The Importance
Once an arbitration clause is inserted in the appointment letter of an employee, the employer will be forced to go into arbitration even if he does not desire to. While the dispute may be non-arbitrable, any averment with respect to the same can only be taken before the arbitrator.
Case Citation
The Supreme Court, in the recent case of Dushyant Janbandhu v. M/s. Hyundai Autoever India Pvt. Ltd., was confronted with the interesting question of whether disputes falling exclusively under the ambit of labour and employment law, more particularly the Industrial Disputes Act, 1947 (“ID Act”) and the Payment of Wages Act, 1936 (“PoW Act”) are arbitrable or not. It was held that the issues of payment of wages under the PoW Act and those issues which are exclusively covered under the ID Act (such as termination of services) are to the exclusion of civil courts and are not arbitrable.
What not to do
While this is the settled legal position, it does not mean that employers should mindlessly start incorporating arbitration clauses in the appointment letters or employment contracts issued to their employees. It has been seen that the primary motivation behind employers rushing to incorporate arbitration clauses stems from the misconception that an arbitrator of their choice can be appointed, who may bring favorable outcomes and save them from the scrutiny of the Courts. This is also why most arbitration clauses in appointment letters state that the employer will have the exclusive right to appoint the arbitrator, often preferring a sole arbitrator instead of a panel to save costs—or that a director or manager of the company, or someone nominated by them, will act as the arbitrator.
This, however, is impermissible under law. The Supreme Court in TRF Ltd v. Energo Engineering Projects Ltd. held that a person who has an interest in a dispute or its outcome should not have the power to unilaterally appoint a sole arbitrator. This was reiterated in Perkins Eastman Architects DPC v. HSCC (India) Ltd.. A constitution bench of the Supreme Court in Central Organisation for Railway Electrification v. M/s. ECI SPIC SMO MCML (JV) also held that such clauses cause justifiable doubts as to the arbitrator’s impartiality. Any proceedings conducted before such an arbitrator are invalid and the resulting award is unenforceable and against Public Policy of India—unless the employee expressly consents in writing.
What should you do
This does not mean that the entire arbitration clause is void. The intent to refer disputes to arbitration is separate from the procedure of appointing arbitrators. In Perkins, although the clause allowed unilateral appointment, the Supreme Court referred the matter to arbitration using its powers under Section 11 of the Arbitration and Conciliation Act, 1996. Section 11 allows parties to agree on procedures but if they fail, either party may request the High Court or Supreme Court to appoint the arbitrator.
Some might argue that if the dispute relates to termination or wages—which are non-arbitrable—the court would not refer it to arbitration. But in SBI General Insurance Co. Ltd. v. Krish Spinning, the Supreme Court clarified that at the stage of appointment, courts only examine if an arbitration agreement exists. Even if the dispute is non-arbitrable, this challenge must be raised before the arbitrator—not the court.
Therefore, once such a clause is in the appointment letter, the employer may be compelled to arbitrate—even if they would prefer to avoid it. Courts will not intervene unless the award is patently unjust. Mere disagreement over interpretation will not suffice, as held in MMTC Limited v. Vedanta Limited.
Employers wishing to use arbitration clauses should keep in mind:
Do not grant the employer sole authority to appoint the arbitrator. A director or employee cannot serve as arbitrator. Even providing the employee with a list curated by the employer is invalid unless specific written consent is obtained.
Consider using alternative dispute resolution clauses—such as mediation or negotiation—rather than binding arbitration.
The clause should define the appointment procedure clearly. If the parties cannot agree, the clause may state that arbitration should not proceed. However, this approach is under judicial review in M/s. R.S. Construction v. Building Construction Department & Ors.
Restrict arbitration to specific disputes that do not fall under statutory labour laws. This could include lock-in periods or confidentiality breaches as seen in Lily Packers Private Limited v. Vaishnavi Vijay Umak.
Gaurav Kumar
Advocate, Supreme Court of India
Editor: Labour Law Reporter
Email: info@labourlawreporter.com
