Afcons Infrastructure Ltd. & Anr.

 Vs.

 Cherian Varkey Construction Co. (P)

  

Facts:

           The second respondent entrusted the work of construction of certain bridges and roads to the appellants under an agreement. The appellants sub-contracted a part of the said work to the first respondent under an agreement. 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 dues from the appellants and their assets. In the said suit an order of attachment for recovery of dues was awarded. There after 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 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 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 High Court held that the concept of pre existing arbitration agreement which was necessary for reference to arbitration under the provisions of the Arbitration and Conciliation Act, 1996 was inapplicable to references under section 89 of the Code.

From the predicaments stated above the appellants moved to Supreme Court seeking inapplicability of sec 89 of civil procedure code due to non existence of arbitration agreement.

What is wrong with section 89 of the Code?

          Primarily the definitions of ‘mediation’ and ‘judicial settlement’ are interchanged in sec 89 of civil procedure code. When words are universally understood in a particular sense, and have been 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 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. If sub-section (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 by ADR process.

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 or 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. It is sufficient if the court merely describes the nature of dispute and makes reference to ADR. It would be unnecessary to discuss the issue of the case.

Whether the arbitration can be enforced on an unwilling party?

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. This is course of 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.

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 or not otherwise.

Conclusion

From the above mentioned views of the honorable judge 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, and also this appeal is allowed as 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.