• Liquidated damages clause in service agreement bond

Respected lawyers,

My friend works for a company that sponsored a full-time higher education for 2 years with salary too. 

He had to sign service agreement bond to serve the company for a minimum of 3 years from the date of completion of the higher education course.

As per the bond terms, the TOTAL amount spent by the company on higher education was around Rs. 6 lakhs. 

In case of breach of the bond, the employee has to pay liquidated damages as follows

leaving before completion of first year : Rs. 16 lakhs
leaving before completion of second year : 10 lakhs
leaving before completion of third year : Rs. 6 lakhs

Given that the company spent only 6 lakh on higher education, is the liquidated damages specified valid ? What is the actual liability to be paid by my friend if he wishes to leave the company.
Asked 7 years ago in Labour

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6 Answers

1) the courts will not automatically grant the liquidated damages merely because it is stipulated in the contract.

2) The court will grant compensation only if the company has actually suffered a loss as a result of the Employee's early termination of contract. .

3) Hence the company which goes to court should prove that it has suffered a loss to the extent of its claim in order to get that amount, though it has been fixed under the contract.

4) in your case the company has spent Rs 6 lakhs on your higher education . further company must have incurred expenses for your accommodation , air fare etc .

5) you have not mentioned the period which your friend served company after return to india

6) your friend should offer to pay Rs 6 lakhs spent by company on his education in case he desires to leave the organisation

Ajay Sethi
Advocate, Mumbai
95205 Answers
7607 Consultations

5.0 on 5.0

1) it is in your friend interest to serve atleast for another 6 months

2) on expiry of 2 years LD is limited to Rs 6 lakhs

3) in such a case his liability to pay LD would be limited to Rs 6 lakhs

4) his salary paid during higher education period of 2 years would not be required to be repaid to the company

Ajay Sethi
Advocate, Mumbai
95205 Answers
7607 Consultations

5.0 on 5.0

A. When a person agreed all the terms and conditions regarding employment under offer by accepting the same by entering into contract( Bond Agreement) that would be binding on him.

B. However, the employee can take some following defense when the employer filed a suit for recovery of liquidated damages under the bond agreement viz.,

1. There was no any training imparted to the employee by the Employer

2, The said agreement was contradiction with the Appointment order's terms and conditions

3. Terms and Conditions mentioned in bond was unreasonable restrictions on person's trade and profession under the Indian Contract Act

C. Moreover, a contract executed between two parties if it was executed by mentioning clauses in faour of one sided that would be null and void under the Indian Contract Act. Hence, most of the bond recitals would establish one side favourable clauses.

D. Mere execution of bond will not protect the employer. The employer has bounden duty to establish the pecuniary loss to claim liquidated damages under the bond agreement.

E. As you aware, bonded labor system was abolished very long back. And in many cases Supreme Court also stated that no employee forcibly employed against their wish.

F. Finally, the amount mentioned in the bond must be reasonable. Example: Employee salary was 10,000/- but bond amount was 3 Lakh is highly illegal.

G. You can issue a legal notice to HR and Reporting Manager to relieve immediately without claiming bond amount because of against to rule of law if it was executed illegally.

B.T. Ravi
Advocate, Bangalore
943 Answers
96 Consultations

5.0 on 5.0

Given that the company spent only 6 lakh on higher education, is the liquidated damages specified valid ? What is the actual liability to be paid by my friend if he wishes to leave the company.

It is legal in India to work with bonds that prescribe a reasonable penalty as compensation in case of breach. Bonds that are prima facie unconscionable are illegal. An employer expends resources to train his employee and hone his skills.A bond for a specific period of employment safeguards the interests of the employer and ensures that he reaps the benefits of his investment in his employee. To this end, bonds stipulate a period of continuous employment. The employee, if he so wishes, is at liberty to discontinue his employment during the specific period. However, he is required to to pay compensation to the employer on doing so.

The courts in India have held in its various judgments that in the event of breach of contract by the employee, the employer shall be entitled to recover damages only if a considerable amount of money was spent on providing training or incurred other expenses for the employee.

T Kalaiselvan
Advocate, Vellore
85404 Answers
2236 Consultations

5.0 on 5.0

Given that the company spent only 6 lakh on higher education, is the liquidated damages specified valid ? What is the actual liability to be paid by my friend if he wishes to leave the company.

The negative covenant in the agreement or employment bond in favor of the employer is not maintainable in law. The courts in India have held in its various judgments that in the event of breach of contract by the employee, the employer shall be entitled to recover damages only if a considerable amount of money was spent on providing training or incurred other expenses for the employee. a and also only to that extent and also proportionately to the extent of the service the employee has completed after the enforcement of the said agreement.

It is pertinent to be cautious while drafting the employment bond because it is mandatory that the conditions mentioned in the employment bond, including the compulsory employment period and amount of penalty are reasonable in order to be valid under the Indian law. The term "reasonable" is not defined under the legislation and, therefore, the meaning has to be determined on a case by case basis depending upon the issues involved and circumstances of the case. In general, the conditions stipulated in the contract should justify that it is necessary to safeguard the interest of the employer and to compensate the loss in the event of breach of contract. Further, the penalty or compulsory employment period stipulated in the contract should not be exorbitant to be considered as valid and to be regarded as reasonable.

The present bond by the employer seems not reasonable hence it may not sustain if your friend decides to approach court in case the employer denies to relieve him after accepting the reasonable compensation for quitting the job.

Your friend may issue a legal notice to the employer questioning the validity of the agreement due its exorbitant or unreasonable nature.

Consult a local advocate and issue a legal notice in case he has any problem in this regard

T Kalaiselvan
Advocate, Vellore
85404 Answers
2236 Consultations

5.0 on 5.0

1. Once the agreement has been executed the clause of liquidated damages binds both the parties. It cannot be that your friend accepts a part of the agreement which suits him but challenges the other part which does not suit him.

2. The company can recover the liquidated damages with interest from your friend by filing a civil suit for recovery of money.

Ashish Davessar
Advocate, Jaipur
30763 Answers
972 Consultations

5.0 on 5.0

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