by Mr. Prateek Mahajan, practicing advocate at the Punjab & Haryana High Court, Chandigarh
Recently, the Supreme Court of India over-ruling its own decision in Himangni Enterprises v. Kamaljeet Singh Ahluwalia, held in the case of Vidya Drolia v. Durga Trading Corporation that landlord-tenant disputes governed by the Transfer of Property Act, 1882 (“TP Act”) are arbitrable as they are not actions in rem but pertain to subordinate rights in personam that arise from rights in rem. The Court in this case has answered a reference from a two Judge bench which raised questions as to the correctness of the dictum laid down in the case of Himangni Enterprises wherein it was held that landlord-tenant disputes governed by the TP Act would not be arbitrable as disputes arising under the TP Act constitute a right in rem and it would be contrary to public policy. The judgment in Vidya Drolia highlights the shifting paradigms in the approach of the apex court in relation to arbitrability of disputes and the top court has appeared keen to rule in favour of arbitrability of disputes as far as possible so as to reduce the burden on the traditional civil courts. At the same time, the necessity to keep certain matters away from arbitration keeping in view the peculiar sensitivities of certain subject matters are an issue which engages the attentions of Courts from time to time. Labour and industrial disputes is one such field. While the issue is yet to find conclusive adjudication from the Apex Court, certain High Courts have been seized of the issue keeping in view the increasing tendency of employers nowadays to include arbitration clauses in labour and employment contracts.
It must be pointed out here that the Arbitration and Conciliation Act, 1996 itself does not make any provision defining or even giving any guiding principle as to which category of disputes will be arbitrable or non-arbitrable. So, while the legislature has left this lacuna, the onus has shifted on to judiciary to plug the gap and explain which category of disputes will be arbitrable and otherwise. The landmark judgment of the Supreme Court which settled the law in this regard is Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. The test laid down in Booz Allen was that ordinarily any civil or commercial dispute whether based on a contract or otherwise capable of being adjudicated by a civil court is in principle capable of being decided upon and resolved by arbitration as a dispute resolution mechanism “subject to the dispute being governed by the arbitration agreement” unless the jurisdiction of the arbitral tribunal is barred by either an explicit clause or by necessary implication in the contract.
Express bar to arbitration as a dispute resolution mechanism is rare and there exist no civil or commercial legislation where arbitration is expressly barred. So, to determine arbitrability of a dispute we need to understand when the jurisdiction of Arbitral Tribunal will be impliedly barred. In this regard, the Supreme Court ruled that adjudication of certain categories of proceedings is reserved by the legislature exclusively for public fora as they pertain to a matter of public policy. Other categories, though not exclusively reserved for adjudication by courts and tribunals by necessary implication stands excluded from the purview of private fora and hence could not be resolved using arbitration as a dispute resolution mechanism.
The second test laid down is related to the rights involved in the dispute. The Court held that a certain class of actions operates in rem, which is a right exercisable against the world at large as contrasted with a right in personam which is an interest protected against private persons. All disputes relating to rights in personam are considered to settled by arbitration while rights in rem are required to be adjudicated by courts and tribunals of open nature akin to courts. The Court enumerated certain examples of non-arbitrable disputes in para 36 of the Vidya Drolia case.
Now, let us examine the arbitrability of labour and industrial disputes in terms of the principles enunciated by the Supreme Court in Vidya Drolia case. If we apply the two tests prescribed by the Supreme Court, although with the rights test, there is little doubt that the rights involved in labour and industrial law are rights in personam and hence, it may appear labour and industrial disputes can be arbitrable. However, the second test assumes significance in such a case. While applying the second test, we have to see whether labour and industrial disputes have been exclusively reserved for adjudication by a public forum. The Industrial Disputes Act, 1947 (“ID Act”) provides for public fora in the form of Labour Courts, Industrial Tribunals and National Tribunals for settlement of such disputes, however, whether such disputes are exclusively reserved for such fora is the question which this post seeks to address by taking help of the relevant case law on the subject.
The question of arbitrability of labour disputes first arose before the Bombay High Court in Kingfisher Airlines v. Captain Prithvi Malhotra and others. In this case there were various labour recovery proceedings instituted by pilots and other staff members of the (now defunct) Kingfisher Airlines. The proceedings were instituted before the specially empowered labour courts for the recovery of unpaid wages and other salary benefits. Kingfisher Airlines contested the jurisdiction of the labour court by relying on the arbitration clause enshrined in the employment agreements. To that end, Kingfisher filed an application invoking Section 8 of the Arbitration and Conciliation Act seeking reference to arbitration in terms of the employment agreements. The labour court rejected the application and retained jurisdiction over the proceedings.
