Are Employment Disputes Arbitrable?

Arbitration is a private dispute resolution mechanism where two or more parties agree to resolve their current or future disputes before an Arbitral Tribunal in an alternative to adjudication by courts and other public fora established by law. The mutual consensus of parties to resort to arbitration for resolving disputes is captured in an arbitration agreement, where parties forego their legal right to have their disputes adjudicated in other courts/public fora.

As a rule, civil or commercial adjudication through arbitration are permissible upon fulfilment of the following conditions:

1. Existence of an arbitration agreement between the parties;
2. The dispute is covered under the arbitration agreement;
3. The dispute is civil /commercial in nature and can be settled through arbitration.

Whether the dispute between the parties signatory to the arbitration agreement is arbitrable or not has been always contested by the parties.

The legal position & issue of arbitrability has been resolved by the hon’ble Supreme Court in the matter of Vidya Drolia v. Durga Trading Corporation

[1], where the hon’ble Supreme Court held that disputes are not arbitrable when the cause of action and/or subject-matter of the dispute:

1. relates to actions in rem, that do not pertain to subordinate rights in personamthat arise from rights in rem;
2. affects third party rights, have erga omnes effect, require centralized adjudication, and mutual adjudication would not be appropriate;
3. relates to inalienable sovereign and public interest functions of the State; and
4. is expressly or by necessary implication non-arbitrable under a specific statute.

The Supreme Court has clarified that the above tests are not watertight compartments; rather, they dovetail and overlap. However, it was observed that on a holistic and pragmatic application, the above test brings a great degree of certainty and help in ascertaining whether a dispute is non-arbitrable. Further, it was been held by the hon’ble Supreme Court in the matter that the issue of arbitrability of disputes can be raised at three stages:

1. Firstly, before the court on an application for reference under Section 11 or stay of pending judicial proceedings and reference under Section 8 of the Arbitration Act;
2. Secondly, before the Arbitral Tribunal during the course of the arbitration proceedings;
3. Thirdly, before the court at the stage of the challenge to the award or its enforcement.

In its recent judgement by hon’ble Supreme Court in the matter of Dushyant Janbandhu v/s Hyundai AutoEver India Pvt. Ltd.

[1], it was been analysed that-“whether the disputes between the employee and employer can be resolved through arbitration?”

Brief FactsThe dispute arose from an employment relationship between the Dushyant Janbandhu ( “Appellant”) , who was appointed as an Assistant Manager by the Hyundai AutoEver India Pvt. Ltd. ( “Respondent Company”)on 15.03.2019. During the Covid-19 pandemic, Appellant was directed to work from home from 22.03.2020. When the Respondent Company requested him to resume physical attendance in August 2020, he refused to comply, leading to disciplinary proceedings. The Respondent Company issued a show cause notice on 04.09.2020, followed by a charge memo on 25.11.2020, ultimately culminating Appellant’s termination on 21.01.2021, citing violations of various terms of his with the Respondent Company.

Legal Proceedings: Appellant initiated proceedings under the Payment of Wages Act for non-payment of wages and challenged his termination before the Industrial Tribunal under the Industrial Disputes Act. In response, the Respondent Company attempted to appoint an arbitrator unilaterally and subsequently filed a petition under Section 11(6) of the Arbitration and Conciliation Act for arbitrator appointment. This created a complex jurisdictional issue, as both the Payment of Wages Act and Industrial Disputes Act provide exclusive statutory remedies for such disputes.

Supreme Court’s Decision:  Hon’ble Supreme Court's has given its decision primarily focussed on the following two crucial aspects:

• Firstly, Hon’ble Court examined the principle of non-arbitrability, applying the fourfold test enunciated in the judgment of Vidya Drolia v. Durga Trading Corporation[1] wherein it found that matters expressly or impliedly non-arbitrable under mandatory statutes cannot be referred to arbitration.

Secondly, the Hon’ble Apex Court scrutinized the Respondent Company's conduct, particularly noting that the allegation regarding violation of the non-disclosure agreement was conspicuously absent from the original disciplinary proceedings and termination order, appearing only in the Section 11(6) petition.

Concluding Remarks:

Hon’ble Supreme Court's decision clarifies that employment disputes are non-arbitrable and disputes regarding wages and termination fall squarely within the jurisdiction of statutory authorities, and these specialized forums cannot be bypassed through arbitration. And, introduction of non-disclosure violation by the Respondent Company is a futile attempt with an intent to circumvent the statutory authority’s jurisdiction through arbitration proceedings.

The present judgment serves as a significant precedent in employment law and arbitration jurisprudence, firmly establishing that statutory remedies in employment matters take precedence over contractual arbitration clauses. The decision effectively prevents the misuse of arbitration as a tool to circumvent labor laws and protects employees' right to access statutory forums.

The judgment's broader implications extend to defining clear boundaries between arbitrable and non-arbitrable matters in employment disputes, emphasizing the need for good faith in invoking arbitration, and discouraging tactical litigation that attempts to bypass mandatory statutory provisions.

This article is for information purpose only and should not be taken as legal advice. To know further details, clarification, assistance or any advice on Arbitration, labour & employment claims under arbitration proceedings or any legal issues on arbitration, you may connect with us at admin@equicorplegal.com / 08448824659 and visit www.equicorplegal.com