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(Process of referral to different modes of ADR under Section 89 of CPC, 1908)
R.V.RAVEENDRAN, J. Leave granted. The general scope of Section 89 of the Code of
Civil Procedure (`Code’ for short) and the question whether the said section empowers the
court to refer the parties to a suit to arbitration without the consent of both parties, arise for
consideration in this appeal.
- The second respondent (Cochin Port Trust) entrusted the work of construction of
certain bridges and roads to the appellants under an agreement dated 20.4.2001. The
appellants sub-contracted a part of the said work to the first respondent under an agreement
dated 1.8.2001. It is not in dispute that 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 and their assets and/or the amounts due to the appellants from the
employer, with interest at 18% per annum. In the said suit an order of attachment was made
on 15.9.2004 in regard to a sum of Rs.2.25 crores. Thereafter 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
appellants filed a counter dated 24.10.2005 to the application submitting that they were not
agreeable for referring the matter to arbitration or any of the other ADR processes under
section 89 of the Code. In the meanwhile, the High Court of Kerala by order dated 8.9.2005,
allowed the appeal filed by the appellants against the order of attachment and raised the
attachment granted by the trial court subject to certain conditions. While doing so, the High
Court also directed the trial court to consider and dispose of the application filed by the first
respondent under section 89 of the Code. - The trial court heard the said application under section 89. It recorded the fact that first
respondent (plaintiff) was agreeable for arbitration and appellants (defendants 1 and 2) were
not agreeable for arbitration. The trial court allowed the said application under section 89 by a
reasoned order dated 26.10.2005 and held that as the claim of the plaintiff in the suit related to
a work contract, it was appropriate that the dispute should be settled by arbitration. It
formulated sixteen issues and referred the matter to arbitration. The appellants filed a revision
against the order of the trial court. The High Court by the impugned order dated 11.10.2006
dismissed the revision petition holding that the apparent tenor of section 89 of the Code
permitted the court, in appropriate cases, to refer even unwilling parties to arbitration. The
High Court also held that the concept of pre existing arbitration agreement which was
necessary for reference to arbitration under the provisions of the Arbitration & Conciliation
Act, 1996 (`AC Act’ for short) was inapplicable to references under section 89 of the Code,
having regard to the decision in Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya & Anr. [2003
(5) SCC 531]. The said order is challenged in this appeal. - On the contentions urged, two questions arise for consideration :
20 Afcons Infrastructure Ltd. v. Cherian Varkey Construction Company Pvt. Ltd.
- What is the procedure to be followed by a court in implementing section 89 and
Order 10 Rule 1A of the Code? - Whether consent of all parties to the suit is necessary for reference to arbitration
under section 89 of the Code?
- To find answers to the said questions, we have to analyse the object, purpose, scope
and tenor of the said provisions. The said provisions are extracted below :
“89. 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 (26 of 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 Authority Act,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 Authority Act, 1987 (39 of 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.”
Other relevant provisions under CPC may be extracted as follows:
Order 10 Rule 1A. Direction of the Court to opt for any one mode of alternative dispute
resolution.–After recording the admissions and denials, the Court shall direct the parties to
the suit to opt either mode of the settlement outside the Court as specified in sub-section (1)
of section 89. On the option of the parties, the Court shall fix the date of appearance before
such forum or authority as may be opted by the parties.
Order 10 Rule 1B. Appearance before the conciliatory forum or authority.–Where a suit
is referred under rule 1A, the parties shall appear before such forum or authority for
conciliation of the suit.
Afcons Infrastructure Ltd. v. Cherian Varkey Construction Company Pvt. Ltd. 21
Order 10 Rule 1C. Appearance before the Court consequent to the failure of efforts of
conciliation.–Where a suit is referred under rule 1A and the presiding officer of conciliation
forum or authority is satisfied that it would not be proper in the interest of justice to proceed
with the matter further, then, it shall refer the matter again to the Court and direct the parties
to appear before the Court on the date fixed by it.” - If section 89 is to be read and required to be implemented in its literal sense, it will be a
Trial Judge’s nightmare. It puts the cart before the horse and lays down an impractical, if not
impossible, procedure in sub-section (1). It has mixed up the definitions in sub-section (2). In
spite of these defects, the object behind section 89 is laudable and sound. Resort to alternative
disputes resolution (for short `ADR’) processes is necessary to give speedy and effective relief
to the litigants and to reduce the pendency in and burden upon the courts. As ADR processes
were not being resorted to with the desired frequency, Parliament thought it fit to introduce
Section 89 and Rules 1-A to 1-C in Order X in the Code, to ensure that ADR process was
resorted to before the commencement of trial in suits. In view of its laudable object, the
validity of section 89, with all its imperfections, was upheld in Salem Advocate Bar
Association v. Union of India reported in [2003 (1) SCC 49 – for short, Salem Bar – (I)] but
referred to a Committee, as it was hoped that section 89 could be implemented by ironing the
creases. In Salem Advocate Bar Association v. Union of India [2005 (6) SCC 344 – for short,
Salem Bar-(II)], this Court applied the principle of purposive construction in an attempt to
make it workable.
