The Standard-Vacuum Refining Co. of India Ltd. vs Its Workmen and Others

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 130 of 1959

Decision Date: 06/04/1960

Coram: K.N. Wanchoo, P.B. Gajendragadkar, K.C. Das Gupta

The case under consideration is Standard‑Vacuum Refining Co. of India Ltd. versus its workmen and others, decided on 6 April 1960 by the Supreme Court of India. The judgment was authored by Justice K N Wanchoo, and the bench comprised Justices K N Wanchoo, P B Gajendragadkar and K C Das Gupta. The petitioner is the Standard‑Vacuum Refining Co. of India Ltd., while the respondents are the workmen of the company and other persons. The citation for the decision is 1960 AIR 948 and 1960 SCR (3) 466. Citator references to this decision appear in the following reports: F 1967 SC 1206 (10) R, 1972 SC 319 (15) F, 1972 SC 1942 (24,95) R, 1987 SC 777 (6) RF, 1990 SC 532 (6) E and 1992 SC 457 (19,20). The dispute arose under the Industrial Disputes Act, 1947, specifically concerning the abolition of a contract labour system employed by the company for cleaning and maintenance of its refinery, premises and plant. The regular workmen of the company raised a demand that the contract system be discontinued and that the workers employed through contractors be absorbed into regular service. The matter was referred to an industrial tribunal under section 10 of the Act. The company opposed the reference on two grounds: first, that it was incompetent to entertain the grievance because no direct dispute existed between the company and the respondents and the respondents could not raise a dispute concerning the contractor’s personnel; and second, that the choice of method for conducting its business was a managerial decision that the tribunal should not interfere with. The tribunal held that the reference was competent and, on merits, found that the work performed by the contractor was essential to daily operations of the company, that the use of annual contracts deprived the contractor’s workers of security of service and associated benefits, and therefore the contract system should be abolished. The Supreme Court affirmed that the dispute qualified as an industrial dispute within the meaning of section 2(k) of the Act, relying on the decision in Workmen of Dimakuchi Tea Estate v. Management of Dimakuchi Tea Estate, [1958] 467 SCR 1156, because the respondents shared a community of interest with the contractor’s workers, they possessed a substantial interest in the subject matter, and the company was capable of granting relief. Accordingly, the reference was deemed competent, and the direction to abolish the contract system was held to be just in the circumstances.

In the civil appellate jurisdiction the matter concerned Civil Appeal No 130 of 1959, taken on special leave from an award dated 5 September 1958 issued by the Industrial Tribunal of Bombay in Reference (I.T.) No 187 of 1958; the appeal was styled D. Macropollo and Co. (P) Ltd. v. D. Macropollo and Co. (P) Ltd. Employees’ Union and reported in A.I.R. 1958 S.C. 1012. Counsel for the appellants comprised the Solicitor‑General of India, C. K. Daphtary, together with G. B. Pai and Sardar Bahadur, while for respondent No 1 the representatives were H. R. Gokhale, S. B. Naik and K. R. Chaudhury. The judgment was delivered on 6 April 1960 by Justice Wanchoo and concerned an appeal by special leave in an industrial dispute. The appellant was The Standard Vacuum Refining Company of India Limited, hereinafter referred to as “the company”, and the respondents were the workmen employed by the company who raised a grievance about the use of contract labour for cleaning and maintenance of the refinery, its plant and its premises. The company’s regular practice was to engage contractors to perform this cleaning work for a fixed period of one year, beginning on 1 October and ending on 30 September each year. At the time the reference was made, the contract for the period from 1 October 1957 to 30 September 1958 was held by Ramji Gordhan and Company. On 27 April 1957 the workmen submitted a demand that the contract system then prevailing in the company be abolished and that all workers employed through contractors be absorbed into the regular service of the company, with the absorption to be deemed retrospective to the date of their original employment through the contractors. The workmen argued that the contractor was frequently changed from year to year, and each change resulted in the dismissal of the workers employed by the preceding contractor. As an illustration they pointed out that before 1 October 1957 the contract had been with Gowri Construction Company, which had employed sixty‑seven workmen for the cleaning tasks. When the contract was subsequently awarded to Ramji Gordhan and Company, all sixty‑seven of those workmen were terminated, although forty of them were later re‑engaged as fresh hires by the new contractor. The effect of this practice, the workmen submitted, was a complete lack of job security for those actually performing the company’s work. In addition, the contractors paid substantially lower wages to their workmen than the company paid to its own unskilled regular employees. Furthermore, the contract workers were excluded from statutory and company‑provided benefits such as a provident fund, gratuity, bonus, privileged leave, medical facilities and subsidised food and housing, all of which were available to the regular workforce. Although the cleaning work was of a permanent nature, the company had instituted the contract system to deny the workers the rights and benefits that it afforded to its own employees. The dispute was initially referred to the conciliation officer; after conciliation attempts failed, the Government of Bombay proceeded to make a reference.

