Supreme Court Decisions“Contract of Service” or “Contract for Service”?

July 20, 20200
Sushilaben Indravadan Gandhi & Another v. The New India Assurance Company Limited and Ors.
Civil Appeal No.2235 of 2020 | 15.04.2020
In the present case, Dr. Alpesh Gandhi, (hereinafter referred to as “the deceased”) husband of Sushilaben Indravadan Gandhi (hereinafter referred to as “the Appellant”), had entered into a contract dated May 4, 1996 with the Rotary Eye Institute (hereinafter referred to as “the Institute”). The contract was titled Contract for Services as Honorary Ophthalmic Surgeon at Rotary Eye Institute, (hereinafter referred to as “the Contract”).
The insured i.e. the Institute, had taken up a “Private Car B” policy from the New India Assurance Company Limited (hereinafter referred to as “the Respondent”) wherein, the Institute had paid an extra premium for an endorsement IMT-5 (hereinafter referred to as “Insurance Policy“).
The said insurance policy gave an additional accidental personal coverage to unnamed passengers other than the ones insured, his paid driver or cleaner or a person employed by the insured and coming within the scope of Workman Compensation Act, 1923 to the scale of 100% compensation in case of death.
Due to the reckless and negligent driving of the bus driver, the deceased while travelling in a mini-bus owned by the Institute, suffered serious injuries and ultimately succumbed to the injuries.
Therefore, the Appellant filed a petition before the Motor Accidental Claim Tribunal (hereinafter referred to as “the Tribunal“) under Section 166 of the Motor Vehicles Act, 1988 the Respondent, the Institute and the driver of the mini-bus and claimed a compensation of Rs.1 Crore. The Tribunal held that the employment arrangement between the deceased and the institute to be a ‘Contract for Service and therefore the deceased was not an employee of the institute.
For the aforesaid reason, the Tribunal directed the Respondent, the institute and the driver of the mini-bus to pay a compensation of Rs. 37,63,100/- along with interest at the rate of 8% p.a.
Aggrieved by the order of the Tribunal, an appeal was filed by the Respondent before the High Court of Gujarat, wherein a the Court relied upon the limitation of liability clause under the Insurance Policy which exempted the Respondent from any liability to a third party, wherein the death has arisen out of and in the course of the employment of such person.
Additionally the Court held that since the contract between the insurance company and the deceased was a Contract of Service’, the liability of insurance company towards the deceased was limited to the extent of Rs.50,000/-.
Being distressed by the impugned decision of the High Court of Gujarat, the Appellant filed an appeal before the Supreme Court for increasing the amount of compensation.
The following issues were considered before the Supreme Court:
1. Whether the deceased surgeon could have been said to be an employee of the insured hospital?
2. Whether the limitation of liability clause was to be applied in favor or against the insurance company on the basis of determination of the contractual arrangement between the deceased surgeon and insured hospital?
The Court referred to various judgments which laid down the tests to differentiate between a Contract for Service and a Contract of Service. The Court meticulously evaluated precedents for this aspect and observed that there are no established tests that can be practiced, and that each and every fact would be examined for drawing a conclusion on this aspect.
Further, the Court observed that the initial tests where an employer exercises “control” over the person engaged cannot be enforced in isolation. Depending on the case, other factors also need to be taken into a consideration.
The Court referred to paragraph no. 12 of Dharangadhara Chemical Works Ltd. v. State of Saurashtra 1957 SCR 158 and observed as under:
“After setting out the definition of “workman” under Section 2(s) of the said Act, this Court referred to the earliest test laid down to distinguish between a contract of service and a contract for service, namely, that whereas in the latter case, the master can order or require what is to be done, in the former case, he can not only order or require what is to be done, but also how it shall be done.”
“The principle which emerges from these authorities is that the prima facie test for the determination of the relationship between master and servant is the existence of the right in the master to supervise and control the work done by the servant not only in the matter of directing what work the servant is to do but also the manner in which he shall do his work… The proper test is whether or not the hirer had authority to control the manner of execution of the act in question.”
The preliminary test for establishing relationship between a master and servant is the subsistence of the master’s right to supervise and control the work not only by giving directions what work the servant is to do, but also in what manner servant shall do his work.
However, the nature or extent of control which is necessary to ascertain the relationship between an employer and his employee must essentially vary from business to business and is by its very nature inept of an accurate definition.
The Court also referred to paragraph no. 7 of Silver Jubilee Tailoring House v. Chief Inspector of Shops & Establishments (1974) 3 SCC 498 wherein it was stated that:
“The rate depends upon the skill of the worker and the nature of the work. When cloth is given for stitching to a worker after it has been cut, the worker is told how he should stitch it. If he does not stitch it according to the instruction, the employer rejects the work and he generally asks the worker to restitch the same. When the work is not done by a worker according to the instructions, generally no further work would be given to him. If a worker does not want to go for work to the shop on a day, he does not make any application for leave, nor is there any obligation on his part to inform the employer that he will not attend for work on that day. If there is no work, the employee is free to leave the shop before the shop closes.”
