Employment Law Insight: Lessons Recent Case Law Teach us on Arbitration Clause in Employment Contract

  1. INTRODUCTION

    An arbitration clause is a contract clause that requires parties to handle disputes through arbitration before instituting a suit. Enforcing arbitration clauses is an effective way of minimizing risk within your organization. This is because they are a valuable tool for reducing disputes thereby saving time, money and effort spent on legal suits.

    Arbitration clauses have increasingly gained popularity beyond commercial contracts and are being included in employment contracts. However, emerging case law shows that the Employment and Labour Relations Court has discouraged the inclusion of arbitration clauses in employment contracts. This article seeks to outline the lessons we can learn from the holding in these cases, and what that means to you.

    A BRIEF SUMMARY

    The Employment and Labour Relations Court in Okeyo Vs. Board of Directors HHI Management Service Limited & Another [2024] eKLR recently reaffirmed the decision in Kennedy Amuhaya Vs. African Medical & Research Foundation [2018] eKLR pertaining to arbitration clauses in employment contracts. The Court held that arbitration was not an appropriate means of dispute resolution in employment disputes. In both cases, the Claimants’ employment contracts had an arbitration clause requiring disputes arising from the agreement be referred to arbitration before the dispute could be litigated. The employers were therefore seeking to have the claims referred to arbitration.

    LESSONS LEARNT

    Here are some of the lessons we picked from the Courts’ reasoning and decision—

    Arbitration is a consensual process

    Though the employment contract had an arbitration clause, the Claimant argued that his consent was needed for the arbitration to proceed because of the unequal bargaining power between him and his employer. The Court agreed with this position since in its view, the wording of section 15 (1) of the Industrial Court Act required a reference to other alternative modes of dispute resolution, to be by consent of both parties.

    There is an unequal bargaining power dynamic in employment contracts

    The Court’s position was that potential employees are rarely involved in negotiating the employment terms save for the salary and benefits. The terms and clauses are usually crafted by the prospective employer and most prospective employees are usually eager to sign the agreement to secure employment.

    The parties must define issues they want to be referred to Arbitration before the Court can grant orders to stay the proceedings

    The Court was of the view that it would be premature to stay proceedings and refer the matter to arbitration because the parties had failed to define what issue was to be referred to arbitration. They had also failed to give the 21 days’ notice required before a matter could be referred to Arbitration.

    Arbitration is not one of the modes of Alternative Dispute Resolution for employment matters

    Section 15(1) of the Employment and Labour Relations Court Act requires the court to promote appropriate means of dispute resolution being: internal methods, conciliation, mediation and traditional dispute resolution mechanisms. The Court was of the opinion that the exclusion of arbitration as an alternative method of dispute resolution in that Court was deliberate. The justification was: despite the inclusion of arbitration in article 159(2)(c) of the Constitution; section 15(1) which was enacted after the promulgation of the 2010 Constitution, omits the word.

     The Arbitration law in Kenya is for resolving commercial disputes and not employment disputes.

    The Claimant was concerned that the arbitral process would be expensive for him since both parties were required to pay the arbitrator. Arbitration is appropriate for commercial contracts involving huge amounts of money as the consideration. However, including arbitration clauses in employment contracts is uncommon and demonstrates the unequal bargaining power between the employer and the employee because of the clauses they impose on employees.

    The Court was not persuaded that referring an employment dispute to arbitration was more favourable than litigation. The Court’s reasoning was that section 26 of the Employment Act contains the minimum conditions of employment where the employment terms agreed by the parties, prescribed by regulations, collective agreement or decreed by the court; are less favourable.

    The Court looks at how the parties conducted themselves before the request to refer the matter to arbitration was made

    The Court had requested the parties to consider court annexed mediation but they didn’t. The Claimant sought interim orders while the 2nd Respondent took no active steps towards mediation. Further, the 2nd Respondent had failed to provide clarity on the Claimant’s apprehension regarding cost. It is because of this conduct that the Court was not convinced that they were capable of following through with the arbitration process.

    The Court in Wanguhu Vs. Sustainet Group Limited [2022] KEELRC stated that section 6 (1) (a) of the Arbitration Act grants a court power to refuse to stay legal proceedings for an arbitration referral where the arbitration agreement is incapable of being performed. It was of the opinion that an employer’s refusal to participate in other forms of alternative dispute resolution available to the parties, was confirmation that the arbitration clause in the employment contract was incapable of being performed.

    An Arbitration Agreement is only Applicable where there is an Employment Relationship

    The Court in Sammy Onyango Ochieng Vs. Abno Softwares International Limited [2020] eKLR reasoned that letting the parties resolve the dispute on their own where employment has been terminated or there is a claim of unfairness, breach of contract and unfair dealing, would only deny the employee justice. In dismissing the application seeking to refer the claim to arbitration, the Court relied on section 7 of the Arbitration Act that empowers it to issue orders despite the existence of an arbitration clause.

    CONCLUSION

    Whether the parties’ freedom of contract will be upheld, or the unequal bargaining power in employment negotiations will be factored in when determining applications for referring claims to arbitration; is something only the Employment and Labour Relations Court can determine. Nevertheless, employees can take advantage of the new developments to negotiate for the exclusion of arbitration clauses in their employment contracts where they feel it doesn’t benefit them.

    On the other hand, employers ought to weigh the risk of including an arbitration clause against the risk excluding it, and settle on the one with the least risk. This depends on a number of factors like what the employer wishes to preserve or the employee’s likelihood of seeking the Court’s intervention. And where the employee files a claim, the employer should remember to make their application for referral and stay of proceedings in good time, or they may be considered to have forfeited this right.

    FOOD FOR THOUGHT

    What happens in instances where a prospective employee, suggests amendments to the contract and the same are accepted and adopted by the employer?

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