Private Arbitration Cannot Override Statutory Labour Adjudication: Madras High Court

The Madras High Court has recently held that statutory labour adjudication cannot be displaced by private contractual arbitration where statutory worker rights are involved.

A Division Bench of Justice P Velmurugan and Justice K Govindarajan Thilakavadi observed, “While the Arbitration and Conciliation Act, 1996 governs voluntary arbitration, the Industrial Disputes Act, 1947 is a specialized social legislation designed to protect workers, and its mandatory procedures cannot be over ridden by private agreements.”

The bench further observed, “Moreover, the industrial disputes act, 1947 is a beneficial legislation that takes precedents when contractual arbitration is used to override statutory rights. In other words, a decision from a labour Court or Industrial Tribunal is mandatory and takes precedents, as it operates under statutory authority to maintain industrial peace, which is superior to private contract disputes.”

The case arose from agreements executed in 2004-05 under which Veejay Lakshmi Engineering Works Limited agreed to sell its spinning unit at Udumalpet as a going concern to GTN Enterprises Limited. Under the Memorandum of Understanding, Slump Sale Agreement and Deed of Indemnity, Veejay Lakshmi had agreed to settle pending liabilities relating to the unit before transfer.

Before the transfer, Veejay Lakshmi had terminated 12 workers in 2003, leading to industrial disputes before the Labour Court, Coimbatore. In 2012, the Labour Court passed an ex parte award directing reinstatement of nine workers with continuity of service, full back wages and attendant benefits.

GTN later settled the workers' claims by paying Rs 32 lakh and sought reimbursement from Veejay Lakshmi under the contractual arrangements. Veejay Lakshmi denied liability.

GTN invoked arbitration, and a sole arbitrator directed Veejay Lakshmi to reimburse Rs 25.65 lakh with interest. The Commercial Court upheld the award, prompting the present appeal.

Veejay Lakshmi argued that the arbitral tribunal lacked jurisdiction because disputes arising from statutory labour adjudication are non-arbitrable.

Accepting the contention, the High Court held that while the parties' contracts covered pending liabilities, reinstatement of workers was not contemplated under those agreements, and the amount paid by GTN to settle with the workers could not be recovered through arbitration.

“Even if an arbitration Clause exists, it cannot override statutory remedies,” the Court held.

Holding that the arbitral tribunal had acted beyond its jurisdiction, the High Court set aside both the arbitral award and the Commercial Court's order upholding it, while granting liberty to the parties to work out their remedies in accordance with law.

For Appellant: Advocates P.R Ramakrishnan and R Bharath Kumar

For Respondent: Advocate Rahul Balaji