"Those words are there as a heading to cl. 33. But I do not regard them as more than a label or signpost, and not as contributing to the interpretation of the clause"
The Supreme Court of India ("Supreme Court") in Sushilaben Indravadan Gandhi & Anr. v. New India Assurance Company Limited & Ors.1, has expounded various tests to differentiate between 'contract of service' and 'contract for service'. In the instant case, the Supreme Court was adjudicating upon an insurance claim wherein it held that there are no fixed parameters for ascertaining the true nature of an employment contract, as each case has to be dealt in light of its own facts and circumstances. The present judgment discusses cases decided across different jurisdictions in order to arrive at an informed conclusion, which may prove to be an important milestone for all times to come.
In many contracts, there is a conceivable distinction between the title assigned to it and the wordings of contractual terms. This distinction may give rise to ambiguity and make the interpretation of such contractual terms, arduous and complex. In such situations, the only way to arrive at a plausible interpretation is through a microscopic analysis of contractual terms. Thus, it is the terms of the contract and not the macro labels assigned to it, which defines the intention of the contracting parties.
In the aforesaid context, employment contracts have been analysed by courts across jurisdictions to ascertain the nature of the contractual terms to be 'of service' and 'for service'. While the former is a type of contract defining regular employment, the latter represents the contract of independent workers being hired on a temporary basis. Different parameters have been applied by different courts, including Indian courts to deal with such ambiguity for ascertaining the nature of employment and conclude on legal consequences thereof.
Brief Facts of the Case
The husband of Appellant No. 1 ("Mr. Gandhi") was travelling along with other staff members of the Rotary Eye Institute ("Institute") in a mini-bus owned by the Institute. Mr. Gandhi had entered into a contract for services, dated 04.05.1996 ("Employment Contract") with the Institute, as an Honorary Ophthalmic Surgeon. The Employment Contract contained the terms relating to the services being provided by Mr. Gandhi.
In the backdrop of the aforesaid event, it is pertinent to mention that the Institute had taken a comprehensive Insurance Policy on 17.04.1997 from New India Assurance Company Limited ("Insurer") which was valid from 24.04.1997 till 20.04.1998 ("Insurance Policy") The Insurance Policy excluded the liability of the Insurer to pay compensation to the employees of the insured i.e. the Institute in the present case. While travelling, the mini-bus met with an accident resulting in the death of Mr. Gandhi.
The Appellants filed a petition under Section 166 of the Motor Vehicles Act, 1988 before the Motor Accident Claims Tribunal ("Tribunal") against the driver of the min-bus, Institute and the Insurer claiming compensations for the death of Mr. Gandhi. On adjudication, the Tribunal granted a total compensation of Rs. 37,63,100/- along with interest at the rate of 8% p.a., in favour of the Appellant, while holding that the driver's rash and negligent driving led to the death of Mr. Gandhi. The Tribunal also held all the Respondents to be jointly and severally liable to pay the aforesaid amount.
Thereafter, the Respondents approached the Gujarat High Court against the decision of the Tribunal wherein the Gujarat High Court, vide its order dated 26.07.2018 ("Impugned Judgment"), held that the Employment Contract of Mr. Gandhi with the Institute was in the nature of employment rather than being a contract for services. This resulted in limiting the liability of the Insurer to pay compensation of only Rs. 50,000/- to the Appellant as per Regulation 27 of the General Regulations of the Indian Motor Tariffs dated 01.08.1989 while reading the same with the terms of the Insurance Policy.
Issue Determined by the Supreme Court
While appreciating the facts of the case, the Hon'ble Supreme Court decided the matter while considering the following issue:
- Whether the Employment Contract entered by the husband of the Appellant i.e. Mr. Gandhi with the Institute can be categorised as 'Contract of Services' or 'Contract for Services'?
- Whether the term "employment", as mentioned under Clause 1(a) under Section II of the Insurance Policy, be construed to have a wider meaning or is it to be interpreted strictly?
Summary of Findings
Tests/Parameters for assessing the nature of a contract
While dealing with the first issue, the Supreme Court discussed a plethora of judgments before dealing with the factual matrix of the case. Such judgments included cases from India, England and the United States. The crux of the discussion in these cases related to the principles applied to differentiate between a 'contract of service' and a 'contract for services' in different common law jurisdictions. While doing so, the deliberation began with the applicability of the 'test of control' with an intricate analysis of cases such as the Dharangadhara Case2 and Silver Jubilee Case3. While discussing the aforesaid judgments, the Supreme Court highlighted the following tests for assessing the true nature and import of the contract :
- The existence of a right of a master to not only direct the servant to work but also the manner in which the work is needed to be done.4
- Economic control over the worker's subsistence, skill and continued employment.5
- Whether the person engaged has done so in business of his own account.6
The Supreme Court further highlighted the critical analysis made in such judgments which are as follows:
- The test of control cannot be universally applied, especially in cases of skilled labour, as there are cases that have contracts, where the master does not control the manner in which the work is to be done.7
- There was a need to apply more complex tests than the 'test of control' which would also include ownership of the tools, the chance of profit and risk of loss.8
The Supreme Court referred to its observations made in Silver Jubilee Case, which apart from the earlier judgments passed by Indian courts, had references and reiterations of judgments passed by English Courts as well. Analysis of the Silver Jubilee Case and several other judgments concluded that the 'test of control' cannot be the sole test for determining whether the nature of a contract is that of 'of service' or 'for service'.
