Afcons Infra. Ltd. & ANR. Vs. M/S Cherian Varkey Constn Co.P.Ltd.& Ors
 INSC 545 (26 July 2010)
SUPREME COURT OF INDIA Reportable CIVIL APPELLATE JURISDICTION CIVIL APPEAL
NO.6000 OF 2010 (Arising out of SLP (C) No.760 of 2007) Afcons Infrastructure
Ltd. & Anr. ... Appellants Cherian Varkey Construction Co. (P) Ltd. &
Ors. ... Respondents
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 3 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.
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.
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 :
is the procedure to be followed by a court in implementing section 89 and Order
10 Rule 1A of the Code? (ii) Whether consent of all parties to the suit is
necessary for reference to arbitration under section 89 of the Code? 4
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 :
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;
judicial settlement including settlement through Lok Adalat; or (d) mediation.
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;
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, 1987 (39 of 1987) and all other provisions of that Act shall apply in
respect of the dispute so referred to the Lok Adalat;
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
mediation, the Court shall effect a compromise between the parties and shall
follow such procedure as may be prescribed."
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 5
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.
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.
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, 6 as it was hoped that
section 89 could be implemented by ironing the creases.
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.
wrong with section 89 of the Code?
The first anomaly is the mixing up of the definitions of
`mediation' and `judicial 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 7 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
(d) and the words "judicial settlement" in clause (c) are
interchanged, we find that the said clauses make perfect sense.
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 sub-section (1) of Section 89 is to be literally followed, every Trial Judge
before framing issues, is required to ascertain whether there 8 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.
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.
73(1) of Arbitration and Conciliation Section 89(1) of Code of Civil Procedure
Act, 1996 relating to the final stage of relating to a stage before reference
to an settlement process in conciliation. ADR process.
appears to the conciliator that there Where it appears to the Court that there
exist elements of a settlement which may exist elements of a settlement which
may be acceptable to the parties, he shall be acceptable to the parties, the
Court shall formulate the terms of a possible settlement formulate the terms of
settlement and give and submit them to the parties for their them to the
parties for their observations observations. After receiving the and after
receiving the observations of the observations of the parties, the conciliator
parties, the Court may reformulate the may reformulate the terms of a possible
terms of a possible settlement and refer the settlement in the light of such
observations. same for (a) arbitration; (b) conciliation;
judicial settlement including settlement through Lok Adalat; or (d) mediation.
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 10 or the Lok 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.
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'.
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.
from the literal rule, by making structural changes or substituting 11 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 vs. Lt.
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.
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 12 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
Maxwell on Interpretation of Statutes (12th Edn., page 228), under the caption
`modification of the language to meet the intention' in the chapter dealing
with `Exceptional Construction' states the position succinctly:
the language of a statute, in its ordinary meaning and grammatical
construction, leads to a manifest contradiction of the apparent purpose of the
enactment, or to some inconvenience or absurdity, hardship or injustice, which
can hardly have been intended, a construction may be put upon it which modifies
the meaning of the words, and even the structure of the sentence. This may be
done by departing from the rules of grammar, by giving an unusual meaning to
particular words, or by rejecting them altogether, on the ground that the
legislature could not possibly have intended what its words signify, and that
the modifications made are mere corrections of careless language and really
give the true meaning. Where the main object and intention of a statute are
clear, it must not be reduced to a nullity by the draftman's unskilfulness or
ignorance of the law, except in a case of necessity, or the absolute
intractability of the language used."
Court in Tirath Singh v. Bachittar Singh [AIR 1955 SC 830] approved and adopted
the said approach.
Shamrao V.Parulekar v. District Magistrate, Thana, Bombay [AIR 1952 SC 324],
this Court reiterated the principle from Maxwell:
one construction will lead to an absurdity while another will give effect to
what commonsense would show was obviously intended, the construction which
would defeat the ends of the Act must be rejected even 13 if the same words
used in the same section, and even the same sentence, have to be construed
differently. Indeed, the law goes so far as to require the Courts sometimes
even to modify the grammatical and ordinary sense of the words if by doing so
absurdity and inconsistency can be avoided."
Molar Mal vs. Kay Iron Works (P) Ltd. - 2004 (4) SCC 285, this Court while
reiterating that courts will have to follow the rule of literal construction,
which enjoins the court to take the words as used by the Legislature and to
give it the meaning which naturally implies, held that there is an exception to
that rule. This Court observed :
exception comes into play when application of literal construction of the words
in the statute leads to absurdity, inconsistency or when it is shown that the
legal context in which the words are used or by reading the statute as a whole,
it requires a different meaning."