What is wrong with section 89 of the Code? - The first anomaly is the mixing up of the definitions of
mediation' andjudicial
settlement’ under clauses (c) and (d) of sub-section (2) of section 89 of the Code. Clause (c)
says that for “judicial settlement”, the court shall refer the same to a suitable institution or
person who shall be deemed to be a Lok Adalat. Clause (d) provides that where the reference
is to “mediation”, the court shall effect a compromise between the parties by following such
procedure as may be prescribed. It makes no sense to call a compromise effected by a court,
as “mediation”, as is done in clause (d). Nor does it make any sense to describe a reference
made by a court to a suitable institution or person for arriving at a settlement as “judicial
settlement”, as is done in clause (c). “Judicial settlement” is a term in vogue in USA referring
to a settlement of a civil case with the help of a judge who is not assigned to adjudicate upon
the dispute. “Mediation” is also a well known term and it refers to a method of non-binding
dispute resolution with the assistance of a neutral third party who tries to help the disputing
parties to arrive at a negotiated settlement. It is also synonym of the term `conciliation’. (See :
Black’s Law Dictionary, 7th Edition, Pages 1377 and 996). When words are universally
understood in a particular sense, and assigned a particular meaning in common parlance, the
definitions of those words in section 89 with interchanged meanings has led to confusion,
complications and difficulties in implementation. The mix-up of definitions of the terms
“judicial settlement” and “mediation” in Section 89 is apparently due to a clerical or
typographical error in drafting, resulting in the two words being interchanged in clauses (c)
and (d) of Section 89(2). If the word “mediation” in clause (d) and the words “judicial
settlement” in clause (c) are interchanged, we find that the said clauses make perfect sense.
22 Afcons Infrastructure Ltd. v. Cherian Varkey Construction Company Pvt. Ltd. - The second anomaly is that sub-section (1) of section 89 imports the final stage of
conciliation referred to in section 73(1) of the AC Act into the pre-ADR reference stage under
section 89 of the Code. Sub-section (1) of section 89 requires the court to formulate the terms
of settlement and give them to the parties for their observation and then reformulate the terms
of a possible settlement and then refer the same for any one of the ADR processes. If subsection (1) of Section 89 is to be literally followed, every Trial Judge before framing issues, is
required to ascertain whether there exists any elements of settlement which may be acceptable
to the parties, formulate the terms of settlement, give them to parties for observations and then
reformulate the terms of a possible settlement before referring it to arbitration, conciliation,
judicial settlement, Lok Adalat or mediation. There is nothing that is left to be done by the
alternative dispute resolution forum. If all these have to be done by the trial court before
referring the parties to alternative dispute resolution processes, the court itself may as well
proceed to record the settlement as nothing more is required to be done, as a Judge cannot do
these unless he acts as a conciliator or mediator and holds detailed discussions and
negotiations running into hours. - Section 73 of AC Act shows that formulation and reformulation of terms of
settlement is a process carried out at the final stage of a conciliation process, when the
settlement is being arrived at. What is required to be done at the final stage of conciliation by
a conciliator is borrowed lock, stock and barrel into section 89 and the court is wrongly
required to formulate the terms of settlement and reformulate them at a stage prior to
reference to an ADR process. This becomes evident by a comparison of the wording of the
two provisions.
Section 73(1) of A&C Act, 1996: When it appears to the conciliator that there exist
elements of a settlement which may be acceptable to the parties, he shall formulate the terms
of a possible settlement and submit them to the parties for their observations. After receiving
the observations of the parties, the conciliator may reformulate the terms of a possible
settlement in the light of such observations.
Section 89 (1) CPC: (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 re-formulate 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.
Formulation and re-formulation of terms of settlement by the court is therefore wholly
out of place at the stage of pre ADR reference. It is not possible for courts to perform these
acts at a preliminary hearing to decide whether a case should be referred to an ADR process
and, if so, which ADR process. - If the reference is to be made to arbitration, the terms of settlement formulated by the
court will be of no use, as what is referred to arbitration is the dispute and not the terms of
settlement; and the Arbitrator will adjudicate upon the dispute and give his decision by way of
award. If the reference is to conciliation/mediation/Lok Adalat, then drawing up the terms of
the settlement or reformulating them is the job of the conciliator or the mediator or the Lok
Afcons Infrastructure Ltd. v. Cherian Varkey Construction Company Pvt. Ltd. 23
Adalat, after going through the entire process of conciliation/ mediation. Thus, the terms of
settlement drawn up by the court will be totally useless in any subsequent ADR process. Why
then the courts should be burdened with the onerous and virtually impossible, but redundant,
task of formulating terms of settlement at pre-reference stage? - It will not be possible for a court to formulate the terms of the settlement, unless the
judge discusses the matter in detail with both parties. The court formulating the terms of
settlement merely on the basis of pleadings is neither feasible nor possible. The requirement
that the court should formulate the terms of settlement is therefore a great hindrance to courts
in implementing section 89 of the Code. This Court therefore diluted this anomaly in Salem
Bar (II) by equating “terms of settlement” to a “summary of disputes” meaning thereby that
the court is only required to formulate a `summary of disputes’ and not ‘terms of settlement’.
