Sushilaben Indravadan Gandhi vs The New India Assurance Company … on 15 April, 2020


Supreme Court of India

Sushilaben Indravadan Gandhi vs The New India Assurance Company … on 15 April, 2020

Author: Rohinton Fali Nariman

Bench: Rohinton Fali Nariman, A.S. Bopanna

                                                                           REPORTABLE
                                     IN THE SUPREME COURT OF INDIA

                                      CIVIL APPELLATE JURISDICTION

                                     CIVIL APPEAL NO. 2235 OF 2020
                              (ARISING OUT OF SLP (CIVIL) NO.1170 OF 2019)


           SUSHILABEN INDRAVADAN GANDHI & ANR.                        …APPELLANTS

                                                      VERSUS


           THE NEW INDIA ASSURANCE
           COMPANY LIMITED & ORS.                                     ...RESPONDENTS


                                                  JUDGMENT

R.F. Nariman, J.

1. Leave granted.

2. On 09.06.1997, the husband of the Appellant No.1, who was a

surgeon, was travelling in a mini-bus that was owned by the Rotary

Eye Institute, Navsari (the Respondent No. 3 herein) along with other

medical staff of the said Institute. The mini-bus had been driven with

excessive speed, as a result of which at around 8.30 P.M. when the

mini-bus was passing through the Gandevi-Navsari Road, near Kabhar

Patiya, the driver of the mini-bus lost control and the vehicle turned
Signature Not Verified

Digitally signed by
SUSHMA KUMARI
BAJAJ
Date: 2020.04.15
turtle. The husband of Appellant No.1 was seriously injured and
14:26:45 IST
Reason:

ultimately succumbed to his injuries.

1

3. On 17.04.1997, the Respondent No. 3 had entered into a

comprehensive Private Car ‘B’ Policy from the New India Assurance

Company Limited (the Respondent No. 1 herein). The aforesaid

Insurance Policy was valid from 24.04.1997 till 20.04.1998. The

limitation of liability clause which has been relied upon by the

impugned judgment of the High Court is set out as follows:

“SECTION II LIABILITY TỌ THIRD PARTIES

1. Subject to the limits of liability as laid down in the
Schedule hereto the Company will indemnify the
insured in the event of an accident caused by or
arising out of the use Motor Car against all sums
including claimant’s costs and expenses which the
insured shall become legally liable to pay in respect of

(a) death of or bodily injury to any person including
occupants carried in the motor car (provided such
occupants are not carried for hire or reward) but
except so far as it is necessary to meet the
requirements of Motor Vehicles Act, the Company shall
not be liable where such death or injury arises out of
and in the course of the employment of such person
by the insured.”

In addition, endorsement IMT-5 states:

“I.M.T.5. Personal Accidental cover to unnamed
passengers other than the insured and his paid driver
or cleaner.

In consideration of the payment of an additional
premium it is hereby understood and agreed that the
Company undertakes to pay compensation on the
scale provided below for bodily injury as hereinafter
defined sustained by any passenger other than the
insured and/or his paid driver attendant or cleaner
and/or a person in the employ of the insured coming
within the scope of the Workman Compensation Act,

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1923 and subsequent amendments of the said Act and
engaged in and upon the service of the insured at the
time such injury is sustained whilst mounting into
dismounting from or travelling in but not driving the
motor car and caused by violent accidental external
and visible means which independently of any other
cause shall within three calendar months of the
occurrence of such injury result in:

Scale of
Compensation

a) Death only 100%

b) Total and irrecoverable loss of:

i) Sight of both eyes or of the 100%
actual loss by physical separation
of the two entire hands or two
entire feet or of one entire hand
and one entire food or of such
loss of one eye and such loss of
one entire hand or of one entire
foot

ii) Use of two hands or two feet, 100%
or of one hand and one foot or of
such loss of sight of one eye and
such loss of use of one hand or
one foot.

c) Total and irrecoverable loss of:

i) the sight of one eye or the 100%
actual loss by physical separation
of one entire hand or one entire
foot

ii) Use of a hand or a foot without 100%
physical separation

There is no dispute that additional premium was paid for endorsement

IMT-5, which will therefore be applicable in the facts of this case. It is

also undisputed that endorsement IMT-16, which deals with a general

liability to employees of the insured who may be travelling in the

employer’s car, other than paid drivers, may also be covered on

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payment of an additional premium. It is undisputed on the facts of this

case that as far as endorsement IMT-16 is concerned, no such

additional premium was paid.

4. The husband of the Appellant No.1, Dr. Alpesh I. Gandhi, had entered

into a contract for services, dated 04.05.1996, as an Honorary

Ophthalmic Surgeon at the aforesaid Respondent No. 3 institute.

Since the important question to be determined in this appeal is

whether Dr. Alpesh I. Gandhi can be said to be employed by the

Respondent No. 3 or has only entered into a contract for services with

the Respondent No. 3 as an independent professional, the terms of

the contract being important are set out herein in full:

“SUB: CONTRACT FOR SERVICES AS HONORARY
OPHTHALMIC SURGEON AT ROTARY EYE
INSTITUTE, NAVSARI.

This contract on the captioned subject entered into
between Dr. ALPESH I. GANDHI, hereinafter referred
to as AIG and the Rotary Eye Institute, Navsari,
hereinafter referred to as REIN, has become effective
from dated 01-04-1996 and the same is governed by
the following terms and conditions.

I.DESIGNATION: Honorary Ophthalmiç Surgeon.

II.HONORARIUM: Rs. 4000/- P.M

III.OTHER COMPENSATIONS: That for the Honorary
Services to REIN, AIG will be compensated as follows:

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i. AIG will be paid 10% of the appropriate percentage
of the total money set aside every month out of the
OPD collection at the REIN;

ii. AIG will also be paid 10% of the appropriate
percentage of the total money set aside every month
out of the Operation Fee component of the
Hospitalization Bills collected by REIN from the
Institute patients;

iii. AIG will also be entitled to 10% of the appropriate
percentage of the total money set aside every month
out of the Room Visiting Fees component of the
Hospitalization Bills collected by REIN from the
Institute patients;

NOTES:

a. That the above compensations are in addition to the
Honorarium as stated at clause II above;

b. That the Patients Hospitalized under AIG’s care will
have to be visited by AIG for the post-operative care.

IV. TIME DEVOTION AND DUTIES:

That the AIG will be devoting full time to the REIN to
cater to the following:

i. The examination of OPD patients both in the
morning and the afternoon sessions;

ii. The Operations of paying as well as non-paying
Patients as per the schedules fixed by the Institute
Management;

iii. The emergency cases of all natures;

iv. Attending the routine as well as special Diagnostic
and Operative Camps as finalized by the competent
authority of the Institute;

v. Participation in the R & D activities programmed and
planned by the R & D Department of the Institute;

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vi. Presenting research papers at the National and
International Medical Conferences on behalf of the R &
D Department of the Institute upon authorization by the
competent authority of the Institute;

vii. Training of junior doctors and other paramedical
staff of the Institute to make them competent enough
to handle the cases
independently.

viii. Any other assignment that might get created in
course of time but not clearly visualized at present.

V. LEAVE RULES:

That AIG will be governed by the leave rules of the
Institute as in vogue from time to time. AIG will,
however, not be entitled to any financial benefit of any
kind as that might be applicable to other regular
employees of the Institute as far as the leave rules are
concerned.

VI. WEEKLY OFFS AND HOLIDAYS:

i. That AIG will be entitled to weekly offs as well as
public holidays as decided by the Institute for each
accounting year.

That Hon. Hospital Superintendent, however, shall
have the rights to make alterations in the same
depending upon the Hospital contingencies.

ii. That AIG will be entitled to 30 days of contingency
leave during each accounting year.

VII. CONDUCT RULES:

That AIG will be governed by the conduct rules of the
Institute as in vogue from time to time and as
applicable to the regular employees of the Institute.

VIII. ARBITRATION OF DISPUTES:

6

That the disputes, if any, arising in course of the tenure
of this contract will be referred to the Managing
Committee of the Institute and the decision of the
Managing Committee will be final.