The Supreme Court further held that the society has moved from a simple agrarian society to a more complex modern society which demands complex tests rather than an earlier simple 'test of control'. It observed that the 'three-tier test', as propounded by English Courts, which includes parameters such as type of consideration, degree of control and other factors can apply to a variety of cases. On the 'economic reality test', the Supreme Court observed that such a test can apply to cases where one must observe whether the worker is working for himself or for his employer. A similar view has been given by the Supreme Court on the parameters of whether the employer economically controls worker's skill, subsistence and continuation of employment. Ultimately, the Supreme Court concluded that instead of assigning outcome-determinative significance to a particular test, a combination of all the applicable tests can be applied in the given facts of the case to yield an outcome on the determination on the nature of a contract being 'of service' or 'for service'. Notably, the courts can only exercise a "balancing act" of comparing the relevant factors pointing in one direction as against the factors pointing in the opposite direction, to arrive at a correct conclusion.
Coming to the factual matrix of the case, the Supreme Court applied the balancing process in the facts and circumstances of the present case by comparing the provisions of the Employment Contract which were in the nature of provisions of 'Contract of Service' against the provisions of 'Contract for Service'. While doing the so, the Supreme Court observed that in the present facts of the case, the terms in the Employment Contract for 'Contract of Service' outweighed the terms of 'Contract for Service' in the Employment Contract. Finally, the Supreme Court, while applying the 'economic reality test', adjudicated that Mr. Gandhi was an "independent professional" being hired by the Institute.
Reiterating the well-settled Principals of Contra Proferentem
While deciding the second issue, the Supreme Court discussed the well settled principles of Contra Proferentem9, while stating that clauses related to insurer's exemption from its liabilities are to be construed against the insurer in case of an ambiguity. The Supreme Court relied on the case of General Assurance Society Ltd. v. Chandumull Jain10 and United India Insurance Co. Ltd. v. Pushpalaya Printers11, which explained the principle to be a rule of interpretation which interprets the terms of a contract of insurance against the insurer, in cases of ambiguity in such terms, thereby interpreting terms in favour of the insured. Similar position of law, as laid down in United India Insurance Co. Ltd. v. Orient Treasures (P) Ltd.12 and Industrial Promotion & Investment Corporation of Orissa Ltd. v. New India Assurance Co. Ltd.13 was also discussed by the Supreme Court.
The Supreme Court further discussed the observations made in the case of BHS Industries v. Export Credit Guarantee Corporation Ltd.14 wherein it was held that a contract of insurance, being a contract formulated in utmost good faith, has to be strictly construed and to be read as a whole by neither adding any further terms nor subtracting anything from its provisions. The inapplicability of the principle of Contra Proferentem in commercial contracts was also elucidated with the reason that commercial contracts are bilateral in nature15.
In the light of the aforesaid discussion, the Supreme Court came to a finding that the word "employment", as mentioned under Clause 1(a) of Section II of the Employment Contract, does not have any ambiguity. Such a conclusion was arrived at by reading the words "in the course of" prefixed to the term "employment" mentioned in the aforesaid clause, thereby leaving no doubt that the liability of the Insurer was not excluded against Mr. Gandhi as he was found as a non-regular employee of the Institute.
After a thorough discussion on the evolution related to the assessment of nature of a contract along with a reference to the principle of Contra Proferentem, the Supreme Court adjudicated the issues in favour of the Appellant, set aside the Impugned Judgment of the Gujarat High Court and restored the order passed by the Motor Accident Claims Tribunal.
Going forward, the 'balancing process' adopted by the Supreme Court in the present case will surely have significant jurisprudential value in deciding cases relate to employment contracts. It is evident that the Supreme Court has acknowledged the complexities involved in an employer-employee relationship, and in view of the same, the Court has laid down that no straight-jacketed formula can be applied to determine the nature of employment contracts. Thus, it is noteworthy that the Supreme Court had neither rejected nor glorified a particular test and has only called for a balanced case-specific approach to ascertain the nature of a contract.
1. Sushilaben Indravadan Gandhi & Anr. v. New India Assurance Company Limited & Ors. 2020 SCC OnLine SC 367, dated 15.04.2020
2. Dharangadhara Chemicals Works Ltd. v. State of Surashtra 1957 SCR 158
3. Silver Jubilee Tailoring House v. Chief Inspector of Shops & Establishments (1974) 3 SCC 498
4. Ibid 3, Mersey Docks and Harbour Board v. Coggins & Griffith (Liverpool) Ltd. (1952) SCR 696
5. Hussainbhai v. Alath Factory Thezhilai Union (1978) 4 SCC 257
6. Lee Ting Sang v. Chung Chi-Keung  2 A.C. 374
7. Cassidy v. Ministry of Health (1951) 1 All ER 574, Market Investigations Ltd. v. Minister of Social Security (1968) 3 All ER 732
8. Montreal v. Montreal Locomotive Works Ltd. etc. (1947) 1 DLR 161, U.S. v. Silk 331 US 704
9. A Doctrine which provides for interpretation of ambiguous terms of a Standard Contract, against the interest of the promisor.
10. General Assurance Society Ltd. v. Chandumull Jain (1966) 3 SCR 500
11. United India Insurance Co. Ltd. v. Pushpalaya Printers (2004) 3 SCC 694
12. United India Insurance Co. Ltd. v. Orient Treasures (P) Ltd. (2016) 3 SCC 49
13. Industrial Promotion & Investment Corporation of Orissa Ltd. v. New India Assurance Co. Ltd. (2016) 15 SCC 315
14. BHS Industries v. Export Credit Guarantee Corporation Ltd. (2015) 9 SCC 414
15. Export Credit Guarantee Corporation of India v. Garg Sons International (2014) 1 SCC 686
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