Holding

The dispute is an international commercial arbitration covered by clause (f) of s.2(1) of the Arbitration and Conciliation Act, 1996, and the arbitration clause in the MoU is valid.

Summary

M/s Com Ed Chemicals Ltd entered into a Memorandum of Understanding with Dr. C.N. Ramchand, appointing him as Director (Technical) of a subsidiary and granting him equity, salary and other benefits. The respondent resigned, the company rejected his resignation and invoked the arbitration clause in the MoU, seeking appointment of an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996. The respondent objected, claiming that the dispute was not ‘commercial’, that he was an employee and that the Chief Justice of a High Court lacked jurisdiction in an international commercial arbitration involving a British national. The Supreme Court examined whether the MoU contained a valid arbitration clause, whether the relationship was of a commercial nature, and whether the dispute fell within the definition of international commercial arbitration under s.2(1)(f) of the Act. Relying on a liberal construction of ‘commercial’ and on precedents that consultancy and director‑type engagements are commercial, the Court held that the dispute is covered by the Act and the arbitration clause is enforceable. Consequently, it appointed a sole arbitrator and allowed the petition.

Issues considered

The existence and validity of an arbitration clause in the MoU.
Whether the dispute between the company and the Director (Technical) qualifies as ‘international commercial arbitration’ under s.2(1)(f) of the Arbitration and Conciliation Act, 1996.
Whether the respondent’s status as an employee/master‑servant precludes the application of the Act.

Legislation cited

Arbitration and Conciliation Act, 1996s. 11(6), s. 11(9), s. 2(1)(f)

Subjects

ArbitrationInternational commercial arbitrationArbitration clauseSection 11 appointmentCommercial relationshipDirector vs employeeUNCITRAL Model LawMoU

Judgment

[2008) 15 S.C.R. 567

- )._
M/S COM ED CHEMICALS LTD.
v.
C.N. RAMCHAND
A

(Arbitration Petition No. 17 of 2007)

NOVEMBER 6, 2008
B
[C.K. THAKKER, J.]

The Arbitration and Conciliation Act, 1996:
,
... s.2(1)(f) and 11 (6) and (9) - 'International commercial C
arbitration - A British National appointed as Director
(Technic;al) of an Indian subsidiary company formed under the
Memo of Understanding - Dispute with regard to functioning
of Director (Technical) - Application for appointment of
arbitrator- Opposed on the ground that Director (Technical)
0
being an employee and providing technical know-how and
expertise for payment of fees, matter was not covered under
·the term 'commercial' so as to _attract provisions of the Act -
HELD: The relevant clause in the agreement expressly
declared that any dispute pertaining to MoU would be decided
through arbitration - The Director (Technical) was required to E
undertake certain responsibilities under the agreement - He
was allotted 40% equity share in subsidiary company, besides
salary. and other benefits in lieu of services to be rendered
by him - Any dispute between the parties would be covered
under the arbitration clause in the agreement - Case is F
covered by clause (f) of s.2(1) of the Act - Arbitrator
appointed. ·

INTERNATIONAL CONVENTIONS/TREATIES

UNCITRAL Model Law on International Commercial G
Arbitration as adopted by United .Nations Commission on
International Trade Law - Expression 'commercial' - HELD:
Should be given a wide interpretation so as to cover matters
567 H
568 SUPREME COURT REPORTS [2008] 15 S.C.R.

A arising from all relationships of a commercial nature, whether
contractual or not.

The petitioner company, in order to expand its
business in chemicals in the field of bio-technology,
entered into a Memorandum of Understanding and
8 appointed the respondent as Director (Technical). The
MoU stipulated that the respondent would work full time
with the company at least for next eight years. The case
of the petitioner was that the respondent did not take
interest in the work and failed to attend Board Meetings,
C and sent a letter of resignation. The petitioner did not
accept t_~e resignation and sent a notice to the
respondent for arbitration, nominating an arbitrator. The
respondent did not agree to the arbitrator nominated by
the petitioner and suggested three names. In view of non-
0 agreement between the parties, the petitioner filed an
application under s.11 of the Arbitration and
Reconciliation Act, 1996 and requested the Chief Justice
of the High Court to appoint an arbitrator. The respondent
raised an objection that he being a British National, Chief
E Justice of the High Court had no jurisdiction to entertain
the application. Consequently, the company filed the
instant petition.