How should section 89 be interpreted? - The principles of statutory interpretation are well settled. 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 words. Departure from the literal rule, by making
structural changes or substituting words in a clear statutory provision, under the guise of
interpretation will pose a great risk as the changes may not be what the Legislature intended
or desired. Legislative wisdom cannot be replaced by the Judge’s views. As observed by this
Court in somewhat different context : “When a procedure is prescribed by the Legislature, it
is not for the court to substitute a different one according to its notion of justice. When the
Legislature has spoken, the Judges cannot afford to be wiser.” (See : Shri Mandir Sita Ramji
v. Lt. Governor of Delhi – (1975) 4 SCC 298). There is however an exception to this general
rule. Where the words used in the statutory provision are vague and ambiguous or where the
plain and normal meaning of its words or grammatical construction thereof would lead to
confusion, absurdity, repugnancy with other provisions, the courts may, instead of adopting
the plain and grammatical construction, use the interpretative tools to set right the situation,
by adding or omitting or substituting the words in the Statute. When faced with an apparently
defective provision in a statute, courts prefer to assume that the draftsman had committed a
mistake rather than concluding that the Legislature has deliberately introduced an absurd or
irrational statutory provision. Departure from the literal rule of plain and straight reading can
however be only in exceptional cases, where the anomalies make the literal compliance of a
provision impossible, or absurd or so impractical as to defeat the very object of the provision.
We may also mention purposive interpretation to avoid absurdity and irrationality is more
readily and easily employed in relation to procedural provisions than with reference to
substantive provisions.
13 (6) Justice G.P. Singh extracts four conditions that should be present to justify
departure from the plain words of the Statute, in his treatise “Principles of Statutory
Interpretation” (12th Edn. – 2010, Lexis Nexis – page 144) from the decision of the House of
Lords in Stock v. Frank Jones (Tipton) Ltd., [1978 (1) All ER 948] :
“……a court would only be justified in departing from the plain words of the statute when
it is satisfied that (1) there is clear and gross balance of anomaly; (2) Parliament, the
legislative promoters and the draftsman could not have envisaged such anomaly and could not
have been prepared to accept it in the interest of a supervening legislative objective; (3) the
24 Afcons Infrastructure Ltd. v. Cherian Varkey Construction Company Pvt. Ltd.
anomaly can be obviated without detriment to such a legislative objective; and (4) the
language of the statute is susceptible of the modification required to obviate the anomaly.” - All the aforesaid four conditions justifying departure from the literal rule, exist with
reference to section 89 of the Code. Therefore, in Salem Bar-II, by judicial interpretation the
entire process of formulating the terms of settlement, giving them to the parties for their
observation and reformulating the terms of possible settlement after receiving the
observations, contained in sub-section (1) of section 89, is excluded or done away with by
stating that the said provision merely requires formulating a summary of disputes. Further,
this Court in Salem Bar-II, adopted the following definition ofmediation' suggested in the model mediation rules, in spite of a different definition in section 89(2)(d) : "Settlement bymediation’ means the process by which a mediator appointed by parties
or by the Court, as the case may be, mediates the dispute between the parties to the suit by the
application of the provisions of the Mediation Rules, 2003 in Part II, and in particular, by
facilitating discussion between parties directly or by communicating with each other through
the mediator, by assisting parties in identifying issues, reducing misunderstandings, clarifying
priorities, exploring areas of compromise, generating options in an attempt to solve the
dispute and emphasizing that it is the parties’ own responsibility for making decisions which
affect them.”