IX. TENURE OF CONTRACT:

That this contract is operative for a period of THREE
YEARS effective from 1-4-96.

This period can, however, be extended from time to
time with the mutual consent.

X. TERMINATION OF CONTRACT:

That a notice of clear THREE MONTHS will have to be
given.

i. By REIN to AIG, if the institute wishes to terminate
this contract or in lieu of notice period the institute shall
have to pay an amount (to AIG) equivalent to the Hon.
Amount paid to AIG for last three months just
preceding the month of termination of contract;

ii. By AIG to REIN, if AIG wishes to terminate this
contract or in lieu of the notice period AIG shall have to
pay an amount (to REIN) equivalent to the Hon.
Amount paid to him by the Institute for the last three
months just preceding the month of termination of the
contract.

NOTE: That in the event of the proven case
indiscipline or breach of Trust, the REIN reserves the
right to terminate the contract at any time without
giving any compensation whatsoever.

XI. EXPIRATION OF THE PRESENT EMPLOYMENT:

That with effect from 1st April 96, AIG shall no longer
remain as the regular employee of the Institute and
that the earlier appointment order No. 10795 dtd. 03-
04-1995 automatically becomes null and void.”

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5. The Appellants filed a petition under Section 166 of the Motor Vehicles

Act, 1988, being MACP No.1326 of 1997, against the driver, the

Respondent No. 3 and the Respondent No.1, in which they claimed

compensation for the death of Dr. Alpesh I. Gandhi at INR 1 crore. The

petition stated that Dr. Gandhi was 28 years old at the time of his

death and was earning a monthly income of INR 13,000.

6. Despite being served, the Respondent No. 2 and the Respondent No.

3 chose to remain absent before the Tribunal. The Respondent No. 1

filed its written statement where it denied the material averments made

by the Appellants and, in addition, submitted that the deceased being

an employee of the hospital was not covered for death or injury arising

out of and in the course of his employment, thereby excluding the

liability of the insurance company altogether in the case. The Tribunal

framed the following issues and answered them as follows:

“1. Whether the applicants prove that the deceased
died due to the rash and negligent driving on the part
of the driver, opponent No.1 of the vehicle involved in
the accident?

2. Whether the applicants are entitled to get
compensation? If yes, what amount and from whom?
2-A Whether the claimant prove that the risk of the
deceased is covered in the policy issued to the
hospital?

2-B Whether the opponent No.3 proves that the risk of
the deceased is not covered in the policy, because of
the deceased being an employee of the hospital and

8
the death is caused during the course of employment
as the Sec-II of the terms and conditions of the policy
exclude such risk ?

3. What award and order?

My findings to the above issues are as under for the
reasons to follow: –

1. In the affirmative.

2. In the affirmative. As per finding.

2-A In the affirmative.

2-B In the negative

3. As per final order.”

7. By way of findings of fact, it found that the driving license in favour of

the driver was valid, and that the driver was rash and negligent in

driving the vehicle, which led to the death of Dr. Alpesh Gandhi. The

Tribunal then found that the said Doctor was earning an annual

income of INR 1,47,000. Following Sarla Verma v. DTC (2009) 6 SCC

121, the Tribunal, after considering deductions as well as future

prospects, ultimately arrived at an income figure of INR 18,275 as the

monthly income. The Tribunal then applied the multiplier of ‘17’ to the

annual income of INR 2,19,300, making a total of INR 37,28,100/-.

Consortium expenses were added as INR 25,000; Funeral expenses

as INR 10,000, thereby arriving at a total compensation figure of INR

37,63,100 which had to be paid together with interest at 8% per

annum. Importantly, all three Respondents were made jointly and

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severally liable to pay the aforesaid amount. This was on the basis

that on an analysis of the contract entered into between the

Respondent No. 3 and Dr. Alpesh Gandhi, the contract was a contract

for service, as a result of which the deceased could not have been

held to have been in the employment of the Respondent No. 3.

8. The impugned judgment of the High Court dated 26.07.2018, after

analyzing the provisions of the contract for services dated 04.05.1996

between the Respondent No. 3 and Dr. Gandhi came to the opposite

conclusion, stating that since the contract was a contract of service,

the Insurance Company could not be held liable except to the extent of

INR 50,000, which was arrived at after setting out Regulation 27 of the

General Regulations of the Indian Motor Tariffs dated 01.08.1989, by

which the maximum cover for policies of the kind involved in this case

to third persons where the premium paid is INR 25 per person, in

addition to the premium paid for the policy, the capital sum insured per

person would only be INR 50,000. Thus, the liability of the Insurance

Company was pegged to INR 50,000, the liability of the Respondent

No. 2 and the Respondent No. 3 being for the balance amount.

9. The vexed question that arises for consideration is as to whether Dr.

Alpesh Gandhi could have been said to have been in the employ of

the Respondent No. 3 on the date of the accident, as a result of which

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the limitation of liability provision in favour of the Respondent No. 1 as

set out hereinabove would kick in.

10. Shri Vikas Kochar, learned counsel appearing on behalf of the

Appellants, has taken us through the contract between Dr. Gandhi and

the Respondent No. 3 and has emphasised that the contract is one for

services, and that an honorarium of INR 4000 per month is paid.

Further, Dr. Gandhi will not be entitled to any financial benefits as

might be applicable to other regular employees so far as the leave

rules are concerned, making it clear that Dr. Gandhi is not, therefore, a

regular employee of the Respondent No.3. He also emphasised the

fact that Dr. Gandhi no longer remains as a regular employee of the

institute with the coming into force of this new arrangement between

the parties. He then placed reliance on Dharangadhara Chemical

Works Ltd. v. State of Saurashtra 1957 SCR 158 and National

Insurance Company Limited v. Balakrishnan (2013) 1 SCC 731.

11. Learned counsel appearing on behalf of Respondent No. 1 has

supported the judgment of the High Court, stating that on a holistic

reading of the agreement between the Respondent No. 3 and Dr.

Alpesh Gandhi, dated 04.05.1996, the contract is one of service and

not for service. Even otherwise, the learned counsel argued that the

High Court was wrong in stating that the insured was covered by

11
endorsement IMT-5, by which personal accident cover to unnamed

passengers other than the insured and his paid driver or cleaner will

be extended to the extent of 100% where death is caused, on payment

of an additional premium. The learned counsel states that IMT-5 would

not be applicable in the facts of this case, but that IMT-16 would be

applicable. Since additional premium has not been paid to apply IMT-

16, the Insurance Company is not liable to indemnify the insured in

respect of any liability arising for death sustained by an employee in

respect of the accident in connection with the motor vehicle in

question.

12. This Court has in a series of judgment indicated the tests to be

followed in order to determine, in the context of the Industrial Disputes

Act and the Factories Act, as to whether different kinds of persons who

supply goods or services could be said to be “in the employ” of the

employer. Thus, in Dharangadhara (supra), the question posed before

the Court was whether the salt manufactured by a class of

professional laborers, known as agarias, from rain water that got

mixed with saline matter in the soil, could be said to be in pursuance of

contracts of service with the appellant, as a result of which they would

then be entitled to be treated as workmen under the Industrial

Disputes Act. After setting out the definition of “workman” under

12
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. After

referring to a number of English judgments, the Court then held, giving

the example of a ship’s master, a chauffeur, and a reporter on the staff

of a newspaper as against a ship’s pilot, a taxi man and a newspaper

contributor, that the test would be whether work is done as an integral

part of the business of the employer, in which case it would be a

contract of service, or whether it was done as an accessory to such

business, in which case it would be a contract for service. Other tests

that were laid down were as to whether the master had the power to

select the servant, whether he paid wages or other remuneration,

whether the master had the right to control the method of doing the

work, and whether the master had the right to suspend or dismiss the

employee. Ultimately, the true test, according to the judgment, was

held to be as follows:

“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, or to

13
borrow the words of Lord Uthwatt at p. 23 in Mersey
Docks and Harbour Board v. Coggins & Griffith
(Liverpool) Ltd. [(1952) SCR 696, 702] “The proper
test is whether or not the hirer had authority to control
the manner of execution of the act in question.

