This article has been written by Naved Bangi, and Debasmita Goswami pursuing a Certificate Course in Arbitration: Strategy, Procedure and Drafting from LawSikho. This article has been edited by Aatima Bhatia (Associate, Lawsikho) and Smriti Katiyar (Associate, Lawsikho). 

Introduction

Since time immemorial, unconscionable contracts have been considered to be against the notions of public policy and have been subjected to huge criticism. It can be said without an iota of doubt that such contracts act as a hindrance to the mechanisms concerning not only the employment sector but other areas of business too, deliberately leaving the aggrieved party without any remedial measure but to knock the doors of the judicial courts in order to meet the ends of justice. While there have been numerous Indian precedents where the judiciary has vehemently criticized the one-sidedness of such contracts, has also rightly acknowledged them as being arbitrary and coerced.

For Example – The Supreme Court of India  (Indian Supreme Court) in the case of Central Inland Water Transport Corporation Ltd. V. Brojo Nath has rightly observed that forcing the employee to serve a three months notice period in the event of resignation is against the notions of public policy and is arbitrary in nature. The Supreme Court of the United States in the case of AT&T Mobility LLC v. Concepcion has come with a check-list (fraud, duress etc.) for declaring Arbitration Agreement as unenforceable in the employer – employee dispute. In this regard I wish to quote Professor Alexander, Cornell University – “Mandatory arbitration has gone from being a practice used by a relatively small segment of employers to something that affects most American workers.” We further need to take into consideration the reasoning given by the Supreme Court of California in the landmark case of Armendariz Vs. Foundation Health Psychcare Services Inc (Armendariz Case).

On 24th August 2000, The California Supreme Court in the case of Armendariz v. Foundation Health Psychcare Services Inc has explained and laid down the minimum requirements for an employment arbitration agreement to be enforceable in California. The minimum requirements provided for by the supreme court are:

1) Employer must now agree to a neutral arbitrator;

2) Adequate Discovery;

3) Access to full remedies;

4) Written arbitration awards;

5) An employer must pay the arbitration cost.

Now let us understand the case in detail.

Facts and observations 

Before delving into India’s key takeaways from the Armendariz case we first need to take a look at the factual matrix and the issues of the law raised in the instant case. Marybeth Armendariz and Dolores Olague- Rodgers (employees) filed a complaint against Foundation Health Psychcare Services, Inc. (employer). The employees in the instant case were hired in the year 1995 by the employer. Subsequently, in the year 1996, the employees were terminated and they claimed that during their employment tenure they had come across incidents where their supervisors had engaged in sex-based discrimination which was accompanied by harassment. 

In this case, two employees of Foundation Health Psychcare Services Inc sued their employer under the Fair Employment and Housing Act (FEHA) claiming that because of their perceived heterosexual orientation they were harassed and terminated from their positions by their supervisors. The employees had entered into an employment arbitration agreement with the employers. When the matter was brought to trial by the employees, Foundation health moved to compel arbitration, but the judge here denied the motion and gave reasons for it which were as follows:

1)She observed that the arbitration agreement was an unconscionable contract of adhesion.

2) She also observed that the agreement was a one-sided agreement and quite severely limited employees’ damages.

Then the matter went to appeal and the First district court of appeals sided with the trial court judge on the point that the agreement contained one-sided provisions and also agreed that the clause limiting employees damages was unconscionable.

But the First district of appeals took a different approach here by merely severing the unconscionable damages provision in order to promote the spirit of arbitration and granted the motion to compel arbitration in relation to the rest of the agreement. Further, the matter went to the California Supreme Court in which court favoured the employees. 

Issues raised

The Armendariz case being extremely unique has dealt with the key issues of law, that whether employees in the instant case could be compelled to arbitrate their wrongful termination or the anti-discrimination claims brought under the FEHA as per the provisions of Title 9 of  Part  III of the California Code of Civil Procedure, in lieu of filing a suit in the court, on account of signing the compulsory employment arbitration agreement as a condition of employment. While we got a glimpse of the case from the factual matrix and the issues discussed, let us further take a look at what India needs to learn from the jurisprudence laid down in the Armendariz Case. Let’s dive in!

