Contract of service or contract for service - The Supreme Court Test

In Sushilaben Indravadan Gandhi v. The New India Assurance Company Limited,[1] the Supreme Court crystallised and clarified the tests to differentiate between a contract of service and a contract for service, while also interpreting an exemption of liability clause in an insurance policy.

Factual Background

Respondent No. 3 viz. the Rotary Eye Institute, Navsari (“Institute”) subscribed to a Private Car ‘B’ insurance policy offered by Respondent No. 1 viz. New India Assurance Company Limited (“Insurance Company”) on April 17, 1997 (“Insurance Policy”). The Insurance Policy, which inter alia covered death of or bodily injury to any person including occupants in the relevant motor car, expressly excluded the Insurance Company’s liability in cases of death or injury arising out of and in the course of the employment of the person so affected, by the Institute. The Insurance Policy also provided for compensation on a particular scale for bodily injury sustained by any passenger other than inter alia a person in the employ of the Institute, coming within the scope of the Workmen Compensation Act, 1923, and engaged in and upon the service of the Institute at the time when such injury is sustained.

Dr. Alpesh I. Gandhi (“Deceased”), a surgeon, had entered into a contract dated May 4, 1996 with the Institute. The contract was titled ‘Contract for Services as Honorary Ophthalmic Surgeon at Rotary Eye Institute, Navsari’ (“Contract”). On June 9, 1997, the Deceased met with a fatal accident while travelling in a minibus owned by the Institute due to which he was seriously injured and ultimately succumbed to his injuries.

The Deceased’s wife (Appellant No. 1) filed proceedings before the Motor Accident Claims Tribunal (“Tribunal”), claiming compensation for her husband’s death, against the driver of the minibus, the Institute, and the Insurance Company. The Insurance Company denied its liability on the premise that the Deceased was an employee of the Institute and was not covered for death or injury arising out of and in the course of his employment. The Tribunal found that the driver was rash and negligent in driving the vehicle, and that since the Deceased was employed under a contract for service, he was not an employee of the Institute. Accordingly, the Tribunal awarded compensation of INR 37,63,100/- plus interest to Appellant No. 1, to be borne by the driver, the Insurance Company, and the Institute, jointly and severally. In appeal, the Gujarat High Court found that the Contract was a contract of service, capped the liability of the Insurance Company to INR 50,000/- (as per the General Regulations of the Indian Motor Tariffs) and directed the other respondents to bear the balance amount.

Contract of service versus contract for service

Precedents analysed by the Supreme Court

The Supreme Court examined the earlier tests formulated by the Court (from as far back as 1957) for determining whether persons who supply different kinds of goods or services could be said to be in the employ of the employer. These judgments by and large dealt with cases relating to labour legislations such as the Industrial Disputes Act, 1947. Some of the tests, which the Supreme Court took note of, are extracted below.

  1. In Dharangadhara Chemical Works Ltd. v. State of Saurashtra, [2] a four-judge bench of the Supreme Court held that the prima facie test for the determination of the relationship between a master and servant is the existence of the master’s right to supervise and control the work not only by directing what work the servant is to do, but also the manner in which the servant shall do his work. However, the nature or extent of control which is requisite to establish the relationship between an employer and his employee must necessarily vary from business to business and is by its very nature incapable of a precise definition.
  2. In Silver Jubilee Tailoring House v. Chief Inspector of Shops & Establishments, [3] a three-judge bench of the Supreme Court held that an employer-employee relationship existed between a tailoring shop and persons employed by the owner of the shop for stitching. The fact that machines on which sewing took place were supplied by the proprietor, as well as his right to reject sub-standard work, were found to outweigh the fact that such persons did not have to work exclusively for the owner of the shop and that they were not obliged to work for the full day.
  3. The Supreme Court also held, in Silver Jubilee (supra), that in many skilled employments, applying the test of control over the manner of work, to establish a master-servant relationship, would be unrealistic. There can be no single or magic formula to decide whether a contract is one for service or of service. The court can only perform a balancing operation weighing up the factors which point in one direction and balance them against those pointing in the opposite direction.[4]
  4. The economic reality of control test was recognised by a three-judge bench of the Supreme Court in Hussainbhai v. Alath Factory Thezhilali Union[5] wherein it was held that the true test is where a worker or a group of workers labours to produce goods or services which are for the business of another person, then he is the employer of such worker/ group of workers. The Supreme Court found that such an employer has economic control over the workers’ subsistence, skill and continued employment and they would be virtually laid-off if the employer ceased to use their goods or services for any reason. The presence of intermediate contractors with whom alone the workers have an immediate or direct relationship ex contractu was held to be of no consequence, when it could be discerned upon lifting the veil that the contractor was not the real employer.

