The Exception of Sovereign Functions in the Definition of Industry: Should it be done away with?
This article explores the controversy surrounding the exception of sovereign functions from the definition of industry. While sovereign functions were traditionally excluded from the definition due to their inherently governmental nature, the increasing involvement of private sector firms in providing these services has led to calls for a re-evaluation of this exclusion. Supporters argue that excluding sovereign functions creates an artificial boundary between the public and private sectors and can limit innovation and efficiency. However, opponents maintain that sovereign functions are fundamentally different from other economic activities and should be treated as such. The author has attempted to dispute the exception by examining the objective of the Industrial Disputes Act, 1947, which is to prevent unjust labour practices, offer reparation to employees, and establish the process for laying off workers. The author has also cited various court rulings, including the significant verdict in Bangalore Water Supply, where J. Chandrachud upheld this stance.
Introduction
The concept of industry is fundamental in economic theories and is often used to describe a wide range of economic activities. The process of industrialization in India began during the mid-nineteenth century under British rule. Initially, industrial workers were mistreated and had no social standing. They were paid low wages for extended periods while working in unhealthy environments. Management was often exploitative and authoritarian. However, following World War I, a positive trend in this regard was established. Labour legislations in India shifted their focus rapidly to prioritize the health, safety, and welfare of workers while also promoting labour-management relations.
Since, then the definition of industry within the Indian Labour Legislations has been altered multiple times, and there are still debates regarding its precise scope.
Analysis
The Section 2(j) of the Industrial Disputes Act[1] provided a definition for the term “industry” for the first time. It is however challenging to ascertain everything that falls under the purview of an industry because the definition does not define industry in the conventional sense. One such area of ambiguity is the exception of sovereign functions within the definition of industry. There is thus a controversy over whether any government instrumentality that performs sovereign functions would be an industry if its functions would otherwise render it to be an industry.
Two primary issues arise out of this exception. Foremost, the definition of sovereign functions is itself arbitrary. Its scope was last disputed in the case of State Of U.P vs Jai Bir Singh[2]. However, the case has been referred to a larger bench that has not yet been formed. Consequently, there is no conclusive decision in this regard.
Second, these functions are excluded from the definition of industry because they are considered to be inherently governmental and not subject to market forces. However, this makes no logical sense as the it has been made on the basis of who is performing the activity and not the nature of the activity. This reasoning is however illogical as it is based on who is carrying out the activity rather than the characteristics of the activity itself.
In the landmark case of Bangalore Water-Supply & Sewerage Board, etc. vs R. Rajappa & Others[3], J. Chandrachud held the same view and contended that the exclusion of sovereign functions from the definition of industry places emphasis on who is performing the activity, rather than the activity’s nature. According to him, this disregards the crucial criterion for classifying an industry, which should be based on the nature of the activity. Justice Chandrachud added that there should be no distinction between an activity performed by a company in the performance of statutory duties and an activity performed by the state in the execution of an inherent function.
Moreover, the Industrial Dispute Act is a beneficial legislation and its goal is to provide better conditions to workers along with a peaceful co-existence with the management. This further highlights why the impugned exception is not tenable. Municipality-run businesses that provide water or fight fires should be considered industries, as should businesses that produce weapons or manage prison. These operations would undoubtedly fall under the category of industries if they were carried out by private individuals. It would prima facie be unfair to the employees of these businesses if they would be excluded from the benefits of the labour legislations merely on the ground of the nature of their employer. The nature of the activity, which is independent of who conducts it, is the deciding factor.
While the exclusion of sovereign functions from the definition of industry may have made sense in the past, many argue that it is no longer appropriate in today’s economy. One of the primary reasons is the increasing involvement of private sector firms in providing services that were previously considered to be sovereign functions. For example, private security companies are now commonly used to provide security services to businesses and governments, and private prisons are used to incarcerate inmates.
Critics of the exclusion of sovereign functions argue that it creates an artificial boundary between the public and private sectors, and can limit innovation and efficiency in the provision of public services. They argue that if private companies can provide services that are traditionally the responsibility of the government, then these services should be subject to the same market forces as other industries.
The exclusion of sovereign functions can also create legal uncertainty and confusion. For example, there may be situations where it is unclear whether a particular activity should be considered a sovereign function or an economic activity subject to regulation. This can lead to legal disputes and a lack of clarity for businesses and governments alike.
Conclusion
The exclusion of sovereign functions from the definition of industry is a controversial topic. Any decision to change the definition of industry to include sovereign functions will require careful consideration of the potential benefits and drawbacks, as well as a clear understanding of the legal and economic implications. However, the traditional justification for this exclusion is no longer valid. the increasing involvement of private sector firms in providing services traditionally considered to be sovereign functions has led to calls for a re-evaluation of this exclusion. The exclusion is based on the who is performing the activity, rather than the nature of the activity, which makes no logical sense. Therefore, it should be rightfully deleted from the Act.
[1] Industrial Dispute Act, 1947
[2] 2019 SCC OnLine All 5130
[3] 1978 AIR 548
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