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Home / Alternative Dispute Resolution

Civil Law

Afcons Infrastructure Ltd. v. Cherian Varkey Construction Co. P. Ltd. (2010) 8 SCC 24

   »
 17-Aug-2023

    Tags:
  • Civil Procedure Code, 1908 (CPC)
  • THE ARBITRATION AND CONCILIATION ACT, 1996

Introduction

  • This case deals with Section 89 of the Code of Civil Procedure, 1908 (CPC).
  • It was discussed in the case that it is not necessary for the court to formulate or reformulate possible terms of settlement rather the definition of 'Judicial Settlement' and 'Mediation' in clauses (c) and (d) of Section 89 (2) should be interchanged to correct the drafting error.
  • There are different modes of Alternative Dispute Resolution (ADR) under Section 89 of the CPC, 1908.
    • The modes are arbitration, conciliation, judicial settlement, and mediation.
    • The objective of Section 89 is to ensure that the court makes an endeavour to facilitate out-of-court settlements through one of the ADR processes before the trial commences.

Facts

  • The second respondent (Cochin Port Trust) entrusted the work of construction of certain bridges and roads to the appellants under an agreement dated 20.04.2001.
    • The appellants sub-contracted a part of the said work to the first respondent under an agreement dated 1.08.2001.
    • The agreement between the appellants and the first respondent did not contain any provision for reference of the disputes to arbitration.
  • The first respondent filed a suit against the appellants for recovery of Rs. 210,70,881 from the appellants with interest.
  • In March 2005, the first respondent filed an application under Section 89 of the Code before the trial court praying that the court may formulate the terms of settlement and refer the matter to arbitration.
  • The appellant submitted that they were not agreeable for referring the matter for the arbitration.
  • The High Court directed the Trial Court to dispose off the matter under section 89 of the Civil Procedure Code, 1908 and trial Court after hearing the matter allowed the application under Section 89 of the Civil Procedure Code, 1908.
  • The High Court also held that the concept of preexisting arbitration agreement which was necessary for reference to arbitration under the provisions of the Arbitration & Conciliation Act, 1996 was inapplicable to references under Section 89 of the Code.
  • This order was challenged in the Supreme Court as an Appeal.

Issues Involved

  • Whether Section 89 of CPC empowers the court to refer the parties to a suit for arbitration without the consent of both parties?
  • What is the procedure to be followed by a court in implementing Section 89 and Order 10 Rule 1A of the CPC?
  • Whether the settlement in an ADR process is binding in itself?
  • Whether the reference to ADR Process is mandatory?

Observations

  • The Court observed that with respect to Section 89 of the Code where the words of the statute are clear and unambiguous, the provision should be given its plain and normal meaning, without adding or rejecting any word.
  • The Court said the only practical way of reading Section 89 and Order 10, Rule 1A is after the pleadings are complete and after seeking admission/denials wherever required, and before framing issues, the court will have recourse to Section 89 of the Code.
  • The Court observed that to decide the appropriate ADR process under Section 89, the language of the section must be kept in mind which starts with the words "where it appears to the court that there exist elements of a settlement".
  • The Court further said, where the case is unsuited for reference to any of the ADR process, the court will have to briefly record the reasons for not resorting to any of the settlement procedures prescribed under Section 89 of the Code.
  • Therefore, having a hearing after completion of pleadings, to consider recourse to ADR process under Section 89 of the Code, is mandatory.
  • But actual reference to an ADR process in all cases is not mandatory.
    • Where the case falls under an excluded category there need not be reference to ADR process. In all other case reference to the ADR process is a must.
  • The Court said as far as the nature of the ADR process is concerned when the court refers the matter to arbitration under Section 89 of the Act, as already noticed, the case goes out of the stream of the court and becomes an independent proceeding before the arbitral tribunal.
    • Arbitration being an adjudicatory process, it always ends in a decision.

Additional Information

The Court referred the points which should be kept in mind while applying the Section 89 of the Code:

(i) If the reference is to arbitration or conciliation, the court has to record that the reference is by mutual consent. Nothing further need be stated in the order sheet.

(ii) If the reference is to any other ADR process, the court should briefly record that having regard to the nature of dispute, the case deserves to be referred to Lok Adalat, or mediation or judicial settlement, as the case may be. There is no need for an elaborate order for making the reference.

(iii) The requirement in Section 89(1) that the court should formulate or reformulate the terms of settlement would only mean that court has to briefly refer to the nature of dispute and decide upon the appropriate ADR process. (iv) If the Judge in charge of the case assists the parties and if settlement negotiations fail, he should not deal with the adjudication of the matter, to avoid apprehensions of bias and prejudice. It is therefore advisable to refer cases proposed for Judicial Settlement to another Judge.

Conclusion

  • The Court held that the trial court did not adopt the proper procedure while enforcing Section 89 of the Code.
  • Failure to invoke Section 89 suo moto after completion of pleadings and considering it only after an application under Section 89 was filed, is erroneous.
  • And held that a civil court exercising power under Section 89 of the Code cannot refer a suit to arbitration unless all the parties to the suit agree for such reference.

Notes

Section 89 of the Code of Civil Procedure, 1908, Settlement of disputes outside the Court.- (1)Where it appears to the court that there exist elements of a settlement which may be acceptable to the parties, the court shall formulate the terms of settlement and give them to the parties for their observations and after receiving the observations of the parties, the court may reformulate the terms of a possible settlement and refer the same for.-

(a) arbitration;
(b) conciliation;
(c) judicial settlement including settlement through Lok Adalat; or
(d) mediation

(2) Where a dispute has been referred-

(a) for arbitration or conciliation, the provisions of the Arbitration and Conciliation Act, 1996 shall apply as if the proceedings for arbitration or conciliation were referred for settlement under the provisions of that Act;
(b) to Lok Adalat, the court shall refer the same to the Lok Adalat in accordance with the provisions of sub-section (1) of section 20 of the Legal Services Authorities Act, 1987 and all other provisions of that Act shall apply in respect of the dispute so referred to the Lok Adalat;
(c) for judicial settlement, the court shall refer the same to a suitable institution or person and such institution or person shall be deemed to be a Lok Adalat and all the provisions of the Legal Services Authorities Act, 1987 shall apply as if the dispute were referred to a Lok Adalat under the provisions of that Act;
(d) for mediation, the court shall effect a compromise between the parties and shall follow such procedure as may be prescribed.