This article is written by Aman Shakya. This article aims to provide a detailed understanding of compulsory arbitration by analysing its nature and use. It includes the advantages, disadvantages, and objectives of compulsory arbitration. This article also deals with the various landmark and latest cases on the topic at hand. 

This article has been published by Shashwat Kaushik.

Introduction 

Arbitration is a form of the ADR which involves the third person who is neutral and who makes a binding decision. In arbitration, the conflict of the party is decided by the arbitrators, arbiters, or by the arbitral tribunal. The dispute of the parties is decided in the arbitration by one or more persons and they render the decision in the form of the arbitral award. The arbitration decisions or the award is binding legally on both sides and it is enforceable in the courts unless all the parties to the dispute which brings their dispute in the arbitration challenge the process of the arbitration and the decision is non-binding in nature.

It is frequently employed to settle business conflicts. In some other countries such as the US, it is frequently employed in consumer and company employment matters. In situations where it is required by the job description or by commercial contracts, it might involve waiving the ability to pursue a class action lawsuit. Other types of arbitration other than compulsory arbitration are judicial arbitration, online arbitration, high-low arbitration, binding arbitration, non-binding arbitration, and pendulum arbitration. The terms obligatory arbitration and compulsory arbitration distinguish consensual arbitration from commercial arbitration; there are reserved rights for reviewing and appealing arbitration rulings. 

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What is compulsory arbitration 

Compulsory arbitration refers to the mode of arbitration where the parties to the agreement admit for any forthcoming conflict that arises between parties to be decided between them through the arbitration process clause and the dispute cannot be taken into court. 

The compulsory arbitration clauses require the employers to admit to any forthcoming disputes which happen between the employers and the company and to resolve such disputes through the arbitration and the dispute cannot be taken to the court by the parties. 

The owner or the directors take advantage of the fact that they are in a stronger bargaining position in the relationship between the owner of the company and the employee for the enforcement of such stipulations and to limit the employees’ power. 

Arbitration is brought as a fast conflict resolution mechanism and with compulsory arbitration, it is questionable whether the conflict of the parties will ever be fully decided. The arbitration clause in its ambit includes all kinds of conflicts, including conflicts that are relevant to various types of leave, salary, and even accusations of discrimination based on race or sexual orientation. 

Arbitrability of employment disputes in India 

The aforementioned conflicts in India refer to the lack of an official source in India that provides information on the enforceability of arbitrability clauses. Then the problem is evaluated by analyzing the present situation of the courts for determining it in India. 

The first time question arose before the Bombay High Court in the case of the Kingfisher Airlines vs. Capt. Prithvi Malhotra (2012), the facts of this case were associated with the labor process which was instituted through the number of staff members for recovery of the unpaid wages of the non-operational Kingfisher Airlines and for the further benefits of the salary. When the staff of the company instituted proceedings in the labor courts especially empowered. Kingfisher Airlines stated that the court didn’t have the jurisdiction or the court lacked the jurisdiction to entertain this case because, in the employment agreement, there was an arbitration clause. The application of Kingfisher Airlines was denied in reference to the arbitration clause and the court retained the jurisdiction over the proceedings. 

Also, on appeal, the Bombay High Court came to the same decision as the Labour Court. The labor dispute is non-arbitrable under Arbitration And The Conciliation Act, 1996. The Court mentioned the decision of the Supreme Court in the case of Booz Allen and Hamilton vs. SBI Home Finance (2011), in which it was decided that the goal behind the claim’s arbitrability must come from analyzing whether a claim is declared in the personam or in the rem.

Objective of compulsory arbitration 

The compulsory arbitration aims to reduce the burden of the court cases by seeking it within the statute or rules. The objective of compulsory arbitration is to allow the parties to enter into an arbitration agreement at any point in their disputes rather than going for litigation in Court. Therefore, it becomes a legal obligation on the parties to resolve their disputes through arbitration instead of traditional and time consuming methods. The ultimate objective of compulsory arbitration is to provide an alternative dispute resolution mechanism that promotes efficiency, expertise, flexibility, confidentiality, and finality in resolving disputes between parties.

Advantages and disadvantages of compulsory arbitration 

Advantages 

It is essentially a process that is private and the amount is paid by the persons who are involved in the conflict to the person who is appointed as a neutral third person. In simple words, we can say that arbitration is a method to solve conflicts without going to court. In the arbitration, both the disputed parties appoint a neutral third person and submit their dispute to him rather than submitting it in court. 

