The Limits of Arbitration: Primacy of Statutory Remedies in Employment Disputes

Posted On - 18 December, 2024 • By - Garima Singh

Introduction

The Supreme Court’s recent decision in Dushyant Janbandhu v. M/S Hyundai AutoEver India Pvt. Ltd. highlights the intricate interplay between statutory remedies and contractual arbitration in employment disputes. The judgment reinforces the primacy of statutory authorities in resolving employment-related matters, particularly those governed by the Payment of Wages Act, 1936 (PW Act) and the Industrial Disputes Act, 1947 (ID Act). 

Factual Background of the Case

Appointment and Work Conditions

  • The appellant, Dushyant Janbandhu, was appointed as an Assistant Manager by the respondent, M/S Hyundai AutoEver India Pvt. Ltd., on March 15, 2019.   
  • Due to the COVID-19 pandemic, the appellant was asked to work from home from March 22, 2020, to January 6, 2021.   
  • However, the respondent required the appellant to return to physical office attendance from August 2020 onwards.   

Dispute and Disciplinary Action

  • The appellant’s refusal to comply with the return-to-office order led to a show-cause notice issued on September 4, 2020.
  • A subsequent inquiry was conducted, which concluded that the appellant’s absenteeism had impacted the company’s business and customer relations.   
  • A charge sheet was issued on November 25, 2020, citing violations of specific contractual clauses related to non-cooperation and absenteeism.
  • The appellant was ultimately terminated from employment on January 21, 2021, citing violations of clauses 11, 12(V), 17, 24, and 25 of the employment contract.   

Payment of Wages Act, 1936 (PW Act)

  • The appellant filed a petition under Section 15(2) of the Payment of Wages Act to recover unpaid wages.
  • The respondent, in response, filed an application under Section 8 of the Act seeking reference of the dispute to arbitration.
  • The authority under the Payment of Wages Act dismissed the respondent’s application, holding that arbitration could not override the statutory remedies under the Act.

Industrial Disputes Act, 1947 (ID Act)

  • The appellant filed a petition under Section 2(A) of the Industrial Disputes Act to challenge the legality of the termination order.
  • This petition was pending adjudication before the Industrial Tribunal.

Arbitration and Conciliation Act, 1996 (A&C Act)

  • The respondent unilaterally appointed an arbitrator and initiated arbitration proceedings.
  • The appellant challenged the jurisdiction of the arbitrator under Section 16 of the Act, arguing that the dispute was not arbitrable.
  • The arbitrator, recognizing the jurisdictional issue, closed the proceedings.
  • The respondent then filed a petition under Section 11(6) of the Act before the High Court of Madras, seeking the appointment of an arbitrator.

High Court Order and Appeal

  • The High Court granted the respondent’s petition and appointed an arbitrator.
  • The appellant appealed to the Supreme Court, challenging the High Court’s order.
  • Whether the dispute between the parties was arbitrable under the A&C Act.
  • Whether the statutory authorities under the PW Act and the ID Act had exclusive jurisdiction to adjudicate the dispute.
  • Whether the arbitration agreement between the parties covered the specific disputes in question.
  • Whether the principle of judicial restraint should be applied to compel arbitration in this case.

Analysis

The Court’s Reasoning

  • Statutory Jurisdiction Supersedes Arbitration:
    • The SC emphasized that disputes governed by the PW Act and ID Act are non-arbitrable. These statutes confer exclusive jurisdiction to specific statutory authorities or tribunals, such as the Authority under the PW Act and the Industrial Tribunal under the ID Act.
    • Section 22 of the PW Act explicitly bars civil court jurisdiction, including arbitration, over matters related to the recovery of wages.
  • Non-Arbitrability Tests: The Court relied on the fourfold test laid out in Vidya Drolia v. Durga Trading Corporation for determining non-arbitrability, particularly emphasizing that disputes requiring central adjudication or involving statutory rights are unsuitable for arbitration.
  • Pre-existing Remedies and Abuse of Process: The Court observed that the appellant had already initiated proceedings under the PW Act and the ID Act before the respondent sought arbitration. This sequence reinforced the non-arbitrable nature of the disputes and highlighted an abuse of the remedial process by the respondent.
  • Non-disclosure Obligation — An Afterthought: Allegations of breach of non-disclosure obligations under the employment contract were dismissed as afterthoughts. The Court noted that such allegations were absent in earlier disciplinary proceedings and the termination order.
  • Application of Section 11(6): The Court invalidated the High Court’s decision to appoint an arbitrator under Section 11(6) of the A&C Act as the disputes in question were beyond the purview of arbitration.

Non-Arbitrability of Employment Disputes

While arbitration is increasingly preferred for resolving disputes in employment contracts, certain employment disputes are deemed non-arbitrable under Indian law due to statutory restrictions or public policy considerations. 

Judicial Test for Non-Arbitrability

The SC in Vidya Drolia laid down a fourfold test to determine non-arbitrability. A dispute is non-arbitrable if:

  • It pertains to rights in rem (rights enforceable against the world) and not subordinate rights in personam (rights enforceable against specific individuals).
  • It impacts third-party rights or requires centralized adjudication, making mutual arbitration unsuitable.
  • It involves matters expressly or implicitly prohibited from arbitration under mandatory statutes.
  • It relates to sovereign functions or public interest issues where mutual adjudication is unenforceable.

Precedents Recognizing Non-Arbitrable Disputes

In Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd., the SC identified certain disputes as non-arbitrable, including:

  • Criminal offenses, as they are deemed offenses against the state.
  • Matrimonial disputes, guardianship matters, and testamentary issues.
  • Insolvency, winding-up matters, and tenancy disputes.

These precedents affirm that matters involving public interest, third-party rights, or statutory exclusivity are non-arbitrable.

Employment-Specific Limitations

  • Employment disputes primarily involve individual rights, which do not generally impact third parties.
  • Indian labor laws, including the ID Act, allow arbitration but restrict arbitrability where statutory remedies under the ID Act are unavailable or insufficient through arbitration.
  • In Kingfisher Airlines v. Prithvi Malhotra and Ors., the Bombay High Court held that disputes where arbitrators cannot provide remedies equivalent to courts or tribunals under the ID Act are non-arbitrable.

Public Policy and Group Impact

  • Employment disputes involving public policy concerns or group rights of workers are typically non-arbitrable.
  • For example, disputes regarding mass layoffs, union activities, or issues affecting the broader workforce fall within the exclusive jurisdiction of labor courts or industrial tribunals.

To minimize challenges, arbitration clauses in employment contracts should be:

  • Well-drafted to include all anticipated disputes.
  • Compliant with statutory requirements, ensuring that public policy considerations and third-party rights are not impacted.
  • Duly stamped and enforceable.

Conclusion

The case underscores the interplay between statutory remedies and contractual arbitration in employment disputes. The SC’s reaffirmation of non-arbitrability in matters governed by labor laws such as the PW Act and ID Act reflects a commitment to uphold statutory rights and public policy. While arbitration offers flexibility, it cannot override exclusive statutory jurisdiction, especially in disputes with broader societal or public policy implications. Employers must carefully assess the scope of arbitration clauses to ensure compliance with Indian labor laws and public policy. Lawyers can assist by drafting arbitration clauses that align with statutory frameworks, providing tailored advice to navigate disputes effectively, and ensuring compliance with evolving legal standards.

King Stubb & Kasiva,
Advocates & Attorneys

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