Author: Shubham Milind Thakare is a 2nd year-law student at National Law School of India University, Bangalore
The arbitrability of workplace disputes—determining which conflicts can be resolved through arbitration—has profound implications for worker rights in India. While the 2020 Industrial Relations Code permits arbitration for certain labour disputes, Indian courts apply public policy principles from the Arbitration and Conciliation Act (A&C Act) to determine arbitrability. These principles, aimed at safeguarding the broader workforce, often neglect individual fairness. This article argues for a more balanced approach by integrating substantive unconscionability into the arbitrability debate. It highlights how power imbalances lead to mandatory arbitration clauses in employment contracts, restricting workers’ access to labour courts and favouring employers. Although arbitration is framed as “voluntary,” workers often have no genuine choice, as standard-form contracts embed arbitration clauses without negotiation. The process further tilts in favour of employers, who influence arbitrator selection, venue, and procedural rules, limiting transparency and judicial oversight. Additionally, the article critiques the weak link between substantive unconscionability and public policy in India. Courts have used public policy to exclude certain disputes from arbitration but rarely assess whether arbitration clauses themselves impose unfair terms. To address this, the article proposes amending the Industrial Relations Code to allow courts to strike down unconscionable arbitration agreements. Drawing from international models and India’s consumer protection laws, it calls for stronger safeguards to protect workers from coercive contract terms. Ensuring fair access to dispute resolution mechanisms is essential to upholding labour rights and preventing arbitration from becoming a tool of employer dominance.
Introduction
In 2020, the Indian government brought four new labour codes to consolidate and replace the previous labour statutes. One of these was the Industrial Relations Code (here, ‘the code’) which superseded, inter alia, the 1947 Industrial Disputes Act. Voluntary arbitration falls under Chapter VI of this new Code. Section 42 under this chapter largely mirrors the provisions of the former Section 10A. Under this section, only ‘Industrial disputes’ can be referred to arbitration. This means that other forms of disputes are not subject to arbitration under the code. Industrial dispute, defined in Section 2(q) of the code refers to disagreements between employers and workers regarding employment terms and conditions, dismissals and terminations.
Arbitrability of Industrial Disputes
Section 42(8) of the code explicitly excludes the applicability of the Arbitration and Conciliation Act, 1996 (A&C Act henceforth) to arbitrations under the section. Nonetheless, courts have resorted to judicial principles under the A&C Act to determine whether a specific industrial dispute can be resolved through the process of arbitration or not. This determination is known in law as ‘arbitrability’. The 2011 landmark Supreme Court Judgement in the case of in Booz Allen and Hamilton Inc. v. SBI Home Finance outlined three essentials to be fulfilled for a dispute to be considered arbitrable:
- The dispute must fall within the arbitration agreement,
- It must be referred to arbitration by the parties, and
- It must be capable of arbitral adjudication and settlement.
As for the third essential, the court held that every civil or commercial dispute be it contractual or non-contractual, is in principle arbitrable unless expressly or implicitly excluded. The judgment also noted that certain categories of disputes have to be reserved for proceedings under public fora (such as courts and tribunals) as a matter of public policy. It also went on to make a list of non-arbitrable disputes which included those related to criminal offenses and matrimonial disputes to name a few.
More recently in 2020, the Supreme Court in the case of Vidya Drolia & Others v. Durga Trading Corporation case elaborated more on the test from the previous Booz Allen judgment. From this case, we can infer that disputes are deemed non-arbitrable if:
- The disputes relate to actions in rem, or
- They affect third-party rights or require centralized adjudication, or
- They are expressly or implicitly non-arbitrable under mandatory statutes, or
- They involve inalienable sovereign and public interest functions of the state.
These tests were also used by courts to determine whether an industrial dispute can be referred to arbitration under the erstwhile Industrial Disputes Act.
The Test of Public Policy
In India, arbitration agreements that refer industrial disputes to arbitration under the Industrial Relations Code are usually deemed valid and enforced. However, in certain cases, courts have imposed limitations on the enforceability of these agreements owing to public policy considerations.
The Bombay High Court, while giving the judgment in the case Kingfisher Airlines v. Prithvi Malhotra and Ors. created a certain class of industrial disputes that could not be referred to arbitration. The court observed that in certain cases, the arbitrator’s ability to award reliefs under the Industrial Disputes (ID) Act differs from that provided by courts or tribunals under the Act. The court held such cases were reserved for authorities established under the ID Act as a matter of public policy. This was because the ID Act as a beneficial legislation placed some labour disputes on a different pedestal than others due to their potential impact on the entire workforce and industry, rather than just the individual himself.
In the case of Rajesh Korat, this approach to arbitrability in labour disputes were clarified further by the Karnataka High Court. The court observed that there were strong public policy reasons for resolving certain labour and industrial disputes exclusively through the public fora such as courts and tribunals constituted under the ID Act. Arbitrary dismissal of workers and unilateral changes to service conditions were identified as matters which could qualify as contraventions of public policy. The court held that if arbitration was allowed in such cases, it would undermine the objectives of the ID Act, which was both a special enactment and social legislation.
Shortcomings of the Test
This test is by and large focused only on assessing the potential impact of arbitration on other workers in context of the labour statute in question. However, relying on this approach alone will hardly be sufficient. There is a need to factor in the question of substantive unconscionability in the determination of arbitrability as well. This will need courts to scrutinize the substance of the arbitration clause and the overall contract to make sure that they do not impose unfair or one-sided terms on the workers.
Arbitration is presented as a “voluntary” process for both employers and workers under the Industrial Relations Code. However in reality, workers rarely have a truly voluntary choice when they assent to arbitration. Given that these employment contracts are of standard form, workers often feel pressured to accept arbitration clauses along with the whole of the contract. This limits their access to remedies through labour courts and industrial tribunals under the code, since the award of the arbitration tribunal is treated as binding under the code.