  1. Efficient and flexible 

It means quicker resolution or simply scheduling the hearing of the issue and making it easier to generally determine the dispute considerably sooner. While the procurement of the trial date of the court takes several years in arbitration, the date is usually obtained in a few months. The court date is scheduled based on the court’s calendar. While the hearings of the arbitration are scheduled by the convenience or availability of the parties. 

  1. Less complicated 

The arbitration is less complicated and the rules of the evidence and procedure are simplified. The legal proceedings lead to a time-consuming path of filling out papers and motions in order to attend events such as hearings. 

  1. Privacy 

Privacy in the arbitration is maintained and the dispute is out of the public search. The arbitration stands as a private body for solving or resolving conflicts. In the conflict, how is information raised? and the decision or the award given by the neutral third person is kept confidential.

  1. Impartiality 

In arbitration, the judge is not chosen impartially. The disputed parties of the case together choose or pick the arbitrator by which the arbiter from both parties is confident, impartial, and unbiased. 

  1. Usually less expensive 

It is less expensive in nature in most cases because in comparison with the court expenses it is less but not always. Arbitration often resolves disputes much more quickly than the proceedings of the court by which the fees of the attorney are reduced. 

  1. Finality 

The finality means the end of the dispute. In the arbitration where the award which is given or pronounced by the neutral third person is binding in nature then in such cases, the opportunities to go for appeal are limited in the hands of the parties. The finality given in the trial verdict is open to an appeal to additional trials and future appeals. 

Disadvantages

Fairness is in question

  • Compulsory arbitration 

Where the arbitration is compulsory according to the contract which was executed between the parties. Then in such cases, the parties to the contract have not the flexibility to choose or have no option to go for the arbitration by mutual consent. The cases in which arbitration is compulsory in this case, one party forces other parties to settle the conflict through arbitration when another option, such as a jury trial, is available and is more favorable to the other party or the opposing party. 

  • Subjective arbitrator 

The step or the way to choose or select the arbitrator or the neutral third person is not always objective. There are some cases in which the arbitrator or the neutral third person is biased toward one party because of their personal or business relationship with one of the persons involved in the conflict. 

  • Unbalanced

A lot of arbitration agreements benefit both the employer and the manufacturer. When it was questioned by an employee or someone who fails to understand or is unfamiliar with the arbitration process. 

  • No jury 

The arbitration eliminates the juries entirely and leaves the matters in the single arbitrator’s hands. The single arbitrator acts in the form of both judges and the jury. 

  • Lack of transparency 

The hearing of the arbitration is mainly done in private and it has come to be positive and beneficial for many of the people who are involved in such a process. The lack of transparency bore the biases in the process and the award that was pronounced was not fairly given, which is difficult for courts. 

No appeals 

In compulsory arbitration, the decision of the arbitrator or the neutral third person is binding on both sides. Then the parties waive their rights for an appeal if the person who is involved in the conflicts feels the decision is erroneous then there are much fewer opportunities to make it right. 

Can be more expensive 

Sometimes the arbitration becomes more expensive than in comparison with the court or legal process initiated by the court. Also, the arbitration which is known as quality arbitration needs more fees from the persons who are involved in the conflicts where the court proceedings or the litigation process does not demand much fees for quality decisions or judgment. In some cases, the binding award or the decision or award given in the binding arbitration is final and binding to the persons. Where the non-binding award or in the case of the non-binding arbitration the persons who are involved in the conflicts have the right or free to take their case into court.  

Compulsory arbitration clause 

In employment contracts compulsory arbitration clauses are increasingly prevalent in the world. In this clause or under this clause the employers or the owner of the company wish to bind their employee in the arbitration by the execution of the contract between himself and their employees. So, when any conflicts arise in the forthcoming or in the future between the company and the employees then at that time the employee doesn’t have an option to institute the proceedings in the court. Because it saves time for the company and also costs for the company. This clause stated that any conflict arising between the employer and the employee is only solved through the process of the arbitration and no one has the option or right to bring such conflict into the court. 

Where is a compulsory arbitration clause used

Compulsory arbitration is used in several disputes. Here we discussed some disputes as: – 

Consumer dispute 

In our country i.e., the Republic of India here the consumer conflicts or disputes that mainly occur or arise due to the conflicts between the consumers with the companies or others. All these forms of conflicts that arise are mainly the subject of the arbitration clause. Sometimes when the conflict arises the consumer willingly opts for an arbitration without any pre-existing agreement of arbitration between them. In our country all the conflicts related to the consumer are protected and governed through the legislation which is named as the welfare legislation i.e., the Consumer Protection Act, 2019. But such conflicts are also non-arbitrable in nature till the consumer is not able to willingly opt or go to arbitration for remedy of the public fora. 

