Employment Cases Cannot Be Characterised As Commercial Disputes Under Commercial Courts Act: Delhi High Court

The Delhi High Court on Monday held that disputes arising out of employment agreements cannot be treated as commercial disputes under the Commercial Courts Act merely because they contain business related clauses. 

The court categorically stated that “any dispute relating to an employment agreement cannot be treated to be a commercial dispute within the purview of Section 2(1)(c) of the CC Act."

A single bench of Justice Purushaindra Kumar Kaurav  made the observation  as it dismissed a plea by Ritesh Singh, the former Managing Director of Arm Digital Media Private Limited, seeking rejection of a civil suit accusing him of breaching his employment and fiduciary obligations.

According to the court, the Commercial Courts Act's definition of commercial disputes “is undoubtedly inclusive and expansive” but “its breadth is not unrestrained” and every category listed “shares a common commercial thread each pertains to transactions involving trade, business operations, commercial obligations, or mercantile dealings.Thus, when interpreting whether a particular dispute fits within the provision, the inquiry must focus on whether the relationship at issue arises from a commercial or business oriented engagement, rather than merely from the fact that one of the parties is a commercial entity."

It added that the mere presence of restrictive covenants or business related clauses “does not metamorphose an employment contract, which is fundamentally a contract of personal service, into a commercial arrangement”.

According to the suit, the parties are governed by an Employment Agreement dated September 8, 2016. The plaintiffs, Arm Digital Media and its directors, allege that Singh unilaterally increased his own remuneration while serving as Managing Director, failed to ensure statutory and secretarial compliances, misused confidential information, joined a competitor named Icogz soon after resigning.

He allegedly solicited clients, and attempted to disrupt corporate meetings. These actions, the employer said breached both the employment contract and his duties as a director under Section 166 of the Companies Act.

Singh, represented through counsel, argued that the suit should have been filed before a commercial court because the Employment Agreement was inseparable from the Share Subscription cum Shareholders' Agreement executed on the same date, making the dispute one arising out of a shareholders agreement under Section 2(1)(c)(xii) of the Commercial Courts Act.

He also contended that the plaintiffs' references to director duties placed the case within the exclusive domain of the National Company Law Tribunal and that Section 430 of the Companies Act barred the civil court from proceeding. He further submitted that the suit was liable to be rejected because it had not undergone mandatory pre institution mediation under Section 12A of the Commercial Courts Act.

The court rejected these objections after examining the law and the documents on record. It found that the Share Subscription cum Shareholders' Agreement “has since been terminated and the investor has exited, leaving the Employment Agreement as the only operative arrangement” and held that the employment contract “is between the company and the executive not between the investor and the executive and, therefore, cannot be subsumed under the commercial umbrella of the SSSA”.

The court emphasised that the correct inquiry under the Commercial Courts Act is “whether the relationship at issue arises from a commercial or business oriented engagement, rather than merely from the fact that one of the parties is a commercial entity. This distinction becomes particularly significant when examining whether contracts rooted in personal service, such as employment agreements, possess the commercial character necessary to be brought within the ambit of a “commercial dispute.” It reiterated that disputes arising from contracts of personal service do not fall within the commercial courts regime.

Finding that the suit disclosed several civil causes of action and that none of Singh's threshold objections were made out, the court held that the matter must proceed to trial. It dismissed the plea, concluding that the case is “fundamentally civil in nature, centered on employment and related obligations, and is maintainable as a regular civil suit”.