Judgment

The Court held that the employee may be compelled to arbitrate his or her claims under the Fair Employment and Housing Act (FEHA) provide the arbitration satisfies the five minimum fairness requirements and they are as follows:

1) The agreement should provide for a neutral arbitrator;

2) The agreement must afford more than a minimal discovery;

3) The agreement must require a written decision permitting limited judicial review;

4) The agreement must provide the types of relief which would be available in a  civil court;

5) The employer must pay the arbitration cost.

The court also concluded that the FEHA claims can be arbitrable but only if the arbitration permits the employee to vindicate his or her statutory rights. Finding several portions of the arbitration agreement before it unconscionable, The Supreme court held that the entire arbitration agreement was unenforceable. The court also observed two points that weighed against the severance of unconscionable provisions. Firstly stating that the arbitration agreement comprised more than one unconscionable provision which suggested a systematic effort to impose the arbitration on the employee, not as an alternative to litigation but as a forum that is inferior and works to the employer’s advantage. Secondly, there was a lack of mutuality in the arbitration agreement which permeated the entire agreement, which cannot be solved just by severance of the unconscionable provisions but by the reformation of the agreement. The court also held that an arbitration agreement entered into by the employer and the employee should possess a modicum of bilaterality in order to be conscionable.

Lessons which India could learn and India’s current position

Indian courts for a long time have struggled with the validity of such unconscionable agreements. The main reason being if such agreements are upheld they do become a case of witticism. Similar observations were made by the Supreme Court of India in the case of ICOMM Tele Ltd. v. Punjab state water supply and Sewerage Board and Ors. Ruled that “ Deterring a party to the arbitration from invoking this alternative dispute resolution process by a pre-deposit of 10% would discourage arbitration, which is contrary to the object of de-clogging the court system and would render the arbitral process ineffective and expensive”. So as we see the stance of the Supreme Court here has provided a bit of clarity on the position of India on unconscionable agreements. 

As we saw that the Supreme Court of California held that an arbitration agreement entered into by the employer and employee should possess a modicum of bilaterality in order to be conscionable. Now let us understand what has been the position of India in relation to the Unilateral arbitration agreement in order to understand the stance of India in concerning Bilateral arbitration agreements.

Notable Judgement on the validity of the Unilateral option clause has been rendered by the Delhi High Court:

1)In the case of Bhartia Cutler-Hammer v. AVN Tubes (1995 (33) DRJ 672), the Delhi HC held that under the Arbitration and Conciliation Act 1996 a party could not have an exclusive right to initiate arbitration as the Act presupposed that there must be a mutual arbitration agreement between parties and also an opportunity for bilateral invocation. The court further held that notwithstanding the parties expressly consent to such a clause, it would not be deemed a valid arbitration agreement.

2) In Emmsons International Ltd. v. Metal Distributors (2005 (80) DRJ 256),  the Delhi HC found out the identical conclusion as in Bhartia Cutler but supported different reasoning. The court in this case observed that unilateral option clauses were void as they restrained one party’s recourse to legal proceedings, in contravention of Section 28 of the Indian Contract Act, 1872. The court further noted that a unilateral clause would be void being contrary to the public policy of India.

3)Delhi HC in the case of Fuerst Day Lawson Ltd. v. Jindal Exports Ltd. has deviated from its previous decisions and has held unilateral optional clauses to be valid. However, there has been a lack of clarity about the impact of this decision on the position of the court. Reason being that the clause was upheld under the applicable English law and not under Indian law.

4)In the case of Castrol India Ltd. v. Apex Tooling Solutions [(2015) 1 LW 961 (DB)] the Madras HC decided to go completely against the flow as the general principle that the arbitration clause need not necessarily have mutuality was not disputed. On the facts, however, the court determined that the party seeking to use arbitration as its sole option could not do so because it had failed to oppose and had even engaged in the earlier phases of the litigation.

5) In a modest departure from its earlier judgments, the Delhi High Court upheld the validity of a unilateral option clause in Fuerst Day Lawson Ltd. v. Jindal Exports Ltd. (MANU/DE/3204/2009). However, the effect of this ruling on the court’s stance is unclear, given the section was affirmed under applicable English law rather than Indian law.