In our country under the Indian Arbitration Act, 1996 the Indian court may refuse to remove the appointment of an arbitrator if the conflict between the parties is in question or if the court thinks that the conflicts are non-arbitrable in nature. 

Labour dispute 

In general, labour conflicts or labour disputes were settled by arbitration. The purpose for which they are settled is through the process of arbitration because the persons who are involved in the disputes try to solve it peacefully without going or without initiating the process of the trial courts and the parties want to solve their disputes by putting their own efforts. 

General insurance policy 

The IRDA issued a direction of the powers to exercise it and made it compulsory for all. In the General Insurance Policies commercial lines of the business have the arbitration clause.

Contracting parties agree by their own will or by their own consent and then they enter into an independent agreement of the arbitration for settling their conflicts which is now stated in relation to the General Insurance policy.

In our country, the term arbitration or the body governing the arbitration is conducted under the provisions of the act i.e., Arbitration And Conciliation Act, 1996.

Debatable nature of compulsory arbitration  

It was easy to make an argument against compulsory arbitration, and these arguments are conceptually powerful. In India, the ruling parties such as the Congress, or some other Legislative parties which work on the prohibition of the different forms of discrimination in employment also prescribe some procedures by which the person’s rights are discriminated against. So all these rights that are discriminated against are enforced by the procedures that are prescribed or suggested by them. That the employer or the owner of a company who works or acts alone or in collaboration with the union should be able to force the employee or the labour to waive the statutory forum. The statutory forum provided for the procedures and the remedies that are available.  

Results in arbitration and in the court

According to the recent reports, the reports are based on the relative rates of the success of the claimants. The ratio in the employment arbitration and the ratio in the court were surprising. The report or the survey suggested compulsory arbitration does far better in the arbitration. 

Arbitration Association of America. The corporation found a winning rate in one study that the winning rate of the arbitral claimants is 63%. The success rates of the plaintiffs in the individual surveys of the court of federal in the EEOC trials is 14.9% the second is 16.8%. 

Case laws on compulsory arbitration 

Kingfisher Airlines vs. Capt. Prithvi Malhotra (2012) 

Facts of the case 

In this case, a question arose on the arbitrability of labour conflicts. This question first arose in this case and the matter was presented before the High Court which is situated in the territory of Bombay and the matter has the jurisdiction in the same High Court. In this case, it dealt with the proceedings related to the labour conflicts which were instituted by the different members of the staff of the company against the company for the recovery of the unpaid wages and also some other benefits which are related to the salary. The staff of the company i.e., laborers instituted the proceedings of the case in the labour courts. At that time the company said that the respective court lacked the jurisdiction or the respective court did not have the jurisdiction because the employment agreement contained or mentioned an arbitration clause. 

Judgment of the case

The court denied the application which was made by the company for arbitration or for referring the disputes to the arbitration and then the court retained the jurisdiction and instituted the proceedings of the case. 

Booz Allen and Hamilton vs. SBI Home Finance (2011)

Facts of the case 

In this case, the two companies involved owned the flat in the same building and at the same address. The identification of the flat as flat no. 9A which is owned by company one and flat no. 9B which is owned by company two respectively situated at the “Brighton” Mumbai. Company one and company two are taking loans from a well-reputed bank i.e., the State Bank of India (in short SBI) from their Home Finance Department. Company one and company two both executed the loan agreements between the bank and the company by securing their own flats in favor of the Bank or in favor of the Department of Home Finance Ltd. 

Judgment of the case 

In the case of Booz Allen And Hamilton vs. SBI Home Finance (2011), the Supreme Court declared the three conditions by which it could be determined whether the subject matter is arbitrable or not. 

These three conditions are as follows 

  • The conflicts which arise between the persons who are involved in such conflict must be covered or mentioned in the agreement of the arbitration which was executed between them.
  • That the conflicts of the persons must mutually or by force refer to the resolution of such dispute through the process of arbitration. 
  • That the conflicts which arise between the persons are arbitral in nature meaning that the dispute can be resolved by arbitration and is not barred by any law in force in India.  

