Topic: : Arbitrability of employment disputes in India

Words : 1198 words

Brief note : Arbitration has often been the preferred method of dispute resolution in most commercial
contracts in India, including employment contracts. Indian law places a restriction on
arbitrating ‘certain disputes’ on account of public policy considerations. Through this article,
we evaluate and explore complexities surrounding arbitrability of disputes arising out of
employment contracts in India through various judicial precedents, with an aim to decode
the scope of employment disputes that can be adjudicated through arbitration.

Authors : Gerald Manoharan (Partner), Sonakshi Das (Principal Associate) and Sandhya
Swaminathan (Associate), JSA Bengaluru

ARBITRABILITY OF EMPLOYMENT DISPUTES IN INDIA

In recent years, arbitration has often been the preferred method of dispute resolution in most
commercial contracts in India, including employment contracts. Factors including privacy, flexibility,
cost and time effectiveness of arbitration have been some of the key driving contributors to such
growing preference of arbitration over traditional court-driven and other dispute resolution methods.
That said, however, Indian law does place a restriction on arbitrating ‘certain disputes’ on account of
public policy considerations. Through this article, we evaluate and explore the complexities
surrounding arbitrability of disputes arising out of employment contracts in India through various
judicial precedents, with an aim to decode the scope of employment disputes that can be adjudicated
through arbitration.

Understanding ‘arbitrability’. The Indian Arbitration and Conciliation Act, 1996 (“Arbitration Act”)
defines and consolidates the law on domestic arbitration, international commercial arbitration,
conciliation as well as enforcement of foreign arbitral awards. The Arbitration Act recognizes that
“certain disputes may not be submitted to arbitration” and that a competent court may set aside arbitral
awards passed with respect to matters where the “subject-matter of the dispute is not capable of settlement
by arbitration under the law”. As such, ‘arbitrability’, for the purposes of this article refers to the question
of whether a particular dispute can be submitted to arbitration for resolution.

Judicial test of arbitrability. The Arbitration Act does not expressly call out ‘disputes’ which are non-
arbitrable. The position on arbitrability of disputes in India has evolved through several judicial
precedents. In Vidya Drolia & Others v. Durga Trading Corporation,1 the Supreme Court laid down a
fourfold test to determine whether a dispute is arbitrable. It holds a dispute non-arbitrable if it qualifies
as or relates to any of the parameters set out below:

(a) when the cause of action and the subject matter of the dispute relates to actions in rem (rights
enforceable against the world at large), that do not pertain to subordinate rights in personam
(rights enforceable against a person) that arise from rights in rem;

(b) when the cause of action and the subject matter of the dispute affects third party rights; require
centralised adjudication, and mutual adjudication would not be appropriate and enforceable;

(c) when the subject matter of the dispute is expressly or by necessary implication non-arbitrable as
per mandatory statute(s); and/or

(d) when the cause of action and the subject matter of the dispute relates to inalienable sovereign
and public interest functions of the state and hence mutual adjudication would be unenforceable.

1 CA 2402/2019 (SC)
In Booz Allen and Hamilton Inc v. SBI Home Finance Ltd. and Ors.,2 the Supreme Court expressly
recognised certain disputes as non-arbitrable – including, inter alia, (a) disputes which give rise to or
arise out of criminal offences (since they are deemed as offences against the state); (b) matrimonial
disputes; (c) guardianship matters; (d) insolvency and winding up matters; (e) testamentary matters;
and (f) eviction or tenancy matters.

A collective reading of the Supreme Court’s landmark decisions in the cases of Vidya Drolia3 and Booz
Allen4 indicates that disputes where the cause of action or subject matter thereof, involves or impacts,
inter alia, third party rights, sovereign or public interest functions and criminal offences, are generally
non-arbitrable. Further, disputes in matters governed by statutes expressly prohibiting the choice of
arbitration as a method of dispute resolution (or granting exclusive jurisdiction to the court or tribunal
as prescribed under the statute) are also non-arbitrable under the Arbitration Act.

Applying the judicial test of arbitrability in the context of employment disputes. Employment disputes
largely arise out of and impact individual rights and generally may not impact third-party rights.
Labour legislations in India do not cast any statutory bar or restrictions on parties voluntarily choosing
to arbitrate for resolution of disputes. It also does not expressly provide for or limit the jurisdiction to
labour courts or tribunals in deciding matters of employment. Section 10A of the Industrial Disputes
Act, 1947 (“ID Act”) in fact grants parties to an existing or apprehended industrial dispute to refer such
industrial dispute to arbitration, by way of a written agreement.

As such, unless the subject matter of an employment dispute involves matters of public policy, third
party rights, rights in rem or are otherwise deemed non-arbitrable, the arbitrability of employment
disputes where parties to an employment contract have expressly chosen arbitration as their preferred
mode for dispute resolution, has often not been challenged. For instance, in Weiss Technik India Private
Limited v. Ms. Bollupalli Madhalavilatha,5 the Telangana High Court observed that in the existence of an
arbitration clause in the employment contract that is exhaustive and encompasses all disputes raised
therein to be referred to an arbitrator, and such clause being agreed to by both parties, it is not
permissible to retract from such agreed course of arbitration. In several other cases including IBI
Consultancy India Pvt. Ltd. v. DSC Limited6 and Mayavati Trading Pvt. Ltd. v. Pradyuat Deb Burman7 it was
held that where parties to a contract have agreed to arbitrate disputes arising out of their contracts, the
courts are only required to confine their consideration as to whether an arbitration agreement exists.
On the other hand, in Kingfisher Airlines v. Prithvi Malhotra and Ors.,8 the Bombay High Court held that
matters of employment where an arbitrator’s ability to award reliefs and remedies to a workman under
the ID Act are limited by considerations of public policy or are not the same as the remedies and reliefs
that can be awarded by courts or tribunals constituted under the ID Act, are non-arbitrable and are
under the exclusive jurisdiction of courts or tribunals constituted under the ID Act.

Accordingly, while individual employment disputes, including those relating to violation of company
policies or terms of employment contracts including matters of misconduct or misdemeanour – to the
extent not constituting a criminal offence or being a matter of public policy, may generally be arbitrable,
employment disputes impacting public interest or affecting a larger group of workers may generally
be considered non-arbitrable.

Minimising scope of challenge to arbitrability of employment disputes. The question of arbitrability of

2 CA 5440/2022 (SC)
3 CA 2402/2019 (SC)
4 CA 5440/2022 (SC)
5 AA 3/2021 (Telangana HC)
6 (2018) 17 SCC 95
7 (2019) 8 SCC 714
8 WP 2585/2012 (Bombay HC)
clauses incorporated in employment contracts comply with applicable laws, are fair, unbiased, well
drafted and unambiguous, so as to cover resolution of all potential and anticipated disputes arising out
of or in connection with the employment, through arbitration.

Recently, the Supreme Court in the case of N. N. Global Mercantile Pvt. Ltd. v. M/s. Indo Unique Flame
Limited and Ors.9 held that unstamped contracts containing arbitration clauses, including an unstamped
arbitration agreement, is unenforceable under law. In light of this, it also becomes imperative for
employers to ensure that employment contracts having arbitration clauses are duly and adequately
stamped in order to secure its enforceability and validity under law.

9 CA 3802-3803/2020 (SC)