Supreme Court Rulings Highlight Perils of Arbitration Clauses in Employment Contract

 

By Satendra SIngh
A recent judgment by the Supreme Court has sparked renewed debate on the legality and practical pitfalls of incorporating arbitration clauses into appointment letters and employment contracts. The case in focus, Dushyant Janbandhu v. M/s. Hyundai Autoever India Pvt. Ltd., clarified that disputes governed exclusively by labour laws—such as payment of wages under the Payment of Wages Act, 1936, or terminations under the Industrial Disputes Act, 1947—are not arbitrable and fall strictly outside the jurisdiction of civil courts.

 

However, legal experts warn that despite this settled position, many employers continue to insert arbitration clauses in employment agreements under the misconception that appointing a friendly arbitrator can help them avoid judicial scrutiny and secure favourable outcomes.

 

This widespread practice, experts note, is fraught with significant risks. Notably, the Supreme Court in TRF Ltd v. Energo Engineering Projects Ltd. and Perkins Eastman Architects DPC v. HSCC (India) Ltd. held that a party with an interest in a dispute cannot unilaterally appoint a sole arbitrator, as this raises serious doubts about independence and impartiality. Similarly, in Central Organisation for Railway Electrification v. ECI SPIC SMO MCML (JV), the court reaffirmed that such unilateral clauses are contrary to public policy and any award arising from them can be declared invalid.

 

Advocate Gaurav Kumar, writing in the Labour Law Reporter, cautions that even if an employer cannot appoint an arbitrator of their choice, the presence of an arbitration clause in a contract compels the employer to participate in arbitration proceedings—even in matters that are legally non-arbitrable. Under SBI General Insurance Co. Ltd. v. Krish Spinning, the Supreme Court ruled that at the stage of appointing an arbitrator, courts are restricted to verifying the existence of an arbitration agreement and cannot adjudicate whether the underlying dispute itself is arbitrable. As a result, objections about non-arbitrability must be raised before the arbitrator, not the High Court or Supreme Court.

 

Legal practitioners point out that awards rendered in such situations are difficult to set aside. According to the Supreme Court’s decision in MMTC Limited v. Vedanta Limited, mere disagreement over an arbitrator’s interpretation does not warrant judicial intervention to annul the award.

 

 

In view of these legal complexities, experts advise employers to exercise caution. Kumar suggests several safeguards if employers still wish to include arbitration provisions:

• Avoid unilateral appointment: Employers should not reserve the exclusive right to appoint the arbitrator. Directors, managers, or employees of the company should not act as arbitrators. Even requiring employees to pick from a shortlist curated by the employer is legally suspect unless the employee expressly consents in writing.
• Consider alternative dispute resolution (ADR): Instead of hardwiring arbitration, contracts could provide for mediation or negotiation, allowing both parties to explore consensual settlement.
• Specify appointment procedures: Arbitration clauses can outline a clear process for selecting arbitrators, with provisions stating that if the procedure fails, the dispute shall not proceed to arbitration. However, this approach remains under judicial scrutiny, with the Supreme Court yet to rule definitively on its validity in M/s. R.S. Construction v. Building Construction Department.
• Limit arbitration to permissible disputes: Employers may define specific issues suitable for arbitration—such as breach of confidentiality or disputes over lock-in periods—while expressly excluding claims under traditional labour laws.

As case law continues to evolve, employment lawyers stress that companies should consult legal counsel before including arbitration clauses in employment contracts. With courts increasingly vigilant about fairness and neutrality, any procedural misstep could render arbitration agreements unenforceable and expose employers to protracted litigation.