The respondent opposed the petition as not-
F maintainable on the grounds that the agreement
provided for supply of technical knowmhow and expertise l--
for payment of 'fees' and there was no dispute arising out
of legal relationship that could be considered as
'commercial' covered under clause (f) of s.2(1) of the Act;
and that the respondent was appointed by the company
G as an employee and the relationship between them was
of master and serv~nt, and as such the Act had no
application. ·

· Allowing the petition, the Court
H
COMED CHEMICALS LTD. v. C.N. RAMCHAND 569

HELD: 1. A bare reading of Clause 12 of the A
Agreement leaves no room for doubt that it is an
'arbitration clause' and expressly declares that any
dispute pertaining to MoU would be solved and decided
by an arbitrator. [Para 13] [576-H; 577-A]
B
2.1. It would not be correct to say that there was no
'commercial' element in the agreement so as to be
covered within the term 'International commercial
arbitration'. This Court has held that the agreement to
render consultancy service was 'commercial' in nature G
and there was commercial relationship between the
parties. [Para 14 and 17] [577-B; 578-C]

Kamani Engineering Corporation Ltd. & Ors. v. Societe
De Traction Et D'Electricite Societe Anonyme, & Ors., AIR
(1965) Born 114; Josef Meisaner GMBR & Co. v. Kanoria D
Chemicals & Industries Ltd. & Anr., AIR (1986) Cal 45 and
Mukesh H.Mehta & Ors. v. Harendra Mehta, (1998) 92 Comp
Cases 402, cited.

R. M. Investment & Trading Co. Pvt. Ltd. v. Boeing Co. & E
Anr., [1994] 4 sec 541, relied on.

2.2. The UNCITRAL Model Law on International
Commercial Arbitration as adopted by the United Nations
Commission on International Trade Law lays down that
the term 'commercial' should be given a wide F
i interpretation so as to cover matters arising from all
relationship of a commercial nature, whether contractual
or not. Relationships of a commercial nature include, but
are not limited to, inter alia, the transactions of consulting;
joint venture and other forms of industrial or business G
cooperation. This Court has also held that commercial
contract must be broadly construed with a view to give
efficacy to such contract rather than to invalidate it.
.....,,...._,., Clauses of the contract must be liberally interpreted.
H
570 SUPREME COURT REPORTS [2008] 15 S.C.R.

A Narrow and technical approach should be avoided. [Para
20 and 22] [579-D-F; 580-C·D]

Union of India v. D.N. Revri & Co., [1976] 4 SCC 147
and Citibank N.A. v. TLC Marketing PLC & Anr., [2008] 1
B SCC 481, relied on.

Russel on Arbitration (1997) p.60, referred to.

2.3.- The applicant-Company wanted to venture into
the field of bio-technology which was not previously
c chartered or traversed by it (novel bio-products). The
respondent possessed special knowledge and to get the
benefit of such research and expertise, an agreement
was entered into by the parties and respondent was
appointed l)irector (Technical) of the. subsidiary
0 Company. He was allotted 40% equity shares in the
subsidiary Company (Corned Bio~Tech Ltd.). Over·and
above that, he was to be. paid salary and other bt:nefits
in lieu of services rendered by him. Para 3 of the
Agreement required the resrondent to undertake certain
E responsibilities. [Para 25 and 27] [581-G, H; 581-8]

Ram Pershad v. Commissioner of Income Tax, New
Delhi, [1972] 2 sec 696, relied on.

