Validity of Exclusive Jurisdiction Clauses in Employment Contracts: Interpretation of Section 28 of the Indian Contract Act, 1872

ayush chandra

2 weeks ago

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IN THE SUPREME COURT OF INDIA

APPELLATE JURISDICTION

RAKESH KUMAR VERMA … APPELLANT
VS.
HDFC BANK LTD. … RESPONDENT
WITH
HDFC BANK … APPELLANT
VS.
DEEPTI BHATIA … RESPONDENT

J U D G M E N T: DIPANKAR DATTA, J.

CIVIL APPEAL NO. 2282/2025

CIVIL APPEAL NO. 2286/2025

The Supreme Court held that exclusive jurisdiction clauses in employment contracts, which confers exclusive jurisdiction on the courts of a particular location to decides disputes relating to the contract, are not barred by Section 28 of the Contract Act.

Introduction

In a landmark decision, the Supreme Court of India has affirmed the validity of exclusive jurisdiction clauses in employment contracts, provided they comply with certain conditions. This judgment is significant as it clarifies the enforceability of such clauses under Indian law and emphasizes the principle of contractual freedom.

Background

The case involved two employees of HDFC Bank Ltd., Rakesh Kumar Verma and Deepti Bhatia, whose employment was terminated due to allegations of fraud and misconduct. Both employees filed civil suits challenging their termination in courts located in Patna and Delhi, respectively. HDFC Bank contested the jurisdiction of these courts, citing exclusive jurisdiction clauses in the employment contracts that designated the Bombay Courts as the sole forum for dispute resolution.

Legal Provisions

The judgment hinges on the interpretation of Section 28 of the Indian Contract Act, 1872, which declares void any agreement that restricts a party from enforcing their rights through legal proceedings. However, the Court clarified that exclusive jurisdiction clauses are permissible if they meet specific criteria:

Compliance with Section 28: The clause should not absolutely restrict a party from initiating legal proceedings.
Competent Jurisdiction: The designated court must already have jurisdiction under the Code of Civil Procedure (CPC).
Explicit or Implied Agreement: The parties must have either explicitly or implicitly agreed to confer jurisdiction on a specific set of courts.

Supreme Court’s Analysis

The Supreme Court, in its judgment authored by Justice Dipankar Datta and Justice Manmohan, upheld the validity of exclusive jurisdiction clauses in employment contracts. The Court reasoned that such clauses are enforceable as long as they do not violate the provisions of the Contract Act or the CPC. It emphasized that the private sector employs individuals across India, and it is impractical for employers to contest suits in remote locations.

The Patna High Court ruled that the suit filed in Patna was barred due to the exclusive jurisdiction clause in the employment contract. In contrast, the Delhi High Court held that the suit filed in Delhi was permissible, despite the same clause. These conflicting decisions prompted appeals to the Supreme Court, which sought to resolve the legal ambiguity surrounding the enforceability of such clauses.

In its judgment, the Supreme Court, led by Justice Dipankar Datta, clarified that Section 28 of the Indian Contract Act, 1872, does not invalidate exclusive jurisdiction clauses. The Court relied on the precedent set in Swastik Gases (P) Ltd. v. Indian Oil Corpn. Ltd. (2013) 9 SCC 32, which established that such clauses are permissible if they do not absolutely restrict a party’s right to legal recourse. The Court emphasized that these clauses must be clear, unambiguous, and in compliance with statutory provisions to be enforceable.

The Delhi High Court, in its decision, drew upon a ruling from its coordinate bench in the case of Vishal Gupta v. L & T Finance. This judgment was invoked by the employee to argue that when there is a disparity in bargaining power between the employer and the employee, the exclusive jurisdiction clause should not be enforced. The employee contended that such a clause would unfairly disadvantage the weaker party. However, the Supreme Court rejected this argument, asserting that the terms of a valid contract must be honored irrespective of the parties’ relative statuses or strengths.

The Court emphasized the principle of equality in contract law, stating that all contracts, whether commercial, insurance, sales, or employment-related, are legally binding agreements. It stressed that the rights and liabilities of the parties should not be contingent on their status, power, or influence.

The Court reasoned that making exceptions for employment contracts based on the perceived imbalance of power between an employer and an employee would undermine the fundamental principle of equality in contract law. It further clarified that the mere fact of one party being more powerful (likened to a “mighty lion”) and the other being more vulnerable (compared to a “timid rabbit”) does not justify differential treatment in the application of contractual principles.

In a decisive statement, the Court overruled the Vishal Gupta judgment, declaring that the law treats all contracts with equal respect. It affirmed that unless a contract is proven to be vitiated by factors such as fraud, undue influence, or unconscionability, its terms and conditions must be enforced, regardless of the relative strengths or weaknesses of the parties involved. This stance underscores the importance of upholding contractual agreements as they are fundamental to the stability and predictability of legal relationships.

Key Takeaways

Enforceability of Clauses: Exclusive jurisdiction clauses are valid and enforceable if they comply with the three criteria outlined above.
Equality of Contracts: The Court emphasized that employment contracts should not be treated differently from other contracts.
Practical Considerations: Employers can rely on such clauses to centralize litigation, while employees must understand the implications of these clauses before signing contracts.

The Court explained its reasons for upholding the clauses in the present case as follows :

First, Section 28 of the Contract Act does not bar exclusive jurisdiction clauses. What has been barred is the absolute restriction of any party from approaching a legal forum. The right to legal adjudication cannot be taken away from any party through contract but can be relegated to a set of Courts for the ease of the parties. In the present dispute, the clause does not take away the right of the employee to pursue a legal claim but only restricts the employee to pursue those claims before the courts in Mumbai alone.

Secondly, the Court must already have jurisdiction to entertain such a legal claim. This limb pertains to the fact that a contract cannot confer jurisdiction on a court that did not have such a jurisdiction in the first place. The explanation to Section 20 of the CPC is essential to decide this issue. In the instant case, considering that the decision to employ Rakesh and Deepti were taken in Mumbai, the appointment letter in favour of Rakesh was issued from Mumbai, the employment agreement was dispatched from Mumbai, the decision to terminate the services of Rakesh and Deepti were taken in Mumbai and the letters of termination were dispatched from Mumbai, we are convinced that the courts in Mumbai do have jurisdiction.

Lastly, the clause in the contract has clearly and explicitly barred the jurisdiction of all other courts by using the word “exclusive”.

Conclusion

The Supreme Court’s decision reinforces the principle of contractual freedom and the enforceability of exclusive jurisdiction clauses in employment agreements. It balances legal certainty with the need to respect the intentions of contracting parties, provided such intentions are lawful and unambiguous. This judgment serves as a reminder for employers and employees alike to carefully consider the terms of their contracts.

Click here to read the judgment

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