That in many capable employments, relying upon the test of control over the manner of work, to ascertain a master-servant relationship, would be impractical. There cannot be one single or magic formula to determine whether a contract is one of service or for service. The Court can only perform a balancing operation weighing up the factors.
The Court observed in Paragraph 24 that:
“in a society which has moved away from being a simple agrarian society to a complex modern society in the computer age, the earlier simple test of control, whether or not actually exercised, has now yielded more complex tests in order to decide complex matters which would have factors both for and against the contract being a contract of service as against a contract for service.
The early ‘control of the employer’ test in the sense of controlling not just the work that is given but the manner in which it is to be done obviously breaks down when it comes to professionals who may be employed.”
The test to determine if an employee is an integral part of the employer’s business or is just an adjunct thereof is another crucial assessment in order to undertake that on which side of the line contract is made.
The three-tier test laid down by some of the English judgments, namely, whether wage or other remuneration is paid by the employer; whether there is a sufficient degree of control by the employer and other factors would be a test elastic enough to apply to a large variety of cases.”
“The test laid down by the Privy Council in Lee Ting Sang v. Chung Chi-Keung [1990] 2 A.C. 374, namely, is the person who has engaged himself to perform services performing them as a person in business on his own account, is also an important test, this time from the point of view of the person employed, in order to arrive at the correct solution.”
The Court observed that there is no, one particular test that can be universally applied which can ever give the correct result. It is a combination of all applicable tests taken on the whole of the fact situation given in the case that would eventually yield, predominantly in a complex hybrid situation, whether the contract to be construed is a contract of service or a contract for service.
Depending on the fact situation of each case, all the aforesaid factors would not necessarily be relevant, or, if relevant, be given the same weight. Ultimately, the Court can only perform a balancing act weighing all relevant factors which point in one direction as against those which point in the opposite direction to arrive at the correct conclusion on the facts of each case.”
Therefore, in the present case, the Court applied the balancing process to study the contractual arrangement between the institute and the deceased surgeon and held that the factors which make the doctor’s contract as a “Contract for Service exist over the factors which would point in the contrary direction.
Thus, the Court observed that as per the terms of the contract, the deceased was not a regular employee but rather an independent professional of the Institute.
To conclude, the Court relied on the Principle of Contra Porefentum while construing the exemption of liability clause. The principle fundamentally entails that document which is ambiguous, should be interpreted against the party who prepared the document.
The Court reiterated the definite well-settled principles in this respect, comprising of:
1. an insurance contract obliges uberrima fides e. good faith on the part of the assured, and the contract is likely to be interpreted contra proferentumalongside the company in case of vagueness as discussed in General Assurance Society Ltd. v. Chandumull Jain (1966) 3 SCR 500 wherein the Supreme Court held that: 
“A contract of insurance is a species of commercial transactions and there is a well-established commercial practice to send cover notes even prior to the completion of a proper proposal or while the proposal is being considered or a policy is in preparation for delivery…In other respects there is no difference between a contract of insurance and any other contract except that in a contract of insurance there is a requirement of uberrima fides i.e. good faith on the part of the assured and the contract is likely to be construed contra proferentem that is against the company in case of ambiguity or doubt.”
2. if there is any ambiguity or a term which is capable of two probable interpretations, one in favoring the insured should be allowed, consistent with the purpose for which the policy is taken viz. to cover the risk on the occurrence of a certain event United India Insurance Co. Ltd. v. Pushpalaya Printers (2004) 3 SCC 694
3. This principle must be worked only in cases of actual uncertainty and not to make an ambiguity. Even when a statement by itself is uncertain, if its meaning becomes apparent by looking at the whole policy, then this principle is not required to be applied. Further, where if one meaning is given to a clause, the entire policy becomes clear, the policy should be understood accordingly. Industrial Promotion & Investment Corpn. Of Orissa Ltd. v. New India Assurance Co. Ltd. (2016) 15 SCC 315
In this present case, the Respondent asserted that the expression ‘employment’ in the exception of liability clause should be taken to mean broadly.
Therefore, the Court held that:
  • the words “in the course of” prior to “employment” denoted that the employment can just be of that person who is a regular employee of the employer; and
  • even assuming that there is an ambiguity or uncertainty, the contra proferentum rule must be applied which makes it apparent that the “employment” refers only to regular employees of the Institute.
The Court set aside the judgment delivered by the High Court of Gujarat and restored that of the Tribunal.
This decision of the Supreme Court brings clarity towards differentiating between ‘Contract for Service’ and ‘Contract of Service’, mainly in the context of commitment of professionals for services. The Court has explained that the relationship between the employer and employee should not be limited to determining the control of the employer over the employee, but the same will depend on the specific factual scenario, interpretation of contractual terms between the parties and harmonizing out the various aspects.
The Court has also held that interpretation of contracts will depend on the context in which the legislation is being applied and those in cases of ambiguity, a beneficial legislation needs to be interpreted in favor of the insured.
The present decision provides much-needed contemporary contextual considerations to be applied by the 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.
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