The nature or extent of control which is requisite to
establish the relationship of employer and employee
must necessarily vary from business to business and
is by its very nature incapable of precise definition. As
has been noted above, recent pronouncements of the
Court of Appeal in England have even expressed the
view that it is not necessary for holding that a person is
an employee, that the employer should be proved to
have exercised control over his work, that the test of
control was not one of universal application and that
there were many contracts in which the master could
not control the manner in which the work was done
(Vide observations of Somervelle, L.J.

in Cassidy v. Ministry of Health, (supra), and Denning,
L.J. in Stevenson, Jordan and Harrison
Ltd. v. Macdonald and Evans, (supra).”
Ultimately, the Court held that it would be a question of fact to be

decided by all the circumstances of the case. It was further held that

the mere fact that the agarias did piece-rated labour, the work being

seasonal, and the fact that they can engage others to do the work

for them, would not detract from the fact that they are professional

labourers who have been hired by the employer. Finally, the Court

refused to exercise its discretion to interfere with the Industrial

Tribunal’s finding that on the facts of the case these agarias would

have to be considered as workmen under the Industrial Disputes

Act.

14

13. In Chintaman Rao v. State of M.P. 1958 SCR 1340, this Court held

that Sattedars and their coolies were not workers within the meaning

of Section 2(1) of the Factories Act. In so holding, the Court referred to

the judgment of Dharangadhara (supra) and held that the fact that

bidi rolling was done outside the factory premises, and that such

rolling can be done at any time that the Sattedar chooses clinched the

issue in favour of the fact that Sattedars and their coolies were

independent contractors. The court then hedged its decision by stating

that it was not intended to lay down that under no circumstances can a

Sattedar be considered to be a worker within the meaning of the

Factories Act. Ultimately, everything depends on the terms of the

contract entered into between such person and the employer.

14. In Birdhichand Sharma v. First Civil Judge (1961) 3 SCR 24, this

Court found on facts that the persons employed in a bidi factory, who

could work at the time they chose, on a piece-rated basis, the caveat

being that if they came after mid-day they were not allowed to work,

even though the factory closed at 7 PM, that such persons were

workers under the Factories Act. The earlier two judgments of this

court were discussed and emphasis was laid on the fact that the

persons who were employed had to work within the factory premises

and had to report to work before mid-day. Further, the “right of control”

15
was extended to mean that so long as there is some amount of

supervision by the management, inasmuch as the management has

the right to reject the bidis prepared if they do not come up to the

proper standard, would indicate that such persons would be workers.

15. In Shankar Balaji Waje v. State of Maharashtra 1962 Supp (1) SCR

24, this Court set out the established facts between one Pandurang,

who was employed by the owner of a factory manufacturing bidis, and

the employer, as follows:

“The first contention is based on the established facts
of the case which, it is submitted, do not make out the
relationship of master and servant between the
appellant and Pandurang, inasmuch as they indicate
that the appellant had no supervision and control over
the details of the work Pandurang did in the factory.
The following are the established facts:
(1) There was no agreement or contract of service
between the appellant and Pandurang.
(2) Pandurang was not bound to attend the factory for
the work of rolling bidis for any fixed hours of work or
for any fixed period. He was free to go to the factory at
any time he liked and was equally free to leave the
factory whenever he liked. Of course, he could be in
the factory during the hours of working of the factory.
(3) Pandurang could be absent from work on any day
he liked. He could be absent up to ten days without
even informing the appellant. If he was to be absent
for more than ten days he had to inform the appellant,
not for the purpose of taking his permission or leave,
but for the purpose of assuring the appellant that he
had no intention to give up work at the factory.
(4) There was no actual supervision of the work
Pandurang did in the factory.

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(5) Pandurang was paid at fixed rates on the quantity
of bidis turned out. There was however no stipulation
that he had to turn out any minimum quantity of bidis in
a day.

(6) Leaves used to be supplied to Pandurang for being
taken home and cut there. Tobacco to fill the bidis
used to be supplied at the Factory. Pandurang was not
bound to roll the bidis at the factory. He could do so at
his place, on taking permission from the appellant for
taking tobacco home. The permission was necessary
in view of Excise Rules and not on account of any
condition of alleged service.

(7) At the close of the day, the bidis used to be
delivered to the appellant and bidis not up to the
standard, used to be rejected.”

On these facts, the judgment in Birdhichand (supra) was

distinguished and that of Chintaman Rao (supra) applied. The Court

held:

“Further, the facts of the case indicate that the
appellant had no control and supervision over the
details of Pandurang’s work. He could not control his
hours of work. He could not control his days of work.
Pandurang was free to absent himself and was free to
go to the factory at any time and to leave it at any time
according to his will. The appellant could not insist on
any particular minimum quantity of bidis to be turned
out per day. He could not control the time spent by
Pandurang on the rolling of a bidi or a number of bidis.
The work of rolling bidis may be a simple work and
may require no particular supervision and direction
during the process of manufacture. But there is
nothing on record to show that any such direction
could be given.

xxx xxx xxx
It is true, as contended for the State, that persons
engaged to roll bidis on job work basis could be
workers, but only such persons would be workers who
17
work regularly at the factory and are paid for the work
turned out during their regular employment on the
basis of the work done. Piece-rate workers can be
workers within the definition of ‘worker’ in the Act, but
they must be regular workers and not workers who
come and work according to their sweet will. It is also
true, as urged for the State, that a worker, within the
definition of that expression in the Act, need not be a
whole-time worker. But, even then, the worker must
have, under his contract of service, an obligation to
work either for a fixed period or between fixed hours.
The whole conception of service does not fit in well
with a servant who has full liberty to attend to his work
according to his pleasure and not according to the
orders of his master.

We may say that this opinion further finds support from
what we hold on the second contention. If Pandurang
was a worker, the provisions about; leave and leave
wages should apply to him. We are of opinion that they
do not and what we say in that connection reinforces
our view that Pandurang was not a worker as the three
criteria and conditions laid down in Shri Chintaman
Rao case [1958 SCR 1340] for constituting him as
such are not fulfilled in the present case.”

16. In D.C. Dewan Mohideen Sahib and Sons v. Secretary, United

Beedi Workers’ Union (1964) 7 SCR 646, the Court set out a sample

agreement which disclosed the facts of the case before it, as follows:

“It seems that a sample agreement was produced
before the High Court, which provided inter alia for the
following terms:

(1) That the proprietor should supply the tobacco
and the bidi leaves;

(2) that the intermediary should engage premises of
his own and obtain the requisite licence to carry on the
work of having the bidis rolled there;

(3) that at no time should more than nine bidi rollers
work in the premises of that intermediary;

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(4) that the intermediary should meet all the
incidental charges for rolling the bidis including the
cost of thread and the remuneration paid to the bidi
rollers;

(5) that for every unit of 1000 bidis rolled and
delivered by the intermediary to the proprietor, the
latter should pay the stipulated amount, after
deducting the cost of the tobacco and the bidi leaves
supplied by the proprietor;

(6) that the intermediary should not enter into
similar engagement with any other industrial concern;

(7) that the price of the raw materials and price to
be paid for every unit of 1000 bidis rolled and delivered
were to be fixed at the discretion of the proprietor.

