Karnataka High Court: Employment contract cannot be given a colour of a commercial dispute by dressing it to be a provision of services

Karnataka High Court: Employment contract cannot be given a colour of a commercial dispute by dressing it to be a provision of services

The Karnataka High Court in a significant ruling has held that a pure and simple employment contract cannot be given a colour of a commercial dispute by dressing it to be a provision of services.

The single judge Justice M. Nagaprasanna emphasized the need to differentiate between employment contracts and commercial disputes, preventing the potential overload of Commercial Courts with excessive litigation if every employment agreement were treated as a business issue. The Court emphasized that such an approach would defeat the purpose for which commercial courts were established.

In the present case, the petitioner, who was initially employed by Elior India Food Services LLP (referred to as “the firm”), later became a partner and minor partner in the firm with a specific share. Due to certain actions and omissions on the part of the petitioner, the firm initiated an inquiry by issuing a charge sheet on 10 May, 2022.

In response to these proceedings, the petitioner filed a Commercial Arbitration Application invoking Section 9 of the Arbitration and Conciliation Act, 1996, before the Commercial Court on 13 May, 2021, based on an arbitration clause in the employment agreement.

While the Section 9 application was pending, the petitioner was terminated from service by the firm. On 8 June, 2021, the petitioner invoked arbitration under Section 21 of the Act and issued a notice to the firm. However, the application under Section 9 filed before the Commercial Court was dismissed during the Section 21 proceedings.

The petitioner then filed a commercial appeal before the Court, but it was also dismissed by a Division Bench on 22 October, 2021, affirming the order of the lower Court. The petitioner did not challenge this dismissal by the Division Bench.

As per the arbitration clause in the Employment Agreement, a three-member Arbitral Tribunal was constituted. The first hearing of the Arbitral Tribunal took place on 8 December, 2021, during which the parties were represented, and the Tribunal directed the completion of pleadings. On 15 December, 2022, the Arbitral Tribunal issued an order of interim or partial award in favor of the petitioner, and directed the respondents to make the specified payments.

However, the respondents, feeling dissatisfied with the decision of the arbitral tribunal, approached the Commercial Court.

In response to the respondents’ actions, the petitioner raised a question regarding the jurisdiction of the commercial court.

The issue before the judge was whether an Employment Agreement would come within the meaning of Section 2(1)(c)(xviii) of the Act, for the agreement to become a commercial dispute.

In this regard, the Court observed, “Interpretation of whatever nature that can be placed to the definition of commercial dispute, as obtaining under Section 2(1)(c)(xviii) will not lead to the subject agreement, to become an agreement for services, as obtaining under the afore-quoted provision. The provision relates to agreements of sale of goods or provision of services. They cannot be read in isolation. A pure and simple employment contract cannot be given a colour of a commercial dispute by dressing it to be a provision of services.”

The Court remarked that if every Employment Agreement is brought within the ambit of commercial dispute, it would then be opening a pandoras' box or will be opening flood gates of litigation before the Commercial Court/s that would clog the Court. This in effect would defeat the very reason why the commercial Court was constituted.

The Court further placed reliance on the decision passed by the Apex Court in the case of Ambalal Sarabhai Enterprises Ltd vs. K.S. Infraspace LLP wherein the Apex Court held that issues which do not relate to commercial disputes filed before the commercial Courts merely because of high value and with the intention of seeking early disposal, such issues brought before the Commercial Court should not be entertained, as it is not intended to bring in every dispute before the commercial Court by the law makers.

The Apex Court further held that the excluded class of litigation will, in any event be entertained, in the ordinary civil Courts wherein the remedy always existed to add, does always exist.

In view of the preceding analysis, the High Court had no hesitation in holding that the dispute between the parties was not a commercial dispute within the meaning of Section 2(1)(c)(xviii) of the Act and therefore, observed that the Commercial Court ought not to have entertained the dispute.