All over the country the courts have been referring cases under section 89 to mediation by
assuming and understanding `mediation’ to mean a dispute resolution process by negotiated
settlement with the assistance of a neutral third party. Judicial settlement is understood as
referring to a compromise entered by the parties with the assistance of the court adjudicating
the matter, or another Judge to whom the court had referred the dispute. - Section 89 has to be read with Rule 1-A of Order 10 which requires the court to direct
the parties to opt for any of the five modes of alternative dispute resolution processes and on
their option refer the matter. The said rule does not require the court to either formulate the
terms of settlement or make available such terms of settlement to the parties to reformulate
the terms of possible settlement after receiving the observations of the parties. Therefore the
only practical way of reading Section 89 and Order 10, Rule 1-A is that 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. Such recourse requires the court to
consider and record the nature of the dispute, inform the parties about the five options
available and take note of their preferences and then refer them to one of the alternative
dispute resolution processes. - In view of the foregoing, it has to be concluded that proper interpretation of section
89 of the Code requires two changes from a plain and literal reading of the section. Firstly, it
is not necessary for the court, before referring the parties to an ADR process to formulate or
re-formulate the terms of a possible settlement. It is sufficient if the court merely describes the
nature of dispute (in a sentence or two) and makes the reference. Secondly, the definitions ofjudicial settlement' andmediation’ in clauses (c) and (d) of section 89(2) shall have to be
interchanged to correct the draftsman’s error. Clauses (c) and (d) of section 89(2) of the Code
will read as under when the two terms are interchanged:
Afcons Infrastructure Ltd. v. Cherian Varkey Construction Company Pvt. Ltd. 25
(c) for “mediation”, 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 Authority Act, 1987 (39 of 1987) shall apply as if the dispute were referred to
a Lok Adalat under the provisions of that Act;
(d) for “judicial settlement”, the court shall effect a compromise between the parties and
shall follow such procedure as may be prescribed. The above changes made by interpretative
process shall remain in force till the legislature corrects the mistakes, so that section 89 is not
rendered meaningless and infructuous.
Whether the reference to ADR Process is mandatory? - Section 89 starts with the words “where it appears to the court that there exist
elements of a settlement”. This clearly shows that cases which are not suited for ADR process
should not be referred under section 89 of the Code. The court has to form an opinion that a
case is one that is capable of being referred to and settled through ADR process. Having
regard to the tenor of the provisions of Rule 1A of Order 10 of the Code, the civil court
should invariably refer cases to ADR process. Only in certain recognized excluded categories
of cases, it may choose not to refer to an ADR process. 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 ADR process is a must. - The following categories of cases are normally considered to be not suitable for ADR
process having regard to their nature:
(i) Representative suits under Order 1 Rule 8 CPC which involve public interest or
interest of numerous persons who are not parties before the court. (In fact, even a compromise
in such a suit is a difficult process requiring notice to the persons interested in the suit, before
its acceptance).
(ii) Disputes relating to election to public offices (as contrasted from disputes between
two groups trying to get control over the management of societies, clubs, association etc.).
(iii) Cases involving grant of authority by the court after enquiry, as for example, suits for
grant of probate or letters of administration.
(iv) Cases involving serious and specific allegations of fraud, fabrication of documents,
forgery, impersonation, coercion etc.
(v) Cases requiring protection of courts, as for example, claims against minors, deities
and mentally challenged and suits for declaration of title against government.
(vi) Cases involving prosecution for criminal offences. - All other suits and cases of civil nature in particular the following categories of cases
(whether pending in civil courts or other special Tribunals/Forums) are normally suitable for
ADR processes :
26 Afcons Infrastructure Ltd. v. Cherian Varkey Construction Company Pvt. Ltd.
(i) All cases relating to trade, commerce and contracts, including – disputes arising out of
contracts (including all money claims);
- disputes relating to specific performance;
- disputes between suppliers and customers;
- disputes between bankers and customers;
- disputes between developers/builders and customers;
- disputes between landlords and tenants/licensor and licensees;
- disputes between insurer and insured;
(ii) All cases arising from strained or soured relationships, including - disputes relating to matrimonial causes, maintenance, custody of children;
- disputes relating to partition/division among family members/co-parceners/coowners; and
- disputes relating to partnership among partners.
(iii) All cases where there is a need for continuation of the pre-existing relationship in
spite of the disputes, including - disputes between neighbours (relating to easementary rights, encroachments, nuisance
etc.); - disputes between employers and employees;
- disputes among members of societies/associations/Apartment owners Associations;
(iv) All cases relating to tortious liability including - claims for compensation in motor accidents/other accidents; and
- All consumer disputes including
- disputes where a trader/supplier/manufacturer/service provider is keen to maintain his
business/professional reputation and credibility orproduct popularity. The above enumeration ofsuitable’ and `unsuitable’ categorization of cases is not
intended to be exhaustive or rigid. They are illustrative, which can be subjected to just
exceptions or additions by the court/Tribunal exercising its jurisdiction/discretion in referring
a dispute/case to an ADR process.
How to decide the appropriate ADR process under section 89?
- Section 89 refers to five types of ADR procedures, made up of one adjudicatory
process (arbitration) and four negotiatory (non adjudicatory) processes – conciliation,
mediation, judicial settlement and Lok Adalat settlement. The object of section 89 of the Code
is that settlement should be attempted by adopting an appropriate ADR process before the
case proceeds to trial. Neither section 89 nor Rule 1A of Order 10 of the Code is intended to
supersede or modify the provisions of the Arbitration and Conciliation Act, 1996 or the Legal
Services Authorities Act, 1987. On the other hand, section 89 of the Code makes it clear that
Afcons Infrastructure Ltd. v. Cherian Varkey Construction Company Pvt. Ltd. 27
two of the ADR processes – Arbitration and Conciliation, will be governed by the provisions
of the AC Act and two other ADR Processes – Lok Adalat Settlement and Mediation (See :
amended definition in para 18 above), will be governed by the Legal Services Authorities Act.