Mangin v. Inland Revenue Commission [1971 (1) All.ER 179], the Privy Council
object of the construction of a statute, be it to ascertain the will of the
legislature, it may be presumed that neither injustice nor absurdity was intended.
If, therefore a literal interpretation would produce such a result, and the
language admits of an interpretation which would avoid it, then such an
interpretation may be adopted."
classic example of correcting an error committed by the draftsman in
legislative drafting is the substitution of the words `defendant's witnesses'
by this Court for the words `plaintiff's witnesses' occurring in Order VII 14
Rule 14(4) of the Code, in Salem Bar-II. We extract below the relevant portion
of the said decision :
VII relates to the production of documents by the plaintiff whereas Order VIII
relates to production of documents by the defendant. Under Order VIII Rule
1A(4) a document not produced by defendant can be confronted to the plaintiff's
witness during cross-examination. Similarly, the plaintiff can also confront
the defendant's witness with a document during cross-examination. By mistake,
instead of 'defendant's witnesses', the words 'plaintiff's witnesses' have been
mentioned in Order VII Rule (4). To avoid any confusion, we direct that till
the legislature corrects the mistake, the words 'plaintiff's witnesses, would
be read as 'defendant's witnesses' in Order VII Rule 4. We, however, hope that
the mistake would be expeditiously corrected by the legislature."
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] :
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 anomaly can be
obviated without detriment to such a legislative objective;
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 15 -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
this Court in Salem Bar-II, adopted the following definition of `mediation'
suggested in the model mediation rules, in spite of a different definition in
section 89(2)(d) :
by `mediation' 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."
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.
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
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 17 reference.
Secondly, the definitions of `judicial settlement' and `mediation' 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:
"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
"judicial settlement", the court shall effect a compromise between
the parties and shall follow such procedure as may be prescribed.
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.
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
18 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.
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 :
Representative suits under Order 1 Rule 8 CPC which involve public interest or
interest of numerous persons who are not parties before the court.
even a compromise in such a suit is a difficult process requiring notice to the
persons interested in the suit, before its acceptance).
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.).
Cases involving grant of authority by the court after enquiry, as for example,
suits for grant of probate or letters of administration.
Cases involving serious and specific allegations of fraud, fabrication of
documents, forgery, impersonation, coercion etc.
requiring protection of courts, as for example, claims against minors, deities
and mentally challenged and suits for declaration of title against government.
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 :
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;
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/co-owners; and 20 - disputes relating to partnership among partners.
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;
cases relating to tortious liability including - claims for compensation in
motor accidents/other accidents; and (v) All consumer disputes including -
disputes where a trader/supplier/manufacturer/service provider is keen to
maintain his business/professional reputation and credibility or `product
enumeration of `suitable' 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.
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 21
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 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 22 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
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 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 pre-existing
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 pre-supposes that there is no
pre-existing arbitration agreement. Even if there was no pre-existing 23
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
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.
Salem Bar (I), this Court held :
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. x x x x x 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."
supplied) 24.2) In Salem Bar - (II), this Court held :
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
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.
25 One of
the modes to which the dispute can be referred is "arbitration".
89(2) provides that where a dispute has been referred for arbitration or
conciliation, the provisions of the Arbitration and Conciliation Act, 1996 (for
short "the 1996 Act") 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."
supplied) 24.3) The position was reiterated by this Court in Jagdish Chander v.
Chander [2007 (5) SCC 719] thus :
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
supplied) 24.4) 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 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.
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 27 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.
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.
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
28 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 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 29 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.
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.
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 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 31 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 :
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.
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.
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.
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 32 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.
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 :
Adalat; (b) mediation by a neutral third party facilitator or mediator; and (c)
a judicial settlement, where a Judge assists the parties to arrive at a
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 33 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.
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.
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.
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.
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
The Court should also bear in mind the following consequential
aspects, while giving effect to Section 89 of the Code :
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
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.
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.
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.
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 35 become a tool in the
hands of an unscrupulous litigant intent upon dragging on the proceedings.
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).
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.
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;
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.
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.
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:
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.
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
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 37
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
trial court did not adopt the proper procedure while enforcing Section 89 of
the Code. Failure to invoke Section 89 suo moto after 38 completion of
pleadings and considering it only after an application under Section 89 was
filed, is erroneous.
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.
.............................J. (R V Raveendran)
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