Besides these conditions, the contract also provided
that it was liable to termination on breach of any of the
conditions, and that the proprietors had no connection
with and that they assumed no responsibility for the
bidi workers who had to look to the intermediary for
what was payable to them for rolling the bidis.”
The earlier judgments of this Court were referred to. After applying the

tests laid down in the said judgments, this Court found:

“There is in our opinion little doubt that this system has
been evolved to avoid regulations under the Factories
Act
. Further there is also no doubt from whatever
terms of agreement are available on the record that
the so-called independent contractors have really no
independence at all. As the appeal court has pointed
out they are impecunious persons who could hardly
afford to have factories of their own. Some of them are
even ex-employees of the appellants. The contract is
practically one-sided in that the proprietor can at his
choice supply the raw materials or refuse to do so, the
so-called contractor having no right to insist upon the
supply of raw materials to him. The so-called
independent contractor is even bound not to employ
more than nine persons in his so-called factory. The
sale of raw materials to the so-called independent
contractor and resale by him of the manufactured bidis

19
is also a mere camouflage, the nature of which is
apparent from the fact that the so-called contractor
never paid for the materials. All that happens is that
when the manufactured bidis are delivered by him to
the appellants, amounts due for the so-called sale of
raw materials is deducted from the so-called price
fixed for the bidis. In effect all that happened is that the
so-called independent contractor is supplied with
tobacco and leaves and is paid certain amounts for the
wages of the workers employed and for his own
trouble. We can therefore see no difficulty in holding
that the so-called contractor is merely an employee or
an agent of the appellants as held by the appeal court
and as such employee or agent he employs workers to
roll bidis on behalf of the appellants. The work is
distributed between a number of so-called
independent contractors who are told not to employ
more than nine persons at one place to avoid
regulations under the Factories Act. We are not
however concerned with that aspect of the matter in
the present appeals. But there can be no doubt that
the workers employed by the so-called contractors are
really the workmen of the appellants who are
employed through their agents or servants whom they
choose to call independent contractors.”

17. The next case in chronological order is of seminal importance in

deciding which side of the line a particular set of facts would lead to a

conclusion that a contract is one for service or of service. Thus, in

Silver Jubilee Tailoring House v. Chief Inspector of Shops &

Establishments (1974) 3 SCC 498, this Court had to determine

whether there is a relationship of employer and an employee between

a tailoring shop and persons employed by the owner of the shop for

stitching purposes under Section 2(14) of the Andhra Pradesh

(Telangana Area) Shops and Establishments Act, 1951. Section 2(14)

20
of the said Act defined a ‘person employed’ as meaning, in the case of

a shop, a person wholly or principally employed therein in connection

with the business of the shop. The facts were set out in paragraph 7 of

the said judgment as follows:

“7. The following facts appear from the finding of the
learned Single Judge. All the workers are paid on
piece-rate basis. The Workers generally attend the
shops every day if there is work. The rate of wages
paid to the workers is not uniform. 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. Almost all the workers work in the
shop. Some workers are allowed to take cloth for
stitching to their homes on certain days. But this is
done always with the permission of the proprietor of
the shop. The machines installed in the shop belong to
the proprietor of the shop and the premises and the
shop in which the work is carried on also belong to
him.”

After referring to several judgments of this Court, the Court then

referred to judgments of the English and American Courts as follows:

“19. In Cassidy v. Ministry of Health [(1951) 1 All ER
574, 579] Lord Justice Sommerwell pointed out that
the test of control of the manner of work is not

21
universally correct, that there are many contracts of
service where the master cannot control the manner in
which the work is to be done as in the case of a
Captain of a ship.

20. In many skilled employments, to apply the test of
control over the manner of work for deciding the
question whether the relationship of master and
servant exists would be unrealistic.

21. In Montreal v. Montreal Locomotive Works Ltd. etc.
[(1947) 1 DLR 161 at p. 1969] Lord Wright said that a
single test, such as the presence or absence of
control, was often relied on to determine whether the
case was one of master and servant, mostly in order to
decide issues of tortious liability on the part of the
master or superior and that in the more complex
conditions of modern industry, more complicated tests
have often to be applied. He said that it would be more
appropriate to apply a complex test involving: (i)
control; (ii) ownership of the tools; (iii) chance of profit;

(iv) risk of loss, and that control in itself is not always
conclusive. He further said that in many cases the
question can only be settled by examining the whole of
the various elements which constitute the relationship
between the parties.

22. In Bank Voor Handel en Scheepvaart
N.V. v. Slatford [(1952) 2 All ER 956 at 971] Denning,
L.J., said:

“… the test of being a servant does not rest
nowadays on submission to orders. It depends on
whether the person is part and parcel of the
organisation….”

23. In U.S. v. Silk [331 US 704] the question was
whether men working for the plaintiffs, Silk and
Greyvan, were ‘employees’ within the meaning of that
word in the Social Security Act, 1935. The Judges of
the Supreme Court of U.S.A., agreed upon the test to

22
be applied, though not in every instance upon its
application to the facts. They said that the test was not
“the common law test,” viz “power of control, whether
exercised or not, over the manner of performing
service to the undertaking”, but whether the men were
employees “as a matter of economic reality”. Important
factors were said to be “the degrees of control,
opportunities of profit or loss, investment in facilities,
permanency of relations and skill required in the
claimed independent operation”.

xxx xxx xxx

25. In Market Investigations Ltd. v. Minister of Social
Security [(1968) 3 All ER 732] the Court said:

“I think it is fair to say that there was at one time a
school of thought according to which the extent and
degree of the control which B. was entitled to exercise
over A. in the performance of the work would be a
decisive factor. However, it has for long been apparent
that an analysis of the extent and degree of such
control is not in itself decisive.”

26. It is in its application to skilled and particularly
professional work that control test in its traditional form
has really broken down. It has been said that in
interpreting “Control” as meaning the power to direct
how the servant should do his work, the Court has
been applying a concept suited to a past age.

“This distinction (viz., between telling a servant
what to do and telling him how to do it) was based
upon the social conditions of an earlier age; it
assumed that the employer of labour was able to direct
and instruct the labourer as to the technical methods
he should use in performing his work. In a mainly
agricultural society and even in the earlier stages of
the Industrial Revolution the master could be expected
to be superior to the servant in the knowledge, skill

23
and experience which had to be brought to bear upon
the choice and handling of the tools. The control test
was well suited to govern relationships like those
between a farmer and an agricultural labourer (prior to
agricultural mechanization) a craftsman and a
journeyman, a householder and a domestic servant,
and even a factory owner and an unskilled ‘hand’. It
reflects a state of society in which the ownership of the
means of production coincided with the profession of
technical knowledge and skill in which that knowledge
and skill was largely acquired by being handed down
from one generation to the next by oral tradition and
not by being systematically imparted in institutions of
learning from universities down to technical schools.
The control test postulates a combination of
managerial and technical functions in the person of the
employer i.e. what to modern eyes appears as an
imperfect division of labour. [ See Prof. Kahn-Freund in
(1951), 14 Modern Law Review, at p. 505] ”

27. It is, therefore, not surprising that in recent years
the control test as traditionally formulated has not been
treated as an exclusive test.

28. It is exceedingly doubtful today whether the search
for a formula in the nature of a single test to tell a
contract of service from a contract for service will
serve any useful purpose. The most that profitably can
be done is to examine all the factors that have been
referred to in the cases on the topic. Clearly, not all of
these factors would be relevant in all these cases or
have the same weight in all cases. It is equally clear
that no magic formula can be propounded, which
factors should in any case be treated as determining
ones. The plain fact is that in a large number of cases,
the Court can only perform a balancing operation
weighing up the factors which point in one direction
and balancing them against those pointing in the

24
opposite direction [ See Atiyah, PS. “Vicarious Liability
in the Law of Torts”, pp. 37-38] .

29. During the last two decades the emphasis in the
field has shifted and no longer rests so strongly upon
the question of control. Control is obviously an
important factor and in many cases it may still be the
decisive factor. But it is wrong to say that in every case
it is decisive. It is now no more than a factor, although
an important one [See Argent v. Minister of Social
Security and Another, (1968) 1 WLR 1749 at 1759].”
Ultimately, the Court found that two important considerations clinched

the issue in favour of deciding that the persons employed were

employed wholly or principally in connection with the business of the

shop. First and foremost, machines on which sewing took place were

supplied by the proprietor of the shop. And, secondly, supervision and

control in tailoring business terms would include the right to reject sub-

standard work. These factors were held to outweigh the fact that such

persons did not have to work exclusively for the owner of the shop as

also that they are not obliged to work for the full day.