Lee v. Lee's Air Framing Ltd., (1961) AC 12, referred to.
F
2.4. From settled legal position as also from the
functions to be performed by the respondent, he was
working in double capacity, i.e. (i) as an employee, and
(ii) as a Director. In the latter capacity, however, he was
. the Chief Executive Officer of the subsidiary Company
G and had to look after all operational matters. The
functions to be performed by him were supervisory and
· related to policy making decisions in the affairs of the
Company. Any. dispute between the applicant-Company
and the respondent would, therefore, be covered by
H Clause 12 of the Agreement which provides for
COMED CHEMICALS LTD. v. C.N. RAMCHAND 571

arbitration. [Para 32] [583-E-G] A
- >-
3. The case is covered by clause (f) of sub-section
(1) of Section 2 of the Act. It is a case of 'International
commercial arbitration' and is covered by Clause 12 of
MoU. Since there is a dispute between the parties, it has
B
to be decided by an arbitrator. The relevant clause
provides for an arbitrator i.e. sole arbitrator; therefore, only
one arbitrator should be appointed. Sole arbitrator
} appointed to decide the dispute between the parties.
[Para 33] [584-A-C]
c
Case Law Reference :
AIR 1965 Born 114 cited Para 15
AIR 1986 Cal 45 cited para 15
'o
(1998) 92 Comp Cases 402 cited para 15
(1994) 4 sec 541 relied on para 16
(1976) 4 sec 147 relied on para 21
(2008) 1 sec 481 relied on para 22 E
(1961) AC 12 referred to para 27
(1972) 2 sec 696 relied on para 29
CIVIL ORIGINAL JURISDICTION: Arbitration Petition No. F
1 17 of 2007.
- O.P. Dhingra, Kav!ta Kapil and Debasis Misra for the
Appellant.

Prashant Bhushan and Mayank Misra for the Respondent. G

The Judgment of the Court was delivered by
___:,,,!
C.K. THAKKER, J. 1. The present petition is filed by the
petitioner under Section 11 of the Arbitration and Conciliation
H

""'
572 SUPREME COURT REPORTS [2008] 15 S.C.R.

A Act, 1996 (hereinafter referred to as "the Act") praying to
Hon'ble the Chief Justice of India to appoint third Arbitrator as
Presiding Arbitrator or to appoint Sole Arbitrator as deemed
fit in the facts an<d circumstances of the case.

B 2. It is the case of the applicant that it is a Company known
as Mis Corned Chemicals Ltd. registered under the Indian
Companies Act, 1956. Mr. Ashwani Kapil is the authorized
signatory who has approached this Court. It is stated in the
application that the Company is doing business in chemicals
C in the fieid of bio-technology. To expand the business, the
Company floated a subsidiary company in the name and style
of Corned Biotech Ltd. For the said purpose, it entered into a
Memorandum of Understanding ('MoU' for sho:-t) and appointed
Dr. C.N. Ramchand (respondent herein) on September 4, 2003
for the development of products in the field of bio-industries and
D manufacturing and marketing of such products. After various
meetings and negotiations, terms and conditions were finalized
between the parties and the respondent was appointed as
Director (Technical) by the applicant Company. A copy of the
agreement has been annexed to the Application. MoU also
E provided that the respondent will work full time with the Company
at least for next eight years from the date of signing of the
agreement. According to the Company, it invested large amount
in the new adventure and paid substantial sum as remuneration
to the respondent for the work.
F
3. It is the allegation of the Company that the respondent
did not take interest in work and failed to attend Board Meetings
held in May and June, 2004 in spite of prior notice and
information in advance about such meetings. A notice was
issued by the Company to the respondent on July 14, 2004
-
G asking him to remain present at the Board Meeting scheduled
to be held on July 30, 2004. The respondent, however, sent a
Letter of Resignation on July 17, 2004. The Company has
alleged that not only the respondent wanted to quit the
Company before completing the work assigned to him in
H violation of the agreeme,ht, but he also instigated other
COM ED CHEMICALS LTD. v. C.N. RAMCHAND 573
[C.K. THAKKER, J.]