As for the last of the ADR processes – judicial settlement (See : amended definition in para 18
above), section 89 makes it clear that it is not governed by any enactment and the court will
follow such procedure as may be prescribed (by appropriate rules). - Rule 1A of Order 10 requires the court to give the option to the parties, to choose any
of the ADR processes. This does not mean an individual option, but a joint option or
consensus about the choice of the ADR process. On the other hand, section 89 vests the
choice of reference to the court. There is of course no inconsistency. Section 89 of the Code
gives the jurisdiction to refer to ADR process and Rules 1A to IC of Order 10 lay down the
manner in which the said jurisdiction is to be exercised. The scheme is that the court explains
the choices available regarding ADR process to the parties, permits them to opt for a process
by consensus, and if there is no consensus, proceeds to choose the process. - Let us next consider which of the ADR processes require mutual consent of the
parties and which of them do not require the consent of parties.
Arbitration - Arbitration is an adjudicatory dispute resolution process by a private forum, governed
by the provisions of the AC Act. The said Act makes it clear that there can be reference to
arbitration only if there is an `arbitration agreement’ between the parties. If there was a preexisting arbitration agreement between the parties, in all probability, even before the suit
reaches the stage governed by Order 10 of the Code, the matter would have stood referred to
arbitration either by invoking section 8 or section 11 of the AC Act, and there would be no
need to have recourse to arbitration under section 89 of the Code. Section 89 therefore presupposes that there is no pre-existing arbitration agreement. Even if there was no pre-existing
arbitration agreement, the parties to the suit can agree for arbitration when the choice of ADR
processes is offered to them by the court under section 89 of the Code. Such agreement can be
by means of a joint memo or joint application or a joint affidavit before the court, or by record
of the agreement by the court in the ordersheet signed by the parties. Once there is such an
agreement in writing signed by parties, the matter can be referred to arbitration under section
89 of the Code; and on such reference, the provisions of AC Act will apply to the arbitration,
and as noticed in Salem Bar-I, the case will go outside the stream of the court permanently
and will not come back to the court. - If there is no agreement between the parties for reference to arbitration, the court
cannot refer the matter to arbitration under section 89 of the Code. This is evident from the
provisions of AC Act. A court has no power, authority or jurisdiction to refer unwilling
parties to arbitration, if there is no arbitration agreement. This Court has consistently held that
though section 89 of the Code mandates reference to ADR processes, reference to arbitration
under section 89 of the Code could only be with the consent of both sides and not otherwise.
24.1) In Salem Bar (I) [Salem Advocate Bar Association v. Union of India, (2003) 1 SCC
49], this Court held :
28 Afcons Infrastructure Ltd. v. Cherian Varkey Construction Company Pvt. Ltd.
“It is quite obvious that the reason why Section 89 has been inserted is to try and see that
all the cases which are filed in court need not necessarily be decided by the court itself.
Keeping in mind the law’s delays and the limited number of Judges which are available, it has
now become imperative that resort should be had to alternative dispute resolution mechanism
with a view to bring to an end litigation between the parties at an early date. The alternative
dispute resolution (ADR) mechanism as contemplated by Section 89 is arbitration or
conciliation or judicial settlement including settlement through Lok Adalat or mediation. If
the parties agree to arbitration, then the provisions of the Arbitration and Conciliation Act,
1996 will apply and that case will go outside the stream of the court but resorting to
conciliation or judicial settlement or mediation with a view to settle the dispute would not
ipso facto take the case outside the judicial system. All that this means is that effort has to be
made to bring about an amicable settlement between the parties but if conciliation or
mediation or judicial settlement is not possible, despite efforts being made, the case will
ultimately go to trial.”
In Salem Bar – (II) [Salem Advocate Bar Association v. Union of India, (2005) 6 SCC
344], this Court held :
“Some doubt as to a possible conflict has been expressed in view of used of the word
“may” in Section 89 when it stipulates that “the court may reformulate the terms of a possible
settlement and refer the same for” and use of the word “shall” in Order 10 Rule 1-A when it
states that “the court shall direct the parties to the suit to opt either mode of the settlement
outside the court as specified in sub-section (1) of Section 89″.
