By Soumyajit Haldar
[The author is a fourth-year student at the West Bengal National University of Juridical Sciences.]
Introduction
The Industrial Disputes Act (hereinafter referred to as the ‘ID Act’) is a beneficial enactment introduced primarily for the welfare and protection of employees. In order to address the presence of significant imbalances in the bargaining power that often exists between two or more parties in the event of an ‘industrial dispute’, a provision had been made for specialized Labour Courts under the ID Act for the resolution of such kind of disputes. The ID Act also has a provision for the ‘voluntary reference of disputes to arbitration’ by way of a written agreement. This essentially provides the workers with a quicker medium to resolve disputes with their employers and reach an out-of-court settlement. Therefore, in order to avail this option if the need arose, employers and employees often include arbitration clauses in the employment contracts.
However, in recent times, employers have begun to mandatorily include arbitration clauses while entering into employment contracts. Mandatory arbitration clauses basically require employees to agree that any future dispute or differences between such employee and the company(employer) will compulsorily have to be resolved through arbitration and the aggrieved employee cannot go to court. Such clauses in an employment agreement are suppressive in nature and in violation of labour rights. Employers seek to avoid long-drawn court proceedings and therefore, bind their employees to arbitration since the inception of their employment. Such mandatory clauses suppress collective bargaining and labour rights and go against the very intent of the ID Act. Although arbitration as resolution process has gained significant popularity in India, the question of arbitrability of labour disputes still remains undecided. Although some protection has been provided to “workmen” by the courts, there are no measures taken to safeguard the interests of those employees who fall outside the definition of “workman” under the Act.
Against this backdrop, the paper shall attempt to argue how the negative aspects of the inclusion mandatory arbitration clauses in employment contracts and address the issue of lack of protection given to “non-workmen” employees. In Part-II of the paper, I shall discuss the limited jurisprudence in India with regard to arbitrability of labour disputes. Subsequently, in Part III of the paper, I shall discuss and also critically examine the grounds on which such mandatory arbitrary clauses can be held to be unconscionable. Part IV concludes the discussion of the paper.
Indian Jurisprudence on the Arbitrability of Labour Disputes
There are a few cases which have deliberated on the issue of arbitration related to labour disputes in India. The question of whether labour disputes are arbitrable or not first arose in the case of Kingfisher Airlines v. Captain Malhotra and Others. In this particular case, the Bombay High Court decided that labour disputes cannot be resolved by way of arbitration under the Arbitration and Conciliation Act, 1996 (A&C Act). The Bombay High Court cited the Booz Allen and Hamilton v. SBI Home Finance in order to formulate the two-prong test to decide upon the arbitrability of labour disputes. Firstly, the validity of an arbitration claim depends on whether the rights being violated are in-personam or in-rem. Disputes involving rights-in-rem are not arbitrable and must be decided in a court of law (as was held in the Booz Allen case). Secondly, the Bombay High Court also stated that it must also go beyond the first prong and evaluate if any dispute must be decided by any court for public policy reasons. This essentially means that the even disputes involving rights-in-personam can be reserved exclusively for adjudication by public forms such as specialized courts for public policy reasons.
A similar issue was also raised in the case of Rajesh Korat v. Innoviti wherein the Karnataka High Court stated that labour disputes cannot be resolved by means of arbitration under the A&C Act and such disputes can only be taken for arbitration under the ID Act. The Court also reiterated the point of paramount importance of public policy considerations which make it necessary to reserve exclusive jurisdiction of competent courts and tribunals for the resolution of these disputes.
The judgements given by the High Courts in the Kingfisher and Rajeev Korat cases align with arguments made and address the pertinent concerns that have been raised in the paper. These two cases take cognizance of the severe public policy ramifications that may arise if resolution of all disputes is restricted only to arbitration. However, this protection under Section 10A of the ID Act has been extended only to those employees who fall within the definition of “workmen” under the Section 2(s) of the ID Act. In several cases, the courts have devised different tests such as the ‘nature of work’ test in order to determine whether employees fall within the ambit of “workman” or not. Employees of an organization/company who fall within the category of non-workmen are not provided any immunity from such mandatory arbitration clauses. There is no specific court ruling which provides protection to such “non-workman” employees.
Mandatory arbitration: An unconscionable clause?
Mandatory arbitration clauses in employment contracts are unilaterally developed and are forced by employers on their employees. Employers are aware of the fact that they are in a relatively stronger bargaining position as compared to the employees and use this situation to their advantage to exploit the employees and curb their rights. Further, this issue is also aggravated for employees belonging to socio-economically weaker sections as there is a higher degree of inequality between the employer and employee thereby allowing the employer to include a multitude of conditions which the employees are compelled to agree too. There also arises the question of financial accessibility for such employees who are mandated to resolve disputes by arbitration. Such employees are usually a part of labour unions and rely on collective bargaining to negotiate with such influential employers. Research has also found that it is highly unlikely for employees to win arbitration cases and they also recover less damages than what they would have in courts.
In light of the above-mentioned reasons, mandatory arbitration clauses should be declared as unconscionable clauses and must therefore, be declared as void. ‘Non-workmen’ employees must be extended protection under Section 16 of the Indian Contract Act which mention that contracts signed under undue influence would be voidable at the option of the aggrieved party. It is quite evident that employers often use their position of power to influence the decisions of their employees. While at the outset it may seem that the employee is consenting to be bound by such terms in an agreement, the employee has no real choice to negotiate such terms with the employer as their employment is contingent on accepting the terms laid down by the employer. Therefore, such mandatory arbitration clauses can be struck down on grounds of unconscionability.
There are various judgements in which the courts have taken a hard stance against unconscionable contracts. In the landmark case of Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly, the court stated that it will interfere and strike down an unfair and unreasonable contract if it is entered into by parties with unequal bargaining power. There is an obvious inequality in the bargaining power between employers and employees working in such big companies. Further, in the case of State of Rajasthan v. Vidyawati, the court held that it contract may be repudiated if it is found to be unconscionable or against public policy. Later, in the Brojo Nath Ganguly case, the court was faced with a question as to whether which category could unconscionable bargain be put. The court decided that if it fell within the category of undue influence, the contract would be voidable. On the other hand, if it is within the ambit of being in violation of public policy, the contract would be held to be void.
It is therefore humbly submitted that the practice of including mandatory arbitration clauses in employment contracts is highly problematic considering that is goes against the fundamental principles of the nature of arbitration and more importantly, such clauses seek to silence the employees and curb their rights. Therefore, such clauses should not be included in employment contracts and should be struck down by the courts on grounds of unconscionability and unfairness, if included.
Conclusion
The inclusion of mandatory arbitration clauses in employment contracts are against the very spirit and ethos of arbitration. Therefore, in light of the arguments put forward in the paper, it is imperative that some concrete action be taken which categorically prohibits inclusion of mandatory arbitration clauses in employment contracts thereby protecting “non-workmen” employees. Mandatory arbitration is a growing threat to employees’ rights and such problematic practices ought to be stopped at the earliest. It is imperative that while “workmen” are given protection by the courts against such unreasonable clauses, at the same time, adequate measures should also be in place in order to protect the rights of those employees who are not “workmen” by definition.