Employment agreement with the negative covenant is valid and legally enforceable if the parties agree with their free consent i.e. without force, coercion, undue influence, misrepresentation and mistake
The first thing to be kept in mind while trying to understand if the bond is valid is ascertaining that the bond is a valid contract under the Indian Contract Act, 1872 i.e. it must be an agreement enforceable by law.
Bonds are applicable only if the company has spent money on the personal grooming and enhancement of the employees, but not just a training that helps employees perform better. Also to prove that the bond is legal, it should not be one sided or just favour the employer.
The court always questions the reasonability of the bond for it to be accepted legally. For e.g. if an employer has developed a particular software and the employee has the knowledge of that software then, refraining that employee via bond from using that software for another employment is legal hence valid. But under unreasonable circumstances, an employment bond is not recognised as legal.
In case an employer has incurred monetary expenses for training the employee for the particular employment, he can claim for damages in respect of the monetary loss that he has incurred.
The employment bond will not be enforceable if it is either one sided, unconscionable or unreasonable. Therefore, 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 for it 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 case by case basis depending upon the issues involved and circumstances of the case.
Case in point: Sicpa India Limited v Shri Manas Pratim Deb, the plaintiff had incurred expenses of INR 67,595 towards imparting training to the defendant. For the same an employment bond was executed under which the defendant had agreed to serve the plaintiff company for a period of three years or to make a payment of INR 200,000. The employee left the employment within a period of two years and to implement the agreement the employer went to the court, which awarded a sum of INR 22,532 as compensation to the employer for breach of contract by the employee. It is vital to note that though the bond lays down a payment of INR 200,000 as compensation for breach of contract, the judge had considered the total expenses incurred by the employer and the employee's period of service while deciding the compensation amount. Since the defendant had already completed two years of service out of the agreed three year period, the judge divided the total expenses of INR 67,595 incurred by the plaintiff into three equal parts for three years period and awarded a sum of INR 22,532 as a reasonable compensation for leaving the employment a year before the agreed time period.
