Sham contracts: Employment under the veil

August 28, 2019
Sham contracts

Image Source: https://bit.ly/2HwLOuX

The article is written by Raj Shekhar, who is a 1st Year Student pursuing his BA LL.B from
National University of Study and Research in Law, Ranchi. The article speaks about Sham
Contracts and Zero Hour Contracts.


The Indian Contract Act 1872, incorporates various types of contracts like indemnity,     bailment and pledge. It also deals with representative contracts such as agency and partnership. But, despite being so exhaustive there are certain barricades to a contract. Such as, it fails to deal with sham contracts and zero hour contracts. The Indian Contract Act was enforced in 1872, from there on the situations have changed drastically. Law being dynamic in nature, it has to evolve accordingly, as said in “The Doctrine of Living Tree”. Thus, it is the dire need of the hour to discuss and check the viability of these contracts. This research paper objects to make the concepts of these contracts clearer. It aims to show the intricacies and deal with all the nuances of the contract. The paper tries to contemplate the sham contracts and give a critical analysis while adhering to the present scenario of our country.


There is always a tussle that whether the person employed is an employee or a contractor. The reason behind this is that there is no hard and fast rule to test this. The issue mainly arises where there is an unfair dismissal or the dismay of the wages, it is also seen in the case of compensation, where a person is entitled to receive compensation. The very purpose of such contracts is to protect the vulnerable workers from economic duress and the collection of taxes.To understand this, we must understand the fact that, a contract of employment is radically different from a purchase of a chocolate. There is a heated argument that to what extent the validity should apply in the contract of employment, particularly in “Sham” self employment.

 Click Here

What is a Sham Contract

The Sham Contracts was defined in the leading case of “Snook v. London & West Riding Investment Ltd[1]” as the contracts whose as those agreements whose terms were ‘not quite the same as the real legitimate rights and obligations (assuming any) which the parties expect to make. If interpreted the other way the sham agreements are those in which the written agreement does not reflect the de facto agreement made by the parties. The employer treats the party as an independent contractor when his relationship is actually that of an employee.

In the famous case of “Autoclenz v. Benchler” [2]where the claimants worked as the car attendant for the Autobenz company, which stated that they were independent contractors. They had to pay their own taxes and the national insurance. They signed a contract for substitution that allowed them to engage other people on their behalf. The court decided that the clause didn’t reflect the true nature of their agreement and it was a Sham agreement.

Sham Contracts are usually to place the employer in advantageous situation. It shifts the responsibility and cost to employees. It also provides the employers an undue advantage over the legitimate workers and those making the use of bona fide contracting. The main benefits of the Sham Contract are as follows:

It is needless to say but there are certain benefits that are enjoyed by the employee as well while entering into the sham agreements, like charging an excessive hourly rate to compensate the losses like superannuation and other benefits.

To know the differences between an employee and an independent contractor the table has been annexed at the end of the research paper.

The intention in Sham Contract

To constitute a Sham Contract there must be a valid intention. As said by Justice Diplock in “Yorkshire Railway Wagon Co v. Maclure and Stoneleigh Finance Ltd. v Phillips”[3], that for acts or documents to be a “sham”, with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documentsdo not create the legal rights and obligations which they appear to create. No unexpressed intentions of a “shammer” affect the rights of a party whom he deceived.

The same principle was taken into consideration in the case of “Midland Bank Plc v. Wyatt”[4], also seen as rainy day agreement case. In this it was held that the declaration of trust was not what it purported to be but pretence or, as it is sometimes referred to, a “sham”.

There are certain guidelines to check whether the contract is a sham contract or not:

Instances of Sham Contracts

Some instances that is not proof of sham

As it was contended in the case of “Miles v. Bull”[7], that an agreement doesn’t turns out to be a sham, just for the sake that it had a specific purpose behind it. The thing done genuinely holds well, even if it has an ulterior motive behind it.

The court cannot dismiss the legal and actual intention as shams just because they are not liked. Besides, the court cannot compare a license to a sham just for the reason that the court think the parties ought to have a tenancy.[8]

Burden of Proof

As it was seen in the case of “National Westminster Bank plc v. Jones[9] it was held that sham is accompanied by dishonesty, and the fact that there is an involvement of the third party who may rely on the smartness of a provision. There is a strong presumption against holding a contract as a Sham.