The intention of the legislature behind enacting Section 89 is that where it appears to the
court that there exists an element of a settlement which may be acceptable to the parties, they,
at the instance of the court, shall be made to apply their mind so as to opt for one or the other
of the four ADR methods mentioned in the section and if the parties do not agree, the court
shall refer them to one or the other of the said modes. Section 89 uses both the words “shall”
and “may” whereas Order 10 Rule 1-A uses the word “shall” but on harmonious reading of
these provisions it becomes clear that the use of the word “may” in Section 89 only governs
the aspect of reformulation of the terms of a possible settlement and its reference to one of
ADR methods. There is no conflict. It is evident that what is referred to one of the ADR
modes is the dispute which is summarized in the terms of settlement formulated or
reformulated in terms of Section 89.
One of the modes to which the dispute can be referred is “arbitration”. Section 89(2)
provides that where a dispute has been referred 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 the 1996 Act. Section 8 of
the 1996 Act deals with the power to refer parties to arbitration where there is arbitration
agreement. As held in P. Anand Gajapathi Raju v. P.V.G. Raju [2000 (4) SCC 539] the 1996
Act governs a case where arbitration is agreed upon before or pending a suit by all the parties.
The 1996 Act, however, does not contemplate a situation as in Section 89 of the Code where
the court asks the parties to choose one or other ADRs including arbitration and the parties
choose arbitration as their option. Of course, the parties have to agree for arbitration.”
Afcons Infrastructure Ltd. v. Cherian Varkey Construction Company Pvt. Ltd. 29
The position was reiterated by this Court in Jagdish Chander v. Ramesh Chander [2007
(5) SCC 719] thus :
“It should not also be overlooked that even though Section 89 mandates courts to refer
pending suits to any of the several alternative dispute resolution processes mentioned therein,
there cannot be a reference to arbitration even under Section 89 CPC, unless there is a mutual
consent of all parties, for such reference.”
Therefore, where there is no pre-existing arbitration agreement between the parties, the
consent of all the parties to the suit will be necessary, for referring the subject matter of the
suit to arbitration under section 89 of the Code.
Conciliation - Conciliation is a non-adjudicatory ADR process, which is also governed by the
provisions of AC Act. There can be a valid reference to conciliation only if both parties to the
dispute agree to have negotiations with the help of a third party or third parties either by an
agreement or by the process of invitation and acceptance provided in section 62 of AC Act
followed by appointment of conciliator/s as provided in section 64 of AC Act. If both parties
do not agree for conciliation, there can be no `conciliation’. As a consequence, as in the case
of arbitration, the court cannot refer the parties to conciliation under section 89, in the absence
of consent by all parties. As contrasted from arbitration, when a matter is referred to
conciliation, the matter does not go out of the stream of court process permanently. If there is
no settlement, the matter is returned to the court for framing issues and proceeding with the
trial. The other three ADR Processes - If the parties are not agreeable for either arbitration or conciliation, both of which
require consent of all parties, the court has to consider which of the other three ADR
processes (Lok Adalat, Mediation and Judicial Settlement) which do not require the consent
of parties for reference, is suitable and appropriate and refer the parties to such ADR process.
If mediation process is not available (for want of a mediation centre or qualified mediators),
necessarily the court will have to choose between reference to Lok Adalat or judicial
settlement. If facility of mediation is available, then the choice becomes wider. It the suit is
complicated or lengthy, mediation will be the recognized choice. If the suit is not complicated
and the disputes are easily sortable or could be settled by applying clear cut legal principles,
Lok Adalat will be the preferred choice. If the court feels that a suggestion or guidance by a
Judge would be appropriate, it can refer it to another Judge for dispute resolution. The court
has used its discretion in choosing the ADR process judiciously, keeping in view the nature of
disputes, interests of parties and expedition in dispute resolution.
Whether the settlement in an ADR process is binding in itself ? - 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. There is also no question of failure of ADR process or the matter being returned to
the court with a failure report. The award of the arbitrators is binding on the parties and is
executable/enforceable as if a decree of a court, having regard to Section 36 of the AC Act. If
any settlement is reached in the arbitration proceedings, then the award passed by the Arbitral