.. >-
subordinate staff-workers to leave the organization. Resultantly,
other staff members also resigned. In view of the large
A

investment by the Company, it refused tO accept the resignation
of the respondent. There was correspondence and exchange
of legal notices between the parties. It is, however, not
necessary to enter into the details thereof in the present B
proceedings.

4. By a communication dated August 12, 2005, the ·.
I applicant through his advocate sent a notice to the respondent
for appointment of an arbitrator in accordance with Clause 12 ·
of MoU and informed him that the applicant-Company had
c
decided to appoint Ramesh H. Nanavati, retired District Judge
as his arbitrator. The applicant called upon the respondent to
state whether he was agreeable to the said name. It also stated
that if he was not agreeable, he could suggest any other name
and/or appoint an arbitrator for resolving the dispute failing D
which the applicant would be constrained to take appropriate
action in accordance with law. The respondent through his
advocate informed the Company on September 12, 2005 ~hat
he was not agreeable to the arbitrator suggested by the
Company. He, however, suggested three names. At S!. No. 1, E
there was a name of Dr. Sandeep H. Shah, President, Indian
Psychiatric Association.

5. In view of non-agreement between the applicant and
respondent, the Company filed Arbitration Application No. 9 of F
i 2006 under Section 11 of the Act in the High Court of Gujarat
• at Ahmedabad requesting the Hon'ble Chief Justice of the High
Court to appoint an arbitrator. Notice was issued to the
respondent who filed his reply. In the reply, he asserted that he
is a 'British national' and hence any question of arbitration
G
between the applicant-Company which is registered in India
and the respondent-British national would fall under

_,. ~
'lnternationai Commercial Arbitration' as defined in Section
2(1 )(f) of the Act and under Section 11 (9) of the Act, it would
be within the power and authority of the Chief Justice of India
( H
574 SUPREME COURT REPORTS [2008] 15 S.C.R.

A to deal with and decide such application and the Chief Justice
of a High Court has no jurisdiction to entertain the application.
...
---'.

In support of the contention that he is a British national, the
respondent submitted requisite material which went to show that
he is British national. In view of the above contention, the
B Company sought permission from the High Court to withdraw
the petition so as to enable the Company to make appropriate
application to the Hon'ble Chief Justice of India. The permission
sought for was granted and the application was disposed of as
withdrawn.
c 6. The Company then approached this Court by filing the
present application on May 22, 2007. Hon'ble the Chief Justice
of India designated me a$ his nominee to deal with and decide
the application preferred by the Company. Notice Was issued
to the respondent pursuant to which he appeared and filed a
D counter-affidavit on February 12, 2008. The Registry was
directed to place the matter for hearing.

7. I have heard the learned counsel for the parties.

8. Learned counsel for the applicant-Company submitted
E
that the application deserves to be allowed by appointing a third
arbitrator as Umpire or sole arbitrator in view of difference
between the applicant and the respondent and failure to come
to an agreement to appoint an arbitrator acceptable to both the
parties. It was stated that the applicant appointed Ramesh H.
F Nanavati, retired District Judge as his arbitrator since the ,..
controversy related to interpretation of agreement and legal ...
issues were involved. The respondent, however, did not agree
and suggested another name. The applicant could not agree
to that name because of absence of legal background on the
G part of the person sought to be appointed. The Company,
therefore, invoked Section 11 of the Act by going to the High
Court of Gujarat. But in view of objection raised by the
""--··
respondent that he is a British national, the application was
withdrawn and thereafter the applicant has approached this
H Court. It was, therefore, prayed that the petition deserves to be
COMED CHEMICALS LTD. v. C.N. RAMCHAND 575
[C.K. THAKKER, J.]

allowed by either appointing third arbitrator as Umpire or by A
appointing sole arbitrator to deal with dispute between the
p.arties.