On May 13, 1958 a reference was made directing that the contract system used for cleaning the premises and plant of the refinery be abolished. The reference stipulated that workers who were employed through Ramji Gordhan and Company should be regarded as employees of Standard Vacuum Refining Company of India Limited, Bombay. It required that the wage scales, conditions of service and other employment terms that applied to the refinery’s regular workers be extended to these men. Moreover, the reference ordered that the past service of these workers be taken into account and that they be treated as having been continuously in the service of the Stanvac refinery from the date they began their employment. The company opposed this claim and advanced two principal contentions. First, it argued that the reference issued under section 10 of the Industrial Disputes Act, No. 14 of 1947 (the “Act”) was legally incompetent. Second, it maintained that the work performed by the contractor’s employees was not integral to the manufacturing process and therefore appropriately assigned to the contractor. The company contended that if the contractor’s workers were dissatisfied with their conditions of service, they should address their grievances with the contractor, not with the company. Regarding the disparity in wages, benefits and amenities between the company’s regular employees and the contractor’s workers, the company asserted that the two categories performed fundamentally different work and that any differences in remuneration were a matter between the contractor and its own workforce. It further emphasized that the contractor was an independent employer and that it was incorrect to regard the company as the real employer. Accordingly, the company claimed that it was entitled to determine the most suitable method of conducting its business and that the industrial tribunal should not intrude upon this management function.

The tribunal, however, found that the reference was competent. On the merits, it held that the work carried out under the contract was necessary for the company and had to be performed on a daily basis, even though it was not part of the manufacturing process itself. The tribunal observed that the use of annual contracts for this work deprived the contractor’s workers of security of service and of various benefits, privileges and leave that regular employees enjoyed. Considering these facts, the tribunal concluded that the case warranted a directive for the company to abolish the contract system with respect to this cleaning work. Consequently, the tribunal ordered that, effective November 1, 1958, the company must cease obtaining this work through contractors and must instead have it performed by workers directly engaged by the company. The tribunal rejected the demand that the company take over all of the contractor’s workers, count their past service, and grant them the same wage scale and conditions of service that applied to the regular workforce. The company was further

The Court noted that the company was ordered to employ regular workmen for the specific task and, in doing so, it was required to give preference to those workers who were previously employed by Ramji Gordhan and Company. The determination of the wage scale and any additional benefits for these newly engaged workers was left to the discretion of the company. The learned Solicitor‑General, appearing on behalf of the company, raised two principal contentions before the Court. First, he questioned whether the present controversy qualified as an industrial dispute and therefore whether the reference to the tribunal was appropriate. Second, he contended that the tribunal had exceeded its authority by interfering with the management prerogative concerning the method by which the company should carry out its work.

Regarding the first contention, the Solicitor‑General argued that no genuine dispute existed between the company and the respondents and that the respondents could not properly raise a dispute concerning the workmen employed by another firm, namely Ramji Gordhan and Company. He based this argument on the definition of “industrial dispute” found in section 2(k) of the Industrial Disputes Act and on the earlier decision of this Court in Workmen of Dimakuchi Tea Estate v. Management of Dimakuchi Tea Estate. Section 2(k) defines an industrial dispute as requiring three elements: (i) the presence of a dispute or difference; (ii) that the dispute be between employers and employers, employers and workmen, or workmen and workmen; and (iii) that the dispute be connected with the employment, non‑employment, terms of employment, or conditions of labour of any person. The first element concerns the existence of a real and substantial dispute, the second identifies the parties involved, and the third specifies the subject‑matter of the dispute. The Solicitor‑General’s submission therefore consisted of two sub‑contentions: (i) that no real or substantial dispute existed between the company and the respondents, and (ii) that the subject‑matter did not fall within the scope of the definition in section 2(k). The Court found the first sub‑contention readily dismissible, observing that a genuine and substantial dispute did exist between the company and the respondents concerning the employment of contract labour for the company's work. The fact that the respondents bringing the dispute were not themselves contract labourers did not diminish the reality of the dispute over how the company should perform its work. The core of the dispute was whether the company should directly employ workmen instead of relying on contractors, and this issue was clearly real and substantial even though the respondents themselves were regular workmen and not contract workers. The Court also referred to the Dimakuchi case, where the dispute concerned an employee of a tea estate, to illustrate that disputes of this nature are recognised as industrial disputes under the Act.