18. In Hussainbhai v. Alath Factory Thezhilali Union (1978) 4 SCC 257,

this Court was confronted with persons who are engaged to make

ropes from within a factory which manufactured ropes. What was

argued before the Court was that the workmen were not the

employer’s workmen but only the contractor’s workmen. The question

that came up for consideration was whether they are “workmen” within

25
the meaning of Section 2(s) of the Industrial Disputes Act. The test

applied by this judgment to find out whether such persons are

“workmen” was as follows:

“5. The true test may, with brevity, be indicated once
again. Where a worker or group of workers labours to
produce goods or services and these goods or
services are for the business of another, that other is,
in fact, the employer. He has economic control over
the workers’ subsistence, skill, and continued
employment. If he, for any reason, chokes off, the
worker is, virtually, laid off. The presence of
intermediate contractors with whom alone the workers
have immediate or direct relationship ex contractu is of
no consequence when, on lifting the veil or looking at
the conspectus of factors governing employment, we
discern the naked truth, though draped in different
perfect paper arrangement, that the real employer is
the Management, not the immediate contractor. Myriad
devices, half-hidden in fold after fold of legal form
depending on the degree of concealment needed, the
type of industry, the local conditions and the like may
be resorted to when labour legislation casts welfare
obligations on the real employer, based on Articles 38,
39, 42, 43 and 43-A of the Constitution. The court must
be astute to avoid the mischief and achieve the
purpose of the law and not be misled by the maya of
legal appearances.”

Applying this test, the economic reality of control of the employer over

the workman’s subsistence, skill and continued employment pointed to

such persons being direct employees of the owner.

19. In Shining Tailors v. Industrial Tribunal II, U.P. (1983) 4 SCC 464, a

3-Judge Bench of this Court followed Silver Jubilee (supra) to arrive

26
at the conclusion that the persons employed were “workmen” within

the meaning of the U.P. Industrial Disputes Act, 1947.

20. In P.M. Patel & Sons v. Union of India (1986) 1 SCC 32, this Court

was faced with the important question as to whether the workers

employed at their homes in the manufacture of bidis are entitled to the

benefit of Employees’ Provident Funds and Miscellaneous Provisions

Act, 1952. After referring to the earlier judgments of this Court, this

Court held that the Silver Jubilee case (supra) made the law take a

major shift from the earlier judgments on criteria to be applied to

determine relationship of master and servant, and pointed out that the

right of rejection of sub-standard bidis can constitute, in itself, an

effective degree of supervision and control, so as to render a finding

that such persons are “employees” within the meaning of Section 2 of

the said Act.

21. In Indian Banks Assn. v. Workmen of Syndicate Bank (2001) 3

SCC 36, this Court after referring to Silver Jubilee (supra) found that

Deposit Collectors employed by specified banks were entitled to be

treated as workmen. The court held:

“26. We also cannot accept the submission that the
banks have no control over the Deposit Collectors.

Undoubtedly, the Deposit Collectors are free to
regulate their own hours of work, but that is because of
the nature of the work itself. It would be impossible to
27
fix working hours for such Deposit Collectors because
they have to go to various depositors. This would have
to be done at the convenience of the depositors and at
such times as required by the depositors. If this is so,
then no time can be fixed for such work. However,
there is control inasmuch as the Deposit Collectors
have to bring the collections and deposit the same in
the banks by the very next day. They have then to fill
in various forms, accounts, registers and passbooks.
They also have to do such other clerical work as the
Bank may direct. They are, therefore, accountable to
the Bank and under the control of the Bank.”

22. In Indian Overseas Bank v. Workmen (2006) 3 SCC 729, the

question was whether the banks who employed jewel appraisers for

loans were “workmen” within the meaning of Section 2(s) of the

Industrial Disputes Act. After distinguishing the Indian Banks case

(supra), this Court referred to Dharangadhara (supra), Silver Jubilee

(supra), Shining Tailors (supra) and Chintaman Rao (supra) and

then held:

“17. The inferences culled out from the reading of
those judgments can be summed up as follows:

(a) Where the contractors were substantially
responsible for the main and sole business, they would
be treated as workers.

(b) One exception is that where in such cases flexibility
of the contract was at variance with the normal
worker’s contract, the contractors would not be treated
as workers.

(c) Where the contractor is in the nature of supplier of
goods and services, they are to be treated as supplier
contractors and not workmen.

28

18. At this juncture the distinction between jewel
appraisers and the regular employees of the Bank can
be noted.

             Regular employees                       Jewel appraisers

             1.      Subject     to                  1.                 No
             qualification and age                   qualification/age.
             prescribed.

             2.       Recruitment                    2.           Direct
             through employ-ment                     engagement by the
             exchange/Banking                        local Manager.
             Service Recruitment
             Board.

             3.   Fixed      working                 3. No fixed working
             hours.                                  hours.

             4. Monthly wages.                       4. No guaranteed
                                                     payment,      only
                                                     commission paid.

             5.       Subject      to                5. No disciplinary
             disciplinary control.                   control.

             6. Control/supervision                  6.                No
             is exercised not only                   control/supervision
             with regard to the                      over the nature of
             allocation of work, but                 work      to      be
             also the way in which                   performed.
             the work is to be
             carried out.

             7. Wages are paid by                    7. Charges are paid
             the Bank.                               by the borrowers.

             8. Retirement age.                      8. No     retirement
                                                     age.

             9. Subject to transfer.                 9. No transfer.

             10.      While     in                   10. No bar to carry
             employment     cannot                   on any avocation or
             carry on any other                      occupation.
             occupation.

Therefore, the jewel appraisers are not employees of
the Bank.”

23. At this stage, it is important to advert to a fairly recent judgment of the

English Court of Appeal in E v. English Province of Our Lady of
29
Charity and Anr. 2012 EWCA Civ 938. In the aforesaid case, a

question arose as to whether the Roman Catholic Church would be

vicariously liable in a claim brought for damages alleging that a lady,

when she had been resident in a children’s home operated by a

Roman Catholic order of nuns, had been sexually abused by a priest

appointed by the diocesan bishop. Under the sub-heading “The

hallmarks of the relationship of employer and employee” the court

referred to various earlier English judgments and the tests laid down

as follows:

“64. I indicated early on at para 21, vicarious liability
tended to depend on the difference between employee
and independent contractor. If, as I believe, it is
necessary to attempt to capture the essence of what it
is that makes a man an employee, I must examine
those differences in more detail. Generally speaking,
an employee works under the supervision and
direction of his employer: an independent contractor is
his own master bound by his contract but not by his
employers orders. An employee works for his
employer: an independent contractor is in business on
his own account. In Ready Mixed Concrete (South
East) Ltd v Minister of Pensions and National
Insurance [1968] 2 QB 497 (a case which I observe
with envy occupied the court for six days whilst we
were allowed one only), MacKenna J said, at p 515,
that a contract of service exists if these three
conditions are fulfilled:

“(i) The servant agrees that, in consideration of a wage
or other remuneration, he will provide his own work
and skill in the performance of some service for his
master. (ii) He agrees, expressly or impliedly, that in
the performance of that service he will be subject to
the others control in a sufficient degree to make that

30
other master. (iii) The other provisions of the contract
are consistent with its being a contract of service.”
He elaborated:

“Control includes the power of deciding the thing to be
done, the way in which it shall be done, the means to
be employed in doing it, the time when and the place
where it shall be done. All these aspects of control
must be considered in deciding whether the right
exists in a sufficient degree to make one party the
master and the other his servant.”
Later, at p 524, he commented on Lord Thankerton’s
“four indicia” of a contract of service, said in Short v J
& W Henderson Ltd (1946) 62 TLR 427, 429 to be: “(a)
The master’s power of selection of his servant; (b) the
payment of wages or other remuneration; (c) the
master’s right to control the method of doing the work;
and (d) the master’s right of suspension or dismissal.”
MacKenna J said:

“It seems to me that (a) and (d) are chiefly relevant in
determining whether there is a contract of any kind
between the supposed master and servant, and that
they are of little use in determining whether the
contract is one of service. The same is true of (b),
unless one distinguishes between different methods of
payment, payment by results tending to prove
independence and payment by time the relation of
master and servant.”

