. an employee who was engaged as Sale Engineer committed a breach of the undertaking when he left the services of the plaintiff after serving for 14 months only as against the contracted period of three years. In this case it was held that it becomes unnecessary for the employer to prove separately any post-breach damages. On the other hand, it would suffice to substantiate the fact that the concerned employee was the beneficiary of special favour or concession or training at the cost and expense wholly or in part of the employer and there had been a breach of the undertaking by the beneficiary of the same. In such cases, the breach would per se constitute the required legal injury resulting to the employer, out of the breach or violation by the employees. The High Court, also clarified that while awarding damages as stipulated, the statutory exception for mitigating the quantum of damages will have no bearing.
In Subir Ghosh v. Indian Iron and Steel Company, a Division Bench of the Calcutta High Court had an occasion to deal with the scope of S. 74 of the Indian Contract Act, in the context of an apprentice who under-went training under a contract, which contained a stipulation agreeing to serve the company for a particular period of time and to pay a fixed sum of damages in breach thereof. Division Bench of the Calcutta High Court took the view that since the stipulation in the agreement was for payment of liquidated damages in breach of the Government, it is immaterial to specifically plead or prove damages and that it is open to the management to sue for the recovery of the liquidated damages.
So an employment bond is enforceable in India and before signing such bonds, it is prudent to understand the terms and conditions associated with it.
A lot of people , lament about the bonds after joining the companies. Those people have to understand that they always have the option to refuse the offer and not to join the company. One of the main reason stated by freshers is that the company did not offer them good “technical” work . Companies never promised to give specific work nor they promise to deploy in any specific technology. Anyways most of those people who crib like this could not even basically write few good lines of code. Any IT company spends a lot of money to hire and train resources. It is basically their right to self guard their interests. If we don’t agree to terms and conditions in the employment, nothing stops us from accepting the offer. Let us not accept the offer ,sign the bond and then crib about it.
Companies do send legal notices and file cases in the court for breach of employment agreement. This would mean that if your future employer does background checks on court records for civil and criminal cases , then there is a likelihood of not them hiring you. In certain situations, employers not only file cases against the employee but includes the employer who has hired them also as a party to the dispute. If the employer who has hired you feels the heat, he may ditch you and try to avoid getting in to prolonged judicial proceedings.
At the same time companies do get over board and try to put negative covenants on the contract. Few employers are putting terms such as on termination of the contract, employee should not take up work with their competitors. This is not valid as per Section 27 of the Indian contract Act 1872.
Section 27 of the contract act states
Agreement in restraint of trade void.-Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.
As per Sec 27 of the Indian contract Act, terms and conditions stipulated in the contract are valid only during the existence of the contract. It cannot be enforced after the contract is terminated .
In Superintendance of company vs Kirshna mugai it was stated that A contract in restraint of trade is one by which a party restricts his future liberty to carry on his trade,business or profession in such manner and with such persons as he chooses. A contract of this class is prima facie void, but it becomes binding upon proof that the restriction is justifiable in the circumstances as being reasonable from the point of view of the parties themselves and also of the community . Restrictions on competitions during the period of service are normally valid and indeed may be implied by law by virtue of the servant's duty of fidelity. In such cases the restriction is generally reasonable, having regard to the interest of the employer and does not cause any undue hardship to the employee, who will receive a wage or salary for the period in question. But if the covenant is to operate after the termination of services, or is too widely worded, the Court may refuse to enforce it.
The same guidelines was given by the court in Gujarat Pottling Co.Ltd. & Ors vs The Coca Cola Co. & Ors, Pepsi Foods Ltd. And Others vs Bharat Coca-Cola Holdings Pvt Ltd.
One of the persistent questions that is being asked is whether employer can force the employee to work in the company. The answer is no since specific relief act which can be used to enforce the contracts cannot be used for personal services like employment . The only thing that an employer can do is to sue for damages.
At the same time if the employment did involve some trade secrets and if the court feels that the past employer's concern is genuienly valid then it can give an injunction restraining the employee to take up the work. But this is done in rarest of rare cases .
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