How to Determine whether a Contract is Contract of Service or Contract for Service?

Companies or organizations entered into a number of contracts with a large number of people in order to grow in the business world. Several times they join their hands with other organizations or with a third party to meet their business requirement. The contract they have entered into is differentiated into two parts, i.e., “contract of service” or “contract for service”. This is why it is very important for organizations or individuals to understand the difference between both contacts before entering into it. The terms “contract of service” and “contract for service” are in vogue to identify the type of agreement into which parties entered. Generally, “contract of service” refers to a person who is employed in an organization, or who is in the company for service on a permanent basis. Under a contract of service, all the persons are entitled to get the benefits of employees, whereas in the contract for service the person gets no benefits as awarded to an employee of the company or organization.

On 15^th April 2020 in the case of Sushilaben Indravadan Gandhi v. The New India Assurance Company Limited1, Hon’ble Supreme Court clarified the difference between “contract of service” and “contract for service”. In this case, the deceased husband entered into a “contract for service” as an Honorary Ophthalmic Surgeon with Rotary Eye Institute, Navsari. The deceased met with an accident and suffered a serious injury while traveling in a minibus owned by the institution. The institute had availed a comprehensive car policy from the “New Assurance Company” already before the accident occurred. But the insurance of the employee is not covered by the company despite having a liability clause that says that all the insurance will be covered. The appellant filed a petition against the driver, The institution, the company claiming compensation of Rs. 1 crore for the death of the deceased husband. The company opposed the petition claiming that the deceased was an employee of the institution and is excluded from the liability of the company as per the policy. The tribunal allowed the petition on the ground that the contract was a “contract for service”, and the deceased was not an employee of the institution at the time of the accident. The tribunal held all three respondents liable to pay compensation of Rs. 37,63,100/-.

However, the Gujrat High Court held that the contract was a “contract of service” and therefore the company would be liable to pay only to the extent of Rs. 50,000/- as per Regulation 27 of the General Regulations of the Indian Motor Tariffs and the rest will be borne by the driver and the institution.

The court held that while determining if a contract is a “contract of service” or “contract for service” the control test should be done, in which the following factors are to be included:-

1. Test of “control of the employer”, as in whether the employer is controlling the manner in which the work is done along with the work or not.

2. The person employed under an organization is just giving his/her contribution to the organization or he/she is associated with the employer’s organization on a permanent basis.

3. This factor is laid down from the English judgment that whether the wage or other remuneration is paid by the employer and whether there is a sufficient degree of control by the employer among other factors, this test would be elastic enough to apply to a variety of cases.

4. Test to determine who is making profit and loss among the business and who owns the assets, whether an employer or it is owned by one’s personal account.

5. Test to determine, Whether the employer has economic control over the worker’s subsistence, and skill and whether that particular worker works for himself or under the guidance of his/her employer.

6. Test to determine, whether the person who has an engagement with an organization is performing service on his own account or not?

7. A “conglomerate of all applicable tests taken on the totality of the factual situation in a given case”, would be required to determine whether a contract is a “contract of service” or whether is it a “contract for service”?

Principle of contra proferentum:

While interpreting the exemption of liability clause the supreme court relied on the “principle of contra proferentum”. This principle clearly states that when the words of a document are ambiguous, they will be constructed against the party who prepared that document. In the present case, the Insurance Company contended that the expression “employment” in the exemption of liability clause should be construed widely. Hence, the Supreme Court held that the words “in the course of” before employment enunciates that the employment can only be that person who is employed by the employer on a regular permanent basis. In case when the ambiguity arises we should apply the principle of contra proferentum which says that the term “employment” refers to regular or permanent employees of the company or organization.

Conclusion:

The Supreme Court thus set aside the order passed by Gujarat High Court and restored the order passed by the Tribunal. This judgment by the Supreme Court brings clarity to the difference between the term “contract for service” and “contract of service”. The tests adopted by the Supreme Court are the aptest decision dealing to determine the nature of a contract in case of ambiguity especially arises in labor laws. In this case, the contractual relationship is made crystal clear by the tests and also the principles. Court also considered the account of new independent professionals while determining the case.