65. That leaves control as an important distinguishing
factor. The example is often given of the difference
between the chauffeur and the taxi driver but it is not
always as easy as that. As times have changed so
control has become an unrealistic guide. It may have
been more meaningful when work was done by
labourers under the direction of employers who had
the same or greater technical skills than their
workmen. Now that one is frequently dealing with a
professional person or a person of some particular skill
and experience, for example a brain surgeon, there
can be no question of the employer telling him how to
do his work for in truth the skilled person is engaged

31
for the very reason that he possesses skills which the
employer lacks. The emphasis placed on control has
thus been reduced. As Roskill J said in Argent v
Minister of Social Security [1968] 1 WLR 1749, 1758—
1759:

“in the earlier cases it seems to have been suggested
that the most important test, if not the all-important
test, was the extent of the control exercised by the
employer over the servant. If one goes back to some
of the cases in the first decade of this century, one
sees that that was regarded almost as the conclusive
test. But it is also clear that as one watches the
development of the law in the first 60 years of this
century and particularly the development of the law in
the last 15 or 20 years in this field, the emphasis has
shifted and no longer rests so strongly upon the
question of control. Control is obviously an important
factor. In some cases it may still be the decisive factor,
but it wrong to say that in every case it is the decisive
factor. It is now, as I venture to think, no more than a
factor albeit a very important one.”
Roskill J’s test was, at p 1760:

“Finally it has been more recently suggested that the
matter can be determined by reference to what in
modern parlance was called economic reality. All these
are matters which have to be borne in mind. To my
mind, no single one is decisive. One has to look at the
totality of the evidence, at the totality of the facts found
and then apply them to the language of the statute.
One cannot do better than echo the words of
Somervell LJ in Cassidy v Ministry of Health [1951] 2
KB 343 , 352: ‘one perhaps cannot get much beyond
this: “was his contract a contract of service within the
meaning which an ordinary person would give to the
words?”’”
Roskill J also referred to Denning LJ’s views
expressed in Stevenson Jordan & Harrison Ltd v
Macdonald & Evans [1952] 1 TLR 101 , 111 and Bank
voor Handel en Scheepvaart NV v Slatford (No 2)
[1953] 1 QB 248 , 295. In the former Denning LJ said:

32

“One feature which seems to run through the
instances is that, under a contract of service, a man is
employed as part of the business, and his work is
done as an integral part of the business; whereas,
under a contract for services, his work, although done
for the business, is not integrated into it but is only
accessory to it.”

67. The Privy Council in the Lee Ting Sang case did,
however, give this help [1990] 2 AC 374, 382:
“What then is the standard to apply? This has proved
to be a most elusive question and despite a plethora of
authorities the courts have not been able to devise a
single test that will conclusively point to the distinction
in all cases. Their Lordships agree with the Court of
Appeal when they said that the matter had never been
better put than by Cooke J in Market Investigations Ltd
v Minister of Social Security [1969] 2 QB 173 , 184–
185: ‘The fundamental test to be applied is this: “is the
person who has engaged himself to perform these
services performing them as a person in business on
his own account?” If the answer to that question is
“yes”, then the contract is a contract for services. If the
answer is “no”, then the contract is a contract of
service. No exhaustive list has been compiled and
perhaps no exhaustive list can be compiled of the
considerations which are relevant in determining that
question, nor can strict rules be laid down as to the
relative weight which the various considerations
should carry in particular cases. The most that can be
said is that control will no doubt always have to be
considered, although it can no longer be regarded as
the sole determining factor; and that factors which may
be of importance are such matters as whether the man
performing the services provides his own equipment,
whether he hires his own helpers, what degree of
financial risk he takes, what degree of responsibility for
investment and management he has, and whether and
how far he has an opportunity of profiting from sound
management in the performance of his task.’”

33

68. To much the same effect is an earlier Privy Council
case, Montreal v Montreal Locomotive Works Ltd
[1947] 1 DLR 161 , where Lord Wright said, at p 169:
“In earlier cases a single test, such as the presence or
absence of control, was often relied on to determine
whether the case was one of master and servant,
mostly in order to decide issues of tortious liability on
the part of the master or superior. In the more complex
conditions of modern industry, more complicated tests
have to be applied. It has been suggested that a
fourfold test would in some cases be more
appropriate, a complex involving (1) control; (2)
ownership of the tools; (3) chance of profit; (4) risk of
loss. Control in itself is not always conclusive.”
He went on to say that:

“it is in some cases possible to decide the issue by
raising as the crucial question whose business is it, or
in other words by asking whether the party is carrying
on the business, in the sense of carrying it on for
himself or on his own behalf and not merely for a
superior.”

69. There being no single test, what one has to do is
marshal various tests which should cumulatively point
either towards an employer/employee relationship or
away from one. Adopting that approach confirms that
which is accepted as the common ground, namely,
that Father Baldwin is not a true employee. The test
may yet be useful to see whether he can be said to be
an independent contractor, for if he is, the law is clear:
the employer is not vicariously liable for the torts of his
independent contractor. I am satisfied that Father
Baldwin is no more a true independent contractor than
he is an employee. For a start, he has no contractual
relationship with his bishop. He is hardly a person in
business on his own account with a free hand to carry
out the job, if it is a job, as and when he wishes.”

In concluding that the Church would be vicariously liable, the Court

then held:

34

“81. The result of each of the tests leads me to the
conclusion that Father Baldwin is more like an
employee than an independent contractor. He is in a
relationship with his bishop which is close enough and
so akin to employer/employee as to make it just and
fair to impose vicarious liability. Justice and fairness is
used here as a salutary check on the conclusion. It is
not a stand alone test for a conclusion. It is just
because it strikes a proper balance between the
unfairness to the employer of imposing strict liability
and the unfairness to the victim of leaving her without
a full remedy for the harm caused by the employer’s
managing his business in a way which gave rise to
that harm even when the risk of harm is not
reasonably foreseeable.”

24. A conspectus of all the aforesaid judgments would show 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. A variety of cases come in

between cases which are crystal clear – for example, a master in a

school who is employed like other employees of the school and who

gives music lessons as part of his employment, as against an

independent professional piano player who gives music lessons to

35
persons who visit her premises. Equally, a variety of cases arise

between a ship’s master, a chauffeur and a staff reporter, as against a

ship’s pilot, a taxi driver and a contributor to a newspaper, in order to

determine whether the person employed could be said to be an

employee or an independent professional. The control test, after

moving away from actual control of when and how work is to be

performed to the right to exercise control, is one in a series of factors

which may lead to an answer on the facts of a case slotting such case

either as a contract of service or a contract for service. The test as to

whether the person employed is integrated into the employer’s

business or is a mere accessory thereof is another important test in

order to determine on which side of the line the contract falls. 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 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 another important test when it comes to work to be

performed by independent contractors as against piece-rated

labourers. Also, the economic reality test laid down by the U.S

36
decisions and the test of whether the employer has economic control

over the workers’ subsistence, skill and continued employment can

also be applied when it comes to whether a particular worker works for

himself or for his employer. 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. No one test of universal application can

ever yield the correct result. It is a conglomerate of all applicable tests

taken on the totality of the fact situation in a given case that would

ultimately yield, particularly 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.

25. Given the fact that this balancing process may often not yield a clear

result in hybrid situations, the context in which a finding is to be made

37
assumes great importance. Thus, 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, as was done in

Dharangadhara (supra), Birdhichand (supra), D.C.Dewan (supra),

Silver Jubilee (supra), Hussainbhai (supra), Shining Tailors (supra),

P.M. Patel (supra), and Indian Banks (supra). On the other hand,

where the context is that of legislation other than beneficial legislation

or only in the realm of contract, and the context of that legislation or

contract would point in the direction of the relationship being a contract

for service then, other things being equal, the context may then tilt the

balance in favour of the contract being construed to be one which is

for service.