30 Afcons Infrastructure Ltd. v. Cherian Varkey Construction Company Pvt. Ltd.
Tribunal on such settlement, will also be binding and executable/enforceable as if a decree of
a court, under Section 30 of the AC Act. - The other four ADR processes are non-adjudicatory and the case does not go out of
the stream of the court when a reference is made to such a non- adjudicatory ADR forum. The
court retains its control and jurisdiction over the case, even when the matter is before the
ADR forum. When a matter is settled through conciliation, the Settlement Agreement is
enforceable as if it is a decree of the court having regard to Section 74 read with Section 30 of
the AC Act. Similarly, when a settlement takes place before the Lok Adalat, the Lok Adalat
award is also deemed to be a decree of the civil court and executable as such under Section 21
of the Legal Services Authorities Act, 1987. Though the settlement agreement in a
conciliation or a settlement award of a Lok Adalat may not require the seal of approval of the
court for its enforcement when they are made in a direct reference by parties without the
intervention of court, the position will be different if they are made on a reference by a court
in a pending suit/proceedings. As the court continues to retain control and jurisdiction over
the cases which it refers to conciliations, or Lok Adalats, the settlement agreement in
conciliation or the Lok Adalat award will have to be placed before the court for recording it
and disposal in its terms. Where the reference is to a neutral third party (`mediation’ as
defined above) on a court reference, though it will be deemed to be reference to Lok Adalat,
as court retains its control and jurisdiction over the matter, the mediation settlement will have
to be placed before the court for recording the settlement and disposal. Where the matter is
referred to another Judge and settlement is arrived at before him, such settlement agreement
will also have to be placed before the court which referred the matter and that court will make
a decree in terms of it. Whenever such settlements reached before non-adjudicatory ADR
Fora are placed before the court, the court should apply the principles of Order 23 Rule 3 of
the Code and make a decree/order in terms of the settlement, in regard to the subject matter of
the suit/proceeding. In regard to matters/disputes which are not the subject matter of the
suit/proceedings, the court will have to direct that the settlement shall be governed by Section
74 of AC Act (in respect of conciliation settlements) or Section 21 of the Legal Services
Authorities Act, 1987 (in respect of settlements by a Lok Adalat or a Mediator). Only then
such settlements will be effective.
Summation - Having regard to the provisions of Section 89 and Rule 1-A of Order 10, the stage at
which the court should explore whether the matter should be referred to ADR processes, is
after the pleadings are complete, and before framing the issues, when the matter is taken up
for preliminary hearing for examination of parties under Order 10 of the Code. However, if
for any reason, the court had missed the opportunity to consider and refer the matter to ADR
processes under Section 89 before framing issues, nothing prevents the court from resorting to
Section 89 even after framing issues. But once evidence is commenced, the court will be
reluctant to refer the matter to the ADR processes lest it becomes a tool for protracting the
trial. - Though in civil suits, the appropriate stage for considering reference to ADR
processes is after the completion of pleadings, in family disputes or matrimonial cases, the
position can be slightly different. In those cases, the relationship becomes hostile on account
Afcons Infrastructure Ltd. v. Cherian Varkey Construction Company Pvt. Ltd. 31
of the various allegations in the petition against the spouse. The hostility will be further
aggravated by the counter-allegations made by the respondent in his or her written statement
or objections. Therefore, as far as Family Courts are concerned, the ideal stage for mediation
will be immediately after service of respondent and before the respondent files
objections/written statements. Be that as it may. - We may summarize the procedure to be adopted by a court under section 89 of the
Code as under :
(a) When the pleadings are complete, before framing issues, the court shall fix a
preliminary hearing for appearance of parties. The court should acquaint itself with the facts
of the case and the nature of the dispute between the parties.
(b) The court should first consider whether the case falls under any of the category of the
cases which are required to be tried by courts and not fit to be referred to any ADR processes.
If it finds the case falls under any excluded category, it should record a brief order referring to
the nature of the case and why it is not fit for reference to ADR processes. It will then proceed
with the framing of issues and trial.
(c) In other cases (that is, in cases which can be referred to ADR processes) the court
should explain the choice of five ADR processes to the parties to enable them to exercise their
option.
(d) The court should first ascertain whether the parties are willing for arbitration. The
court should inform the parties that arbitration is an adjudicatory process by a chosen private
forum and reference to arbitration will permanently take the suit outside the ambit of the
court. The parties should also be informed that the cost of arbitration will have to be borne by
them. Only if both parties agree for arbitration, and also agree upon the arbitrator, the matter
should be referred to arbitration.
(e) If the parties are not agreeable for arbitration, the court should ascertain whether the
parties are agreeble for reference to conciliation which will be governed by the provisions of
the AC Act. If all the parties agree for reference to conciliation and agree upon the
conciliator/s, the court can refer the matter to conciliation in accordance with section 64 of the
AC Act.
(f) If parties are not agreeable for arbitration and conciliation, which is likely to happen in
most of the cases for want of consensus, the court should, keeping in view the
preferences/options of parties, refer the matter to any one of the other three other ADR
processes : (i) Lok Adalat; (ii) mediation by a neutral third party facilitator or mediator; and
(iii) a judicial settlement, where a Judge assists the parties to arrive at a settlement.
(g) If the case is simple which may be completed in a single sitting, or cases relating to a
matter where the legal principles are clearly settled and there is no personal animosity
between the parties (as in the case of motor accident claims), the court may refer the matter to
Lok Adalat. In case where the questions are complicated or cases which may require several
rounds of negotiations, the court may refer the matter to mediation. Where the facility of
mediation is not available or where the parties opt for the guidance of a Judge to arrive at a
settlement, the court may refer the matter to another Judge for attempting settlement.