Tests crystallised in the present judgment

In the present case, the Supreme Court held the following:

  1. The simple test of ‘control of the employer’ i.e. whether the employer controls not just the work but also the manner in which it is done, is only one in a series of factors to be examined to determine if the contract is of service or for service, in the complex modern society.
  2. Whether the person employed is integrated into the employer’s business or is a mere accessory thereof is another important test to determine which side of the line the contract falls on.
  3. Various factors laid down by English courts are also elastic enough to apply to a large variety of cases including whether the employer is paying the person in question wages or other remuneration and whether there is a sufficient degree of control by the employer.
  4. The test of who owns the assets with which the work is to be done, and/or who ultimately makes a profit or a loss, so that one may determine whether a business is being run for the employer or on one’s own account, is also a useful test.
  5. The economic reality test viz. whether the employer has economic control over the workers’ subsistence, skill and continued employment can also be applied to determine whether a particular worker works for himself or for his employer.
  6. Whether the person who has engaged himself to perform services is doing so on his own account is also an important test from the point of view of the person employed.
  7. No one test of universal application can yield the correct result. A “conglomerate of all applicable tests taken on the totality of the fact situation in a given case” would be required to determine whether a given contract is one of service or for service.
  8. All the aforesaid factors would not necessarily be relevant always. The court can only perform a balancing act by weighing some of the factors which point in one direction against those pointing in the opposite direction. The context in which a finding is to be made assumes great importance. If the context is one of a beneficial legislation being applied to weaker sections of society, the balance tilts in favour of declaring the contract to be one of service. Where the context is other than of a beneficial legislation or only in the realm of contract that would point towards a contract for service then, other things being equal, the court may tilt the balance in favour of construing the contract as being one for service.


The Contract is a ‘contract for service’

On perusing the Contract to gather the intention of the parties, the Supreme Court applied the economic reality test and concluded that the terms of the Contract made it clear that it is one for service and that the Deceased was an independent professional and not an employee of the Institute.

Some of the factors considered by the Court while arriving at the above findings are as follows:

  1. The Contract clearly provided that the Deceased shall no longer remain as a regular employee of the Institute, making it clear that his services were no longer seen as that of a regular employee but as an independent professional.
  2. The remuneration under the Contract was described as an honorarium, which was consistent with the position that the Deceased was an independent professional working with the Institute.
  3. The Deceased was given a share of the spoils insofar as the Contract entitled him to receive a percentage of the earnings of the Institute for certain activities.
  4. The Contract was on equal terms as the duration was for three years, extendable only by mutual consent.
  5. The Contract could not be terminated in the usual manner, as with other regular employees of the Institute, but only upon notice by either side.
  6. Even though the leave rules of the Institute were applicable to the Deceased, since he was not a regular employee, the Contract provided that he was not entitled to any financial benefit as might be applicable to other regular employees of the Institute.
  7. The fact that the Contract provided for arbitration of disputes between the Deceased and the Institute by the Managing Committee of the Institute showed that their pact was not that of master and servant but of employer and independent professional.

The Court found that certain provisions did point in the direction of a contract of service viz. that the employment was full-time and the Deceased could do no other work, the Deceased was to work on all days except weekly offs and holidays given by the Institute, he was governed by the conduct rules of the Institute and the Contract could be terminated by the Institute at any time without compensation in the event of a proven case of indiscipline or breach of trust. However, the Court found that the factors which made the contract one for service outweighed these factors.

In case of ambiguity, exemption of liability clauses in insurance contracts are to be construed contra proferentum

The Supreme Court also relied on the principle of contra proferentum while interpreting the exemption of liability clause. The principle essentially requires that where the words of a document are ambiguous, they should be construed against the party who prepared the document.

The Court reiterated certain well-settled principles in this regard, including that (a) an insurance contract requires uberrima fides i.e. good faith on the part of the assured, and the contract is likely to be interpreted contra proferentum against the company in case of ambiguity;[6] (b) if there is any ambiguity or a term is capable of two possible interpretations, one beneficial to the insured should be accepted, consistent with the purpose for which the policy is taken viz. to cover the risk on the happening of a certain event;[7] (c) this principle must be used only in cases of real ambiguity and not to create an ambiguity. Even where a clause by itself is ambiguous, if its meaning becomes clear by looking at the whole policy, then there is no room for the application of the principle. Further, where if one meaning is given to a clause, the rest of the policy becomes clear, the policy should be construed accordingly.[8]

In the present case, the Insurance Company contended that the expression ‘employment’ in the exemption of liability clause should be construed widely. The Supreme Court held that (a) the words “in the course of” before “employment” indicated that the employment can only be that of a person regularly employed by the employer and (b) even assuming that there is an ambiguity or doubt, the contra proferentum rule must be applied which makes it clear that that the “employment” refers only to regular employees of the Institute.

Concluding remarks

The Supreme Court proceeded to set aside the judgment of the Gujarat High Court and restored that of the Tribunal. Though the contract in the present case was fairly specific, there were factors which also pointed it in the direction of being a contract of service. Therefore, this judgment serves as a useful and contemporary precedent for courts while performing the balancing act required in cases of such nature. The wider rationale adopted by the Supreme Court in the present case is a welcome precedent, given that most prior decisions dealt with the concept of a contract of service vis-à-vis a contract for service in the context of labour laws. The present decision provides much-needed contemporary contextual considerations to be applied by courts when considering purely contractual matters and crystallises the tests to be applied when deciding whether a contract is one of service or for service.

[1] Judgement dated 15th April 2020 in Civil Appeal No. 2235 of 2020

[2] 1957 SCR 152

[3] (1974) 3 SCC 498

[4] Ibid

[5] (1978) 4 SCC 257

[6] General Assurance Society Ltd. v. Chandumull Jain (1966) 3 SCR 500

[7] United India Assurance Co. Ltd. v. Pushpalaya Printers (2004) 3 SCC 694

[8] Industrial Promotion & Investment Corpn. Of Orissa Ltd. v. New India Assurance Co. Ltd. (2016) 15 SCC 315