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 a growing preference for 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 the aim of decoding 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, 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.

In Booz Allen and Hamilton Inc v. SBI Home Finance Ltd. and Ors., 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 Drolia and Booz Allen 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, 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 Limited and Mayavati Trading Pvt. Ltd. v. Pradyuat Deb Burman 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., 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 employment disputes is not free from challenge. However, since arbitration offers an efficient and viable means of resolving workplace conflicts, by taking proactive measures, employers can minimize potential challenges to arbitrability of employment disputes, and strengthen the enforceability of arbitration clauses in employment contracts. This can include, inter alia, ensuring that arbitration 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. 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.

This article was first published in ET Edge Insights