32 Afcons Infrastructure Ltd. v. Cherian Varkey Construction Company Pvt. Ltd.
(h) If the reference to the ADR process fails, on receipt of the Report of the ADR Forum,
the court shall proceed with hearing of the suit. If there is a settlement, the court shall
examine the settlement and make a decree in terms of it, keeping the principles of Order 23
Rule 3 of the Code in mind.
(i) If the settlement includes disputes which are not the subject matter of the suit, the
court may direct that the same will be governed by Section 74 of the AC Act (if it is a
Conciliation Settlement) or Section 21 of the Legal Services Authorities Act, 1987 (if it is a
settlement by a Lok Adalat or by mediation which is a deemed Lok Adalat). This will be
necessary as many settlement agreements deal with not only the disputes which are the
subject matter of the suit or proceeding in which the reference is made, but also other disputes
which are not the subject matter of the suit.
(j) If any term of the settlement is ex facie illegal or unforceable, the court should draw
the attention of parties thereto to avoid further litigations and disputes about executability. - The Court should also bear in mind the following consequential aspects, while giving
effect to 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.
(v) If the court refers the matter to an ADR process (other than Arbitration), it should
keep track of the matter by fixing a hearing date for the ADR Report. The period allotted for
the ADR process can normally vary from a week to two months (which may be extended in
exceptional cases, depending upon the availability of the alternative forum, the nature of case
etc.). Under no circumstances the court should allow the ADR process to become a tool in the
hands of an unscrupulous litigant intent upon dragging on the proceedings.
(vi) Normally the court should not send the original record of the case when referring the
matter for an ADR forum. It should make available only copies of relevant papers to the ADR
forum. (For this purpose, when pleadings are filed the court may insist upon filing of an extra
copy). However if the case is referred to a Court annexed Mediation Centre which is under
the exclusive control and supervision of a Judicial Officer, the original file may be made
available wherever necessary.
Afcons Infrastructure Ltd. v. Cherian Varkey Construction Company Pvt. Ltd. 33 - The procedure and consequential aspects referred to in the earlier two paragraphs are
intended to be general guidelines subject to such changes as the concerned court may deem fit
with reference to the special circumstances of a case. We have referred to the procedure and
process rather elaborately as we find that section 89 has been a non-starter with many courts.
Though the process under Section 89 appears to be lengthy and complicated, in practice the
process is simple: know the dispute; exclude `unfit’ cases; ascertain consent for arbitration or
conciliation; if there is no consent, select Lok Adalat for simple cases and mediation for all
other cases, reserving reference to a Judge assisted settlement only in exceptional or special
cases. Conclusion - Coming back to this case, we may refer to the decision in Sukanya Holdings relied
upon by the respondents, to contend that for a reference to arbitration under section 89 of the
Code, consent of parties is not required. The High Court assumed that Sukanya Holdings has
held that section 89 enables the civil court to refer a case to arbitration even in the absence of
an arbitration agreement. Sukanya Holdings does not lay down any such proposition. In that
decision, this Court was considering the question as to whether an application under section 8
of the AC Act could be maintained even where a part of the subject matter of the suit was not
covered by an arbitration agreement. The only observations in the decision relating to Section
89 are as under:
“Reliance was placed on Section 89 CPC in support of the argument that the matter
should have been referred to arbitration. In our view, Section 89 CPC cannot be resorted to
for interpreting Section 8 of the Act as it stands on a different footing and it would be
applicable even in cases where there is no arbitration agreement for referring the dispute for
arbitration. Further, for that purpose, the court has to apply its mind to the condition
contemplated under Section 89 CPC and even if application under Section 8 of the Act is
rejected, the court is required to follow the procedure prescribed under the said section.”
The observations only mean that even when there is no existing arbitration agreement
enabling filing of an application under section 8 of the Act, there can be a reference under
section 89 to arbitration if parties agree to arbitration. The observations in Sukanya Holdings
do not assist the first respondent as they were made in the context of considering a question as
to whether section 89 of the Code could be invoked for seeking a reference under section 8 of
the AC Act in a suit, where only a part of the subject- matter of the suit was covered by
arbitration agreement and other parts were not covered by arbitration agreement. The first
respondent next contended that the effect of the decision in Sukanya Holdings is that “section
89 of CPC would be applicable even in cases where there is no arbitration agreement for
referring the dispute to arbitration.” There can be no dispute in regard to the said proposition
as Section 89 deals, not only with arbitration but also four other modes of non-adjudicatory
resolution processes and existence of an arbitration agreement is not a condition precedent for
exercising power under Section 89 of the Code in regard to the said four ADR processes. - In the light of the above discussion, we answer the questions as follows :
(i) 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.
34 Afcons Infrastructure Ltd. v. Cherian Varkey Construction Company Pvt. Ltd.
(ii) 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. - Consequently, this appeal is allowed and the order of the trial court referring the
matter to arbitration and the order of the High Court affirming the said reference are set aside.
The Trial Court will now consider and decide upon a non-adjudicatory ADR process.