Sankar Sealing Systems P. Ltd. vs. Jain Motor Trading Co. And Anr. (2003) 

Facts of the case 

In this case, the plaintiff claimed the money for the recovery of Rs. 13,41,165,75 of the goods/gaskets that were supplied to the defendant at their offices and to various branches of the defendants. In the same transaction, various payments were made by the defendant to the plaintiff. After the deduction of such payments, the amount due was Rs. 9,10,739.53. 

The plaintiff made various repeated demands and issued notice but the defendant did not pay a single penny to the plaintiff. Later, the defendant admitted his liability for the sum of Rs. 6,07,064.01. The plaintiff again demanded the amount that was admitted by the defendant but still, the defendant didn’t pay. The Plaintiff filed a suit for the recovery. 

The defendant said according to the agreement in which clause- 23A was mentioned and according to this clause disputes that arise between the parties are referred only to the arbitration for the settlement. 

Judgment of the case 

The court held that in this case the application which was moved under Section 8 of the Act was dismissed in appeal number 927 of 2003. 

In appeal number 5296 of 2002 respondents/defendants did not furnish any security which was required to be done by the attachment before the judgment of the movable properties which was given in the schedule and the application was allowed by stating for attaching the security by four weeks. 

In appeal number 918 of 2003 the court viewed the order passed in appeal number 5296 of 2002 and the application was dismissed. 

Compulsory arbitration versus collective bargaining 

S.no.BasisCompulsory arbitrationCollective bargaining
1. Between Compulsory arbitration is made between the parties to the agreement. Collective bargaining is made between the employer and a group of workers or labour union.
2. Representation The employees or party to the agreement represent himself. The employees of the organization were represented by the labour union. 
3.Kinds of conflicts In compulsory arbitration, the conflicts include salary, leave, and discrimination on the basis of race or sex.In collective bargaining, the employees negotiate on terms such as salaries, working conditions, working hours, etc.
4. Fundamental right Compulsory arbitration is not a fundamental right. According to the ILO Collective bargaining is a fundamental right of the employee. 
5.  Binding Compulsory arbitration is binding on the parties to the agreement.Collective bargaining is not binding on the employees. 

Difference between compulsory arbitration and voluntary arbitration

S.no.BasisVoluntaryCompulsory
1.Consent Both the disputed parties mutually agreed to go for the arbitration.Parties are not mutually agreed. They go to the arbitration by the instructions. 
2. Contract Not mandatoryMandatory and signed by the parties
3. Appointment of the arbitratorsThe arbitrator is appointed by the disputed parties by their mutual consent.The arbitrator is appointed by the parties in which the contract is executed. 

Comparison between the court suits and compulsory arbitration 

S.No.BasisCourt suits/LitigationCompulsory Arbitration
1. SpeedIt takes too long depending on the discovery and schedule of the court.It takes less time depending on the arbitrator as soon as selected. 
2. CostFees of the arbitrators and other expenses are less. Except in some cases.Fees of counsel, court fees, and other expenses are much more. 
3. Privacy Privacy is maintained between the two parties and arbitrators. Privacy is not maintained; it is in a public courtroom. 
4. Atmosphere Comparatively, the atmosphere is cooperative. The atmosphere is antagonistic. 
5. Recourse The award of the arbitrator is binding.The decisions of the court are open to levels of appellate review. 

Conclusion

The compulsory arbitration makes it clear that the employment agreement contains the arbitration clause compulsory and if the dispute arises or arises between the employers and employees then they must go to the arbitration first rather than to take the matter before the court. Compulsory arbitration reduces the burden of the courts and helps in resolving disputes outside of the court. In simple words, an arbitration clause is stated to resolve the dispute outside the court or without moving to the court.      

Frequently Asked Questions (FAQs)

Whether compulsory arbitration is worth it or not? 

Compulsory arbitration is worth it but not in every dispute. Arbitration is a good way to resolve a dispute through mutual understanding, but it is not applicable to all disputes.  

Does compulsory arbitration save the cost?

Compulsory arbitration in most cases saves the cost of the parties who are involved in the disputes. The compulsory arbitration can save costs by methods such as less paperwork, fast decisions, the cost of the arbitrator is less in comparison with the counsel, etc.

Is the arbitral award binding on the parties in the compulsory arbitration?

No, the arbitral award in the case of compulsory arbitration is non-binding in nature. 

Is it mandatory to go for compulsory arbitration?

Under the clause of compulsory arbitration, the parties are required to accept the arbitration process as solving their disputes without any willingness on their part.  

References 

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