Kingfisher aggrieved by the order of the Labour Court thereafter, approached the Bombay High Court and assailed the same. The Bombay High Court affirmed the order of the labour court and held that labour disputes were not amenable to arbitration under the Arbitration and Conciliation Act, 1996; as the Court observed that the resolution of labour and industrial disputes has been reserved for resolution before the judicial fora which is to be constituted and governed by the under the ID Act. The court relied upon the various aids of constructions such as using preamble of the act to decode the intent of the legislature and by observing the trend of resolution of the labour disputes, to support its finding.
The Court in this case examined the scheme of the ID Act and concluded that it provides for a unique process for arbitration of collective labour claims. It also, concluded that if there were to be adjudication of labour and industrial claims outside of the courts and tribunals constituted under the Act, the reference to and resolution by arbitration would have to be governed by the specific provisions of the ID Act (and the rules made thereunder) and not the Arbitration and Conciliation Act, 1996 which lays down the general law governing arbitration in India. The Court therefore, concluded two crucial issues: claims under the ID Act are not arbitrable under Arbitration and Conciliation Act, 1996 and by extension, where it is arbitrable, it must confirm to the requirements and procedure under the ID Act, since it is a special legislation governing the disputes in industrial sector, relying upon the maxim “generalia specialibus non derogant”. After this judgement of the Court the authors arrive at the conclusion that labour and industrial claims are not per se non-arbitrable, but are instead only arbitrable in the manner and to the extent which is permitted by the ID Act. Under the scheme of the ID Act, only voluntary arbitrations are permitted i.e., where both the parties willingly submit the dispute to arbitration in terms of the provisions of Section 10A of ID Act and are binding only in accordance with the provisions of Section 17 and 18 of the ID Act.
A similar question arose subsequently in 2017 in Rajesh Korat v. Innoviti before the Karnataka High Court. In this case, an application for reference to arbitration was made before the labour court, the application was allowed and parties were referred to arbitration as per the terms of the arbitration agreement. However, the same was reversed by the High Court which observed that there are strong and compelling public policy reasons to ensure that labour and industrial disputes are exclusively resolved by courts and tribunals constituted and governed by the ID Act. The Court even observed that the ID Act is a self-contained code, and to that extent the Arbitration and Conciliation Act, does not have any application to matters governed by the ID Act.
Importantly, both these decisions in Kingfisher and Innoviti are attentive to the asymmetry in bargaining power inherent in labour disputes. In larger picture the ID Act (and other labour legislations generally in India), are meant to address this issue. Part of this remedial function is achieved through the creation of specialized courts and tribunals under the ID Act. A closer reading of both these would reveal that the Court was persuaded in large part by the consequences of relegating labour disputes to private arbitral tribunals.
If these cases were decided the other way and labour disputes were held to be arbitrable, it would mean that individual and collective labour disputes would have to be resolved by way of private arbitration which is usually a costly affair and where the employers would potentially have more say in the choice of arbitrators, employers could refuse to participate in the appointment process forcing employees to follow the procedure under Section 11 of the Act and/or could also have the power to designate arbitral institutions, which would be beyond the reach and means of industrial workers for example say having a seat and venue of tribunal outside India or even a state would have been difficult for the employees to access. In sum, the Courts rightly seem convinced that holding labour disputes to be arbitrable would place undue burdens on aggrieved workers in accessing and thereafter, participating in private arbitral proceedings done before the private arbitration tribunals constituted under the Arbitration and Conciliation Act, 1996. In my opinion, the decisions of the Hon’ble Courts are correct and should serve as the benchmark for deciding the arbitrability of such disputes in future.
On a concluding note, the author feels that there is a dire need of either a judicial pronouncement by the Apex Court or a legislative amendment by the Union Legislature to settle the dust around the issue and to attain finality once and for all. As we have seen that India had recently consolidated its major chunk of labour laws into 4 codes for promoting ease of business and to capitalize the resource of abundant labour, the state should also look forward to address such issues and not adopt the approach of ‘crossing the bridge when we come to it’ as it might prove harmful in the long run.
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