9. The learned counsel for the respondent, on the other
hand, submitted that the present application is not
8
maintainable. According to him, there is no dispute arising out
of legal relationship considered as commercial covered by
clause (f) of Section 2(1) of the Act and hence the provisions
of the Act would not apply to the case on hand. It was also
submitted that the agreement in substance, provides for supply' C
of technical know-how and expertise for payment of 'fees' and
there is no element of 'commerce' which could attract the
provisions of the Act. It was also urged that the respondent was
appointed by the Company as an employee and the relation
between the Company and the respondent was of master and
servant and to such cases, the Act has no application. Clause D
(12) of the Agreement on which strong reliance had been
placed by the Company cannot be termed as 'arbitration
clause'. In absence of legal, valid and enforceable arbitration
clause, applicant-Company has no right to approach this Court.
It was, therefore, submitted that the application deserves to be E
dismissed.

10. Having heard the learned counsel for the parties, in my
opinion, the petition should be allowed. Clause (f) of sub-
i Section (1) of Section 2 of the Act defines "International F
Commercial Arbitration" and reads thus;

(f) "international commercial arbitration" means an
arbitration relating to disputes arising out of legal
relationsrips, whether contractual or not, considered as
commercial under the law in force in India and where at · G
least one of the parties is-

r (i) an individual who is a national of, or habitually
resident in, any country other than India; or
H
576 SUPREME COURT REPORTS [2008] 15 S.C.R.

......_
A (ii) a body corporate which is incorporated in any
country other than India; or

(iii) a company or an association or a body of
individuals whose central management and control
is exercised in any country other than India; or
B
(iv) the Government of a foreign country.

11. Chapter II of the Act deals with "Arbitration Agreement"
and deciares that all disputes arising between the parties would
c be governed by the provisions of the Act. Chapter Ill provides
for "Composition of Arbitral Tribunal". Section 10 enacts that
the parties are free to determine number of arbitrators, but such
j-
number shall not be an even number. In case of failure to
determine number of arbitrators, the Arbitral Tribunal shall
D consist of a sole arbitrator. Section 11 relates to appointment
of arbitrators. It states that in case of failure on the part of the
parties in arriving at an agreement to appoint an arbitrator, an
application may,be made to the Chief Justice of India in case
of International Commercial Arbitration so that an appropriate
order may be passed for appointment of arbitrator. It is on the
E
basis of the above provision that the applic~nt-Company has
filed this application.

12. I find no substance in the preliminary objection raised
by the learned counsel for the respondent that there is no
F arbitration clause in the Agreement. Clause 12 of the agreement r
which provides for arbitration reads thus;

12. If there be any dispute pertaining to meaning of this
MoU or of any nature, will be solved and decided by
appointing an independent Arbitrator acceptable to all the
G
parties and if not solved by him can be referred to court
of law and for which the jurisdiction will be Vadodara.
~
"
13. Bare reading of the above clause leaves no room for
doubt that it is an 'arbitration clause' and expressly declares
H
. COMED CHEMICALS LTD. v. C.N. RAMCHAND 577
[C.K. THAKKER, J.]
... .>--
that any dispute pertaining to MoU would be solved and A
decided by an arbitrator.

14. I am also unable to uphold the argument of the learned
counsel that there is no International Commercial Arbitration.
The learned counsel for the respondent submitted that there is
B
no 'commercial' element in the agreement and what wa$
agreed between the parties was to provide 'technical knowL
~
how' and 'expertise' to the applicant-Company for which the
respondent was to be paid 'fees'.