In the earlier Dimakuchi case, the dispute had arisen with an individual who was not a workman, yet the Court had held that the controversy nevertheless constituted a real and substantial dispute between the workmen and the employer. The Court observed that the manner in which the work should be carried on was a matter of considerable importance to the workmen, and therefore it could not be said that the controversy failed to qualify as a real and substantial industrial dispute between the company and its workmen. Accordingly, the first element of section 2(k) was satisfied, and the second element was also satisfied because the dispute was between the company and the respondents. The third element required further analysis in light of the Dimakuchi decision.

Section 2(k), as worded, permitted workmen of a particular employer to raise a dispute connected with the employment or non‑employment, the terms of employment, or the conditions of labour of any person. The Dimakuchi judgment examined the phrase “any person” in that provision and held that it did not empower workmen of a particular employer to raise a dispute about any individual in the world, although the words “any person” could not be equated with the words “any workman.” The Court therefore articulated a test for determining the scope of “any person,” which it set out on pages 1174‑75 as follows: “If, therefore, the dispute is a collective dispute, the party raising the dispute must have either a direct interest in the subject‑matter of dispute or a substantial interest therein in the sense that the class to which the aggrieved party belongs is substantially affected thereby. It is the community of interest of the class as a whole‑class of employers or class of workmen‑which furnishes the real nexus between the dispute and the parties to the dispute. We see no insuperable difficulty in the practical application of this test. In a case where the party to a dispute is composed of aggrieved workmen themselves and the subject‑matter of the dispute relates to them or any of them, they clearly have a direct interest in the dispute. Where, however, the party to the dispute is also composed of workmen who espouse the cause of another person whose employment or non‑employment, etc., may prejudicially affect their interest, the workmen have a substantial interest in the subject‑matter of dispute. In both such cases the dispute is an industrial dispute.”

The Court therefore needed to determine whether the respondents who had raised the present dispute possessed a direct interest in the subject‑matter of the dispute or, alternatively, a substantial interest such that the class to which they belonged was substantially affected, and whether there existed a community of interest between the respondents and those whose cause they had taken up. It was evident, the Court found, that such a community of interest existed.

In this case the dispute involved the respondents and the workmen employed by Ramji Gordhan and Company. Both groups belonged to the same class of workers and performed their duties for the same employer, making it possible for the company to grant the relief sought by the respondents. The Court observed that the respondents also possessed a substantial interest in the subject‑matter of the dispute, namely the abolition of the contract system for this type of work. The learned Solicitor‑General stressed that the respondents’ interest could not be said to be prejudicially affected by the employment status, terms of service, or labour conditions of the Ramji Gordhan workmen, and he relied on the phrase “may prejudicially affect their interest” from earlier observations. The Court explained that the test required the workmen who espouse a cause to have a substantial interest in the dispute, and the phrase about potential prejudice was merely an example used to illustrate the practical application of that test in the Dimakuchi case. Mr Gokhale, appearing for the respondents, argued that even if a prejudicial effect were necessary, the respondents’ interest might be harmed in the future should the contract system be allowed to continue in this branch, because the company could extend the same system to other branches now staffed by regular workmen. The Court declined to explore that argument, noting that the prejudice illustration was only one way to apply the Dimakuchi test, which required a substantial interest defined as the class to which the aggrieved party belongs being significantly affected. Consequently, the Court found that the respondents shared a community of interest with the Ramji Gordhan workmen, who were effectively employed by the same employer, and that the respondents’ class—workmen—was substantially affected by the dispute. The Court further held that the company was capable of providing the requested relief. Accordingly, all the elements of section 2(k) as interpreted in Dimakuchi were satisfied, the dispute qualified as an industrial dispute, and the reference to the tribunal was proper. Turning to the next issue, the Court considered whether the tribunal was justified in directing the abolition of the contract system in the manner it had done.

In contemporary industrial relations the employment of contract labour has generally been discouraged. The Royal Commission on Labour observed that, although the system might have been appropriate in primitive times, it is now desirable for management to exercise full control over the selection, working hours, and payment of workers in order to fulfil the complex responsibilities imposed by law and equity. Similar conclusions have been reached by several Labour Enquiry Committees appointed in various States. The Court agreed that when workmen raise a dispute concerning the use of contract labour by an employer, the tribunal must examine the specific merits of that dispute in addition to the general principle that contract labour ought not to be encouraged. Accordingly, the decision must not rest solely on abstract or theoretical objections to contract labour, but must also consider the particular terms and conditions under which the contract labour is employed and the precise grievance articulated by the employees. While theoretical considerations may have some relevance in industrial adjudication, their importance should not be overstated. The Court therefore turned to the contract labour arrangement that was the subject of the present proceedings.

