Afcons infrastructure and Ors. v.
Cherian Verkay Construction and Ors
[2010 (8) SCC 24]
Introduction of Section 89 of Code emerged as “Trial Nightmare” for quite long period.This nightmare
gripped the mind of the Indian judicial system till the recent judgment of Afcons infrastructure and
Ors. v. Cherian Verkay Construction and Ors. 2010 (8) SCC 24. I think this judgment has finally end
up the chapter of dynamism of the Alternate Dispute Resolution which is pro bono for the Indian
Judicial System.Section 89 of CPC, 1908, its need and the revolutionary changes has brought in
terms of ADR practices in India. The mixture in role of Legislature in promoting ADR practices and
approach of judiciary in this context is rightly pointed out in this particular case.The 238th Report of
Law Commission dated December , 2011 with regard to amending section 89 of the code of civil
procedure provides clear understanding of the existing process of Alternate Dispute resolution and
how the dynamism of Section 89 could be stopped.
I have tried to focus completely on the interpretation of the section 89 of the code of civil procedure
and its usage as an Alternate Dispute Mechanism through critically analyzing Afcons Infrastructure
case.
Facts of the Case
The Cochin Port Trust (2nd Respondent) entrusted the work of construction of certain bridges and
roads to the Afcons Infrastructure and Ors. (Appellants) under an agreement dated 20.04.2001. The
Afcons Infrastructure and Ors. Sub-contracted a part of the said work to Cherian Verkay
Construction (1st Respondent) under an agreement dated 1.8.2001.
Cherian Verkay Construction filed a suit against the Afcons Infrastructure and Ors. for recovery of
Rs.210,70,881 which includes the amount due to the appellants from the employer with interest at
18% per annum.
In the same suit an order of attachment was made on 15.09.2004 in regard to the sum of Rs. 2.25
crores. Thereafter, In March 2005 ,Cherian Verkay Construction filed an application under section 89
of CPC before the trial court praying that the court may formulate the terms of settlement and refer
the matter to arbitration.
Afcons infrastructure and Ors. 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 after hearing the parties allowed the said application under section 89 of the code.
Then ,the Appellants filed the review petition 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. This order was challenged in the Superme Court as an Appeal.
Anomaly in Afcons Infrastructure Case
Not a single provision in the legal world seems genuine or uncontroversial. Law is a naturally
evolving subject . It is based on the development of society and its entities.According to my opinion,
it doesnot confine our ideas and strength but limits our scope.
The Supreme Court rightly pointed out various drafting errors in interpreting section 89 of the code of
civil procedure.
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 neutral third party who tries to help the disputing parties to arrive at a negotiated
settlement. It is also synonym of the term `conciliation'.
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.
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 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 Arbitration and Conciliation 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.
The apex Court tried to make demarcation between the extent of ADR to dispute and settlement . It
was stated in Salem Advocate Bar Association v. Union of India that 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 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.
In Salem Bar Association case, it was stated that the court is only required to formulate a ‘summary
of disputes’ and not ‘terms of settlement'. Interpretation of any statute is based on the Principle of
Statutory Interpretation. This principle applies when there is any ambiguity in understanding the
provisions of the statute. 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 and ‘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’.
Issues Discussed
Keeping in view the contentions of both the parties, The apex court formulated two issues which
were later on discussed in this particular case:
1.Procedure to be followed by a court in implementing section 89 and Order 10 Rule 1A of the
Code.
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.
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 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 (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 Supreme Court declared that 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.
2.Consent of all parties to the suit is necessary for reference to arbitration under section 89 of the
Code.
The main question discussed by the Supreme Court in this particular case was whether reference to
ADR process is mandatory.
The Court considered the interpretation made in the Salem Bar Association Case which considered
the aspect of advert conflict between the language of section 89 and Order 10 Rule 1-A of the code.
However after analyzing the fact, the Supreme Court clarified the legal position more aptly by
stating that:
‘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 1-A 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 processes, 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 cases reference to ADR process is a must’.
Though , The Superme Court accepted that in most of the cases references to ADR process is must
but it also mentioned the excluded category which are not to be referred for ADR Process.
Those are:
· 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).
· 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 section after enquiry, as for example, suits or grant of
probate or letters of administration.
· Cases involving serious and specific allegations of fraud, fabrication of documents, forgery,
impersonation, coercion etc.
· Cases requiring protection of sections, as for example, claims against minors, deities and mentally
challenged and suits for declaration of title against the Government.
· Cases involving prosecution for criminal offences.”
The Supreme Court also stated that all the other suits and cases of civil nature which falls under the
following categories ,whether pending in civil courts or any tribunals, can be referred for ADR
Process.
· All cases relating to trade, commerce and contracts;
· All cases arising from strained relationship, such as matrimonial cases;
· All cases where there is a need for continuation of the pre-existing relationship, such as disputes
between neighbour and members of societies;
· All cases relating to tortuous liability, including motor accident claims; and
· All consumer disputes.
The Supreme Court endeavoured to resolve the conflict under section 89 of the code and hence
made a demarcation as to which cases can be brought under ‘suitable’ and ‘unsuitable’ categories
for referring ADR processes.
Exercising Judicial Procedure under Section 89 of the CPC
Sometime, it becomes difficult as to when can we exercise ADR process in continuation to the
Judicial Procedure. However, The court have summarized the procedure to be adopted by the court
under section 89 of the code.
· 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.
· 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.
· 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.
· 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.
· If the parties are not agreeable for arbitration, the court should ascertain whether the parties are
agreeable 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.
· 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 :
(a) Lok 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 settlement.
· 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.
· 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.
· 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.
· 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.
Judgment
In this particular case, The Supreme Court relied upon the judgment of Sukanya Holdings Case and
held that to contend for a reference to arbitration under section 89 of the Code, consent of parties is
not required. The High Court has assumed 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.The Division Bench held that 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 Court drew out inference that even in the absence of Arbitration agreement, Parties can go for
ADR process through Mutual Consent and Finally the Supreme court enlightened in this matter by
delivering landmark judgment stating that:
1. 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.
2. 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.
Conclusion
"Discourage litigation. Persuade your neighbours to compromise wherever you can. Point out to
them how the nominal winner is often a real loser - in fees, expenses, and waste of time. As a
peacemaker, the lawyer has a superior opportunity of being a good man. There will still be business
enough." ---- Abraham Lincoln
It was red letter day in the history of the procedural law when section 89 was introduced in the code
of civil procedure, 1908. Section 89 emerged with the mechanism of settling dispute outside the
purview of the existing court. The idea behind introducing this mechanism is to provide parties a
chance to settle dispute on their own so as to reduce burden of the court in trivial matters as well.
This mechanism tries to reduce the long lasting litigation and go for compromise decree in fewer
expenses and in a short span of time.
Inference that can be drawn from this judgment is that consent is always given priority in seeking
remedies. The Court aptly stated that there must be free consent of both the parties before
exercising ADR Processes under section 89 of the code of Civil Procedure.
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
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.
Ministry of Petroleum set the prices of diesel on fortnightly basis. I appreciate this is not the case
with the legal provisions in India.