15. The learned counsel in this connection referred tcp c
Kamani Engineering Corporation Ltd. & Ors. v. Societe De
Traction Et D'Electricite Societe Anonyme, & Ors., AIR (1965)
Born 114, Josef Meisaner GMBR & Co. v. Kanoria Chemicalp
& Industries Ltd. & Anr., AIR (1986) Cal 45 and Mukesh
H.Mehta & Ors. v. Harendra Mehta, (1998) 92 Comp Cases D
402. It was submitted by the counsel that in the above cases,
it has been held that if the work undertaken by a person is of~
professional character and does not involve business or trade,
the contract cannot be said to be of 'commercial' nature. Such
contract does not involve business or trade and there is no E
element of participation in commercial activity or in profit.
Remuneration, if any, is in the nature of 'fees'. A person
scrupulously keeps himself away from any commercial
1 relationship. As such, provisions relating to arbitration
agreement in the field of commercial arbitration are not F
attracted to these cases.

16. It may, however, be profitable to refer to a decision of
this Court in R.M. Investment & Trading Co. Pvt. Ltd. v. Boeing
Co. & Anr., (1994) 4 SCC 541. There this Court was called
upon to consider the provisions of Foreign Awards G

__,,. .
(Recognition and Enforcement) Act, 1961. The question before
the Court was whether there was commercial relationshi:p
between the parties as defined in Section 2 of the Act and
"' whether the Act would apply. In that case, an Indian Company
entered into an agreement with a Company registered in USA. H

'\
578 SUPREME COURT REPORTS [2008] 15 S.C.R.
F
A The Indian Company agreed to provide Boeing with consultancy
services for sale of Boeing Aircraft in India. Agreement for
..J.,
-
purchase of two Boeing Aircrafts was executed. A dispute
arose and the appellant claimed compensation and
remuneration for consultancy services. In view of arbitration
B clause, the matter was referred to arbitrator. It was contended
by the foreign Company that there was no 'commercial element'
and hence the application was liable to be dismissed.

17. This Court, however, rejected the contention. It Was held
that the agreement to render consultancy service by the appellant
c to the respondent was 'commercial' in nature and there was
commercial relationship between the parties.

18. Referring to earlier cases, this Court stated;
..
"It is not disputed that the sale of aircraft by Boeing to
D
customers in India was to be a commercial transaction. The )r
question is whether rendering of consultancy services by
RMI for promoting such commercial transaction as
consultant under the Agreement is not a "commercial
transaction". We are of the view that the High Court was
E right in holding that the agreement to render consultancy
services by RMI to Boeing is commercial in nature and that ...,,
RMI and Boeing do stand in commercial relationship with
each other. While construing the expression "commercial"
in Section 2 of the Act it has to be borne in mind that the r
F Act is calculated and designed to subserve the cause of "'<'-
facilitating international trade and promotion thereof by ;
,..
providing for speedy settlement of disputes arising in such
trade through arbitration and any expression or phrase
occurring therein should receive, consistent with its literal
r ~

G and grammatical sense, a liberal construction." [See:
Renusagar Power Co. Ltd. v. General Electric Co. (SCC )

at p. 723-24 : SCR at p. 492) and Koch Navigation Inc. v. i--
I
Hindustan Petroleum Corpn. Ltd.6 (SCC at p. 262 : SCR
!'-
at p. 75).J ~
J-
H
l...
·.. .,
COMED CHEMICALS LTD. v. C.N. RAMCHAND 579
[C.K. THAKKER, J.]
r"' >-
j The expression "commercial" should, therefore, be A
construed broadly having regard to the manifold activities
which are integral part of international trade today".

(emphasis. supplied)

19. lt was further observed; B

"While construing the expression 'commercial relationship'
in Section 2 of the Act, aid can also be taken from the
Model Law prepared by UNCITRAL wherein relationships
of a commercial nature include "commercial c
representation or agency" and 'consulting"'.