The contract in question covered four distinct matters, yet the reference before the tribunal was limited to a single issue: the cleaning and maintenance work at the refinery, including the premises and plant. This work is ancillary to the manufacturing process, essential for its operation, and of a perennial nature that requires daily performance. Such duties are ordinarily performed by regular workmen directly employed by the employer, and there is no inherent difficulty in employing permanent staff for them. The situation would be different if the work were intermittent, temporary, or of such limited scope that employing full‑time workmen would be impractical. Given these facts, the tribunal’s order directing the abolition of the contract system for this specific activity was deemed just, and there was no compelling reason for the Court to interfere. The Court noted the decision in D. Macropollo And Co. (P) Ltd. v. D. Macropollo And Co. (P) Ltd. Employees’ Union (A.I.R. 1958 S.C. 1012) where it had been argued that the tribunal should not have intruded upon management’s discretion to organise work in the most economical and convenient manner. It was observed that the present case did not involve a contract system used as a camouflage whereby the contractor’s workmen were in reality the company’s own workmen. The contractor here was an independent entity, the arrangement was genuine, and there was no indication that the company was attempting to disguise its own labour obligations. Consequently, the tribunal’s decision to leave the contract in place, while directing that any future selection of workers give preference to those already employed by the contractor, was upheld as appropriate.

The Court noted that the mere existence of a bona‑fide contract does not automatically shield the arrangement from scrutiny by an industrial tribunal. It explained that if the contract had been concluded in bad faith, serving as a disguise to conceal the reality that the workers were in fact employees of the company, the tribunal would have been justified in ordering the company to assume responsibility for the entire workforce and to treat those individuals as its own workmen. However, because the contract in the present case was found to be bona‑fide, the tribunal did not issue an order for the company to take over the whole body of workmen. Instead, the tribunal left the company free to determine, for itself, the appropriate number of workmen to employ and the terms on which they should be engaged. The only specific direction given by the tribunal was that, during any selection process, preference should be accorded to those workmen who were already employed by the existing contractor.

In discussing the relevance of earlier authority, the Court referred to the decision in Macropollo and Co. (P) Ltd. v. Macropollo and Co. (P) Ltd. Employees’ Union (1). It recalled that the Supreme Court in that case had held that the reorganisation undertaken by the employer was motivated by considerations of economy and convenience and was therefore bona‑fide. The Court described the factual background of the Macropollo case: the principal business of the concern was acting as a selling agency for several cigarette manufacturers. Prior to 1946 the concern relied on independent distributors, who in turn employed salesmen. In 1946 communal riots erupted in Calcutta, prompting the concern to bring those salesmen directly into its own payroll so that it could reorganise them on communal lines in response to the prevailing circumstances. Later, in 1954, the concern decided to shut down its own outdoor sales department and to revert to the distributor system. This decision necessitated the retrenchment of certain workmen. The Supreme Court held that the reorganisation scheme adopted in 1954, undertaken for reasons of economy and convenience, was bona‑fide (1) A.I.R. 1958 S.C. 1012, and that any resulting retrenchment was inevitable. Those facts demonstrated that the Macropollo case involved a genuine restructuring of business that led to retrenchment.

The Court contrasted those facts with the situation before it. It observed that, in the present matter, there was no comparable business reorganisation. The only issue to be resolved was whether work that is continuous, required day by day, incidental and essential to the operation of the refinery, and sufficient to employ a substantial number of full‑time workmen—work that, in most enterprises, is performed by regular employees—could be lawfully assigned to contractors. After examining the nature of the work and the conditions of service applicable in the present case, the Court concluded that the tribunal’s decision was appropriate and warranted no interference. The sole amendment required, the Court held, was a change of the effective date, because a direction could not be given retrospective effect from 1 November 1958. Noting that the existing contract was due to expire in a few months, the Court expressed the view that the present arrangement could continue for that short remaining period. Accordingly, the appeal was dismissed, with the modification that the tribunal’s order would take effect from the date on which the current contract in force within the company comes to an end.

The Court directed that the operative effect of the order would commence only on the date when the existing contract, which was then in force within the company, came to an end. Consequently, the order would not be back‑dated but would become applicable from the moment the current contractual arrangement terminated. The Court further ordered that the costs incurred by the respondents in these proceedings would be paid by the company. Accordingly, the financial burden of the litigation expenses was placed upon the corporate entity rather than on the individual respondents. Finally, the Court disposed of the appeal, holding that it was to be dismissed, but expressly qualified this dismissal by the foregoing modification concerning the commencement date of the order and the allocation of costs. This modification constituted the sole alteration to the tribunal’s original order, leaving the remainder of the tribunal’s decision intact.