26. Looked at in this light, let us now examine the agreement between Dr.

Alpesh Gandhi and the Respondent No. 3. The factors which would

lead to the contract being one for service may be enumerated as

follows:

(i) The heading of the contract itself states that it is a contract for

service.

(ii) The designation of Dr. Gandhi is an Honorary Ophthalmic

Surgeon.

(iii) INR 4000 per month is declared to be honorarium as opposed

to salary.

38

(iv) In addition to INR 4000 per month, Dr. Gandhi is paid a

percentage of the earnings of the Respondent No. 3 from out of

the OPD, Operation Fee component of Hospitalization Bills, and

Room Visiting Fees.

(v) The arbitration clause which speaks of disputes arising in the

course of the tenure of this contract will be referred to the

Managing Committee of the Institute, the decision of the

Managing Committee being final, is also a clause which is

unusual in a pure master-servant relationship.

(vi) The fact that the appointment is contractual – for 3 years – and

extendable only by mutual consent, is another pointer to the fact

that the contract is for service, which is tenure based.

(vii) The fact that termination of the contract can be by notice on

either side would again show that the parties are dealing with

each other more as equals than as master-servant.

(viii) Clause XI of the agreement also makes it clear that the earlier

appointment that was made of Dr. Gandhi would cease the

moment this contract comes into existence, Dr. Gandhi no

longer remaining as a regular employee of the Institute.

27. As against the aforesaid factors which would point to the contract the

contract being a contract for service, the following factors would point

in the opposite direction:

39

(i) The employment is full-time. Dr. Gandhi can do no other work,

and apart from the seven types of work that Dr. Gandhi is to

perform under Clause IV, any other assignment that may get

created in the course of time may also be assigned to him at the

employer’s discretion.

(ii) Dr. Gandhi is to work on all days except weekly offs and

holidays that are given to him by the employer. However, what

is important is that though governed by the leave rules of the

Institute as in vogue from time to time, Dr. Gandhi will not be

entitled to any financial benefit of any kind as may be applicable

to other regular employees of the Institute under Clause V.

(iii) Dr. Gandhi will be governed by the Conduct Rules of the

Institute as invoked from time to time and as applicable to

regular employees of the Institute.

(iv) That in the event of a proven case of indiscipline or breach of

trust, the Institute reserves a right to terminate the contract at

any time without giving any compensation whatsoever.

28. If the aforesaid factors are weighed in the scales, it is clear that the

factors which make the contract one for service outweigh the factors

which would point in the opposite direction. First and foremost, the

intention of the parties is to be gathered from the terms of the contract.

The terms of the contract make it clear that the contract is one for

service, and that with effect from the date on which the contract

40
begins, Dr. Gandhi shall no longer remain as a regular employee of

the Institute, making it clear that his services are now no longer as a

regular employee but as an independent professional. Secondly, the

remuneration is described as honorarium, and consistent with the

position that Dr. Gandhi is an independent professional working in the

Institute in his own right, he gets a share of the spoils as has been

pointed out hereinabove. Thirdly, he enters into the agreement on

equal terms as the agreement is for three years, extendable only by

mutual consent of both the parties. Fourthly, his services cannot be

terminated in the usual manner of the other regular employees of the

Institute but are terminable on either side by notice. The fact that Dr.

Gandhi will devote full-time attention to the Institute is the obverse side

of piece-rated work which, as has been held in some of the judgments

hereinabove, can yet amount to contracts of service, being a neutral

factor. Likewise, the fact that Dr. Gandhi must devote his entire

attention to the Institute would not necessarily lead to the conclusion

that de hors all other factors the contract is one of service. Equally

important is the fact that it is necessary to state Dr. Gandhi will be

governed by the Conduct Rules and by the Leave Rules of the

Institute, but by no other Rules. And even though the Leave Rules

apply to Dr. Gandhi, since he is not a regular employee, he is not

entitled to any financial benefit as might be applicable to other regular

41
employees. Equally, arbitration of disputes between Dr. Gandhi and

the Institute being referred to the Managing Committee of the Institute

would show that they have entered into the contract not as master and

servant but as employer and independent professional. A conspectus

of all the above would certainly lead to the conclusion, applying the

economic reality test, that the contract entered into between the

parties is one between an Institute and an independent professional.

29. Even otherwise, it is well-settled that exemption of liability clauses in

insurance contracts are to be construed in the case of ambiguity

contra proferentum. Thus, in General Assurance Society Ltd. v.

Chandumull Jain (1966) 3 SCR 500, this Court held:

“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.”

30. This judgment has been cited with approval in United India Insurance

Co. Ltd. v. Pushpalaya Printers (2004) 3 SCC 694 as follows:

42

“6. The only point that arises for consideration is
whether the word “impact” contained in clause 5 of the
insurance policy covers the damage caused to the
building and machinery due to driving of the bulldozer
on the road close to the building. It is evident from the
terms of the insurance policy that the property was
insured as against destruction or damage to whole or
part. The appellant Company agreed to pay towards
destruction or damage to the property insured to the
extent of its liability on account of various happenings.
In the present case both the parties relied on clause 5
of the insurance policy. Clause 5 is also subject to
exclusions contained in the insurance policy. That a
damage caused to the building or machinery on
account of driving of vehicle on the road close to the
building is not excluded. Clause 5 speaks of “impact”
by any rail/road vehicle or animal. If the appellant
Company wanted to exclude any damage or
destruction caused on account of driving of vehicle on
the road close to the building, it could have expressly
excluded it. The insured possibly did not understand
and expect that the destruction and damage to the
building and machinery is confined only to a direct
collision by vehicle moving on the road with the
building or machinery. In the ordinary course, the
question of a vehicle directly dashing into the building
or the machinery inside the building does not arise.
Further, “impact” by road vehicle found in the company
of other words in the same clause 5 normally indicates
that damage caused to the building on account of
vibration by driving of vehicle close to the road is also
included. In order to interpret this clause, it is also
necessary to gather the intention of the parties from
the words used in the policy. If the word “impact” is
interpreted narrowly, the question of impact by any rail
would not arise as the question of a rail forcibly coming
to the contact of a building or machinery would not
arise. In the absence of specific exclusion and the
word “impact” having more meanings in the context, it
cannot be confined to forcible contact alone when it
includes the meanings “to drive close”, “effective
action of one thing upon another” and “the effect of
such action”, it is reasonable and fair to hold in the

43
context that the word “impact” contained in clause 5 of
the insurance policy covers the case of the respondent
to say that damage caused to the building and
machinery on account of the bulldozer moving closely
on the road was on account of its “impact”. It is also
settled position in law that 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, namely,
to cover the risk on the happening of certain event.
Although there is no ambiguity in the expression
“impact”, even otherwise applying the rule of contra
preferentem, the use of the word “impact” in clause 5
in the instant policy must be construed against the
appellant. Where the words of a document are
ambiguous, they shall be construed against the party
who prepared the document. This rule applies to
contracts of insurance and clause 5 of the insurance
policy even after reading the entire policy in the
present case should be construed against the insurer.
A Constitution Bench of this Court in General
Assurance Society Ltd. v. Chandmull Jain
[AIR 1966
SC 1644 : (1966) 3 SCR 500] has expressed that (AIR
p. 1649, para 11)

“in a contract of insurance there is 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””.

31. Likewise, in Export Credit Guarantee Corpn. of India Ltd. v. Garg

Sons International (2014) 1 SCC 686, this Court held:

“11. The insured cannot claim anything more than
what is covered by the insurance policy. “The terms of
the contract have to be construed strictly, without
altering the nature of the contract as the same may
affect the interests of the parties adversely.” The
clauses of an insurance policy have to be read as they
are. Consequently, the terms of the insurance policy,
that fix the responsibility of the insurance company
44
must also be read strictly. The contract must be read
as a whole and every attempt should be made to
harmonise the terms thereof, keeping in mind that the
rule of contra proferentem does not apply in case of
commercial contract, for the reason that a clause in a
commercial contract is bilateral and has mutually been
agreed upon. (Vide Oriental Insurance Co.
Ltd. v. Sony Cheriyan
[(1999) 6 SCC 451] , Polymat
India (P) Ltd. v. National Insurance Co. Ltd
. [(2005) 9
SCC 174 : AIR 2005 SC 286] , Sumitomo Heavy
Industries Ltd. v. ONGC Ltd
. [(2010) 11 SCC 296 :

(2010) 4 SCC (Civ) 459 : AIR 2010 SC 3400]
and Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram
Saran
[(2012) 5 SCC 306 : AIR 2012 SC 2829] .)”

