LEGAL LEARNING – SHRI GANPATI JURISTS
Legal Learning: Interpreting Standard Form Employment Contracts
In a significant ruling, the Supreme Court of India laid down principles for interpreting standard form employment contracts—often drafted unilaterally by employers and presented to employees on a “take-it-or-leave-it” basis, highlighting the inherent inequality of bargaining power.
Key Legal Principles Recognized:
1. Presumption of Inequality
Standard form employment contracts are prima facie evidence of unequal bargaining power.
2. Scrutiny by Courts
If the employee alleges coercion, undue influence, or that any clause violates public policy, courts must scrutinize such claims considering the inequality and context.
3. Burden of Proof
If a restrictive covenant is challenged, the employer bears the burden to prove that it is not in restraint of lawful employment or contrary to public policy.
Validity of Restrictive Clauses
Mere inequality does not invalidate such contracts.
Courts assess:
Whether the employee was in a vulnerable position
Whether the penalty clause is disproportionately harsh compared to salary
Whether the clause exceeds actual loss incurred by employer
On Exclusivity and Penalty Clauses:
The Court upheld the legality of a clause requiring a fixed minimum service period, with a monetary penalty for early exit. It ruled such a clause:
Does not restrain future employment, hence not violative of Section 27 of the Indian Contract Act
Serves a legitimate objective of securing commitment in public sector employment, where early resignation leads to high recruitment costs
Conclusion:
A clause that imposes a reasonable financial consequence for early resignation, especially in public service, may not be deemed oppressive or unconscionable.
Such covenants, if proportionate and purposeful, are legally sustainable even in standard form contracts.
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