Exemption of liability clauses in insurance contracts are to be construed in the case of ambiguity contra proferentum; SC.

Supreme Court of India

Justice R. F. Nariman & Justice S. Ravindra Bhat

The SC on April 15, 2020 {SUSHILABEN INDRAVADAN GANDHI & ANR. v. THE NEW INDIA ASSURANCE COMPANY LIMITED & ORS.} held that 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. 

It was held that 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.

It was further held that, 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. On the other hand, it was held that 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.

It was held that, in present case, if the 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. It was held that first and foremost, the intention of the parties is to be gathered from the terms of the contract. It was also held that 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 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. It was held that 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. It was also held that 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. It was held that 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. It was held that the fact that Dr. Gandhi will devote full-time attention to the Institute is the obverse side of piece-rated work which can yet amount to contracts of service, being a neutral factor. Likewise, it was held that 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. It was held that 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. It was held that 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 employees. It was held that 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.  It was held that 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.

Further held that it is well-settled that exemption of liability clauses in insurance contracts are to be construed in the case of ambiguity contra proferentum.

In the present case, the Motor Accident Claim awarded total compensation of INR 37,63,100 which had to be paid together with interest at 8% per annum to the family of the deceased doctor. Importantly, all three Respondents were made jointly and 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, it was held by the tribunal that 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. The said view was set aside by the HC by limiting the liability of the insurance company to Rs. 50,000/- towards the deceased doctor - on the basis that the contract entered between the respondent no. 3 and the deceased doctor was contract of service.

The appeal was allowed by the SC by setting aside the judgment of the Gujarat High Court and restoring that of the Motor Accident Claims Tribunal, that is, by awarding total compensation of INR 37,63,100 which has to be paid together with interest at 8% per annum to the family of the deceased doctor by respondent no. 1 to 3, jointly and severally. 

The question that arises for consideration in present case before the SC was as to whether Dr. Alpesh Gandhi could have been said to have been in the employment of the Respondent No. 3 on the date of the accident, as a result of which the limitation of liability provision in favour of the Respondent No. 1 would kick in. The said was answered in negative by the SC, as aforesaid.