Moreover, the process of arbitration usually favours employers more than workers for several reasons. Employers usually have a huge say in most aspects of the arbitration process, including who to select as arbitrator. This may lead to bias on the part of the arbitrators towards the employer’s business interests. Employers can also select the seat of arbitration, potentially making it highly inconvenient for workers to attend arbitration proceedings. Unlike courts, arbitrators are not required to provide detailed explanations for their decisions. This leads to doubts about their transparency during the process and holding them accountable. Furthermore, the scope for judicial review of arbitration awards is very limited. Although some high courts have allowed petitions under Article 226 in cases of substantial errors, this process remains uncertain in absence of any explicit statutory provision. The same confusion persists regarding the filing of special leave petitions before the Supreme Court under Article 136. All of these factors make viewing arbitration agreements with scrutiny with respect to their content very pertinent.
One might argue that substantive unconscionability could be presumed to be implicitly covered by the existing test on public policy. However, this assumption does not hold true. In India, the scope of public policy is mostly limited to the statute under which it is invoked. In the context of arbitrability of industrial disputes, the concept of public policy will entail keeping in mind the worker’s interests and welfare.
However, this does not tell us much by itself. To get more insights into what public policy covers, we need to look more broadly at Section 23 of the Indian Contract Act. This section stipulates that agreements that are opposed to public policy are void. However, the statute itself nowhere defines what it means by “public policy” or a contract that is “opposed to public policy.” Scholars claim that the term itself is inherently vague and escapes precise definition. Public policy broadly concerns the public good and interest, and both of these change over time. In the case of Central Inland Water Transport, it was held that courts should not hesitate to develop new heads of public policy when public conscience and interests demand it.
The first known Indian case on unconscionability under Section 23 was that of Sheik Mahamad Ravuther. While the majority judgment accepted the unjust clause as enforceable, Justice Shankaran Nair dissented. He determined that the clause went against public policy under Section 23. Later on a similar note, the Law Commission also observed that Section 23 aims to protect public welfare by restricting unfair contracts for the good of the entire community. However, Dr. M.P. Ram Mohan & Anmol Jain observed that courts have been restrictive in their application of Section 23. They have, in many cases, favoured the idea of contractual freedom instead of public interest. Often times when parties have willingly entered into an unconscionable agreement, Indian courts have denied their requests to get the agreement to be declared as void. Moreover, on reading the judgments which read unconscionability into Section 23, it seems that courts had employed the use of public policy only because there was no concrete statute, they could rely on to strike down an unfair clause.
In India, the focus of courts is mostly on procedural unconscionability under Section 16 of the Indian Contract Act. This has led to the relegation of substantive unconscionability—to a secondary concern. Thus, the connection between substantive unconscionability and public policy remains underdeveloped and unclear in India. Even the 103rd Report of the Law Commission of India (as reiterated by the 199th Report of the Law Commission) had observed that unconscionability cannot be adequately addressed solely by using the lens of public policy.
Although some high courts have allowed judicial review under Article 226 (which grants high courts the power to intervene in cases where there are substantial errors in the arbitration process), this remains inconsistent because it is not supported by a clear statutory rule. Similarly, the potential to file a special leave petition under Article 136 to the Supreme Court is also uncertain. Both Articles allow for judicial intervention, but without explicit statutory guidance, the use of these articles in arbitration cases remains ambiguous.
A Possible Way Forward
One effective solution to address the issue of unconscionability in employer-worker agreements is to enact specific statute or provisions that enables courts to declare void the arbitration agreements which are deemed unconscionable. Dr. M.P. Ram Mohan and Anmol Jain’s two-step approach, premised on the 199th Law Commission report, deserves consideration here. He supposes that first, an amendment to the Indian Contract Act should be done, which would incorporate the Law Commission’s proposed Section 67A. Thiswould allow courts to declare contracts as unenforceable if they are found to be substantively unconscionable. Second, India could enact a law or provision similar to the UK’s Unfair Contract Terms Act (1977). That actlimits the extent to which civil liability can be avoided through unfair contractual terms. The 199th Law Commission report annexed a draft bill, the Unfair (Procedural and Substantive) Terms in Contract Bill, 2006 which is relevant to this extent.
The Consumer Protection Act of 2019 was an appropriate step in this direction. The Act protects consumers from unfair terms in their contracts with businesses. Sections 49 and 59 authorize state and national commissions respectively to declare such terms null and void. A potential general statute on unfair terms, as put forward by Dr. M.P. Mohan, would assist in extending these protections beyond consumer law. Until then, the following amendment must be made to the Industrial Relations Code 2020 to protect workers from unconscionable arbitration agreements:
Section 42A: Unconscionable Arbitration Agreements
(1) For the purposes of this chapter, an arbitration agreement shall be deemed unconscionable if it creates a significant imbalance in the position of the worker vis a vis their employer, to the detriment of the worker.
For this determination, the court or tribunal shall take into account whether:
a) The worker had knowledge of and understood the implications of the arbitration agreement at the time of signing the contract.
b) The clause in effect exempts the employer from liability due to the worker’s financial incapacity or otherwise.
c) The arbitration clause is part of a broader contract containing other terms that are also to the detriment of the workers.
(2) If an arbitration clause is found to be unconscionable under section 42(A)(1), the court or tribunal shall provide relief to the worker by declaring such clause null and void and allow the worker to seek remedies through other adjudication mechanisms under this Act.
(3) This section shall apply to all arbitration agreements under this chapter, irrespective of whether they were entered into before or after the addition of this Section.
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