Likewise, in BHS Industries v. Export Credit Guarantee Corpn. Ltd.

(2015) 9 SCC 414, this Court held:

“31. As has been held in Chandumull Jain [AIR 1966
SC 1644 : (1966) 3 SCR 500] by the Constitution
Bench that in a contract of insurance, there is a
requirement of good faith on the part of the insured
and in case of ambiguity, it has to be construed
against the company. As per other authorities, the
insurance policy has to be strictly construed and it has
to be read as a whole and nothing should be added or
subtracted. That apart, as has been held in Polymat
India (P) Ltd. [(2005) 9 SCC 174] , it is the duty of the
Court to interpret the document as is understood
between the parties and regard being had to the
reference to the stipulations contained in it.

xxx xxx xxx

35. The terms of the policy are to be strictly construed.
There can be no cavil about the proposition of law that
in case of ambiguity, the construction has to be made
in favour of the insured”

45

32. In United India Insurance Co. Ltd. v. Orient Treasures (P) Ltd.

(2016) 3 SCC 49, this Court quoted Halsbury’s Laws of England as

follows:

“37. In Halsbury’s Laws of England (5th Edn., Vol.
60, Para 105) principle of contra proferentem rule is
stated thus:

“Contra proferentem rule.—Where there is
ambiguity in the policy the court will apply
the contra proferentem rule. Where a policy is
produced by the insurers, it is their business to see
that precision and clarity are attained and, if they fail
to do so, the ambiguity will be resolved by adopting
the construction favourable to the insured. Similarly,
as regards language which emanates from the
insured, such as the language used in answer to
questions in the proposal or in a slip, a construction
favourable to the insurers will prevail if the insured
has created any ambiguity. This rule, however, only
becomes operative where the words are truly
ambiguous; it is a rule for resolving ambiguity and it
cannot be invoked with a view to creating a doubt.
Therefore, where the words used are free from
ambiguity in the sense that, fairly and reasonably
construed, they admit of only one meaning, the rule
has no application.””

33. In Industrial Promotion & Investment Corpn. of Orissa Ltd. v. New

India Assurance Co. Ltd. (2016) 15 SCC 315, this Court referred to

the contra proferentum rule as follows:

“10. We proceed to deal with the submission made
by the counsel for the appellant regarding the rule
of contra proferentem. The Common Law rule of
construction “verba chartarum fortius accipiuntur
contra proferentem” means that ambiguity in the
wording of the policy is to be resolved against the

46
party who prepared it. MacGillivray on Insurance
Law [ Legh-Jones, Longmore et al
(Eds.), MacGillivray on Insurance Law (9th Edn.,
Sweet and Maxwell, London 1997) at p. 280.] deals
with the rule of contra proferentem as follows:

“The contra proferentem rule of construction arises
only where there is a wording employed by those
drafting the clause which leaves the court unable to
decide by ordinary principles of interpretation which
of two meanings is the right one. ‘One must not use
the rule to create the ambiguity — one must find the
ambiguity first.’ The words should receive their
ordinary and natural meaning unless that is
displaced by a real ambiguity either appearing on
the face of the policy or, possibly, by extrinsic
evidence of surrounding circumstances.”
(footnotes omitted)

11.Colinvaux’s Law of Insurance [ Robert and
Merkin (Eds.), Colinvaux’s Law of Insurance (6th
Edn., 1990) at p. 42.] propounds the contra
proferentem rule as under:

“Quite apart from contradictory clauses in policies,
ambiguities are common in them and it is often very
uncertain what the parties to them mean. In such
cases the rule is that the policy, being drafted in
language chosen by the insurers, must be taken
most strongly against them. It is construed contra
proferentem, against those who offer it. In a doubtful
case the turn of the scale ought to be given against
the speaker, because he has not clearly and fully
expressed himself. Nothing is easier than for the
insurers to express themselves in plain terms. The
assured cannot put his own meaning upon a policy,
but, where it is ambiguous, it is to be construed in
the sense in which he might reasonably have
understood it. If the insurers wish to escape liability
under given circumstances, they must use words
admitting of no possible doubt.

But a clause is only to be contra proferentem in
cases of real ambiguity. One must not use the rule

47
to create an ambiguity. One must find the ambiguity
first. Even where a clause by itself is ambiguous if,
by looking at the whole policy, its meaning becomes
clear, there is no room for the application of the
doctrine. So also where if one meaning is given to a
clause, the rest of the policy becomes clear, the
policy should be construed accordingly.”
(footnotes omitted)”

34. The High Court held in the impugned judgment that as additional

premium had been paid so as to attract the applicability of IMT-5, in

any case the Insurance Company would be liable under the policy to

pay compensation in the case of death to unnamed passengers other

than the insured and his paid driver or cleaner, Dr. Alpesh Gandhi

being one such unnamed passenger. This was done on the footing

that the exception to IMT-5 was that a person in the employ of the

insured coming within the scope of the Workmen’s Compensation Act,

1923 is excluded from the cover, but that as Dr. Alpesh Gandhi did not

come within the scope of the Workmen’s Compensation Act,

compensation payable due to his death in a motor accident would be

covered by IMT-5. We see no reason to disturb this finding. The

inapplicability of endorsement IMT-16, as additional premium had not

been paid would, therefore, make no difference on the facts of this

case. Section-II, entitled “liability to third parties” in the insurance

policy dated 17.04.1997 set out hereinabove exempts the insurance

company from the death of a person carried in a motor car where such

48
death arises out of and in the course of the employment of such

person by the insurer. The question that arises before us is as to

whether the expression “employment” is to be construed widely or

narrowly – if widely construed, a person may be said to “employed” by

an employer even if he is not a regular employee of the employer.

However, the wider meaning that has been canvassed for by the

insurance company cannot possibly be given, given the language

immediately before, namely, “in the course of”, thereby indicating that

the “employment” can only be that of a person regularly employed by

the employer. Even otherwise, assuming that there is an ambiguity or

doubt, the contra proferentum rule referred to hereinabove, must be

applied, thus making it clear that such “employment” refers only to

regular employees of the Institute, which, as we have seen

hereinabove, Dr. Alpesh Gandhi was certainly not.

35. The Appellants placed reliance on an Order of this Court dated

05.03.2019, which reads as follows:

“1. Leave granted.

2. The limited question to be examined arising from
the impugned order is the effect of the direction that
the insurance company is liable to pay only a sum
of Rs.25,000/- and the balance amount may be
recovered from the respondent No.2.

49

3. The appellant(s)/claimant(s) seeks to contend
that it is impossible for the appellants to enforce
their remedy specially giving their economic status.

4. On the conspectus of the matter and on hearing
learned counsel for the parties, we consider it
appropriate to direct that full amount should be paid
by respondent No.1-Insurance Company and the
amount beyond the liability to be paid by
respondent No.1 may be recovered by the
Insurance company from respondent No.2.

5. The appeal accordingly stands disposed of.
Parties to bear their own costs.”
This Order seems to have been passed under Article 142 of the

Constitution on the facts of that case, without reference to any case

law. In the view that we have taken, it is unnecessary for us to place

reliance on such Order.

36. In this view of the matter, we allow the appeal, set aside the judgment

of the Gujarat High Court and restore that of the Motor Accident

Claims Tribunal.

.……………………………J.

(R.F. Nariman)

.……………………………J.

(S. Ravindra Bhat)
New Delhi;

April 15, 2020.

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