A sham is a falsification; it includes a finding that the genuine agreement between the parties is an option that is other than that which shows up on the substance of the reports. Sham isn’t the same as fraud (eg the fabrication of an exchange report) however it will regularly include a component of dishonesty. In the case of “Vooght v. Hoath”[10]the court said that the agreement was not fraud but a sham contract.

For all intents and purposes the greater part of the evidence was altogether reliable with the record not being honest to goodness and conflicting with it being bona fide. In the event that it were in any case held that fraud had not been set up in those conditions, it would put a deplorable burden on the party charging that the record was along these lines fabricated and back dated, since the Court would not find that a report with a particular date was in certainty executed a while later unless it could be set up through the evidence of one of the parties to the archive or a witness

Thus, in a nutshell it can be said that the burden of proof lies on the party who alleges the contract to be sham.

Misrepresentation and Sham Contracts

Section 357 of the Fair Work Act forbids an employer from misrepresenting that an employment contract under which an employee is or would be utilized is a contract for administrations. However sub-section (2) gives that if the employer can demonstrate that they ‘did not know or were not rash in the matter of whether’ the contract was a contract of employment, the preclusion does not have any significant bearing. Under this arrangement evidence with regards to the employer’s perspective turns into a basic factor in deciding if a break has happened. The extent of this guard and its hugeness was uncovered for a situation taken by the CFMEU under the equal arrangements of the Workplace Relations Act. In spite of the fact that the wording has modified somewhat under the FW Act, the choice in that issue made it clear that the special case in the FW Act is so wide as to make the arrangements relatively useless. In CFMEU v Nubrick Pty Ltd43 the employer, an extensive and very much resourced company, effectively depended on the protection by demonstrating that at the season of the portrayals, they didn’t know or were not foolhardy with respect to whether the contracts being referred to were contracts of employment. It appears that based on this choice and the present wording of the FW Act, if an employer can demonstrate for instance that they didn’t turn their brain to the lawful qualification between a contractor and employee, they can’t be observed to be in break of the sections. This implies the less information of the lawful refinements between contractor and employee and the less consideration given to the issue, the more likely the employer is able to raise a successful defence.

Sham Contracts in India

Though not discussed much in India there have been several cases where it was contended that the contract is a sham or not. The basic understanding that we can derive out from the sham contracts is that; if the employer is employing and handling the Contract Labour through its own employee posing as a contractor, then the employer, without increasing the actual number of employees is controlling the contract labour

The validity of Sham Contract was laid down in the case of “Indian Petrochemicals Ltd.v. Sharmika Sena”[11]. It says that these contracts are void, bogus and therefore needs to be set aside.

In the famous case of “The Management of Bokaro Steel v. Workmen, Represented by Bokaro”[12].It was contended that whether the contract between the management and the worker association is a sham contract or not. It was held that there was no prior invites by the management for carrying out the maintenance of machines, appears to be misconceived and the same cannot be accepted as a reason to declare the contract as Sham.

In another case “Haryana State Electricity Boardv. Suresh & others”[13]it was held that since there was a considerable control over the control of the workers, the contract between them was a sham contract. Thu, the board was supposed to pay money to the respondents.

As we can see there aren’t plethoras of cases, when it comes to the context of Sham contracts, in India.


The main objectives of research paper have been successfully dealt with. The concept of sham contract is much prevalent in the other countries than our country. The reason behind is the efficiency of labor law, which protect the rights of the labors. When we come to the context of India, the rate of unemployment is quite high. So, in the case of sham contracts where an employee is treated as an Independent Contractor, it does results in the hike of unemployment. It is the need of the hour to be a bit stringent over these laws as, a better place for employee will result in the economical development of our country.


[1] [1967] 2 QB 786

[2] [2011] UKSC 41

[3] [1967] 2 QB 786

[4] [1997] 1 BCLC 242

[5]  Footnote 4, supra

[6] [2001] EWCA Civ 1136

[7] [1969] 1 QB 258

[8] Donald v Baldwyn [1953] NZLR 313

[9] [2000] BPIR 1092

[10] Footnote 6, Supra

[11] [1999 (6) SCC 439]

[12] 2010 Indlaw JHKD 128 

[13]  1999 LLR 924 (SC)

Exit mobile version