20. Now, UNCITRAL Model Law on International
Commercial Arbitration as adopted by the United National
Commission on International Trade Law defines the term
'commercial' thus; D

"The term 'commercial' should be given a wide
interpretation so as to cover matters arising from all
relationship of a commercial nature, whether contractual
or not. Relationship of a commercial nature include, but are E
not limited to, the following transactions; any trade
transaction for the supply or exchange of goods or
services; distribution agreement; commercial
representation or agency; factoring leasing, construction
. i
of works; consulting; engineering, licensing; investment, F
financing; banking; insurance; exploitation agreement or
concession; joint venture and other forms of industrial or
business cooperation; carriage of goods or passengers
by air, sea, rail or road." [Foot-note to Article 1 (1)]

.. . -r
(emphasis supplied)

21. Before more than three decades, in Union of India v.
G

D.N. Revri & Co., (1976) 4 SCC 147, this Court stated;
"It must be remembered that a contract is a commercial H

.
at
580 SUPREME COURT REPORTS [2008} 15 S.C.R.

A· document between the parties and it must be interpreted
in such a manner as to give efficacy to the contract rather
than to invalidate it. It would not be right while interpreting
a contract, entered into between two lay parties, to apply
strict rules of construction which are ordinarily applicable
B to a conveyance and other formal documents. The
meaning of such a contract must be gathered by adopting
a common sense approach and it must not be allowed to
be thwarted by a narrow, pedantic and legalistic
interpretation". ,_

C 22. Very recently, in Citibank N.A. v. TLC Marketing PLC
& Anr., (2008) 1 SCC 481, this Court held that commercial
contract must be broadly construed with a view to give efficacy
to such contract rather than to invalidate it. Clauses of the
contract must be liberally interpreted. Narrow and technical
D approach should be avoided. [see also Russel on Arbitration
(1997); p.60]

23. The other issue which has been raised by the learned
courrsel for the respondent is that the respondent was appointed
E as an employee by the applicant-Company and there is
relationship of master and servant between the parties. A
contract in question is a contract of employment to which the
Act does not apply. The submission of the Company, on the
other ha.nd, is that looking to the agreement as a whole, it
F cannot be said that the respondent was a mere employee. The
relevant clauses of the agreement go to show that it was a
contract of trade and business, which is a commercial
transaction and Clause 12 clearly gets attracted.

24. It has not been disputed by the applicant-Company that
G if the contract is merely of an employment and the relationship
between the parties is of master and servant, the matter cannot
be referred to Arbitral Tribunal. But if the respondent is engaged
by the applicant Company to perform functions which are
inextricably linked with functions which could be undertaken by
H a businessman or by a Company and such activities form an
COMED CHEMICALS LTD. v. C.N. RAMCHAND 581
[C.K. THAKKER, J.]

...., integral part of his activities, there is element of 'commerce' . A

• In that case, the provisions of the Act would clearly apply.
)..

25. In the instant case, the respondent has been appointed
as Director (Technical) and has been allotted 40% equity shares
in the subsidiary Company (Corned Bio-Tech Ltd.). Over and B
above that, he was to be paid salary and other benefits in lieu
of services rendered by him. Para 3 of the Agreement required
the respondent to undertake certain responsibilities.

26. They are as under;
c
,. "Responsibility of DR. C.N. RAMCHAND

....•
I
1. Will be responsible for the selection of machineries,
instruments, staff selection includin~:J technical staff
and arrange for the same.
D
2. He will arrange for successful operation of the
research center.
.... "'
3. To arrange and coordinate with the group
companies in the area of the product planning, E
product development and arrange for the stage up
the level of the launching in the market.

4. He will be dhief executive officer in the Corned Bio
Tech Ltd. in al operational matters.
F
5 .. · He will be responsible to develop new bio
molelcules as per the discussion with his utmost
care integrity.

27. The applicant-Company wanted to venture into the field G
of bio-technology which was not previously chartered or
traversed by it (novel bio-products). The respondent possessed
special knowledge and to get the benefit of such research and
expertise, an agreement had qeen entered into by the parties
and respondent had been appointed Director of the subsidiary
H
582 S_UPREME -COURT REPORTS [2008] 15 S.C.R.

