1. This article examines the following scenario of employment law in India, which has been a subject matter of discussion and debate amongst the stake holders and the legal practitioners:
    • 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?
  1. Section 27 of the Indian Contract Act, 1872 (the "Act") is relevant in this context. This Section reads as under:

"27. Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void."

  1. In the case of S. Golikari vs. Century Spinning & Manufacturing Company1, 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 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 on him by the company and also be liable to pay damages, upheld the validity of the above 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, there is no restraint of trade.
  1. The Supreme Court in the case of M/s Gujarat Bottling Company Limited vs. Coca Cola Company2 summed up the law relating to issue of 'negative covenant' in employment contract with reference to earlier judgments of the apex court. The Supreme Court decided that keeping in view the need to balance the employer's interests with the rights of the employee to livelihood, 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 Act3.
  1. On basis of the above 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.
  1. Damages: Section 73 of the Act provides the general right to compensation for loss or damage caused by breach of contract. Section 73 of the Act reads as under:

"73. When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach."

  1. 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 is not to be given for any remote and indirect loss or damage sustained by reason of the breach.
  1. As per Section 73 of the Act, if an employee (who has left the employment prior to the agreed term) initiates legal action against the employer for recovering the training expenses amount appropriated by the employer, to succeed in such action the employer has to prove that it has actually suffered direct damages (including by way of training costs), equal to or higher than the training expenses amount, on account of the breach committed by the employee.
  1. Liquidated Damages: Section 74 of the Act reads as follows:

"74. When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for."

  1. As per the judicial pronouncements on Section 74 of the Act, in case of breach of a contract:
  1. the party complaining of the breach is entitled to receive reasonable compensation whether or not actual loss is proved to have been caused by such breach;
  2. if the compensation named in the contract is by way of penalty, the party would only entitled to reasonable compensation for the loss suffered, as determined by the court; and
  3. if (i) the compensation named in the contract for such breach is genuine pre-estimate of loss, which the parties knew when they made the contract to likely to result from the breach of it, and (ii) the court is not in a position to estimate the actual loss incurred, then the court may award the compensation that is stated in the contract.
  1. This position was summarized by the Supreme Court of India in the case ONGC Ltd. vs. SAW Pipes Ltd.4 as follows:
  1. "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.
  2. 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.
  3. 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.
  4. 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."
  1. In view of the above, if the training expense amount were structured as a genuine pre-estimate of losses that the employer will incur (liquidated damages), in the event the employee were to leave the employment prior to the agreed period, and 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.

Footnotes

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

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.