From Exclusion to Inclusion: Reassessing Arbitrability of Fraud, IP, and Employment Matters in India

Introduction

Due to its efficiency, confidentiality, and cost-effectiveness, arbitration has become the preferred method of resolving commercial disputes. In India, the arbitration ecosystem has changed both through modifications to the Arbitration and Conciliation Act, 1996 and through a more pro-arbitration judiciary. However, there remain areas of uncertainty as to the arbitrability of disputes that raise issues of fraud, intellectual property (IP), or employment. Historically, these disputes have been held to be non-arbitrable because they involve some public interest or statutory right. The case law is heading toward a more contextual flexible approach.

The concept of “arbitrability” concerns whether a particular dispute can be settled through arbitration. Although the Act does not define it, the Supreme Court in Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. clarified that rights in personam are generally arbitrable, whereas rights in rem are not. This distinction, while useful, becomes difficult when disputes combine private and public interests, as in cases of fraud, IP, and employment.

Fraud and the Limits of Party Autonomy

Initially, Indian courts was restrictive in its approach. In N. Radhakrishnan v. Maestro Engineers, the Supreme Court held that serious fraud raising complex issues of evidence could only be determined in civil courts. This also prevented parties from using fraud as an excuse to refuse to arbitrate. In Ayyasamy v. A. Paramasivam, the Court distinguished between simple and serious fraud, concluding that only serious fraud going to the viability of the arbitration agreement could make the dispute non-arbitrable.

Further clarity came in Avitel Post Studioz Ltd. v. HSBC PI Holdings, where the Court ruled that fraud claims between contracting parties are arbitrable if they relate to private commercial rights rather than criminal wrongdoing. Likewise, in K. Mangayarkarasi & Anr. v. N. J. Sundaresan & Anr., involving allegations of fraudulent misrepresentation in a trademark assignment, the Court held that disputes centred on contractual rights are arbitrable since they involve rights in personam. Together, these judgments show that when fraud arises within a commercial relationship, arbitration is no longer excluded.

Intellectual Property and the Public-Private Divide

Intellectual-property disputes were once considered non-arbitrable because they concerned public rights. Issues like registration, validity, or infringement of IP being rights in rem were reserved for statutory tribunals. This view has since softened.

In Eros International Media Ltd. v. Telemax Links India Pvt. Ltd., the Bombay High Court differentiated disputes based on statutory rights from those founded on private contracts. Only the latter licensing or royalty disagreements were held arbitrable. The Delhi High Court in Hero Electric Vehicles Pvt. Ltd. v. Lectro E-Mobility Pvt. Ltd. reaffirmed that IP disputes linked to contractual or family arrangements over trademark usage are arbitrable as they concern private obligations.

Accordingly, courts have adopted a functional approach: implicit contractual exploitation of IP rights are arbitrable; validity or infringement matters that concern the public are not. This is similar to trends in the international arena, which is seen in the US and Singapore, where contractual disputes related to IPR are arbitrable.

Employment Disputes and Power Imbalances

Employment disputes were traditionally excluded from arbitration because of the power imbalance in the employment relationship and the protection afforded by statutory rights under the Industrial Disputes Act, 1947. A case in point is Kingfisher Airlines Ltd. v. Capt. Prithvi Malhotra and Ors., where the Bombay High Court held that employment disputes governed by statutory labour rights are not arbitrable.

However, the Supreme Court in Lalitkumar Sanghavi v. Dharamdas Sanghavi distinguished between a “contract of service” (employer–employee) and a “contract for service” (independent contractor). The latter, being commercial, was held arbitrable. Subsequently, in Lily Packers Pvt. Ltd. v. Vaishnavi Vijay Umak, the Delhi High Court upheld arbitration for disputes involving non-compete and confidentiality clauses in senior-level employment contracts, treating them as commercial.

Modern jurisprudence thus looks beyond rigid exclusion. Arbitration is now permissible where employment contracts involve managerial or proprietary elements, provided no statutory labour rights are infringed.

Comparison and Structural Reflection

Foreign jurisdictions endorse a liberal attitude. English, American and Singapore courts have unanimously recognized arbitrability of commercial fraud, IP licensing and executive employment disputes, except where statute or public policy dictate otherwise. For example, in Fili Shipping Co. Ltd. v. Premium Nafta Products Ltd., the court determined that only fraud relating to the arbitration clause itself precludes arbitration. In the United States, this was upheld in the employment law context in Gilmer v. Interstate/Johnson Lane Corp., where an employee’s claim under various statutes was permitted to be arbitrated due to their final arbitration agreement.

Indian law is relatively practical but, so far, lacks the codified elaboration. The test of “rights in rem vs rights in personam” does not explain a group of hybrid disputes that overlap statutory and private law elements. The definitions of “serious” fraud, or when a dispute involving circumstances of IP or employment is deemed commercial, can create some ambiguity.

Assigning structure could advance India’s practices and align them with values in comparable arbitration jurisdictions, such as establishing panels for IP and employment disputes on the framework (and principles) of arbitration, codifying fraud as an element test based on the here and after statutes, and integrating or appointing subject-matter experts to apply their technique of valuing weight in aspects of the arbitration like relevant procedures of investigation. This would create probabilistic continuity in practice and build on increasing trust in arbitral outcomes.

Structural reforms could align India with global standards by creating specialized arbitration panels for IP and employment disputes, codifying fraud-related tests, and integrating subject-matter experts within arbitral institutions. Such measures would enhance consistency and trust in arbitral outcomes.

Conclusion

Indian arbitration jurisprudence is moving from a strict exclusion of certain types of disputes to a more nuanced inclusion. Fraud, IP, and employment disputes are not automatically excluded from arbitrability; the question of arbitrability will now depend on whether the dispute is primarily a public or private dispute. Uncertainty remains with respect to the level of complexity involved and how to balance the autonomy that arbitration offers against statutory protections.