A .Company .
,
.28. Now, it is well settled .that a Director is not a mere ,
employee or servant 0f Jhe Company. :In Lee v. Lee'.s Air ""
Framing Ltd., 1961 AC 1.2, it was held that .a Oirector is a
controller-of the cor:npany's affairs and is not a mere servant of
B the Company. Such Director may have .to work_ also as .an
employee in a different capacity. Gower and Davies' Principles
of Modern Company_ Law, -(17th Edn. pp. ,370-76) .also dea_ls
with duties of Director viz-a-viz as an employee of the Company
and makes it clear that a Director per se cannot.be said.to be
C an employee or servant of the Company.

29. In Ram Pershad v. Commissioner of Income Tax,
New Delhi (1972) 2 SCC696, this Court held that a Managing
Director may have a dual capacity. He may be both, a Director
D as well as an Employee.
0

30. The Court stated;

"7. Though an agent as such is not a servant, a servant is
generally for some purposes his master's implied agent,
E the extent of the agency depending upon the duties or
position of the servant. It is again_ true that a director of a
company is not a servant but an agent inasmuch as the
company cannot act in its own person but has only to act
through directors wl'lo qua the company have the
F relationship of an agent to its pr.incipal. A Managing
Director may have a dual capacity. He may both be a
Director as well as employee. It is therefore evident that
in the capacity of a Managing Director he may be regarded
as having not only the capacity as persona of a director
G but also has the persona of an employee, as- an -agent
depending upon the nature of his work and the terms of
his employment. Where he is so employed, the relationship
between him as the Managing Director and the Company
I •

may besimilartoa_person who is'.employed as a_servant
H or an agent for the term "employed" is facile enough to
COMED CHEMICALS LTD. v. C.N. RAMCHAND 583
[C.K. THAKKER, J.]

cover any of these relationships. The nature of his A
=i >- .. employment may be determined by the articles of
association of a company and/or the agreement if any,
under which a contractual relationship between the Director
and the company has be~n broug~t about, whereunder the
Director is constituted an employee of the company, if such 8
be the case, his remuneration will be assessable as salary:
under Section 7. In other words, whether or not a Managing
Director is a servant of the company apart from his being 1

~ a Director can only be determined by the article of
association and the terms of his employment".
c
31. The Court then referred to Anderson v. James
Sutherland (Peterhead) Limited where Lord Normand at p 1
218 said:
,..
~

" ... the managing director has two functions and two D
capacities. Qua Managing Director he is a party to a
~ ~
contract with the company, and this contract is a contract
of employment; more specifically I am of opinion that it is
a contract of service and not a contract for service."

32. Thus, from settled legal position as also from the E
functions to be performed by the respondent, I hold that the
respondent was working in dual or double capacity, i.e. (i) as
an employee, and (ii) as a Director. In the. later capacity,
however, he was the Chief Executive Officer of the subsidiary
Company and had to look after all operational matters. The F
(
"" functions to be performed by him were supervisory and related
to policy making decisions in the affairs of the Company, as
observed by this Court in Ram Pershad. Any dispute between
the.
applicant-Company andI
the respondent would, therefore,
~
I be covered by Clause 12 of the Agreement which provides for G
arbitration. Hence, the contention of the learned counsel for the
I
respondent that the respondent was merely an employee and
' there was no element of business, trade or commerce has no
~ substance and must be rejected.
H

~
I
584 SUPREME COURT REPORTS [2008] 15 S.C.R.

A · 33. For the foregoing reasons, in my opinion, the
application filed by the Company must be allowed by holding -"' •.
that the case is covered by clause (f) of sub-section (1) of
Section 2 of the Act. It is a case of International Commercial
Arbitration and is covered by Clause 12 of MoU. Since there
8 is a dispute betWeen· the parties, it has to be decided by an
arbitrator. The clause extracted hereinabove provides for an
arbitrator i.e. sole arbitrator and hence only one arbitrator
should be appointed. 1, therefore, appoint Mr. Madhukar Fanse,
retired Judge, City Civil Court, Ahmedabad as the sole 1
C arbitrator to decide the dispute between the parties.

R.P. Arbitration Petition allowed.

l