If we analyze the above judgments we can see that Delhi HC has a view that is majorly favouring the notion that unilateral optional clauses are not valid. But even after these judgements there seem to be room for ambiguity as to the position of the courts in this respect.

When we come to the aspect of Learnings that India could take from the Armendariz Case. We must first understand that the position of India in respect to unconscionable agreements and unilateral option clauses has not been laid down clearly and the Only way the stance of India could be clear on the above issues is when the Supreme Court of India lays down its position clearly. So the Armendariz case would Act as a great reference whenever the Indian courts face the above issues in a particular case. The most essential components of the Armendariz case are the five minimum fairness requirements laid down in the case which could serve as a great reference to Indian courts in laying down a clear position on the aspect of the validity of unconscionable agreements and unilateral option clauses. The judgement in the case of ICOMM Tele Ltd. v. Punjab state water supply and Sewerage Board and Ors. Civil appeal No. 2713 of 2019, 11th March 2019 is one of the important Judgements in respect of the question pertaining validity of unconscionable agreements in India.

Let us further take a look at the scenario existing in India. The 103rd and 199th Law Commission of India Reports (Law Commission Reports) do recognize the issues related to the unfair terms in a contract and the inadequacy of the present Indian Statute law and provide us with a brief regarding the procedural and substantive unfair terms in a contract. The Law Commission reports have stated their reasoning with respect to Section 16(3), Section 23 and Section 74 of the Indian Contract Act, 1872 and have also observed that there exists ambiguity when one deals with unconscionable contracts in India. The reports also acknowledge the problems with respect to the Contract of Adhesion. In order to understand this notion further, let us see what the Delhi High Court has held in the case of Bhartia Cutler Hammer Ltd. v. AVN Tubes. The Delhi High Court, in this case, has rightly observed that unequal rights given to the parties under the arbitration clause shall be rendered void, a similar decision was also laid down in the case of Lucent Technologies v. ICICI Bank by the Delhi High Court. Further, the Delhi High Court in the case of Lucent Technology v. ICICI Bank did acknowledge the invalidity of a unilateral clause but, to the contrary, the Delhi High Court in the case of Fuerst Day Lawson Ltd. v. Jindal Exports Ltd. noted in its observations that a unilateral clause shall be rendered as valid. Since the decision was upheld under English law and not Indian law various narratives and ambiguity have been centred around the same.

Conclusion

The California Supreme Court in the Armendariz case rightly acknowledged the significance of the statutory rights prescribed under the FEHA and duly mentioned that these rights are “for a public reason” therefore, a mandatory arbitration agreement cannot act as a hindrance or as a waiver of these rights. The Employment Arbitration Agreement was indeed imposed upon the employees by the employer leaving no room for negotiation. From the judicial pronouncements discussed above, we see that the parties have sought court’s intervention on the grounds of “lack of mutuality, public policy, and restraint of a party’s right to legal proceedings” but there also exists ambiguity in this regard thus, direct intervention from the Indian Supreme Court of India is the need of the hour and the Armendariz Judgment will act as a valuable reference with regards to the five essentials listed above. It can be concluded that the judgment in the Armendariz case has led to the establishment of a very essential set of rules. The Armendariz judgement also goes on to save employees money and has made arbitration of their statutory employment disputes more like judicial adjudication than ever before. I further conclude by saying that the five minimum fairness requirements are the most important learnings provided in the Armendariz case which India could inculcate. The judgement in the case of ICOMM Tele Ltd. is one of the remarkable cases in the avenue of unconscionable agreement and is definitely a positive judgement in the field of arbitration. I finally conclude by saying that if India were to inculcate these 5 principles it can help India to develop arbitration positively. 

References

1. 1. http://arbitrationblog.kluwerarbitration.com/2017/08/30/navigating-labyrinth-indian-courts-one-way-arbitration-clauses/.
   2. http://arbitrationblog.kluwerarbitration.com/2017/10/20/examining-validity-unilateral-option-clauses-india-brief-overview/.
   3. https://www.mondaq.com/unitedstates/employment-and-hr/11312/new-employment-arbitration-rules-the-armendariz-decision.
   4. https://indiacorplaw.in/2020/07/uber-v-heller-analysing-how-indian-courts-have-interpreted-unconscionable-arbitration-agreements.html.

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